Question 1

Profit equals marginal revenue minus marginal cost.

Accepted Answer

Profit is calculated as total revenue minus total cost, not marginal revenue minus marginal cost.

Question 2

The typical total-cost curve is U-shaped.

Accepted Answer

False

Question 3

When economists speak of a firm's costs,they are usually excluding the opportunity costs.

Accepted Answer

Economists do not exclude opportunity costs from a firm's costs. Opportunity cost is the value of the next-best alternative that is forgone when a particular choice is made. It is an important concept in economics, and firms must take it into account when making decisions.

Question 4

The economic field of industrial organization examines how firms' decisions about prices and quantities depend on the market conditions they face.

Accepted Answer

The definition given is correct and describes the focus of industrial organization as an economic field.

Question 5

Profit equals total revenue minus total cost.

Accepted Answer

This is a basic economic principle. Profit is the difference between the amount of money a business makes (revenue) and the amount of money it spends (cost).

Question 6

Diminishing marginal productivity implies decreasing total product.

Accepted Answer

Diminishing marginal productivity implies that each additional unit of input produces less additional output, but total product continues to increase, just at a decreasing rate.

Question 7

A second or third worker may have a higher marginal product than the first worker in certain circumstances.

Accepted Answer

This can occur in situations where the first worker is not able to fully utilize all available resources or where the addition of a second or third worker introduces new skills or abilities that increase overall productivity.

Question 8

Accounting profit is greater than or equal to economic profit.

Accepted Answer

Accounting profit only subtracts explicit costs from total revenue, while economic profit subtracts both explicit and implicit costs, making economic profit lower than or equal to accounting profit.

Question 9

Accountants keep track of the money that flows into and out of firms.

Accepted Answer

Accountants are responsible for recording, classifying, and summarizing financial transactions in order to provide information that is useful in making business decisions. They keep track of the money that flows into and out of firms, among other things.

Question 10

The average fixed cost curve is constant.

Accepted Answer

The average fixed cost curve is downward sloping because as output increases, the fixed cost is spread over more units, decreasing the average fixed cost per unit.

Question 11

Economists and accountants both include forgone income as a cost to a small business owner.

Accepted Answer

Economists consider forgone income as an opportunity cost, but accountants typically do not include forgone income in their financial calculations, focusing instead on explicit costs.

Question 12

Implicit costs are costs that do not require an outlay of money by the firm.

Accepted Answer

Implicit costs can include opportunity costs, such as the value of resources or time used by the firm that could have been used for other purposes. These costs do not involve an actual payment of money, but still have an impact on the firm's profitability.

Question 13

Accountants often ignore implicit costs.

Accepted Answer

Implicit costs refer to the opportunity cost of resources that are already owned and are not recorded in the accounting records. Accountants do not usually consider these costs in their financial reports, which means they are often ignored.

Question 14

The difference between economic profit and accounting profit is that economic profit is calculated based on both implicit and explicit costs whereas accounting profit is calculated based on explicit costs only.

Accepted Answer

Economic profit considers both implicit (non-outlay or opportunity costs) and explicit (actual cash payments) costs, while accounting profit calculates profit using only explicit costs, ignoring the opportunity costs of all resources.

Question 15

Diminishing marginal product exists when the production function becomes flatter as inputs increase.

Accepted Answer

Diminishing marginal product occurs when each additional unit of input produces a smaller increase in output than the previous unit. This causes the production function to become flatter as inputs increase, leading to a reduction in the marginal productivity of each input.

Question 16

In the long run,a factory is usually considered a fixed input.

Accepted Answer

In the long run, all inputs are considered variable, including factories, as firms can adjust all of their inputs based on the production decisions.

Question 17

Economists and accountants usually disagree on the inclusion of implicit costs into the cost analysis of a firm.

Accepted Answer

Economists believe that implicit costs, such as opportunity costs, should be included in the cost analysis of a firm, while accountants typically do not include these costs in their financial statements.

Question 18

Economic profit is greater than or equal to accounting profit.

Accepted Answer

Economic profit takes into account not only explicit costs (costs that involve a direct payment, such as wages and rent) but also implicit costs (opportunity costs, such as the potential income foregone by not pursuing an alternative option). Accounting profit only considers explicit costs. Therefore, economic profit is usually lower than accounting profit, and can be negative even when accounting profit is positive.

Question 19

Diminishing marginal product exists when the total cost curve becomes flatter as outputs increases.

Accepted Answer

Diminishing marginal product refers to a situation where, as the amount of a certain input is increased, the marginal product or output of that input will eventually decrease. This will cause the total cost curve to become steeper as output increases, not flatter. Therefore, the statement is false.

Question 20

Although economists and accountants treat many costs differently,they both treat the cost of capital the same.

Accepted Answer

Economists consider opportunity costs, including the cost of capital as the return that could have been earned on the next best alternative investment. Accountants, however, typically focus on explicit costs and do not always account for opportunity costs in the same way, leading to different treatments of the cost of capital.

Quiz 13: The Costs of Production