Question 1

Which of the following best describes economic profit?

Accepted Answer

Economic profit is total revenue minus the opportunity cost of production, including both explicit and implicit costs.

Question 2

A firm owner uses $200,000 of her own money to buy equipment for her business. If the best alternative was to invest in a bond earning 4% 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 hired employees.

Question 4

If a firm’s total fixed cost (TFC) is $$50 and its total variable cost (TVC) is 120$$, what is its total cost (TC)?

Accepted Answer

$170

Question 5

Which formula correctly calculates marginal cost (MC)?

Accepted Answer

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

Question 6

In the short run, which input is typically considered fixed for most firms?

Accepted Answer

Capital (the firm's plant)

Question 7

Which statement about sunk costs is correct?

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be changed.

Question 8

A firm hires a second worker, and total output increases from 8 to 14 units. What is the marginal product of the second worker?

Accepted Answer

6 units

Question 9

According to the law of diminishing returns, what happens as a firm uses more of a variable input with a fixed input?

Accepted Answer

The marginal product of the variable input eventually diminishes.

Question 10

If average variable cost (AVC) is falling, what must be true about marginal cost (MC) relative to AVC?

Accepted Answer

MC is below AVC.

Question 11

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

Accepted Answer

ATC falls at low output levels due to rapidly falling AFC, then rises as AVC increases due to diminishing returns.

Question 12

If a firm’s total cost (TC) is $200 and it produces 10 units, what is its average total cost (ATC)?

Accepted Answer

$$ATC = TC / Q = 200 / 10 = 20$$

Question 13

Which of the following would shift a firm's cost curves downward?

Accepted Answer

A technological improvement that increases productivity

Question 14

If a firm’s average fixed cost (AFC) is $$5 and average variable cost (AVC) is 7$$, what is its average total cost (ATC)?

Accepted Answer

$$ATC = AFC + AVC = 5 + 7 = 12$$

Question 15

Which of the following is NOT an implicit cost?

Accepted Answer

Wages paid to employees

Question 16

When does the marginal cost (MC) curve intersect the average total cost (ATC) curve?

Accepted Answer

At the minimum point of the ATC curve

Question 17

A firm’s total product increases from 20 to 24 units when the number of workers increases from 4 to 5. What is the marginal product of the fifth worker?

Accepted Answer

4 units

Question 18

If a technological advance causes a firm to use more capital and less labour, what is the likely effect on costs?

Accepted Answer

Fixed costs increase and variable costs decrease.

Question 19

Which of the following best describes normal profit?

Accepted Answer

Normal profit is the minimum profit necessary to keep resources employed in a firm and is considered an opportunity cost.

Question 20

If the price of a variable input increases, which cost curves will shift upward?

Accepted Answer

Total cost (TC), average total cost (ATC), and marginal cost (MC)

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

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