Economics Chapter 8 Quiz

Questions and Answers

What is marginal cost?

The amount added to total cost when one more unit of output is produced.

Total revenue minus total economic cost equals zero means the firm is earning the normal profit rate.

True

What are costs that a firm will incur even if it halts current production?

Fixed costs.

What is the opportunity cost associated with the use of resources owned by a firm?

Implicit costs. Signup and view all the answers

What is defined as a time period sufficient to allow a firm to alter its plant size and capacity?

The short run. Signup and view all the answers

What is marginal cost defined as?

The increase in total cost resulting from an increase in one unit of output. Signup and view all the answers

What is the best definition of fixed costs?

Costs that do not vary with output. Signup and view all the answers

What characterizes the short run in economic terms?

The existing firms in the market do not have sufficient time to increase the size of their existing plant or build a new factory. Signup and view all the answers

What is economic profit?

Total revenues minus total costs. Signup and view all the answers

What defines the long run?

A period sufficient to allow a firm to alter its plant size and capacity and all other factors of production. Signup and view all the answers

When do long-run economies of scale exist?

When the long-run average cost curve falls. Signup and view all the answers

Average fixed costs will always decrease as output expands.

True Signup and view all the answers

Economic profits are greater than accounting profits.

False Signup and view all the answers

What is the major difference between accounting profit and economic profit?

Accounting profit does not consider the opportunity cost of the firm's equity capital. Signup and view all the answers

What does it mean if doubling the quantity of inputs more than doubles the quantity of outputs?

The firm is experiencing increasing returns to scale. Signup and view all the answers

What does the law of diminishing marginal returns explain?

The general shape of the firm's short-run cost curves. Signup and view all the answers

What happens to a firm's ability during the short-run production process?

A firm will be able to vary only some of its factors of production. Signup and view all the answers

If average total costs are declining, marginal cost must be greater than average total cost.

False Signup and view all the answers

Why are accounting costs often unsatisfactory from an economist's point of view?

They often exclude the opportunity costs of the firm's equity capital. Signup and view all the answers

If most businesses in an industry are earning a 13 percent rate of return on their assets, but your firm is earning 23 percent, what is your rate of economic profit?

10 percent. Signup and view all the answers

Study Notes

Marginal Cost

Marginal cost represents the increase in total cost from producing one additional unit of output.

Total Revenue and Profit

When total revenue minus total economic cost equals zero, the firm achieves a normal profit rate.

Costs in Business

Fixed costs are incurred by a firm even if it ceases production temporarily.

Opportunity Costs

Implicit costs represent the opportunity cost tied to resources owned by a firm.

Short Run

In the short run, firms can adjust their production but cannot change the size of their existing plant or build new facilities.

Economic Profit

Economic profit is calculated by subtracting total costs from total revenues.

Long Run

The long run allows firms to modify their plant size, capacity, and all factors of production.

Economies of Scale

Long-run economies of scale occur when the long-run average cost curve declines.

Average Fixed Costs

Average fixed costs decrease as production output increases.

Profit Differences

Economic profits are typically lower than accounting profits due to the inclusion of opportunity costs in economic calculations.

Accounting vs. Economic Profit

The primary difference between accounting and economic profit lies in the treatment of opportunity costs related to equity capital.

Returns to Scale

A firm experiences increasing returns to scale if the output more than doubles when inputs are doubled.

Diminishing Marginal Returns

The law of diminishing marginal returns impacts the shape of a firm's short-run cost curves.

Production Factor Variability

During the short run, a firm can adjust only some of its production factors.

Average Total Costs

If average total costs are decreasing, marginal cost must be less than average total cost.

Accounting Costs Concerns

Economists often find accounting costs unsatisfactory because they usually ignore the opportunity costs associated with equity capital.

Economic Profit Calculation

If majority firms in an industry have a 13% return on assets, but your firm earns 23%, your economic profit rate equates to 10%.

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Description

Test your knowledge on key concepts in Economics Chapter 8. This quiz covers definitions and principles such as marginal cost and normal profit. Perfect for reviewing the essentials of economic cost analysis.