Q: Which formula correctly calculates marginal cost (MC)?

$$MC = \frac{\text{Change in total cost}}{\text{Change in output}}$$

Q: Which equation correctly calculates average variable cost (AVC)?

$$AVC = \frac{\text{Total Variable Cost}}{\text{Output}}$$

Question 1

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

Accepted Answer

Accounting profit is total revenues minus explicit costs, while economic profit is total revenues minus both explicit and implicit costs.

Question 2

A business owner invests $5,000 of personal savings into their firm, forgoing a 5% annual interest rate. What is the opportunity cost of this capital for one year?

Accepted Answer

$250

Question 3

Suppose a firm earns $$77,250 in total revenue, pays 12$$,000 in rent, $$1,000 in office supplies, 20$$,000 for staff, and $$4,000 for phone expenses. The owner could have earned 40$$,000 working elsewhere and $250 in interest on savings. What is the firm's economic profit?

Accepted Answer

$0

Question 4

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

Accepted Answer

Foregone salary the owner could have earned elsewhere

Question 5

In the short run, which of the following statements is true regarding inputs?

Accepted Answer

At least one input is fixed.

Question 6

The law of diminishing marginal product states that:

Accepted Answer

Successive equal-sized increases in a variable input, with fixed inputs, eventually result in smaller increases in output.

Question 7

If a firm’s total fixed costs are $1,000 and it produces 100 units, what is the average fixed cost (AFC) per unit?

Accepted Answer

$10

Question 8

Given the following cost data for a firm: Total Fixed Costs (TFC) = $$1,000, Average Variable Cost (AVC) = 10$$, and Output (Q) = 100 units. What is the Total Cost (TC)?

Accepted Answer

$2,000

Question 9

Which formula correctly calculates marginal cost (MC)?

Accepted Answer

$$MC = \frac{	ext{Change in total cost}}{	ext{Change in output}}$$

Question 10

If the marginal cost (MC) of producing the 100th unit is $$12 and the average total cost (ATC) at 99 units is 10$$, what will happen to ATC when the 100th unit is produced?

Accepted Answer

ATC will increase

Question 11

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

Accepted Answer

Due to the law of diminishing marginal product

Question 12

In the long run, all inputs are:

Accepted Answer

Variable

Question 13

Which of the following is a source of economies of scale?

Accepted Answer

Increased division of labour and specialization

Question 14

A firm is experiencing diseconomies of scale. Which of the following is most likely occurring?

Accepted Answer

Management and communication costs are rising disproportionately

Question 15

The minimum efficient scale of a firm is:

Accepted Answer

The output level where average total cost is minimized

Question 16

If a firm’s marginal product of labour is increasing, what happens to marginal cost?

Accepted Answer

Marginal cost decreases

Question 17

Which equation correctly calculates average variable cost (AVC)?

Accepted Answer

$$AVC = \frac{	ext{Total Variable Cost}}{	ext{Output}}$$

Question 18

A car owner drives 20,000 km per year. If average variable cost is $$0.25/km and total fixed costs are 7$$,180 per year, what is the average total cost per km?

Accepted Answer

$0.609/km

Question 19

Which of the following best describes the relationship between marginal cost (MC) and average total cost (ATC)?

Accepted Answer

ATC reaches its minimum where MC equals ATC.

Chapter 8: The Firm – Cost and Output Determination (Microeconomics Study Notes)

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