Economics Chapter 5 Quiz

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Questions and Answers

What is the primary goal of a firm?

Increase market share

Enhance customer satisfaction

Maximize profit (correct)

Minimize costs

How do accountants determine profit for a firm?

Total revenue divided by total costs

Total revenue minus explicit costs only

Total revenue plus total costs

Total revenue minus total costs (correct)

What type of costs are considered implicit costs?

Utilities paid for production

Opportunity costs of owned resources (correct)

Salaries paid to employees

Money spent on purchasing equipment

Which of the following describes an explicit cost?

Salaries paid to staff Signup and view all the answers

What is the formula for calculating economic profit?

Total revenue minus total costs, including opportunity costs Signup and view all the answers

Which costs are included in the opportunity cost of production?

Both resources bought in the market and owned resources Signup and view all the answers

What distinguishes economic profit from accounting profit?

Economic profit includes implicit costs as opportunity costs Signup and view all the answers

What happens to a firm that fails to maximize profit?

It will be acquired by another firm Signup and view all the answers

What distinguishes the short run from the long run in terms of resource flexibility?

Only some resources can be varied in the short run. Signup and view all the answers

Which type of cost is considered irrelevant in a firm's current decision-making?

Sunk cost Signup and view all the answers

What happens to the marginal product of labor as more labor is employed in the short run?

It initially increases and then decreases. Signup and view all the answers

What is the definition of total product?

The total output produced in a defined period. Signup and view all the answers

During the long run, which of the following can a firm change?

All quantities of resources including the plant size Signup and view all the answers

Why are short-run decisions typically considered reversible?

They are often not critical to survival. Signup and view all the answers

Which of the following statements about average product is true?

Average product is total product divided by labor employed. Signup and view all the answers

What describes a sunk cost?

A cost incurred that cannot be changed or recovered. Signup and view all the answers

What does the implicit rental rate of capital consist of?

Economic depreciation and interest forgone Signup and view all the answers

Which of the following best describes normal profit?

The cost of entrepreneurship Signup and view all the answers

What is an example of an implicit cost for a firm?

Opportunity cost of owner’s labor Signup and view all the answers

If the owner of a firm doesn't take a wage, what is the opportunity cost of their labor?

Wage income from the best alternative job Signup and view all the answers

What is economic profit calculated as?

Total revenue minus total opportunity costs Signup and view all the answers

What is the difference between explicit and implicit costs?

Explicit costs require an outlay of money, implicit costs do not Signup and view all the answers

If Irene's $300,000 could have earned her $15,000 per year in a savings account, what does this amount represent?

Opportunity cost of her financial capital Signup and view all the answers

What component of implicit costs deals with the change in the market value of capital?

Economic depreciation Signup and view all the answers

What does the total product curve illustrate about production levels?

It separates attainable output levels from those that are unattainable in the short run. Signup and view all the answers

What occurs when the marginal product of a worker is lower than that of the previous worker?

The firm is experiencing diminishing marginal returns. Signup and view all the answers

What is a primary cause of increasing marginal returns in production?

Increased specialization and division of labour. Signup and view all the answers

When plotting a marginal product of labour curve, how is it constructed?

By connecting the mid-points of individual marginal product bars. Signup and view all the answers

What is a typical characteristic of production processes as illustrated in the provided information?

They usually start with increasing marginal returns followed by diminishing marginal returns. Signup and view all the answers

What happens to the total product when the second worker is hired according to the marginal product data?

Total product increases by 6 units, reaching 10 units. Signup and view all the answers

What does the height of the bars in the marginal product curve represent?

The marginal product produced by each additional worker hired. Signup and view all the answers

What primarily limits the productivity of additional workers after a certain point?

Less access to capital and decreased workspace. Signup and view all the answers

How does an increase in productivity affect the position of cost curves?

It shifts product curves upward and cost curves downward. Signup and view all the answers

What is the effect of an increase in fixed costs on the cost curves?

It shifts the total cost (TC) and average total cost (ATC) curves upward without affecting the MC curve. Signup and view all the answers

If a technological advance leads to a firm using more capital and less labor, what happens to the costs?

Average total cost increases at low output levels and decreases at high output levels. Signup and view all the answers

What is the outcome of an increase in the price of a variable factor of production?

It shifts the total cost (TC), average total cost (ATC), and marginal cost (MC) curves upward. Signup and view all the answers

Which factor does NOT affect the position of a firm's cost curves?

Market competition conditions Signup and view all the answers

What does the ATC curve represent in relation to the AVC and AFC curves?

ATC is the vertical sum of AVC and AFC. Signup and view all the answers

What characterizes the AVC curve as output increases?

AVC decreases to a minimum and then increases. Signup and view all the answers

At what output level does the MC equal the AVC?

