Question 1

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

Accepted Answer

Economic profit is total revenue minus both explicit and implicit (opportunity) costs, while accounting profit only subtracts explicit costs.

Question 2

Suppose a pizza parlor has a production function given by $$Q = 10L + 4.5L^2$ - 0.333L^3$, where L$ is the number of workers. What does the negative cubic term -0.333L^3$ represent in the context of production?

Accepted Answer

It captures the effect of diminishing marginal returns and overcrowding as too many workers are added.

Question 3

A firm in a perfectly competitive market faces a market price $$P^*. $$Which of the following is true about the firm's marginal revenue ($$MR$$)?

Accepted Answer

$$MR$$ equals $$P^*$$ for every unit sold because the firm is a price taker.

Question 4

If a firm’s total cost function is $$TC = 500 + 100Q$$, where $$Q is $$the quantity produced, what is the firm’s average fixed cost ($$AFC) $$when $$Q = 10$$?

Accepted Answer

$$AFC = \100$

Question 5

In the short run, a firm should continue to operate even if it is making negative economic profit as long as:

Accepted Answer

Price is greater than or equal to average variable cost ($$P \geq AVC).$$

Question 6

Which of the following best explains why average fixed cost ($$AFC) $$decreases as output increases?

Accepted Answer

Fixed costs are spread over more units, so $$AFC = \frac{TFC}{Q}$$ declines as $$Q$$ rises.

Question 7

A firm’s marginal cost ($$MC) $$curve intersects its average total cost ($$ATC) $$curve at:

Accepted Answer

The minimum point of the $$ATC$$ curve.

Question 8

Suppose a firm in a perfectly competitive market is producing at the output level where $$P = MC = ATC. $$What is the firm’s economic profit?

Accepted Answer

Zero economic profit.

Question 9

Which of the following is a real-world example of a fixed cost for a manufacturing firm?

Accepted Answer

Monthly rent for the factory building.

Question 10

Why do firms in highly competitive industries, such as car manufacturing, focus on reducing variable costs rather than fixed costs?

Accepted Answer

Because variable costs are a larger portion of total costs when producing at high volumes.

Question 11

If the marginal product of labor initially increases as more workers are hired, but eventually decreases and becomes negative, which economic principle does this illustrate?

Accepted Answer

Law of diminishing marginal returns.

Question 12

In the context of market structures, which of the following is NOT a characteristic of perfect competition?

Accepted Answer

Product differentiation.

Question 13

A firm’s profit-maximizing rule in a perfectly competitive market is to produce the quantity where:

Accepted Answer

$$MC = MR$$

Question 14

Suppose a firm’s total revenue is $$TR = P 	imes Q$$ and total cost is $$TC = ATC 	imes Q. $$Which formula correctly expresses profit ($$\pi) in $$terms of $$P$$, $$ATC$$, and $$Q$$?

Accepted Answer

$$\pi = (P - ATC) 	imes Q$$

Question 15

Which of the following best describes the role of barriers to entry in market structures?

Accepted Answer

Barriers to entry reduce competition and can lead to monopoly or oligopoly.

Question 16

A firm is considering shutting down in the short run. Its fixed costs are $$\1$$,000$$, variable costs are $$\$$1,000$$, and total revenue is $$\1$$,800$. What should the firm do?

Accepted Answer

Continue operating because total revenue covers all variable costs and part of fixed costs.

Question 17

Which of the following is an example of a real-world scenario where a firm experiences economies of scale?

Accepted Answer

A car manufacturer builds a larger factory, allowing average fixed costs to decrease as output increases.

Question 18

Which of the following statements about the short run and long run in production is correct?

Accepted Answer

In the short run, at least one input is fixed, while in the long run all inputs can be varied.

Question 19

If a firm’s price falls below average variable cost ($$P \u003c AVC) in $$the short run, what is the optimal decision?

Accepted Answer

Shut down production immediately.

Production, Costs, and Perfect Competition: Microeconomics Study Notes

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