Week 7

Profit is the difference between _______ and _______ . A) Total sales; total revenues B) Total profits; total costs C) Total revenues; total costs D) Marginal costs; marginal revenues

C

Profit

difference between TC and TR

Production of a good or service has increasing marginal cost when

each additional unit costs more to produce than the previous one.

Total revenue

price x quantity

Marginal revenue is

the rise in total revenue when output rises one unit

Trend about Total cost curves?

total cost is higher, the greater the level of output

Why should sunk costs be ignored in making decisions about future actions?

- because they have already been incurred and are nonrecoverable, they have no effect on future costs and benefits. - simplifies decision making and avoids mistake of including these costs for some options but not for others.

Money that must be paid for the use of the factors of production such as labor and capital is an: A) Explicit cost B) Accounting profit C) Implicit cost D) Economic profit

A

The average total cost of production A) equals total cost of production divided by the level of output B) equals total cost of production multiplied by the level of output C) equals the explicit cost of production D) is the extra cost required to produce one more unit

A

The marginal product of labor is defined as: A) theadditionaloutputthatresultswhenonemoreworkerishired,holdingallother resources constant B) thecostofhiringonemoreworker C) theadditionalnumberofworkersrequiredtoproduceonemoreunitofoutput D) theadditionalsalesrevenuethatresultswhenonemoreworkerishired

A

Which of the following equations is correct? A) AFC+AVC=ATC B) AVC+ATC=AFC C) AVC-ATC=AFC

A

Which of the following is true of the relationship between accounting profit and economic profit? A) Economic profit is less than accounting profit if implicit cost exist B) Economic profit is always equal to accounting profit C) Economic profit is greater than accounting profit if implicit costs exist D) Economic profit is less than accounting profit if implicit costs are zero

A

A sunk cost is?

A cost that has already been incurred and can not be undone or recovered

A characteristic of the long run is A) there are both fixed and variable factors of production B) all inputs can be varied C) factory capacity cannot be increased or decreased D) there are fixed factors of production

B

According to the optimal output rule, if the marginal benefit is: A) More than the marginal cost, and activity should be reduced B) Less than the marginal cost, and activity should be reduced C) Equal to the marginal cost, an activity should be reduced D) More than the marginal cost, net benefit is maximised

B

An "either-or" decision involves: A) Deciding how much of an activity to do? B) A choice between two activities C) Calculating marginal costs for each activity D) Calculating the marginal benefits for each activity

B

As a firm hires more labor in the short run, the A) output per worker rises B) extra output of another worker may rise at first, but eventually must fall C) costs of production are increasing at a fixed rate per unit of output D) level of total product stays constant

B

Economies of scale exist as a firm increases its size in the long run because of all of the following except: A) labor and management can specialize even further in their tasks B) as a firm expands its production, its profit margin per-unit of output increases C) as a larger input buyer, the firm can purchase inputs at a lower per unit cost D) the firm can afford more sophisticated technology in production

B

Profit computed using explicit costs as the only measure of costs is: A) Explicit profit B) Accounting profit C) Implicit profit D) Economic profit

B

The amount by which an additional unit of activity increases total benefit is: A) Net benefit B) Marginal benefit C) Marginal cost D) Utility

B

The law of diminishing marginal returns A) causesthedifferencebetweenaveragetotalcostandaveragevariablecosttogetsmalleras output increases B) explainswhytheaveragetotalcostandmarginalcostcurvesareU-shapedintheshort run. C) explainswhytheaveragetotalcost,averagefixedcostandthemarginalcostcurvesareU- shaped in the short run D) causesaveragetotalcoststoriseatadecreasingrateasoutputincreases

B

Which of the following is the best example of a short run adjustment? A) Smith University negotiates to acquire a large piece of land to build its new library B) YourlocalTescohirestwomoreshopassistants C) Toyota builds a new assembly plant in Texas D) Alocalbakerypurchasesanothercommercialovenaspartofitscapacityexpansion

B

Accounting profit

Business' revenue minus the explicit cost and depreciation

Economic profit

Business' revenue minus the opportunity cost of its resources. It is often less than the accounting profit.

The implicit cost of capital is: A) The expense associated with leasing machines B) The expense associated with buying machines C) The opportunity cost of capital used by a business D) Irrelevant for determining economic profit

C

Which of the following best describes a "how much" decision? A) Should I drive to work or ride my bicycle? B) Should I rent a movie or watch a baseball game on television? C) Should I attend graduate school or immediately graduate school or immediately enter the labor force? D) Should I buy a third hot dog?

D

Which of the following costs will not change as output changes? A) average variable cost B) marginal cost C) totalvariablecost D) totalfixedcost

D

Which of the following is a factor of production that generally is fixed in the short run? A) Labor B) raw materials C) water D) a factory building

D

You decide to quit your £60,000 per year job as an information technology specialist and illustrate children's books. At the end of the first year of illustrating, you have earned £20,000. You also spent £5,000 for paint and paper. Your economic profit in the first year as an illustrator is: A) £15,000 B) £20,000 C) -£40,000 D) -£45,000

D

The output that maximizes profit

MC=MR

What is the marginal cost?

The marginal cost of producing a good or service is the additional cost incurred by producing one more unit of that good or service.

Implicit cost of capital is?

The opportunity cost of the capital used by a business - the income the owner could have realized from that capital if it had been used in its next best alternative way.

What is the optimal quantity?

The quantity that generates the maximum possible total net gain.

Marginal cost is

The rise in total cost when output goes up by one unit

What is the capital of a business?

The value of its assets, equipment, buildings, tools, inventory and financial assets

Decreasing marginal cost

This arises when marginal cost falls as the number of units produced increases. - often due to learning effects in production, workers are often slow and mistake-prone making the earliest units

What determines the output choice of a profit maximizing firm?

cost and demand conditions

Acounting cost

explicit cost

Economic cost

explicit cost + implicit cost

What is opportunity cost?

foregone opportunities of earnings. The opportunity cost of the resources in a project is the return on its next best alternative use.

Marginal cost curve shows

how the cost of producing one more unit depends on the quantity that has already been produced

Constant marginal cost...

occurs when the cost of producing an additional unit is the same as the cost of producing the previous unit

What is cost minimization?

produce its output as cheaply as possible

Marginal benefit is

the additional benefit earned from producing one more unit of that good or service

All economic decisions involve

the allocation of scarce resources. Some decisions are "either-or" decisions