Q: Which equation correctly represents economic profit?

$$\text{economic profit} = \text{total revenue} - \text{total economic cost}$$

Question 1

A firm produces 3,000 belts and sells each for $10. The explicit costs from suppliers are $15,000, labor costs are $1,600, and the opportunity cost of capital (10% of $20,000) is $2,000. What is the firm's economic profit?

Accepted Answer

$1,000 loss

Question 2

Which of the following best describes the law of diminishing returns?

Accepted Answer

When additional units of a variable input are added to fixed inputs, after a certain point, the marginal product of the variable input declines.

Question 3

A firm is deciding which production technology to use. If labor costs rise significantly, which type of technology is the firm most likely to adopt?

Accepted Answer

Capital-intensive technology

Question 4

Which equation correctly represents economic profit?

Accepted Answer

$$	ext{economic profit} = 	ext{total revenue} - 	ext{total economic cost}$$

Question 5

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

Accepted Answer

The average product rises.

Question 6

A firm faces the following production function: With 2 units of labor, total output is 25; with 3 units, total output is 35. What is the marginal product of the third unit of labor?

Accepted Answer

10

Question 7

Which of the following is NOT considered part of a firm's total economic cost?

Accepted Answer

Revenue from sales

Question 8

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

Accepted Answer

Firms operate under a fixed scale of production and cannot enter or exit the industry.

Question 9

What is the slope of an isoquant representing the marginal rate of technical substitution (MRTS) between capital (K) and labor (L)?

Accepted Answer

$$\frac{MP_K}{MP_L}$$

Question 10

A firm is choosing between five technologies to produce 100 units of output. If the price of labor increases, which technology is likely to become more cost-effective?

Accepted Answer

The technology that uses the least labor and more capital

Question 11

Which of the following best describes an isocost line?

Accepted Answer

A graph showing all combinations of capital and labor available for a given total cost

Question 12

At the cost-minimizing equilibrium, which condition must be satisfied?

Accepted Answer

$$\frac{MP_L}{P_L} = \frac{MP_K}{P_K}$$

Question 13

If a firm’s total product curve shows diminishing marginal returns after a certain point, what does this imply about the marginal product of labor?

Accepted Answer

It decreases as more labor is added.

Question 14

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

Accepted Answer

Wages paid to employees

Question 15

Suppose a firm’s average product of labor is 20 units and it employs 5 workers. What is the total product?

Accepted Answer

100 units

Question 16

Which of the following statements about the long run is correct?

Accepted Answer

All factors of production are variable, and firms can enter or exit the industry.

Question 17

A firm’s total revenue is $50,000, explicit costs are $30,000, and implicit costs are $15,000. What is the economic profit?

Accepted Answer

$5,000

Question 18

If the opportunity cost of capital is not included in a firm’s cost calculations, what is the likely result?

Accepted Answer

Accounting profit will be overstated compared to economic profit.

Question 19

Which of the following best describes the marginal rate of technical substitution (MRTS)?

Accepted Answer

The rate at which a firm can substitute capital for labor and hold output constant.

Question 20

A firm’s isocost line is given by $K + L = 5$. If the price of capital doubles while the price of labor remains the same, what happens to the slope of the isocost line?

Accepted Answer

The isocost line becomes steeper.

Chapter 7: The Production Process – The Behavior of Profit-Maximizing Firms (Microeconomics Study Notes)

Study Guide - Practice Questions

Study Guide - Flashcards