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 (A)</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 (D)</p> Signup and view all the answers

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

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

What is the break-even point of a business?

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

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

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

What is the formula for calculating Total Costs?

<p>FC + VC (B)</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 (C)</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 (D)</p> Signup and view all the answers

What happens to costs in the long run?

<p>All costs become variable (B)</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 (B)</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 (D)</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 (A)</p> Signup and view all the answers

What is the formula for calculating total revenue?

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

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

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

What is the formula for calculating profit?

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

What does a positive profit indicate?

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

What is the purpose of calculating marginal cost?

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

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

<p>Some costs are fixed (D)</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 (C)</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 (C)</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 (C)</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 (D)</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 (D)</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 (B)</p> Signup and view all the answers

What do cost structures help businesses determine?

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

What is a characteristic of long run costs?

<p>All costs are variable (A)</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 (C)</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 (C)</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 (B)</p> Signup and view all the answers

What is the purpose of calculating total revenue?

<p>To understand the interaction with costs (D)</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 (C)</p> Signup and view all the answers

What is calculated by subtracting total costs from total revenue?

<p>Profit (A)</p> Signup and view all the answers

What does a negative profit indicate?

<p>A loss, signaling that costs exceed revenue (C)</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 (D)</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 (B)</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 (D)</p> Signup and view all the answers

What is the primary purpose of calculating marginal revenue?

<p>To determine the optimal level of output (C)</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 (B)</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 (D)</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 (B)</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 (A)</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 (B)</p> Signup and view all the answers

What is the significance of returns to scale in business?

<p>It influences long-term strategic planning (B)</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 (C)</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 (B)</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 (B)</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 (C)</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 (D)</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 (B)</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 (B)</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 (D)</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 (C)</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 (A)</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 (D)</p> Signup and view all the answers

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