Question 1

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

Accepted Answer

Economic profit subtracts total opportunity cost (including implicit and explicit costs) from total revenue, while accounting profit subtracts only explicit costs from total revenue.

Question 2

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

Accepted Answer

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

Question 3

Suppose a firm’s total fixed cost (TFC) is $$100, and its total variable cost (TVC) is 300. $$What is the total cost (TC)?

Accepted Answer

$400

Question 4

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 5

Which formula correctly expresses average total cost (ATC)?

Accepted Answer

$$ATC = AFC + AVC$$

Question 6

A firm’s owner does not pay herself a wage for her labour. What is the opportunity cost associated with this decision?

Accepted Answer

The wage income she could earn in her next best alternative job.

Question 7

Which of the following statements about sunk costs is correct?

Accepted Answer

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

Question 8

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

Accepted Answer

Fixed costs increase and variable costs decrease.

Question 9

Which of the following 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 10

Suppose a firm’s marginal cost (MC) is below its average variable cost (AVC). What is happening to AVC as output increases?

Accepted Answer

AVC is decreasing.

Question 11

A firm’s long-run average cost curve is U-shaped. What does the minimum point on this curve represent?

Accepted Answer

The minimum efficient scale.

Question 12

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 13

Which of the following is NOT an example of an opportunity cost for a firm?

Accepted Answer

The cost of resources that have no alternative use.

Question 14

Suppose a firm’s total product increases from 10 to 13 units when the number of workers increases from 2 to 3. What is the marginal product of the third worker?

Accepted Answer

3 units

Question 15

Which of the following best describes economies of scale?

Accepted Answer

Long-run average cost falls as output increases.

Question 16

A firm is currently producing at a level where marginal cost (MC) equals average total cost (ATC). What does this imply about the ATC curve at this output?

Accepted Answer

ATC is at its minimum.

Question 17

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

Accepted Answer

Long-run average cost remains constant.

Question 18

Which equation correctly defines marginal cost (MC)?

Accepted Answer

$$MC = \frac{\Delta TC}{\Delta Q}$$

Question 19

A firm’s average fixed cost (AFC) curve slopes downward as output increases. Why?

Accepted Answer

Fixed costs are spread over more units of output.

Question 20

Suppose a firm is deciding between four different plant sizes to produce sweaters. For an output of 13 sweaters per day, the average total costs (ATC) for each plant are: Plant 1: $$7.69, Plant 2: 6.80$$, Plant 3: $$7.69, Plant 4: 9.50. $$Which plant should the firm choose?

Accepted Answer

Plant 2

Output and Cost: Microeconomics Study Notes (Chapter 10)

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