Questions and Answers
Which of the following statements is true?
Why do economists classify normal profits as costs?
A normal profit is the amount required to ensure continued supply of the product.
Classify fuel as fixed or variable costs:
variable costs
Classify interest on company-issued bonds as fixed or variable costs:
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Classify shipping charges as fixed or variable costs:
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Classify payments for raw materials as fixed or variable costs:
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Classify real estate taxes as fixed or variable costs:
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Classify executive salaries as fixed or variable costs:
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Classify insurance premiums as fixed or variable costs:
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Classify wage payments as fixed or variable costs:
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Classify sales taxes as fixed or variable costs:
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Classify rental payments on leased office machinery as fixed or variable costs:
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Which of the following statements is true regarding the costs associated with owning and operating an automobile?
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What costs would you take into account when deciding whether to drive or fly 1,000 miles to Florida?
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Which of the following are short-run adjustments, and which are long-run adjustments?
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What type of returns to scale is a firm experiencing if it produces 4,000 units at $8,000, 4,200 units at $8,200, and 4,400 units at $8,800?
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What type of returns to scale is a firm experiencing if it produces 4,000 units at $8,000, 4,100 units at $8,200, and 4,200 units at $8,400?
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Study Notes
Profit and Costs
- Normal profit equals revenue minus implicit costs, ensuring continued supply but does not represent true opportunity cost.
- Accounting profit is defined as revenue minus explicit costs, providing a traditional measure of profitability.
- Economic profit considers opportunity costs, providing a broader view of profitability beyond accounting measures.
Cost Classification
-
Variable Costs include:
- Fuel
- Shipping charges
- Payments for raw materials
- Wage payments
- Sales taxes
-
Fixed Costs include:
- Interest on company-issued bonds
- Real estate taxes
- Executive salaries
- Insurance premiums
- Rental payments on leased office machinery
Automobile Costs
- Fixed costs in automobile ownership: insurance
- Variable costs: gasoline
- Repairs represent maintenance costs which can vary, but depreciation is generally considered a fixed cost.
Decision-Making for Travel
- In deciding between driving and flying, consider:
- Variable costs of the trip
- Opportunity cost of time spent
- Transportation needs once at the destination
Short-Run vs Long-Run Adjustments
- Long-run adjustment example: building a new restaurant (Wendy’s)
- Short-run adjustments include:
- Hiring more production workers (Harley-Davidson)
- Increasing fertilizer use (farmer)
- Adding shifts (Alcoa aluminum plant)
Returns to Scale
- A firm demonstrates increasing returns to scale up to 4,200 units before experiencing decreasing returns afterward.
- Constant returns to scale observed when output increases from 4,000 to 4,200 units with consistent cost increments.
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Description
Explore the concepts of profit, costs, and economic decision-making in this quiz. Understand the differences between normal profit, accounting profit, and economic profit, as well as the classification of variable and fixed costs. Test your knowledge on costs related to automobile ownership and travel decisions.
