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

A firm owns a building worth $$500,000. If it uses the building for production instead of renting it out for 30$$,000 per year, what is the opportunity cost of using the building?

Accepted Answer

The opportunity cost is $30,000, the forgone rental income.

Question 3

Which formula correctly expresses the marginal product of labour ($$MP_L$$)?

Accepted Answer

$$MP_L = \frac{\Delta q}{\Delta L}$$

Question 4

Suppose 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

3 units

Question 5

Which statement best describes 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 ($$MP_L) is $$greater than the average product of labour ($$AP_L$$), what happens to $$AP_L as $$more labour is employed?

Accepted Answer

$$AP_L$$ increases.

Question 7

Which equation correctly defines average total cost ($$ATC$$)?

Accepted Answer

$$ATC = AFC + AVC$$

Question 8

A firm’s total fixed cost ($$TFC) is$$ $$50$$ and total variable cost ($$TVC) is$$ $$100$$ when producing $$10$$ units. What is the average total cost ($$ATC$$)?

Accepted Answer

$$ATC = \frac{50 + 100}{10} = 15$$

Question 9

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

Accepted Answer

Because spreading fixed costs over more output lowers $$AFC$$, but eventually diminishing returns cause $$AVC to $$rise faster than $$AFC$$ falls.

Question 10

If the price of a variable input (such as labour) increases, what happens to the firm’s cost curves?

Accepted Answer

The total cost ($$TC$$), average total cost ($$ATC$$), and marginal cost ($$MC) $$curves all shift upward.

Question 11

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

Accepted Answer

Capital (the plant)

Question 12

Which of the following is a sunk cost?

Accepted Answer

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

Question 13

Suppose a firm’s production function exhibits constant returns to scale. If all inputs are doubled, what happens to output?

Accepted Answer

Output exactly doubles.

Question 14

Which formula correctly expresses average variable cost ($$AVC) in $$terms of wage ($$w) $$and average product of labour ($$AP_L) in $$the short run?

Accepted Answer

$$AVC = \frac{w}{AP_L}$$

Question 15

A firm is deciding which plant size to use for producing 13 units of output. The average total costs ($$ATC) $$for different plant sizes are: ATC1 = $$7.69$$, ATC2 = $$6.80$$, ATC3 = $$7.69$$, ATC4 = $$9.50. $$Which plant size should the firm choose?

Accepted Answer

Plant 2

Question 16

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

Accepted Answer

$$LRAC$$ falls.

Question 17

Which of the following is NOT included in a firm’s opportunity cost of production?

Accepted Answer

Sunk costs that cannot be changed.

Question 18

If the marginal cost ($$MC) $$curve is below the average total cost ($$ATC) $$curve, what is happening to $$ATC as $$output increases?

Accepted Answer

$$ATC is $$decreasing.

Question 19

A firm’s long-run average cost curve ($$LRAC) $$reaches its lowest point at an output of 20 units. What is this output level called?

Accepted Answer

Minimum efficient scale

Output and Cost – Microeconomics Study Notes (Chapter 10)

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