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Questions and Answers
What does total revenue minus total cost represent?
If a firm earns zero economic profit, which of the following is true?
Economic profits for the Sweet Success Bakery selling 500 cakes for $10 each with total costs of $500 are calculated as what?
What constitutes economic costs?
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What is the opportunity cost of using a building as a hardware store, given its values in other uses?
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If a business incurs explicit costs of $250 while selling 300 muffins for $1 each, how much is its accounting profit?
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What is the total economic profit for The Wax Works selling 500 candles at $5 each with total costs of $3,000?
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What are the economic costs for a software business with total revenue of $90,000 and explicit costs of $50,000, considering potential returns on invested capital?
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What does the term 'accounting profit' refer to?
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How is 'economic profit' defined?
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What is opportunity cost?
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Which of the following is considered a fixed cost?
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Variable costs are best described as:
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If the price of cars increases significantly, what is likely to happen to the opportunity cost of purchasing a car?
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In a perfectly competitive market, how does the concept of opportunity cost apply to a consumer's choices?
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If Michael's income triples while the prices of goods double, what impact does this have on his fixed costs?
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What is your accounting profit if your total revenue is $90,000 and your costs total $50,000?
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What is your economic profit if your total revenue is $90,000 and your implicit costs include a $40,000 opportunity cost?
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If you invested capital that could earn you a $40,000 return per year, what is the opportunity cost of starting your software business?
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In the short run, which of the following statements is true regarding fixed and variable costs?
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Which statement best defines the relationship between economic costs and total revenue for a firm that is not maintaining a necessary return?
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How do implicit costs affect a firm’s economic profit relative to its accounting profit?
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What can be said about a firm’s ability to exit an industry in the long run?
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What is one characteristic of fixed costs in a business?
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Study Notes
Indifference Curves
- As you move up an indifference curve, the absolute value of the slope decreases.
Profit
- Total revenue minus total cost equals profit.
Economic Profit
- The Wax Works sells 500 candles at a price of $5 per candle.
- The Wax Works' total economic costs for producing 500 candles are $3,000.
- The Wax Works' economic profit is $2,500.
Economic Costs
- Economic costs include both a normal rate of return on investment and the opportunity cost of each factor of production.
Economic Profit with Cakes
- The Sweet Success Bakery sells 500 cakes at a price of $10 per cake.
- Its total economic costs for producing 500 cakes are $500.
- The Sweet Success Bakery's economic profits are $4,500.
Economic Profit with Muffins
- The Oh So Humble Bakery sells 300 muffins at a price of $1 per muffin.
- Its explicit costs for producing 300 muffins are $250.
- The Oh So Humble Bakery's economic profits are indeterminate from this information.
Zero Economic Profit
- A firm earns exactly a normal rate of return if it earns zero economic profit.
Opportunity Costs
- You own a building that has four possible uses: a cafe, a craft store, a hardware store, and a bookstore.
- The building's value in each use is $2,000; $3,000; $4,000; and $5,000, respectively.
- You decide to open a hardware store.
- The opportunity cost of using this building for a hardware store is $5,000, the value if the building is used as a bookstore.
Economic Costs for Software Company
- You own and are the only employee of a company that writes computer software that gamblers use to collect sports data.
- Last year your total revenue was $90,000.
- Your costs for equipment, rent, and supplies were $50,000.
- To start this business you invested an amount of your own capital that could pay you a $40,000 a year return.
- During the year your economic costs were $90,000.
Normal Rate of Return for Software Company
- A yearly normal rate of return for your computer software firm would be $40,000.
Accounting Profit for Software Company
- Your accounting profit last year was $40,000.
Economic Profit for Software Company
- Your economic profit last year was $0.
Short and Long Run in Economics
- The economist is referring to the short run time period when studying the pricing behavior of Atlanta's 100 dog kennels.
- In the long run, a firm has no fixed factors of production.
- In the short run, a firm has at least one fixed factor of production.
Returns and Economic Costs
- If Pets.com earns a rate of return less than necessary for it to continue operations, then its economic costs exceed its total revenue.
Marginal Product of Labor
- The formula for the marginal product of labor is Δq/ΔL.
Demand Elasticity
- Assume you earn $20,000 a year and your favorite sports magazine costs you $100 a year.
- Your demand for the sports magazine is likely to be elastic.
Budget Constraints
- Michael can buy either pizzas or submarine sandwiches.
- If the prices of pizza and submarine sandwiches double and Michael's money income triples, we can deduce that Michael's budget constraint will shift out but remain parallel to the old one.
Real Costs
- A car's real cost is its opportunity cost.
- Opportunity cost is determined by relative prices.
Utility
- Marginal utility is the additional satisfaction gained by consuming one more unit of a good.
- Kathy eats five slices of pizza on a Saturday night but admits each slice of pizza doesn't taste as good as the previous one.
- This suggests that for Kathy the marginal utility of a slice of pizza is positive but decreasing.
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