Question 1

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

Accepted Answer

Accounting profit is calculated as total revenue minus explicit costs, while economic profit is total revenue minus the sum of explicit and implicit costs.

Question 2

A firm owner invests $200,000 of her own money into the business. If the best alternative use of her funds would earn 4% interest annually, what is the annual implicit cost of capital?

Accepted Answer

$8,000

Question 3

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

Accepted Answer

Interest forgone on owner's invested capital

Question 4

If a firm's total revenue is $$500,000, explicit costs are 300$$,000, and implicit costs are $100,000, what is the firm's economic profit?

Accepted Answer

$100,000

Question 5

Which formula correctly expresses average total cost (ATC)?

Accepted Answer

$$ATC = TC / Q$$

Question 6

In the short run, which of the following is true about fixed costs?

Accepted Answer

Fixed costs remain constant regardless of output.

Question 7

Suppose a firm’s total cost increases from $$120 to 150 $$when output increases from 10 to 15 units. What is the marginal cost per unit over this range?

Accepted Answer

$$MC = (150 - 120) / (15 - 10) = 6$$

Question 8

Which statement best describes the law of diminishing returns?

Accepted Answer

As more of a variable input is used with a fixed input, the marginal product of the variable input eventually diminishes.

Question 9

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 10

A firm’s total fixed cost is $$50, and its total variable cost is 100 at an $$output of 10 units. What is the average total cost?

Accepted Answer

$$ATC = (50 + 100) / 10 = 15$$

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

If a firm’s plant has no resale value, the amount paid for it is considered:

Accepted Answer

A sunk cost

Question 13

Which of the following best describes normal profit?

Accepted Answer

It is the minimum profit necessary to keep an entrepreneur in business, considered an opportunity cost.

Question 14

If the average variable cost (AVC) is falling, what can be said about the marginal cost (MC) relative to AVC?

Accepted Answer

MC is below AVC.

Question 15

Which equation correctly defines marginal cost?

Accepted Answer

$$MC = \Delta TC / \Delta Q$$

Question 16

A firm’s average fixed cost (AFC) curve:

Accepted Answer

Slopes downward as output increases

Question 17

If a technological advance causes a firm to use more capital and less labour, what is the likely effect on costs?

Accepted Answer

Fixed costs increase and variable costs decrease

Question 18

Which of the following is true about sunk costs?

Accepted Answer

They are costs that cannot be changed once incurred.

Question 19

Suppose a firm’s total product increases from 20 to 28 units when the number of workers increases from 4 to 5. What is the marginal product of the fifth worker?

Accepted Answer

8 units

Question 20

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

Accepted Answer

Because AFC falls as output increases, but eventually diminishing returns cause AVC to rise.

Output and Costs: Economic and Accounting Measures, Short-Run Product and Cost Curves

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