Question 1

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

Accepted Answer

Economic profit is total revenue minus total opportunity cost (including both explicit and implicit costs), while accounting profit is total revenue minus explicit costs only.

Question 2

A firm owns a building it uses for production. What is the opportunity cost of using this building?

Accepted Answer

The rent the firm could earn by leasing the building to another business.

Question 3

Suppose a firm’s total revenue is $400,000 and its total opportunity cost of production is $370,000. What is its economic profit?

Accepted Answer

$30,000

Question 4

Which of the following is NOT considered part of a firm's opportunity cost of production?

Accepted Answer

The sunk cost of a plant that has no resale value.

Question 5

In the short run, which input is typically fixed for most firms?

Accepted Answer

Capital (the firm's plant)

Question 6

Which statement about sunk costs is correct?

Accepted Answer

Sunk costs are costs that cannot be changed and are irrelevant to current decisions.

Question 7

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

Accepted Answer

Average product increases.

Question 8

Which formula correctly expresses total cost in the short run?

Accepted Answer

$TC = TFC + TVC$

Question 9

A firm hires a third worker, and total product increases from 10 to 13 units. What is the marginal product of the third worker?

Accepted Answer

3 units

Question 10

Why does the average variable cost (AVC) curve typically have a U-shape?

Accepted Answer

Because marginal product initially rises, then falls, affecting AVC.

Question 11

Which of the following best explains 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 12

If a technological advance allows a firm to use more capital and less labour, what is the likely effect on its cost curves?

Accepted Answer

Fixed costs increase and variable costs decrease.

Question 13

Which cost curve is NOT affected by an increase in fixed costs?

Accepted Answer

Marginal cost (MC)

Question 14

What is the minimum efficient scale?

Accepted Answer

The smallest quantity of output at which long-run average cost is minimized.

Question 15

Suppose a firm’s ATC for producing 13 sweaters per day is $7.69 with one machine, $6.80 with two machines, $7.69 with three machines, and $9.50 with four machines. What is the least-cost way to produce 13 sweaters per day?

Accepted Answer

Using two machines

Question 16

Which of the following statements about the long-run average cost (LRAC) curve is correct?

Accepted Answer

The LRAC curve is made up of the lowest points of each short-run ATC curve for different plant sizes.

Question 17

If a firm experiences economies of scale, what happens to its long-run average cost as output increases?

Accepted Answer

Long-run average cost falls.

Question 18

Which equation correctly expresses average total cost (ATC)?

Accepted Answer

$ATC = AFC + AVC$

Question 19

A firm’s marginal cost (MC) curve intersects its average total cost (ATC) curve at which point?

Accepted Answer

At the minimum of the ATC curve.

Output and Cost – Microeconomics Chapter 10 Study Notes

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