Question 1

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

Accepted Answer

Economic profit accounts for opportunity costs, while accounting profit does not.

Question 2

A firm has total revenue of $$100,000, input costs of 60$$,000, and expected accounting profit of $$30,000. What is the economic profit $$\pi$?

Accepted Answer

$$\10$$,000$

Question 3

Which type of business organization exposes its owners to unlimited personal liability for the debts of the business?

Accepted Answer

Sole Proprietorship

Question 4

In the short run, which input is typically considered fixed in the production function $$q = f(K, L)$$?

Accepted Answer

Capital ($$K)$$

Question 5

Suppose a firm increases the number of workers and observes that the marginal product of labour ($$MP_L) is $$decreasing but still positive. What does this imply about total output?

Accepted Answer

Total output is increasing at a decreasing rate.

Question 6

If a firm’s average variable cost ($$AVC) is $$minimized at a certain output level, what is true about the marginal cost ($$MC) at $$that point?

Accepted Answer

$$MC$$ equals $$AVC.$$

Question 7

A factory’s fixed cost ($$FC) is$$ $$5,000 per month. If the factory produces 500 units in a month, what is the average fixed cost ($$AFC$) per unit?

Accepted Answer

$$AFC = \frac{5,000}{500} = 10$$

Question 8

Which of the following best describes the marginal rate of technical substitution (MRTS) between capital ($$K) $$and labour ($$L$$)?

Accepted Answer

The rate at which a firm can substitute labour for capital while keeping output constant.

Question 9

If the wage rate ($$w) $$increases, what happens to the slope of the iso-cost line in the long-run input choice model?

Accepted Answer

The slope becomes steeper.

Question 10

A firm’s production function is $$q = f(K, L). If $$the marginal product of capital ($$MP_K) is 10 $$and the rental rate of capital ($$r) is$$ $$5$$, while the marginal product of labour ($$MP_L) is 20 $$and the wage rate ($$w) is$$ $$10$$, is the firm minimizing costs?

Accepted Answer

Yes, because $$\frac{MP_K}{r} = \frac{MP_L}{w}.$$

Question 11

Which scenario best illustrates increasing returns to scale?

Accepted Answer

A firm doubles all inputs and output more than doubles.

Question 12

Suppose a firm’s total cost ($$TC) is$$ $$20,000$$ when producing $$2,000$$ units. What is the average total cost ($$ATC$$)?

Accepted Answer

$$ATC = \frac{20,000}{2,000} = 10$$

Question 13

Which of the following is a variable input in the short run for a bakery?

Accepted Answer

Flour used for baking

Question 14

If a firm is experiencing diminishing marginal product of labour, what is likely to happen to its marginal cost ($$MC) as $$output increases?

Accepted Answer

$$MC$$ will increase.

Question 15

A firm’s profit per unit is given by $$\pi = P - ATC. If $$the price ($$P) is$$ $$15$$ and the average total cost ($$ATC) is$$ $$12$$, what is the profit per unit?

Accepted Answer

$$\pi = 15 - 12 = 3$$

Question 16

Which of the following statements about corporations is correct?

Accepted Answer

Corporations are taxed under a separate corporate tax system.

Question 17

If a firm can produce two goods simultaneously at a lower cost per unit than producing them separately, what is this called?

Accepted Answer

Economies of scope

Question 18

Which of the following best describes the effect of technological progress on a firm’s long-run average total cost ($$LATC$$)?

Accepted Answer

Technological progress decreases $$LATC.$$

Question 19

A firm faces the following costs: fixed cost ($$FC) of$$ $$2,000$$, variable cost ($$VC) of$$ $$3,000$$, and produces $$500$$ units. What is the average total cost ($$ATC$$)?

Accepted Answer

$$ATC = \frac{FC + VC}{q} = \frac{2,000 + 3,000}{500} = 10$$

Production and Costs: Types of Business Organization, Investment, and Profit Calculation

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