Question 1

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

Accepted Answer

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

Question 2

A bakery owner pays $$2,000 in wages, 1$$,000 for ingredients, and $$500 in rent. The owner could earn 800 $$working elsewhere and has $$10,000 invested in equipment that could earn 5% elsewhere. If the bakery's total revenue is 5$$,000, what is the economic profit?

Accepted Answer

Question 3

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

Accepted Answer

The opportunity cost of the owner's time spent managing the firm.

Question 4

Suppose a firm’s production function is $$Q = f(L, K)$$, where $$L is $$labour and $$K is $$capital. In the short run, which of the following statements is true?

Accepted Answer

At least one input, typically $$K$$, is fixed while $$L is $$variable.

Question 5

A firm increases the number of workers from 4 to 5, and total output rises from 100 to 120 units. What is the marginal product of the fifth worker?

Accepted Answer

$$MP = 120 - 100 = 20$$

Question 6

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

Accepted Answer

A factory adds more workers to a fixed number of machines, and each additional worker increases output by less than the previous one.

Question 7

If the average product (AP) of labour is at its maximum, what is true about the marginal product (MP) of labour at that point?

Accepted Answer

MP is equal to AP.

Question 8

Which of the following is NOT a form of business organization described in the study materials?

Accepted Answer

Limited liability company (LLC)

Question 9

A firm’s total cost (TC) is $$TC = TFC + TVC. If $$total fixed cost (TFC) is $$500$$ and total variable cost (TVC) is $$1,200$$, what is the average total cost (ATC) if output $$Q = 100$$?

Accepted Answer

$$ATC = \frac{500 + 1,200}{100} = 17$$

Question 10

Which statement about marginal cost (MC) in the short run is correct?

Accepted Answer

MC is the change in total cost resulting from increasing output by one unit, and is always a marginal variable cost.

Question 11

If a firm is operating at an output less than its capacity, what does this imply?

Accepted Answer

The firm has excess capacity.

Question 12

Which of the following would cause a firm’s average variable cost (AVC) and marginal cost (MC) curves to shift upward?

Accepted Answer

An increase in the price of a variable factor.

Question 13

In the context of digital products, why might the law of diminishing returns not apply?

Accepted Answer

Digital products often have large initial fixed costs but near-zero marginal costs, so AVC and MC remain low and constant.

Question 14

A corporation raises funds by selling shares. The profits paid out to shareholders are called:

Accepted Answer

Dividends

Question 15

Which of the following is true about the relationship between marginal product (MP) and average product (AP)?

Accepted Answer

MP intersects AP at AP's maximum point.

Question 16

A firm’s economic profit is negative. What does this indicate?

Accepted Answer

The firm is experiencing an economic loss.

Question 17

Which of the following is NOT considered an explicit cost?

Accepted Answer

Depreciation of machinery

Question 18

If a firm’s total product (TP) increases at a decreasing rate as more units of labour are added, which law is being illustrated?

Accepted Answer

Law of diminishing marginal returns

Question 19

Which of the following is a plausible real-world example of diminishing marginal returns?

Accepted Answer

Each additional filter on a smokestack reduces pollution by less than the previous filter.

Question 20

Which of the following is true about multinational enterprises (MNEs)?

Accepted Answer

MNEs are very common among larger corporations.

Producers in the Short Run: Organization, Financing, and Cost Concepts

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