Question 1

Which of the following best describes economic profit?

Accepted Answer

Economic profit is total revenue minus total opportunity cost of production.

Question 2

A firm’s opportunity cost of production includes which of the following components?

Accepted Answer

Resources bought in the market, resources owned by the firm, and resources supplied by the firm's owner.

Question 3

If a firm’s owner supplies labour but does not take a wage, what is the opportunity cost associated with this?

Accepted Answer

The wage income forgone by not taking the best alternative job.

Question 4

Which formula correctly expresses a firm’s total cost in the short run?

Accepted Answer

$TC = TFC + TVC$

Question 5

What is the marginal product of labour?

Accepted Answer

The change in total product resulting from a one-unit increase in the quantity of labour employed, with all other inputs remaining the same.

Question 6

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 7

Suppose a firm’s total fixed cost is $100 and its total variable cost is $300. What is its average total cost if it produces 20 units?

Accepted Answer

$ATC = \frac{100 + 300}{20} = 20$

Question 8

Which of the following is true about the relationship between marginal cost (MC) and average variable cost (AVC)?

Accepted Answer

When MC equals AVC, AVC is at its minimum.

Question 9

A technological advance that increases productivity will have what effect on a firm’s cost curves?

Accepted Answer

Shift the product curves upward and the cost curves downward.

Question 10

If the price of a variable input increases, which cost curves will shift upward?

Accepted Answer

Total cost (TC), average total cost (ATC), and marginal cost (MC) curves.

Question 11

In the long run, which of the following statements is correct?

Accepted Answer

All inputs are variable and all costs are variable.

Question 12

What is the minimum efficient scale?

Accepted Answer

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

Question 13

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 14

If a firm is experiencing diseconomies of scale, what is happening to its long-run average cost curve?

Accepted Answer

It is sloping upward as output increases.

Question 15

Which equation correctly expresses average variable cost (AVC)?

Accepted Answer

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

Question 16

Suppose a firm’s marginal product of labour is increasing. What is happening to its marginal cost?

Accepted Answer

Marginal cost is falling.

Question 17

Which of the following is an example of a sunk cost?

Accepted Answer

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

Question 18

If a firm’s average fixed cost (AFC) is falling rapidly at low output levels, what effect does this have on the average total cost (ATC) curve?

Accepted Answer

It causes the ATC curve to fall at low output levels.

Question 19

Which of the following best explains why the average variable cost (AVC) curve is U-shaped?

Accepted Answer

Because marginal product initially exceeds average product, then eventually falls below average product.

Microeconomics: Output and Cost (Chapter 10 Study Notes)

Study Guide - Practice Questions