Question 1

Which of the following best describes the difference between economic profit and accounting profit?

Accepted Answer

Accounting profit is calculated as total revenue minus explicit costs, while economic profit is total revenue minus the sum of explicit and implicit costs (opportunity costs).

Question 2

A firm owner invests $200,000 of her own money into the business. If the best alternative use of her funds would have earned her 4% interest annually, what is the annual implicit cost of capital?

Accepted Answer

$8,000

Question 3

Which of the following is an example of an explicit cost?

Accepted Answer

The wages paid to employees.

Question 4

Suppose a firm has total revenue of $$500,000, explicit costs of 300$$,000, and implicit costs of $100,000. What is the firm's economic profit?

Accepted Answer

$100,000

Question 5

Which formula correctly expresses average total cost (ATC)?

Accepted Answer

$$ ATC = TC / Q $$

Question 6

If a firm’s total fixed cost (TFC) is $$50 and its total variable cost (TVC) is 150 at an $$output of 10 units, what is the average total cost (ATC)?

Accepted Answer

$$ ATC = (TFC + TVC) / Q = (50 + 150) / 10 = 20 $$

Question 7

Which statement about the law of diminishing returns is correct?

Accepted Answer

As a firm uses more of a variable input with a given quantity of fixed inputs, the marginal product of the variable input eventually diminishes.

Question 8

In the short run, which of the following is true about a firm's plant size?

Accepted Answer

It is fixed.

Question 9

If the marginal product of labour is greater than the average product of labour, what happens to the average product?

Accepted Answer

Average product increases.

Question 10

A firm’s total cost (TC) is $$400, total fixed cost (TFC) is 100$$, and output (Q) is 20 units. What is the average variable cost (AVC)?

Accepted Answer

$$ AVC = (TC - TFC) / Q = (400 - 100) / 20 = 15 $$

Question 11

Which of the following best explains why the average total cost (ATC) curve is U-shaped?

Accepted Answer

Due to spreading total fixed cost over more output and eventually diminishing returns causing average variable cost to rise.

Question 12

If a technological advance allows a firm to use more capital and less labour, what is the likely effect on the firm’s cost curves?

Accepted Answer

Fixed costs increase and variable costs decrease.

Question 13

Which equation correctly expresses marginal cost (MC)?

Accepted Answer

$$ MC = \Delta TC / \Delta Q $$

Question 14

A firm’s opportunity cost of production includes which of the following?

Accepted Answer

Explicit costs, implicit costs, and the normal profit of the owner.

Question 15

If the price of a variable input increases, what happens to the firm’s cost curves?

Accepted Answer

The TC, ATC, and MC curves all shift upward.

Question 16

Which of the following is true about sunk costs?

Accepted Answer

They are costs incurred by the firm and cannot be changed.

Question 17

Suppose a firm’s marginal product of labour is falling. What is likely happening to its marginal cost?

Accepted Answer

Marginal cost is rising.

Question 18

If a firm’s average fixed cost (AFC) is $$5 and average variable cost (AVC) is 10 at a $$given output, what is the average total cost (ATC)?

Accepted Answer

$$ ATC = AFC + AVC = 5 + 10 = 15 $$

Question 19

Which of the following best describes normal profit?

Accepted Answer

It is the minimum profit required to keep an entrepreneur in business and is considered an opportunity cost.

Output & Costs: Economic and Accounting Measures, Short-Run Product and Cost Curves

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