Question 1

Which of the following best describes economic profit for a firm?

Accepted Answer

Economic profit is total revenue minus total cost, with total cost measured as the opportunity cost of production.

Question 2

Suppose a firm owns a building worth $500,000 and uses it for production. What is the opportunity cost associated with this building?

Accepted Answer

The economic depreciation and the interest forgone from not investing the funds elsewhere.

Question 3

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

Accepted Answer

Capital (the firm's plant)

Question 4

A firm increases the number of workers from 2 to 3, and total output rises from 10 to 13 units. What is the marginal product of the third worker?

Accepted Answer

$$MP_L = \frac{\Delta q}{\Delta L} = \frac{13-10}{3-2} = 3$$

Question 5

Which statement best explains the law of diminishing returns?

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 6

If the marginal product of labour exceeds the average product of labour, what happens to the average product?

Accepted Answer

Average product increases.

Question 7

Given the cost formulas $$TC = TFC + TVC$$, $$AFC = \frac{TFC}{q}$$, and $$AVC = \frac{TVC}{q}$$, which equation correctly expresses average total cost?

Accepted Answer

$$ATC = AFC + AVC$$

Question 8

A firm’s marginal cost curve is at its minimum at the same output level where which other curve is at its maximum?

Accepted Answer

Marginal product curve

Question 9

If a firm experiences economies of scale, what happens to its long-run average cost as output increases?

Accepted Answer

Long-run average cost falls.

Question 10

Suppose Campus Sweaters can produce 13 sweaters per day at the following average total costs: $$ATC_1$$ = \$$7.69$$, $$ATC_2$$ = \$$6.80$$, $$ATC_3$$ = \$$7.69$$, $$ATC_4$$ = \$$9.50. $$Which plant size should the firm choose to minimize cost?

Accepted Answer

Plant 2

Question 11

Which of the following is an example of a sunk cost?

Accepted Answer

The amount paid for a plant that has no resale value.

Question 12

If a firm increases all its inputs by 50% and output increases by exactly 50%, what type of returns to scale is the firm experiencing?

Accepted Answer

Constant returns to scale

Question 13

Which formula correctly calculates marginal cost?

Accepted Answer

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

Question 14

A technological improvement shifts which of the following curves downward?

Accepted Answer

Cost curves (such as ATC and MC)

Question 15

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

Accepted Answer

Total cost, average total cost, and marginal cost curves all shift upward.

Question 16

Which of the following best describes normal profit?

Accepted Answer

Normal profit is the cost of entrepreneurship and is an opportunity cost of production.

Question 17

If a firm’s average variable cost is at its minimum, what is true about the marginal cost at that output level?

Accepted Answer

Marginal cost equals average variable cost.

Question 18

Which of the following is NOT considered part of a firm's opportunity cost of production?

Accepted Answer

Sunk costs

Question 19

If a firm’s long-run average cost curve is U-shaped, what does the minimum point represent?

Accepted Answer

The minimum efficient scale

Question 20

A firm’s production function is given by $$q = f(L, K). If $$the firm doubles both $$L$$ and $$K$$ and output more than doubles, what does this indicate?

Accepted Answer

Increasing returns to scale

Output and Cost: Microeconomics Study Notes (Chapter 10)

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