Economics of Profit and Costs

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to Lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

Which of the following statements is true?

  • Economic profit equals opportunity cost.
  • Accounting profit equals revenue minus explicit costs. (correct)
  • Accounting profit gives a true measure of the opportunity cost of the current business venture.
  • Normal profit equals revenue minus implicit costs.

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:

<p>fixed costs</p> Signup and view all the answers

Classify shipping charges as fixed or variable costs:

<p>variable costs</p> Signup and view all the answers

Classify payments for raw materials as fixed or variable costs:

<p>variable costs</p> Signup and view all the answers

Classify real estate taxes as fixed or variable costs:

<p>fixed costs</p> Signup and view all the answers

Classify executive salaries as fixed or variable costs:

<p>fixed costs</p> Signup and view all the answers

Classify insurance premiums as fixed or variable costs:

<p>fixed costs</p> Signup and view all the answers

Classify wage payments as fixed or variable costs:

<p>variable costs</p> Signup and view all the answers

Classify sales taxes as fixed or variable costs:

<p>variable costs</p> Signup and view all the answers

Classify rental payments on leased office machinery as fixed or variable costs:

<p>fixed costs</p> Signup and view all the answers

Which of the following statements is true regarding the costs associated with owning and operating an automobile?

<p>Fixed costs include insurance, and variable costs include gasoline. (D)</p> Signup and view all the answers

What costs would you take into account when deciding whether to drive or fly 1,000 miles to Florida?

<p>The variable costs of the trip, the opportunity cost of your time, and the need for transportation in Florida.</p> Signup and view all the answers

Which of the following are short-run adjustments, and which are long-run adjustments?

<p>Wendy's builds a new restaurant = long-run adjustment Harley-Davidson Corporation hires 200 more production workers = short-run adjustment A farmer increases the amount of fertilizer used on his corn crop = short-run adjustment An Alcoa aluminum plant adds a third shift of workers = short-run adjustment</p> Signup and view all the answers

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?

<p>increasing, then decreasing</p> Signup and view all the answers

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?

<p>constant</p> Signup and view all the answers

Flashcards are hidden until you start studying

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.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Quiz Team

More Like This

Economics Chapter on Opportunity Cost
21 questions
Economic Profit and Production Quiz
45 questions
Economic Principles Quiz
43 questions

Economic Principles Quiz

FastestConnemara5313 avatar
FastestConnemara5313
Use Quizgecko on...
Browser
Browser