Question 1

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

Accepted Answer

Economic profit is calculated as total revenue minus total opportunity costs (explicit + implicit), while accounting profit is total revenue minus total explicit costs.

Question 2

A firm pays $$50,000 in wages, 10$$,000 for materials, and $$10,000 in interest. The owner could earn 40$$,000 elsewhere and owns a building that could be rented for $1,000. What is the firm's total opportunity cost?

Accepted Answer

$111,000

Question 3

Which formula correctly calculates Marginal Cost (MC)?

Accepted Answer

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

Question 4

If a firm’s total fixed cost (TFC) is $$50 and its total variable cost (TVC) is 70 at an $$output of 2 units, what is the average total cost (ATC) per unit?

Accepted Answer

$$ATC = \frac{TC}{Q} = \frac{50+70}{2} = 60$$

Question 5

Which of the following is an example of an implicit cost?

Accepted Answer

Forgone interest income from funds invested in the business by the owner.

Question 6

The law of diminishing returns states that:

Accepted Answer

Beyond some point, the marginal product decreases as additional units of a variable factor are added to a fixed factor.

Question 7

If the marginal product of labor is greater than the average product of labor, what happens to the average product?

Accepted Answer

The average product increases.

Question 8

Suppose a firm’s total cost (TC) is $$95 when output (Q) is 3 units. If total fixed cost (TFC) is 50$$, what is the total variable cost (TVC)?

Accepted Answer

$$TVC = TC - TFC = 95 - 50 = 45$$

Question 9

Which of the following will cause a downward shift in a firm’s cost curves?

Accepted Answer

A technological improvement that allows more output from the same resources.

Question 10

In the short run, which of the following is true?

Accepted Answer

At least one input is fixed.

Question 11

A firm’s long-run average cost curve is U-shaped primarily because:

Accepted Answer

Economies of scale occur at low output levels and diseconomies of scale at high output levels.

Question 12

If a firm increases its output and its long-run average cost decreases, the firm is experiencing:

Accepted Answer

Economies of scale.

Question 13

Which of the following best describes a sunk cost?

Accepted Answer

A past cost of buying a plant that has no resale value.

Question 14

If the average product (AP) of labor is rising, what is happening to the average variable cost (AVC)?

Accepted Answer

AVC is falling.

Question 15

A firm’s minimum efficient scale is:

Accepted Answer

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

Question 16

Which equation correctly calculates average variable cost (AVC)?

Accepted Answer

$$AVC = \frac{TVC}{Q}$$

Question 17

If a firm’s marginal product of labor is falling, what is happening to its marginal cost curve?

Accepted Answer

Marginal cost is rising.

Question 18

Which of the following is true about normal profit?

Accepted Answer

It is the minimum profit necessary to keep a firm in operation.

Question 19

Suppose a firm’s total revenue is $$100,000, explicit costs are 70$$,000, and implicit costs are $30,000. What is the firm’s economic profit?

Accepted Answer

$$0$$

Question 20

Which of the following best describes constant returns to scale?

Accepted Answer

Long-run average cost curve does not change as output increases.

Production and Costs: Microeconomics Study Notes

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