Question 1

The long-run average total cost curve owes its U-shaped structure to the economies and diseconomies of scale.

Accepted Answer

The U-shaped long-run average total cost curve shows the relationship between the average total cost and the output level. The cost initially decreases due to economies of scale, which are the cost advantages that come with an increase in production. However, as the output continues to increase, the costs may eventually increase due to diseconomies of scale, which are the disadvantages associated with an increase in the scale of production. Therefore, the U-shaped curve is a result of both economies and diseconomies of scale.

Question 2

Rachel bought a sandwich maker. The shopkeeper assured her that it was a very good and useful product. After using the sandwich maker for two months, Rachel found that using it was time consuming and that it also consumed a lot of electricity. So, she stopped using it. Therefore, Rachel has incurred a(n) _____ in buying the sandwich maker

Accepted Answer

The answer of Rachel bought a sandwich maker. The shopkeeper...

Question 3

Lintell Inc. earned a total revenue of $9.3 million and incurred an explicit cost of $3.6 million for the financial year 2013-14. The owner of the company could earn an annual salary of $0.5 million if he joined another firm. Lintell Inc.'s accounting profit for 2013-14 was:

Accepted Answer

To find the accounting profit, we need to subtract the explicit costs from the total revenue:

Accounting Profit = Total Revenue - Explicit Costs

Accounting Profit = $9.3 million - $3.6 million

Accounting Profit = $5.7 million

We do not consider the owner's opportunity cost (potential salary of $0.5 million) in calculating accounting profit, as it is not an explicit cost. Therefore, the correct answer is B.

Question 4

Which of the following observations is true?

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. They are irrelevant for any future action because decisions should be based on future costs and benefits, not on costs that have already been incurred and cannot be changed.

Question 5

Which of the following is not an explicit cost to the owner of a local pizza parlor?

Accepted Answer

Using his garage as the parlor is an implicit cost because it is an opportunity cost - the owner could have rented out his garage to someone else and earned money from it. The other options are explicit costs - costs that require a direct outlay of money.

Question 6

When economic profits in an industry are zero and implicit costs are positive, _____.

Accepted Answer

When economic profits are zero, it means the firm is earning just enough revenue to cover its explicit and implicit costs. However, if implicit costs are positive (such as the opportunity cost of the owner's time), accounting profits will still be positive because they only take into account explicit costs. Therefore, choice A is correct.

Question 7

Economic profits are calculated after taking into account:​

Accepted Answer

Economic profits are calculated by subtracting both implicit and explicit costs from total revenue. Implicit costs include opportunity costs or the foregone alternative use of resources, while explicit costs are actual out-of-pocket expenses. Therefore, both types of costs need to be included in the calculation of economic profits.

Question 8

An explicit cost is:

Accepted Answer

An explicit cost is an out-of-pocket expense that a firm must pay in order to conduct business activities. Examples of explicit costs include wages, rent, and materials.

Question 9

An example of an implicit cost of production is:

Accepted Answer

The cost of space in someone's home that is used as his or her home office is an implicit cost because it is not a direct monetary cost, but it is the opportunity cost of using that space for other purposes, such as renting it out or using it for personal activities.

Question 10

David was taken to a concert by his friend who promised it would be very good. David paid for his own ticket. However, David did not like the concert and left before it ended. Therefore, David incurred a(n) _____ in buying the ticket

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered. Since David paid for the ticket and cannot get his money back, it is considered a sunk cost.

Question 11

An implicit cost is:

Accepted Answer

An implicit cost is an opportunity cost to a firm, representing the forgone benefits from the next best alternative use of resources. It is not an out-of-pocket expense or always included by an accountant while calculating profits, and it can affect future business decisions. The comparison between implicit and explicit costs depends on the specific situation, and it is not always true that one is larger than the other.

Question 12

Lintell Inc. earned a total revenue of $9.3 million and incurred an explicit cost of $3.6 million for the financial year 2013-14. The owner of the company could earn an annual salary of $0.5 million if he joined another firm. Lintell Inc.'s economic profit for 2013-14 was:

Accepted Answer

Economic profit = Total revenue - (Explicit cost + Implicit cost)= $9.3 million - ($3.6 million + $0.5 million)= $5.2 million

Question 13

When long-run average total cost does not change as output varies, firms experience constant returns to scale.

Accepted Answer

The answer of When long-run average total cost does not...

Question 14

When a firm makes zero economic profit, it means that:​

Accepted Answer

Zero economic profit means that the firm's total revenue is equal to its total opportunity costs, including both explicit and implicit costs. Therefore, option B, which states that the firm is covering the total opportunity costs of its resources, is the correct answer. Option C is incorrect because it only mentions explicit costs, and option D is incorrect because it states that the firm is not covering its opportunity costs, which contradicts the definition of zero economic profit. Option E is also incorrect because it refers to social benefits and costs, which are not relevant to the concept of economic profit.

