Question 1

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

Accepted Answer

Accounting profit includes only explicit costs, while economic profit includes both explicit and implicit (opportunity) costs.

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 have earned by leasing the building to another business.

Question 3

Suppose a business owner could earn $60,000 per year working elsewhere but chooses to run her own firm and pays herself no salary. How should this be treated in economic cost calculations?

Accepted Answer

It is an implicit cost and should be included as part of the firm's opportunity cost of production.

Question 4

Which formula correctly represents the relationship between total cost, total fixed cost, and total variable cost?

Accepted Answer

$TC = TFC + TVC$

Question 5

If a firm’s marginal product of labor is increasing as more workers are hired, what is likely happening to marginal cost?

Accepted Answer

Marginal cost is decreasing.

Question 6

Which of the following statements about sunk costs is correct?

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered.

Question 7

A firm’s average total cost (ATC) curve is U-shaped because:

Accepted Answer

Average fixed cost falls as output increases, but eventually diminishing returns cause average variable cost to rise.

Question 8

If the marginal cost (MC) of producing an additional unit is below the average total cost (ATC), what happens to ATC as output increases?

Accepted Answer

ATC decreases.

Question 9

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

Accepted Answer

As more of a variable input is added to a fixed input, the marginal product of the variable input eventually decreases.

Question 10

Suppose a firm’s total fixed cost is $100, and its total variable cost is $200 when producing 10 units. What is the average total cost (ATC)?

Accepted Answer

$ATC = \frac{TC}{Q} = \frac{100 + 200}{10} = 30$

Question 11

Which of the following would cause a firm’s cost curves to shift downward?

Accepted Answer

A technological improvement that increases productivity.

Question 12

In the long run, all costs are:

Accepted Answer

Variable costs.

Question 13

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

Accepted Answer

The interest income forgone by using the owner’s funds to buy equipment.

Question 14

A firm is currently producing at a point where its marginal product of labor is below its average product of labor. What is happening to the average product?

Accepted Answer

Average product is decreasing.

Question 15

Which of the following best describes economies of scale?

Accepted Answer

Long-run average cost decreases as output increases.

Question 16

If a firm’s long-run average cost curve is U-shaped, the minimum point on the curve represents:

Accepted Answer

The minimum efficient scale.

Question 17

Suppose a firm can produce 100 units at a total cost of $500, or 200 units at a total cost of $800. What is the average total cost (ATC) at 200 units, and does this suggest economies of scale?

Accepted Answer

$ATC = \frac{800}{200} = 4$, which is lower than $\frac{500}{100} = 5$, so the firm experiences economies of scale.

Question 18

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

Accepted Answer

When MC is below AVC, AVC is falling; when MC is above AVC, AVC is rising.

Question 19

A bakery is considering whether to buy a new oven. The cost of the oven is $10,000 and cannot be recovered once purchased. If the bakery later decides to close, how should the $10,000 be treated in future decision-making?

Accepted Answer

It is a sunk cost and should not affect future decisions.

Chapter 10

Study Guide - Practice Questions

Study Guide - Flashcards