Answer (D) is correct. Normal profit is the level of profit necessary to induce entrepreneurs to enter and remain in the market. Economists view this profit as an implicit cost of economic activity.
Answer (A) is correct. Economic (pure) profit equals total revenue minus economic costs. Economic costs are defined by economists as total costs, which are the sum of outlay costs, and opportunity costs, which are the values of productive resources in their best alternative uses. The return sufficient to induce the entrepreneur to remain in business (normal profit) is an implicit (opportunity) cost. Net income as computed under generally accepted accounting principles considers only explicit costs, not such implicit costs as normal profit and the opportunity costs associated with not using assets for alternative purposes. Thus, net income will be higher than economic profit because the former fails to include a deduction for opportunity costs, for example, the salary forgone by an entrepreneur who chooses to be self-employed.
Answer (B) is correct. Marginal product is the output obtained by adding one extra unit of a variable input factor. If the cost of the input factor is constant, a rising marginal product will result in a declining marginal cost of output. If marginal product is falling, marginal cost is rising. Hence, marginal cost is at a minimum when marginal product is at a maximum.
Answer (C) is correct. The average total cost per unit is calculated by dividing total costs (fixed variable) by the number of units produced. Thus, $25,000 divided by 500 units produces a unit cost of $50.
Answer (D) is correct. A firm’s total costs consist of both variable and fixed costs. If the average fixed cost for 10,000 units is $3, the total fixed costs are $30,000. Adding the $30,000 of fixed costs to the $50,000 of variable costs produces total costs of $80,000.
Answer (D) is correct. At a production level of 1,000 units, the average fixed cost is $4 ($4,000 ÷ 1,000 units). Adding the $4 of average fixed cost to the $3 of average variable cost produces a total cost of $7.
Answer (D) is correct. If total variable cost is $400 for 5 units, the average variable cost is $80. The average fixed cost is $40 ($200 ÷ 5), and the average total cost is $120 ($80 + $40).
Answer (C) is correct. Since fixed costs are fixed in total, they will decline per unit as production increases. Thus, average total cost will decrease when output is increased.
Answer (D) is correct. The sum of the average fixed costs and the average variable costs for a given output is the average total cost.
Answer (D) is correct. Economic cost is defined as the sum of all costs, both implicit and explicit, of a firm. Explicit costs include direct expenditures made to those outside the firm, for example, the costs of labor, materials, and equipment. Implicit costs are the payments that would have been received if self-owned resources had been used outside the firm’s business. Thus, the lease payments forgone by not renting the firm’s building to others is an implicit cost. The return necessary to keep resources employed in a given enterprise (normal profit) is also an implicit cost.
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