When AVC is at its minimum. Signup and view all the answers

What happens to the ATC curve when fixed costs are spread over larger output?

ATC decreases as output increases. Signup and view all the answers

What is indicated when the MC curve is below the AVC curve?

AVC is decreasing. Signup and view all the answers

Which of the following describes the relationship between MP and MC?

MC is at its minimum when MP is at its maximum. Signup and view all the answers

What does a U-shaped ATC curve indicate?

Diminishing returns eventually raise the average cost. Signup and view all the answers

When MC is above ATC, what can be inferred about the ATC curve?

ATC is increasing. Signup and view all the answers

Study Notes

Output & Costs

The course is ECON 1000: Microeconomics for Managers, Week 7, taught by Professor Irene Henriques.
Learning outcomes include explaining and differentiating between economic and accounting measures of production cost and profit, illustrating and explaining a firm's short-run product curves, and deriving and explaining a firm's short-run cost curves.

Economic Cost and Profit

A firm is an institution that hires factors of production and organizes them to produce and sell goods and services, aiming to maximize profit. Firms that fail to do so are either eliminated or acquired by profit-maximizing competitors.
Accounting profit is used by accountants to ensure correct tax payments and to demonstrate fund usage to investors. It calculates the difference between total revenue and total cost, following Revenue Canada guidelines and accounting standards.
Economic accounting, used by economists, focuses on predicting firm decisions that aim to maximize profit. It determines economic profit by subtracting total cost, measured as the opportunity cost of production, from total revenue.

A Firm's Opportunity Cost of Production

A firm's opportunity cost of production is the value of the best alternative use of the resources it employs in production.
This cost comprises the cost of resources acquired in the market, resources owned by the firm, and resources supplied by the firm's owner.

Explicit and Implicit Costs

Explicit costs are input costs that necessitate a money outlay by the firm.
Implicit costs are input costs that do not require a monetary payment by the firm.
Resources bought in the market are explicit costs, representing the opportunity cost of production because the firm could have used those resources to produce something else.
Resources owned by the firm, such as capital, incur an implicit cost, representing the opportunity cost of not using that capital for a different purpose (e.g., renting it out). This implicit cost is the implicit rental rate of capital.

Economic Depreciation and Interest Forgone

The implicit rental rate of capital comprises economic depreciation (changes in the capital's market value over time) and interest forgone (returns foregone on capital funds that could have been invested elsewhere).

Cost of Capital as an Opportunity Cost

A significant implicit cost for businesses is the opportunity cost of capital invested.
This is exemplified by a scenario where a business owner (Irene) used $300,000 of savings to start a factory. If this money had instead been placed in a savings account with a 5 percent interest rate, it would have generated $15,000 per year in interest. This foregone interest is an implicit opportunity cost.

Resources Supplied by the Firm's Owner

Firm owners may supply entrepreneurship and labor without receiving wages.
Normal profit, the expected return on entrepreneurship, is viewed as an opportunity cost of production.

Economic Accounting: A Summary

Economic profit is the total revenue minus the total opportunity cost of production.

Shifts in the Cost Curves

Two key factors influencing a firm's cost curves are technology and production factor prices.
Technological increases shift product curves upward and cost curves downward. Changes in factor prices have similar effects, although fixed costs shift only the total and average cost curves.

Short-Run Versus Long-Run Decisions

Some business decisions are crucial for survival, although some may be irreversible. Others are easily reversed, influencing profitability but not necessarily long-term survival.
Decisions are frequently categorized as short-run or long-run, where the short run is a timeframe where outputs of some input are fixed, contrasted with the long run, where quantities of all resources, including plant size, can change.

Short-Run Technology Constraints

To increase output in the short run, firms must increase labor.
Total product, marginal product, and average product describe the relationship between output and labor amount. Total product measures total output given labor amount; marginal product measures the change in total product given a change in labor; and average product is total product divided by employed labor.

Short-Run Cost Measures

To produce more output in the short run, firms must increase their costs. Total cost encompasses fixed costs (don't change with output) and variable costs (change with output), while total cost is the sum of both.
Marginal cost (MC) measures the cost increase from a one-unit production increase; MC declines when marginal returns increase and rises when marginal returns decline.
Average cost measures per-unit costs (average total cost, average variable cost, average fixed cost).

Relationships Between Product and Cost Curves

The shapes of a firm's cost curves are determined by technology.
There are relationships between product and cost curves (particularly the average and marginal product and cost curves), so minimum average variable costs occur at maximum average products and vice-versa.

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Description

Test your understanding of key concepts in economics, particularly focusing on firm behavior, profit calculations, and cost distinctions. This quiz covers topics such as economic versus accounting profit and the implications of profit maximization. Dive into the details of short-run and long-run decision-making in firms.