Question 15

private costs are included in economic profit but not in accounting profit.

Accepted Answer

Private costs, sunk costs, external costs, and cash payments are all components that are included in both economic and accounting profit. But implicit costs, which are the opportunity costs of using resources owned by the firm instead of selling them to others, are included in economic profit but not in accounting profit. Hence, the only correct choice in this case is E.

Question 16

Lintell Inc. earned a total revenue of $10 million for the financial year 2013-14. The company incurred a total cost of $6.9 million. Lintell Inc. earned a profit of:​

Accepted Answer

Profit is calculated as total revenue minus total costs. Therefore, $10 million - $6.9 million = $3.1 million.

Question 17

he minimum efficient scale is the level of output at which the long-run average total costs are maximized.

Accepted Answer

The minimum efficient scale is the level of output at which the long-run average total costs are minimized, not maximized.

Question 18

An example of an implicit cost of production is:​

Accepted Answer

Implicit costs are opportunity costs, which are the benefits an individual must forgo when he or she chooses one alternative over another. The income that an entrepreneur could have earned if they had chosen to work for someone else is an example of an implicit cost because it represents the forgone benefits of the next best alternative. Choices A, B, D, and E are all explicit costs, which are incurred by a firm and require the payment of money or other resources.

Question 19

Brad worked as a contractor for a year, earned revenues of $120,000, and incurred an explicit cost of $70,000. If he could have earned $80,000 working for a computer company, his economic profit as a contractor would be_____.

Accepted Answer

Economic profit is calculated by subtracting both explicit and implicit costs from total revenues. Here, explicit costs are $70,000 and the implicit cost (opportunity cost of not working for the computer company) is $80,000. Subtracting both from the revenue ($120,000 - $70,000 - $80,000) gives an economic profit of −$30,000.

Question 20

Brad worked as a contractor for a year, earned revenues of $120,000, and incurred an explicit cost of $70,000. If he could have earned $80,000 working for a computer company, his accounting profit as a contractor would be _____.

Accepted Answer

Accounting profit is calculated by subtracting explicit costs from total revenues. In this case, Brad's accounting profit is $120,000 (revenues) - $70,000 (explicit costs) = $50,000. The opportunity cost of not working for the computer company is not considered in accounting profit calculations.

Quiz 6: Production and Costs

The long-run average total cost curve owes its U-shaped structure to the economies and diseconomies of scale.

Lintell Inc. earned a total revenue of $9.3 million and incurred an explicit cost of $3.6 million for the financial year 2013-14. The owner of the company could earn an annual salary of $0.5 million if he joined another firm. Lintell Inc.'s accounting profit for 2013-14 was:

Which of the following observations is true?

Which of the following is not an explicit cost to the owner of a local pizza parlor?

When economic profits in an industry are zero and implicit costs are positive, _____.

Economic profits are calculated after taking into account:​

An explicit cost is:

An example of an implicit cost of production is:

David was taken to a concert by his friend who promised it would be very good. David paid for his own ticket. However, David did not like the concert and left before it ended. Therefore, David incurred a(n) _____ in buying the ticket

An implicit cost is:

Lintell Inc. earned a total revenue of $9.3 million and incurred an explicit cost of $3.6 million for the financial year 2013-14. The owner of the company could earn an annual salary of $0.5 million if he joined another firm. Lintell Inc.'s economic profit for 2013-14 was:

When long-run average total cost does not change as output varies, firms experience constant returns to scale.

When a firm makes zero economic profit, it means that:​

private costs are included in economic profit but not in accounting profit.

Lintell Inc. earned a total revenue of $10 million for the financial year 2013-14. The company incurred a total cost of $6.9 million. Lintell Inc. earned a profit of:​

he minimum efficient scale is the level of output at which the long-run average total costs are maximized.

An example of an implicit cost of production is:​

Brad worked as a contractor for a year, earned revenues of $120,000, and incurred an explicit cost of $70,000. If he could have earned $80,000 working for a computer company, his economic profit as a contractor would be_____.

Brad worked as a contractor for a year, earned revenues of $120,000, and incurred an explicit cost of $70,000. If he could have earned $80,000 working for a computer company, his accounting profit as a contractor would be _____.

Economic profits are calculated after taking into account:

When a firm makes zero economic profit, it means that:

Lintell Inc. earned a total revenue of $10 million for the financial year 2013-14. The company incurred a total cost of $6.9 million. Lintell Inc. earned a profit of:

An example of an implicit cost of production is: