Economics Worksheet - Production Functions and Profit

Economic profit

• will never exceed accounting profit.

• is most often equal to accounting profit.

• is always at least as large as accounting profit.

• is a less complete measure of profitability than accounting profit.

To an economist, it is conceivable that the objective that motivates an individual entrepreneur to start a business arises from

• an innate love for the type of business that he or she starts.

• a desire to earn a profit.

• an altruistic desire to provide the world with a good product.

• All of the above are correct.

Zach took $400,000 out of the bank and used it to start his new cookie business. The bank account pays 3 percent interest per year. During the first year of his business, Zach sold 6,000 boxes of cookies for $2.50 per box. Also, during the first year, the cookie business incurred costs that required outlays of money amounting to $9,000. Zach’s accounting profit for the year was

• -$494,000.

• $6,000.

• $-6,000.

• $12,000.

Zach took $400,000 out of the bank and used it to start his new cookie business. The bank account pays 3 percent interest per year. During the first year of his business, Zach sold 6,000 boxes of cookies for $2.50 per box. Also, during the first year, the cookie business incurred costs that required outlays of money amounting to $9,000. Zach’s economic profit for the year was

• -$506,000.

• $-6,000.

• $3,000.

• $6,000.

As the number of workers increases,

• total output increases, but at a decreasing rate.

• marginal product increases, but at a decreasing rate.

• marginal product increases at an increasing rate.

• total output decreases.

With regard to cookie production, the figure implies

• diminishing marginal product of worker

• diminishing marginal cost of cookie production

• decreasing cost of cookie production.

• increasing marginal product of workers.

Which of the following statements about a production function is correct for a firm that uses labor to produce output?

• The production function depicts the relationship between the quantity of labor and the quantity of output.

• The slope of the production function measures marginal cost.

• The quantity of output determines the maximum amount of labor the firm will hire.

• All of the above are correct.

Let L represent the number of workers hired by a firm and let Q represent that firm’s quantity of output. Assume two points on the firm’s production function are (L = 12, Q = 122) and (L = 13, Q = 132). Then the marginal product of the 13th worker is

• 8 units of output.

• 10 units of output.

• 122 units of output.

• 132 units of output.