CH 2.2 : Effects of Cost and Revenue
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Questions and Answers

What is the primary objective of most businesses?

  • Revenue maximization
  • Profit maximization (correct)
  • Market share expansion
  • Social welfare improvement

    • What type of profit does not account for implicit costs?

  • Accounting profit (correct)
  • Economic profit
  • Social profit
  • Normal profit

    • Which of the following is an example of a fixed cost?

  • Salaries (correct)
  • Marketing expenses
  • Raw materials
  • Fuel costs

    • What is the formula for calculating Average Variable Cost?

    <p>VC divided by Q</p> Signup and view all the answers

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

    <p>Economic profit includes opportunity costs, while accounting profit does not</p> Signup and view all the answers

    What is the term for the cost of producing one additional unit of output?

    <p>Marginal Cost</p> Signup and view all the answers

    What is the break-even point of a business?

    <p>When the business makes a normal profit</p> Signup and view all the answers

    Which of the following costs vary directly with the level of production?

    <p>Variable Costs</p> Signup and view all the answers

    What is the formula for calculating Total Costs?

    <p>FC + VC</p> Signup and view all the answers

    What is the main purpose of cost structures in businesses?

    <p>To determine the most efficient production levels and anticipate cost changes</p> Signup and view all the answers

    What is the purpose of analyzing cost and revenue in businesses?

    <p>To understand the relationship between cost, revenue, and profitability</p> Signup and view all the answers

    What happens to costs in the long run?

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

    What is an example of economies of scale?

    <p>A firm purchases materials in bulk, reducing its cost per unit</p> Signup and view all the answers

    What is the term for how output changes in response to a proportional increase in all inputs?

    <p>Returns to scale</p> Signup and view all the answers

    What happens when there are increasing returns to scale?

    <p>Output increases by a greater proportion than inputs</p> Signup and view all the answers

    What is the formula for calculating total revenue?

    <p>Price x Quantity</p> Signup and view all the answers

    What is the term for the additional income from selling one more unit?

    <p>Marginal revenue</p> Signup and view all the answers

    What happens to a firm's revenue if it increases its output but keeps its price constant?

    <p>Revenue increases</p> Signup and view all the answers

    What is the formula for calculating profit?

    <p>Total revenue - Total costs</p> Signup and view all the answers

    What does a positive profit indicate?

    <p>A surplus beyond break-even</p> Signup and view all the answers

    Which type of profit is the most accurate indicator of a firm's true financial performance?

    <p>Economic Profit</p> Signup and view all the answers

    In the short run, what happens to fixed costs if the level of output increases?

    <p>They remain the same</p> Signup and view all the answers

    What is the purpose of calculating marginal cost?

    <p>To decide on the optimal level of production</p> Signup and view all the answers

    Which of the following is a characteristic of short-run costs?

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

    What is the relationship between average total cost and marginal cost?

    <p>ATC is equal to MC when output is optimal</p> Signup and view all the answers

    What happens to the profit of a firm if its revenue increases but its cost remains the same?

    <p>Profit increases</p> Signup and view all the answers

    What is the purpose of distinguishing between different types of profit?

    <p>To understand the true financial performance of a firm</p> Signup and view all the answers

    What is the main difference between short-run and long-run cost analysis?

    <p>In the short run, some costs are fixed, while in the long run, all costs are variable</p> Signup and view all the answers

    What is the significance of normal profit in business decision-making?

    <p>It represents the minimum profit required for sustainability</p> Signup and view all the answers

    Why is it important to understand the relationship between cost, revenue, and profitability in business?

    <p>To optimize resource allocation and make informed business decisions</p> Signup and view all the answers

    What do cost structures help businesses determine?

    <p>The most efficient production levels</p> Signup and view all the answers

    What is a characteristic of long run costs?

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

    What occurs when increasing the scale of production leads to a lower cost per unit?

    <p>Economies of scale</p> Signup and view all the answers

    What type of returns to scale occur when output increases by a greater proportion than inputs?

    <p>Increasing returns to scale</p> Signup and view all the answers

    What is the primary factor that influences long-term strategic planning and capacity decisions?

    <p>Long run costs</p> Signup and view all the answers

    What is the purpose of calculating total revenue?

    <p>To understand the interaction with costs</p> Signup and view all the answers

    What is the term for the change in revenue resulting from a change in price or output?

    <p>Revenue change</p> Signup and view all the answers

    What is calculated by subtracting total costs from total revenue?

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

    What does a negative profit indicate?

    <p>A loss, signaling that costs exceed revenue</p> Signup and view all the answers

    What is the primary purpose of analyzing cost and revenue in businesses?

    <p>To make decisions on production and pricing strategies</p> Signup and view all the answers

    What is the primary benefit of understanding economies of scale in business?

    <p>Reduced cost per unit of production</p> Signup and view all the answers

    Which of the following is a characteristic of decreasing returns to scale?

    <p>Output increases by a smaller proportion than inputs</p> Signup and view all the answers

    What is the primary purpose of calculating marginal revenue?

    <p>To determine the optimal level of output</p> Signup and view all the answers

    What is the relationship between total revenue and marginal revenue?

    <p>Total revenue is the sum of marginal revenues</p> Signup and view all the answers

    How do changes in prices or output affect a firm's revenue?

    <p>Revenue changes significantly, impacting production and pricing strategies</p> Signup and view all the answers

    What is the significance of long-run costs in business?

    <p>They provide flexibility to adjust production and influence strategic planning</p> Signup and view all the answers

    What is the purpose of calculating profit in business?

    <p>To analyze the surplus beyond break-even point</p> Signup and view all the answers

    What is the primary factor that influences a firm's long-term strategic planning and capacity decisions?

    <p>Long-run costs</p> Signup and view all the answers

    What is the significance of returns to scale in business?

    <p>It influences long-term strategic planning</p> Signup and view all the answers

    What is the primary purpose of distinguishing between different types of profit in business?

    <p>To understand the true financial performance of the firm</p> Signup and view all the answers

    What is the main reason why accounting profit can give a misleading impression of a firm's financial health?

    <p>It does not account for implicit costs, such as opportunity costs</p> Signup and view all the answers

    What is the main difference between average total cost and marginal cost?

    <p>Average total cost is the total cost divided by quantity, while marginal cost is the change in total cost when one more unit is produced</p> Signup and view all the answers

    What is the primary purpose of distinguishing between different types of profit in business decision-making?

    <p>To get a true measure of a firm's profitability and resource utilization</p> Signup and view all the answers

    What happens to the average fixed cost of a firm when the level of output increases?

    <p>It decreases</p> Signup and view all the answers

    What is the main purpose of calculating marginal cost in business decision-making?

    <p>To make decisions about the optimal level of production</p> Signup and view all the answers

    What is the relationship between economic profit and normal profit?

    <p>Economic profit is the minimum profit needed for sustainability, while normal profit represents the break-even point</p> Signup and view all the answers

    What is the main difference between the short-run and long-run cost analysis?

    <p>In the short run, certain costs are fixed, while in the long run, all costs are variable</p> Signup and view all the answers

    What happens to the total cost of a firm when the level of output increases?

    <p>It increases at an increasing rate</p> Signup and view all the answers

    What is the main purpose of analyzing cost and revenue in businesses?

    <p>To make decisions about production levels and resource allocation</p> Signup and view all the answers

    What is the significance of normal profit in business decision-making?

    <p>It represents the minimum profit needed for sustainability</p> Signup and view all the answers

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