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, which is 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 $$AP_L$$?

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 its total variable cost ($$TVC) is$$ $$100 at a $$certain output level. What is the total cost ($$TC) at $$that output?

Accepted Answer

$$TC = 150$$

Question 9

If the marginal cost ($$MC) $$curve is below the average variable cost ($$AVC) $$curve, what is happening to $$AVC$$?

Accepted Answer

$$AVC is $$decreasing.

Question 10

Which of the following is a sunk cost?

Accepted Answer

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

Question 11

Suppose a firm can produce 13 sweaters per day using different plant sizes. The average total cost per sweater is $$7.69$$ with 1 machine, $$6.80$$ with 2 machines, $$7.69$$ with 3 machines, and $$9.50$$ with 4 machines. What is the least-cost way to produce 13 sweaters per day?

Accepted Answer

Use 2 knitting machines.

Question 12

Which of the following best describes economies of scale?

Accepted Answer

Features of a firm's technology that lead to falling long-run average cost as output increases.

Question 13

If a firm doubles all its inputs and output also doubles, what type of returns to scale does the firm experience?

Accepted Answer

Constant returns to scale

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

Which of the following will shift a firm's cost curves upward?

Accepted Answer

An increase in the price of a factor of production.

Question 16

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

Accepted Answer

Capital (the plant)

Question 17

If a firm experiences diminishing marginal returns to labour, what happens to marginal cost ($$MC) as $$output increases?

Accepted Answer

$$MC$$ rises as output increases.

Question 18

What is the minimum efficient scale?

Accepted Answer

The smallest quantity of output at which long-run average cost reaches its lowest level.

Question 19

Which of the following is NOT considered an opportunity cost of production?

Accepted Answer

A sunk cost paid for a plant with no resale value.

Question 20

Suppose a firm’s total product ($$q) is $$given by $$q = f(L, K)$$, where $$L is $$labour and $$K is $$capital. If the firm increases both $$L$$ and $$K by 50$$%, but output increases by less than 50%, what type of returns to scale does the firm experience?

Accepted Answer

Decreasing returns to scale

Output and Cost – Microeconomics Study Notes (Chapter 10)

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