Question 1

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

Accepted Answer

Accounting profit is total revenue minus explicit costs, while economic profit is total revenue minus both explicit and implicit costs.

Question 2

A firm’s production function is given by $$Q = f(L, K). If $$the firm increases the amount of labour $$L$$ while keeping capital $$K$$ constant, which law is most likely to apply in the short run?

Accepted Answer

The law of diminishing marginal returns.

Question 3

Suppose a firm’s total product (TP) increases from 100 to 120 units when the number of workers increases from 5 to 6. What is the marginal product (MP) of the sixth worker?

Accepted Answer

$$MP = 120 - 100 = 20$$

Question 4

Which of the following is an example of an implicit cost for a firm?

Accepted Answer

The opportunity cost of the owner’s time.

Question 5

If a firm’s total fixed cost (TFC) is $$500$$ and its total variable cost (TVC) is $$1,000 at a $$certain output level, what is its total cost (TC)?

Accepted Answer

$$TC = TFC + TVC = 500 + 1000 = 1,500$$

Question 6

Which statement about the marginal cost (MC) curve in the short run is correct?

Accepted Answer

The MC curve intersects the average total cost (ATC) and average variable cost (AVC) curves at their minimum points.

Question 7

A digital firm produces software with high initial development costs but near zero marginal costs for each additional copy sold. Which cost curve behavior best describes this scenario?

Accepted Answer

The marginal cost (MC) curve is flat and close to zero, and ATC declines as output increases.

Question 8

If the price of a variable factor increases, what happens to the firm’s cost curves in the short run?

Accepted Answer

Both the average total cost (ATC) and marginal cost (MC) curves shift upward.

Question 9

A firm is producing at an output level below the minimum point of its average total cost (ATC) curve. What does this imply?

Accepted Answer

The firm has excess capacity.

Question 10

Which of the following is NOT a form of business organization?

Accepted Answer

Monopoly

Question 11

Suppose a firm’s total product (TP) is 200 units when 10 workers are employed. What is the average product (AP) of labour?

Accepted Answer

$$AP = \frac{200}{10} = 20$$

Question 12

Which of the following is a key assumption economists make about firm behavior?

Accepted Answer

Firms are profit-maximizers and act as single, consistent decision-making units.

Question 13

If a firm’s economic profit is negative, what does this indicate?

Accepted Answer

The firm is earning less than the opportunity cost of its inputs.

Question 14

Which of the following is true about the law of diminishing marginal returns?

Accepted Answer

It states that adding more of a variable input to a fixed input will eventually result in smaller increases in output.

Question 15

A firm’s average variable cost (AVC) reaches its minimum at the same output level where which other curve reaches its maximum?

Accepted Answer

Average product (AP)

Question 16

Which of the following is considered an explicit cost?

Accepted Answer

Depreciation of machinery.

Question 17

If a firm’s marginal product (MP) of labour is greater than its average product (AP), what happens to the AP as more labour is added?

Accepted Answer

AP increases.

Question 18

Which of the following best describes the short run in production?

Accepted Answer

A period when at least one input is fixed.

Question 19

A firm borrows money by issuing bonds. This is an example of which type of financing?

Accepted Answer

Debt financing

Question 20

If a firm’s total cost (TC) increases from $$2,000 to$$ $$2,100$$ when output increases from $$100 to$$ $$101$$ units, what is the marginal cost (MC) of the 101st unit?

Accepted Answer

$$MC = 2,100 - 2,000 = 100$$

Producers in the Short Run: Organization, Production, and Costs

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