Economics Chapter 9 Test Bank

Questions and Answers

What is the definition of economic cost?

Payments that must be accounted for to obtain and retain the services of a resource (correct)

Payments made to workers

Total revenue minus total explicit costs

Opportunity costs of resources

What do production costs reflect to an economist?

Opportunity costs

What do wages paid to factory workers, interest paid on a bank loan, forgone interest, and the purchase of component parts have in common?

All are opportunity costs

What does total cost include for an economist?

Explicit and implicit costs, including a normal profit Signup and view all the answers

Implicit and explicit costs differ in that implicit costs refer to non-expenditure costs and explicit costs refer to monetary payments.

True Signup and view all the answers

Accounting profits equal total revenue minus _____

total explicit costs Signup and view all the answers

What is an explicit cost?

A money payment made for resources not owned by the firm itself Signup and view all the answers

Accounting profits are typically greater than economic profits because accounting profits do not take implicit costs into account.

True Signup and view all the answers

How are economic profits calculated?

By subtracting explicit and implicit costs from total revenue Signup and view all the answers

What is normal profit?

The return to the entrepreneur when economic profits are zero Signup and view all the answers

What is the equation for economic profit?

Economic profit = accounting profit - implicit costs Signup and view all the answers

If a business incurs implicit costs of $200,000 and explicit costs of $1 million, with sales totaling $1.2 million, what are its accounting profits?

$200,000 and its economic profits were zero Signup and view all the answers

If a business incurs implicit costs of $500,000 and explicit costs of $5 million with sales totaling $5 million, what are the accounting profits?

Zero and its economic losses were $500,000 Signup and view all the answers

What are the explicit costs of the Creamy Crisp Donut Company given the cost information?

$150,000 Signup and view all the answers

What are the implicit costs of the Creamy Crisp Donut Company including a normal profit?

$136,000 Signup and view all the answers

What are Creamy Crisp's total economic costs?

$286,000 Signup and view all the answers

What is Creamy Crisp's accounting profit based on the given information?

$230,000 Signup and view all the answers

What is Creamy Crisp's economic profit based on the provided information?

$94,000 Signup and view all the answers

What is the basic characteristic of the short run?

The firm does not have sufficient time to change the size of its plant Signup and view all the answers

Which represents a long-run adjustment?

Unable to meet foreign competition, a U.S. watch manufacturer sells one of its branch plants Signup and view all the answers

Which is an example of a short-run adjustment?

A local bakery hires two additional bakers Signup and view all the answers

What is the main difference between the short run and long run according to economists?

In the long run all resources are variable, while in the short run at least one resource is fixed Signup and view all the answers

What is the basic difference between the short run and the long run?

At least one resource is fixed in the short run, while all resources are variable in the long run Signup and view all the answers

How is the short run characterized?

By fixed plant capacity Signup and view all the answers

How is the long run characterized?

By the ability of the firm to change its plant size Signup and view all the answers

What is marginal product?

The increase in total output attributable to the employment of one more worker Signup and view all the answers

What does the law of diminishing returns indicate?

As extra units of a variable resource are added to a fixed resource, marginal product will decline beyond some point Signup and view all the answers

AP continues to rise so long as TP is rising.

False Signup and view all the answers

Which best expresses the law of diminishing returns?

As successive amounts of one resource (labor) are added to fixed amounts of other resources (capital), beyond some point the resulting extra or marginal output will decline Signup and view all the answers

When do diminishing marginal returns become evident?

With the addition of the third worker Signup and view all the answers

What is the marginal product of the sixth worker in the provided data?

15 units of output Signup and view all the answers

When is average product at a maximum?

When two workers are hired Signup and view all the answers

What is the marginal product of the third worker employed by a firm?

9 Signup and view all the answers

What does the statement 'If a variable input is added to some fixed input, beyond some point the resulting extra output will decline' describe?

The law of diminishing returns Signup and view all the answers

If a firm's total product is increasing in the short run, what could be true about its marginal product?

It could be either increasing or decreasing Signup and view all the answers

What does the law of diminishing returns result in?

A total product curve that eventually increases at a decreasing rate Signup and view all the answers

What do curves 1, 2, and 3 in the diagram represent?

Marginal, average, and total product curves respectively Signup and view all the answers

When marginal product lies above average product, what is true about average product?

Average product is rising Signup and view all the answers

Where is the total output of a firm at a maximum?

When MP is zero Signup and view all the answers

When total product is increasing at an increasing rate, what can be said about marginal product?

It is positive and increasing Signup and view all the answers

When total product is increasing at a decreasing rate, what can be said about marginal product?

It is positive and decreasing Signup and view all the answers

What is fixed cost?

Any cost which does not change when the firm changes its output Signup and view all the answers

Which of the following is most likely to be a fixed cost?

Property insurance premiums Signup and view all the answers

In operating a small bakery, what would be a variable cost in the short run?

Baking supplies (flour, salt, etc.) Signup and view all the answers

What is marginal cost?

The change in total cost that results from producing one more unit of output Signup and view all the answers

Study Notes

Economic Costs

Economic cost encompasses all payments required to acquire and maintain a resource's services.
Production costs reflect the opportunity costs associated with resource utilization.

Costs in Business

Wages, interest on loans, forgone interest, and component purchases are all examples of opportunity costs.
Total cost includes explicit costs (monetary payments) and implicit costs (non-expenditure costs), as well as a normal profit.

Profit Definitions and Calculations

Accounting profits are obtained by subtracting total explicit costs from total revenue.
Economic profits consider both explicit and implicit costs deducted from total revenue.
Normal profit occurs when economic profit is zero, representing the minimum earnings an entrepreneur expects.

Cost Examples

In a scenario where a business has explicit costs of $1 million and implicit costs of $200,000, accounting profit is $200,000, while economic profit is zero.
For a firm with explicit costs of $5 million and implicit costs of $500,000, accounting profits are zero, yielding economic losses of $500,000.

Cost Information for Creamy Crisp Donut Company

Explicit costs calculated: $150,000 (annual lease, payments to workers, utilities).
Implicit costs including normal profit: $136,000 (forgone salary, talent value, interest).
Total economic costs: $286,000.
Accounting profit: $230,000.
Economic profit: $94,000.

Short Run vs Long Run

Short run is characterized by fixed plant capacity; not enough time to change plant size.
Long run allows for changes in plant size; all resources are variable.
Short-run adjustments include hiring extra workers, while long-run adjustments may involve selling branch plants.

Production Concepts

Marginal product refers to the increase in total output from employing one additional worker.
The law of diminishing returns states that adding more of one resource (like labor) leads to reduced marginal output after a certain point.
Total product (TP), average product (AP), and marginal product (MP) exhibit specific relationships, notably that AP rises as long as TP is increasing.

Product Output Analysis

Diminishing marginal returns first appear after employing the third worker.
The marginal product of the sixth worker contributes 15 units of output.
Average product peaks with two workers hired.

Cost Behavior

Fixed costs remain unchanged with variations in output, such as property insurance.
Variable costs fluctuate based on output levels, such as baking supplies.
Marginal cost signifies the change in total cost from producing one additional unit.

Profit Maximization

Total output is at maximum when marginal product (MP) equals zero.
When total product increases at an increasing rate, MP is positive and rising; when it increases at a decreasing rate, MP is positive but decreasing.

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Description

This quiz covers key concepts from Chapter 9 related to economic costs and production. It includes definitions and examples that illustrate opportunity costs and their implications in economics. Test your understanding of these fundamental principles.