Question 1

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

Accepted Answer

Accounting profit subtracts only explicit costs from total revenue, while economic profit subtracts both explicit and implicit costs from total revenue.

Question 2

A firm’s production function in the short run is given by $$ q = f(L, \! K) . If $$capital ($$ K ) is $$fixed, what happens to output as more units of labour ($$ L ) $$are added, according to the law of diminishing returns?

Accepted Answer

Output increases at a decreasing rate after a certain point.

Question 3

Suppose a bakery’s total product of labour increases from 100 to 120 loaves when the number of workers increases from 4 to 5. What is the marginal product of the fifth worker?

Accepted Answer

$$ MP = \frac{\Delta TP}{\Delta L} = \frac{120 - 100}{5 - 4} = 20 $$ loaves

Question 4

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 5

A firm’s average product of labour ($$ AP ) is at $$its maximum when:

Accepted Answer

The marginal product of labour ($$ MP ) is $$equal to the average product.

Question 6

Which of the following cost curves is always horizontal in the short run?

Accepted Answer

Total fixed cost ($$ TFC )$$

Question 7

If a firm’s marginal cost ($$ MC ) is $$below its average variable cost ($$ AVC $$), what will happen to $$ AVC  as $$output increases?

Accepted Answer

$$ AVC $$ will decrease.

Question 8

A digital streaming company faces large initial development costs but near-zero marginal costs for each additional user. Which of the following statements is true?

Accepted Answer

Marginal cost ($$ MC ) is $$constant and close to zero for all units.

Question 9

Which of the following best describes the capacity of a firm in the short run?

Accepted Answer

The largest output that can be produced without encountering rising average cost per unit.

Question 10

Suppose a firm’s total cost ($$ TC ) $$increases from $$500 to 540 $$when output ($$ Q ) $$increases from 50 to 55 units. What is the marginal cost ($$ MC ) of $$producing the 51st to 55th units?

Accepted Answer

$$ MC = \frac{540 - 500}{55 - 50} = 8 $$ per unit

Question 11

Which of the following is NOT a characteristic of a corporation?

Accepted Answer

Profits go directly to the owners without any management or board.

Question 12

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

Accepted Answer

Both $$ ATC $$ and $$ MC $$ curves shift upward.

Question 13

A coffee shop hires more baristas, but the number of espresso machines is fixed. Initially, output per worker rises, but after a certain point, it begins to fall. This is an example of:

Accepted Answer

The law of diminishing returns.

Question 14

Which of the following equations correctly represents the relationship between average total cost, average fixed cost, and average variable cost?

Accepted Answer

$$ ATC = AFC + AVC $$

Question 15

A non-profit organization differs from a corporation in that:

Accepted Answer

It reinvests surpluses in its mission rather than distributing profits.

Question 16

If a firm is producing at an output less than the point of minimum average total cost ($$ ATC $$), it is said to have:

Accepted Answer

Excess capacity.

Question 17

Which of the following statements about marginal cost ($$ MC ) $$and marginal product ($$ MP ) is $$correct?

Accepted Answer

$$ MC $$ reaches its minimum when $$ MP $$ reaches its maximum.

Question 18

A carpenter quits a $$60,000/year job to start a business. In the first year, the business earns 100$$,000 in revenue and incurs $70,000 in explicit costs. What is the economic profit?

Accepted Answer

$$100,000 - (70$$,000 + $$60,000) = -30$$,000$

Question 19

Which of the following is a plausible reason for the U-shape of the average variable cost ($$ AVC ) $$curve in the short run?

Accepted Answer

Diminishing average product of the variable factor after a certain point.

Question 20

A firm’s total cost ($$ TC ) is$$ $$400$$ when output ($$ Q ) is$$ $$20$$ units, and $$500$$ when output is $$30$$ units. What is the marginal cost ($$ MC ) of $$increasing output from $$20 to$$ $$30$$ units?

Accepted Answer

$$ MC = \frac{500 - 400}{30 - 20} = 10 $$ per unit

Chapter 7 - Producers in the Short Run: Production, Costs, and Profits (Microeconomics Chapter 7 Study Notes)

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