Question 1

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

Accepted Answer

Accounting profit is total revenue minus explicit costs, while economic profit is total revenue minus both explicit and implicit (opportunity) costs.

Question 2

Suppose Sam's Smoothies has total revenue of $$150,000, explicit costs of 100$$,000, and implicit costs (including normal profit) of $50,000. What is Sam's economic profit?

Accepted Answer

$0

Question 3

Which of the following is an example of an implicit cost for a business owner?

Accepted Answer

The salary the owner could have earned working elsewhere

Question 4

A firm is deciding whether to use $10,000 of its own funds to buy new equipment or invest it in a bank account earning 5% interest. What is the opportunity cost of using the funds to buy equipment?

Accepted Answer

The 5% interest that could have been earned, or $500

Question 5

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

Accepted Answer

At least one input is fixed.

Question 6

If a firm increases the number of workers it employs and its total product increases at an increasing rate, the firm is experiencing:

Accepted Answer

Increasing marginal returns

Question 7

Which formula correctly represents average total cost (ATC)?

Accepted Answer

$$ATC = AFC + AVC$$

Question 8

Suppose a firm’s total cost (TC) is $$500 when producing 100 units. Its total fixed cost (TFC) is 200. $$What is the average variable cost (AVC)?

Accepted Answer

$$AVC = \frac{TC - TFC}{Q} = \frac{500 - 200}{100} = 3$$

Question 9

Why is the average total cost (ATC) curve typically U-shaped?

Accepted Answer

Because average fixed cost decreases and average variable cost eventually increases as output increases

Question 10

If marginal cost (MC) is below average total cost (ATC), what happens to ATC as output increases?

Accepted Answer

ATC decreases

Question 11

Which of the following best describes economies of scale?

Accepted Answer

Long-run average total cost decreases as output increases

Question 12

A firm is experiencing diseconomies of scale if:

Accepted Answer

Long-run average total cost increases as output increases

Question 13

Suppose a firm’s total product increases from 6 to 9 units when the number of workers increases from 3 to 4. What is the marginal product of the fourth worker?

Accepted Answer

3

Question 14

Which of the following is a correct formula for marginal cost (MC)?

Accepted Answer

$$MC = \frac{\Delta TC}{\Delta Q}$$

Question 15

If a firm’s average product of labor is increasing, what must be true about the marginal product of labor?

Accepted Answer

Marginal product is greater than average product

Question 16

In the long run, which of the following is true about a firm’s inputs?

Accepted Answer

All inputs are variable

Question 17

A firm’s plant size is fixed in the:

Accepted Answer

Short run

Question 18

Suppose a firm’s total revenue is $$200,000, explicit costs are 120$$,000, and implicit costs are $60,000. What is the firm’s accounting profit?

Accepted Answer

$80,000

Question 19

Which of the following best illustrates the law of diminishing marginal returns?

Accepted Answer

As more workers are hired, each additional worker eventually adds less to total output than the previous one.

Question 20

If a firm’s total fixed cost is $300 and it produces 50 units, what is its average fixed cost (AFC)?

Accepted Answer

$$AFC = \frac{300}{50} = 6$$

Economic Cost, Profit, and Production in the Short Run and Long Run

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