Question 1

Economic cost differs from accounting cost because accountants do not consider implicit costs.

Accepted Answer

Economic cost takes into account both explicit (monetary) and implicit (opportunity) costs, whereas accounting cost only considers explicit costs. Therefore, the statement is true.

Question 2

What is economic profit?

Accepted Answer

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Question 3

Can a firm's accounting profit be smaller than the economic profit? Assume that all costs are positive.

Accepted Answer

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Question 4

Implicit cost is the opportunity cost of the inputs that do not require monetary payment.

Accepted Answer

Implicit cost refers to the opportunity cost of using resources that the company already has instead of investing in alternative resources. It does not require a monetary payment but it still has an economic impact on the company.

Question 5

Recall the Application about the opportunity cost of an entrepreneur to answer the following question(s).
-Recall the Application. Which of the following would be included as an opportunity cost of driving for Uber?
A) salary received from a regular job
B) paid sick leave and vacation days
C) subsidized health insurance
D) all of the above

Accepted Answer

All of the above options (salary received from a regular job, paid sick leave and vacation days, and subsidized health insurance) represent alternative options an entrepreneur must give up when they choose to drive for Uber. These options are foregone and represent the opportunity cost of the entrepreneur's decision.

Question 6

Diminishing marginal returns implies that firms
A) require fewer and fewer workers to produce each additional unit of output.
B) require more and more workers to produce each additional unit of output.
C) get decreasing amounts of revenue for each unit of output they produce.
D) get increasing amounts of revenue for each unit of output they produce.

Accepted Answer

Diminishing marginal returns occur when the marginal or additional output produced by each additional unit of input (such as labor or capital) starts to decline. This means that, at some point, adding more inputs will result in smaller increases in output. Therefore, firms require more and more workers to produce each additional unit of output.

Question 7

Explain the difference between the short run and the long run.

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Question 8

Economic cost is always less than accounting cost.

Accepted Answer

Economic cost takes into account both explicit costs (accounting costs) and implicit costs (opportunity costs), whereas accounting costs only consider the explicit costs. Therefore, economic cost is always equal to or greater than accounting cost, never less.

Question 9

Diminishing marginal returns implies that
A) marginal costs are decreasing.
B) marginal costs are increasing.
C) marginal costs are constant.
D) marginal costs may be increasing or decreasing.

Accepted Answer

Diminishing marginal returns mean that the additional output achieved by adding one more unit of input is decreasing. This results in an increase in marginal costs as more and more input is added.

Question 10

Diminishing marginal returns implies that
A) marginal product is decreasing.
B) marginal product is increasing.
C) marginal product is constant.
D) marginal product may be increasing or decreasing.

Accepted Answer

Diminishing marginal returns occurs when adding additional units of a variable factor causes the marginal product of that factor to decrease. In other words, the increase in output caused by adding each additional unit of the variable factor becomes smaller and smaller.

Question 11

Which of the following is NOT true when the firm experiences diminishing marginal product?
A) The total product is decreasing.
B) The marginal product of the previous worker is higher than the current worker.
C) The firm is operating in the short run.
D) The firm's total cost is increasing.

Accepted Answer

When a firm experiences diminishing marginal product, it means that each additional unit of input (e.g., labor) contributes less to output than the previous unit. This does not imply that the total product is decreasing; it can still be increasing, just at a decreasing rate. Choices B, C, and D can all be true in the context of diminishing marginal product.

Question 12

What is the explicit and implicit cost?

Accepted Answer

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Question 13

Explain the relationship between average fixed cost and marginal cost.

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Question 14

What are the differences between economic cost and accounting cost?

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Question 15

The interest on a business loan is an implicit cost.

Accepted Answer

Interest on a business loan is considered an explicit cost because it is a direct, out-of-pocket expense that a company pays for using borrowed funds.

Question 16

In the short run, at least one factor of production is fixed. This implies that beyond some level of output a firm will
A) "learn by doing."
B) experience diminishing marginal returns.
C) experience increasing marginal returns.
D) have a U-shaped long-run average cost curve.

Accepted Answer

When at least one factor of production is fixed in the short run, the law of diminishing marginal returns will come into effect, which means that beyond some level of output, the firm will start to experience diminishing marginal returns. This is because the fixed factor becomes a bottleneck, while the other variable factors are added.

Question 17

Economic profit is total revenue less economic costs.

Accepted Answer

Economic profit is calculated by subtracting economic costs, which include both explicit costs (such as wages and rent) and implicit costs (such as opportunity costs of forgoing the next best alternative use of resources), from total revenue. Therefore, the statement is true.

Question 18

A firm experiences diminishing marginal returns because
A) all factors of production are variable.
B) people "learn by doing."
C) all factors of production are fixed.
D) at least one factor of production is fixed.

Accepted Answer

Diminishing marginal returns occur when at least one factor of production is fixed, while others are variable. As more units of the variable factor are added to the fixed factor, there is a reduction in the marginal product of the variable factor, leading to diminishing marginal returns.

Question 19

Explain the difference between fixed costs in the short run and in the long run.

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Question 20

Since all costs are positive, then economic profit would always be smaller than accounting profit.

Accepted Answer

Economic profit takes into account the opportunity cost of resources used in a business, including implicit costs such as the owner's salary. Therefore, it will always be lower than accounting profit, which only considers explicit costs.

Quiz 5: Production Technology and Cost