Understanding Economic Profit vs
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Questions and Answers

Which concept is referred to as 'average total cost' in the text?

  • Average variable cost (correct)
  • Marginal cost
  • Fixed cost
  • None of the above

    • What is the formula for calculating marginal cost?

  • MC = Q/AC
  • MC = AC/TC
  • MC = TC/Q
  • MC = ∆TC/∆Q (correct)

    • Why does marginal cost initially decline?

  • Because fixed costs decrease
  • Because average cost decreases
  • Because variable costs decrease (correct)
  • Because output decreases

    • At what level of output will marginal cost and average cost be equal?

    <p>The level of output where average cost is minimized</p> Signup and view all the answers

    What is the relationship between marginal revenue and marginal cost in perfect competition?

    <p>Marginal revenue is always equal to marginal cost</p> Signup and view all the answers

    What is the formula for calculating total revenue?

    <p>Total revenue = P × Q</p> Signup and view all the answers

    What is the formula for calculating total cost?

    <p>Total cost = QC × AC</p> Signup and view all the answers

    In short-run equilibrium, can a perfectly competitive firm earn an economic profit?

    <p>It depends on the market demand</p> Signup and view all the answers

    What is the difference between total revenue and total cost called?

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

    According to the text, why are demand curves negatively sloped?

    <p>Because the value of each additional unit of the good falls as more of the good is consumed.</p> Signup and view all the answers

    According to the text, what does the demand curve represent?

    <p>The willingness of consumers to pay for each additional unit of a good.</p> Signup and view all the answers

    According to the text, what is consumer surplus?

    <p>The willingness of consumers to pay for each additional unit of a good.</p> Signup and view all the answers

    According to the text, what is the market supply curve?

    <p>The sum of the supply curves of individual firms in the market.</p> Signup and view all the answers

    According to the text, what is economic cost?

    <p>The remuneration needed to keep the productive resource in its current employment or to acquire the resource for productive use.</p> Signup and view all the answers

    According to the text, what is economic profit?

    <p>The difference between total revenue and total cost.</p> Signup and view all the answers

    According to the text, what is opportunity cost?

    <p>The resource's next best opportunity.</p> Signup and view all the answers

    Which of the following best defines consumer surplus?

    <p>The difference between the value a consumer places on a purchase and the amount of money required to pay for it</p> Signup and view all the answers

    What does a negatively sloped demand curve indicate?

    <p>As price falls, consumers are willing to buy more of the good</p> Signup and view all the answers

    How can consumer surplus be interpreted?

    <p>As a measure of how much consumers value each additional unit of the good</p> Signup and view all the answers

    What is the relationship between the highest price consumers are willing to pay for an additional unit and their consumption of the good?

    <p>The highest price consumers are willing to pay for an additional unit declines as they consume more and more of the good</p> Signup and view all the answers

    What does it mean if a consumer receives consumer surplus from a purchase?

    <p>The price they paid was lower than the maximum amount they would have been willing to pay</p> Signup and view all the answers

    Why is it important for analysts to understand the nature of equilibrium in a market?

    <p>To evaluate business pricing strategies</p> Signup and view all the answers

    What is the difference between the value a consumer places on a purchase and the value of the item?

    <p>Consumer surplus</p> Signup and view all the answers

    Which of the following is true about economic profit and accounting profit?

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

    What is the equilibrium price in a perfectly competitive market with the given demand and supply functions? P = 25 − 0.5QD = − 2 + 0.2QS = P

    <p>$5.71</p> Signup and view all the answers

    In a perfectly competitive market, what does each firm's demand curve look like?

    <p>A horizontal line at the equilibrium price</p> Signup and view all the answers

    What is the relationship between average revenue (AR), price, and marginal revenue (MR) for an individual firm in perfect competition?

    <p>Price = AR = MR</p> Signup and view all the answers

    What happens to average and marginal costs as output increases in a firm's production?

    <p>They initially decline and then increase</p> Signup and view all the answers

    How is average cost (AC) calculated?

    <p>Total cost (TC) divided by output (Q)</p> Signup and view all the answers

    What causes the law of diminishing returns in production?

    <p>Each additional unit of input produces a progressively smaller increase in output</p> Signup and view all the answers

    Which of the following is true about the relationship between average revenue (AR), price, and marginal revenue (MR) for an individual firm in perfect competition?

    <p>AR = Price = MR</p> Signup and view all the answers

    What is the relationship between total revenue (TR) and average revenue (AR) for an individual firm in perfect competition?

    <p>TR = AR x Quantity</p> Signup and view all the answers

    What is the relationship between marginal revenue (MR) and price for an individual firm in perfect competition?

    <p>MR = Price</p> Signup and view all the answers

    What is the formula for calculating average cost (AC) for a firm?

    <p>AC = Total cost / Output</p> Signup and view all the answers

    What is the shape of the average cost (AC) and marginal cost (MC) curves in a firm's production?

    <p>U-shaped</p> Signup and view all the answers

    What is the relationship between marginal cost (MC) and average cost (AC) in a firm's production?

    <p>MC intersects AC at its minimum point</p> Signup and view all the answers

    What is the relationship between price and quantity in a perfectly competitive market?

    <p>Price is determined by the market supply and demand functions</p> Signup and view all the answers

    Which of the following is true about economic profit and accounting profit?

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

    What is the equilibrium price in a perfectly competitive market with the given demand and supply functions?

    <p>$5.71</p> Signup and view all the answers

    Which of the following statements is true about the demand curve faced by a perfectly competitive firm?

    <p>It is a horizontal line at the equilibrium price.</p> Signup and view all the answers

    What is the relationship between average revenue (AR), price, and marginal revenue (MR) for a perfectly competitive firm?

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

    What is the formula for calculating average cost (AC)?

    <p>AC = TC/Q</p> Signup and view all the answers

    What causes average and marginal costs to increase in production?

    <p>The law of diminishing returns</p> Signup and view all the answers

    What is the shape of average cost (AC) and marginal cost (MC) curves in the short run?

    <p>U-shaped</p> Signup and view all the answers

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