Microeconomics Practice Quiz Test

The statement "Fixed cost plus variable costs equal total costs" is true. In business, fixed costs are expenses that remain constant regardless of the level of production or sales, such as rent or salaries. Variable costs, on the other hand, fluctuate depending on the level of production or sales, such as raw materials or direct labor. When you add these fixed and variable costs together, you get the total costs incurred by a business. Therefore, the statement is correct.

As a firm continues to employ more workers within the same size factory, the law of diminishing marginal returns comes into play. This means that each additional worker contributes less and less to the overall output or productivity of the firm. This occurs because the factory's resources, such as space and equipment, become increasingly limited and cannot be effectively utilized by an expanding workforce. Therefore, the firm will eventually experience diminishing marginal product, making the statement "True."

The statement is true because total revenue is calculated by multiplying the quantity of output produced by the firm with the price at which it sells its output. This means that the more quantity of output the firm produces and the higher the price at which it sells, the higher its total revenue will be. Therefore, the statement accurately describes the relationship between total revenue, quantity of output, and price.

In the long run, a firm has more flexibility to adjust its inputs and make changes to its production process. This means that it can take advantage of economies of scale and reduce its average total cost. As a result, the average-total-cost curve in the long run is flatter compared to the short run. This is because the firm can spread its fixed costs over a larger quantity of output, leading to lower average costs. Therefore, the statement is true.

The statement is false because average total costs are calculated by dividing total costs by the quantity of output, not by marginal costs. Marginal costs, on the other hand, represent the change in total costs when producing one additional unit of output. Therefore, the correct formula for average total costs is total costs divided by quantity of output, not marginal costs.

When marginal costs are below average total costs, it means that the additional cost of producing one more unit is lower than the average cost of producing all units. This suggests that the average cost per unit is decreasing as more units are produced. Therefore, it can be concluded that average total costs must be falling in this scenario.

As the quantity produced increases, a production function initially exhibits increasing marginal product, meaning that each additional unit of input contributes more to the output. However, at a certain point, the production function starts to exhibit diminishing marginal product, where each additional unit of input contributes less to the output. This implies that the cost of producing each additional unit of output initially decreases and then starts to increase. Therefore, the corresponding marginal-cost curve will be U-shaped, starting with a downward slope and then turning upward.

The accounting profit is calculated by subtracting explicit costs from the total revenue. In this case, the total revenue is $100 and the explicit costs are $50, so the accounting profit would be $100 - $50 = $50. Therefore, the statement that accounting profit equals $50 is true.

Economic profit is calculated by subtracting all costs, including both implicit and explicit costs, from total revenue. Implicit costs refer to the opportunity costs of using resources in one way instead of their next best alternative use, while explicit costs are the actual monetary expenses incurred in running a business. By considering both implicit and explicit costs, economic profit provides a comprehensive measure of the true profitability of a business, accounting for all costs involved in its operations.

When there are implicit costs of production, it means that the resources used in production have alternative uses and therefore have an opportunity cost. Accounting profits only consider explicit costs, which are the actual out-of-pocket expenses incurred. Economic profits, on the other hand, take into account both explicit and implicit costs. Since accounting profits do not include implicit costs, they will be higher than economic profits. Therefore, the statement is true.

Wages and salaries paid to workers are not an example of implicit costs of production. Implicit costs refer to the opportunity costs of using resources for a particular activity, such as the foregone income from using capital in a business instead of investing it elsewhere. Wages and salaries, on the other hand, are explicit costs that are directly incurred in the production process. Therefore, the statement is false.

If there are implicit costs of production, accounting profit will exceed economic profit. This is because accounting profit only takes into account explicit costs, which are the actual monetary expenses incurred in production. On the other hand, economic profit considers both explicit and implicit costs, which include the opportunity cost of using resources in a particular production activity. Therefore, when implicit costs are present, economic profit will be lower than accounting profit, indicating that the business is not generating as much profit as it may seem based solely on accounting calculations.

A production function that initially exhibits increasing marginal product and later diminishing marginal product suggests that the additional output gained from each additional unit of input starts to decrease after a certain point. This indicates that the cost of producing each additional unit of output increases initially, reaches a minimum, and then starts to increase again. This pattern is reflected in a U-shaped marginal-cost curve, where the cost per unit of output decreases initially, reaches a minimum, and then increases. Therefore, the correct answer is that the marginal-cost curve will be U-shaped.

Accounting profit is calculated by deducting all the explicit costs from the total revenue. Explicit costs are the actual out-of-pocket expenses incurred by a business, such as wages, rent, and utilities. These costs are easily measurable and can be directly attributed to the production of goods or services. Implicit costs, on the other hand, are the opportunity costs associated with using resources in a particular way, such as the foregone income from using personal savings to start a business instead of investing it. Since accounting profit only considers explicit costs, it does not take into account the opportunity costs or implicit costs. Therefore, the correct answer is explicit costs.

When marginal costs are below average total costs, it means that the additional cost of producing one more unit is less than the average cost of producing all units. This indicates that the average total costs are falling. In other words, the cost of producing each unit is decreasing, resulting in a decrease in the overall average cost of production.

If a production function exhibits diminishing marginal product, it means that as more units of input are added, the additional output produced by each additional unit of input decreases. This implies that the cost of producing each additional unit of output increases. Therefore, the slope of the corresponding total-cost curve becomes steeper as the quantity of output increases.

When a production function gets flatter, it means that the increase in input leads to a smaller increase in output. In other words, the marginal product of each additional unit of input decreases. Therefore, the statement that the marginal product is increasing when a production function gets flatter is incorrect.

In the short run, wages paid to factory labor can be considered a variable cost. This is because the number of workers can be adjusted based on the level of production. If the company needs to increase production, they can hire more workers and their wages will increase accordingly. On the other hand, if the company needs to reduce production, they can lay off workers and their wages will decrease. Therefore, wages paid to factory labor can vary depending on the level of output and are considered a variable cost in the short run.

In the long run, all costs are variable because in this period of time, a company has the flexibility to adjust its production capacity and change the level of inputs used. This means that both fixed costs (such as rent or salaries) and variable costs (such as raw materials or labor) can be adjusted to meet the changing needs of the business. Unlike the short run, where some costs are fixed and cannot be easily changed, the long run allows for greater flexibility in cost management.

The efficient scale of production refers to the quantity of output at which the average total cost is minimized. This means that producing more or less than this quantity would result in higher average total costs. Average total cost is calculated by dividing the total cost by the quantity of output. It includes both fixed and variable costs. Therefore, the correct answer is average total cost.

If a production function exhibits diminishing marginal product, it means that as the quantity of the input increases, the additional output produced from each additional unit of input decreases. This implies that the slope of the production function becomes flatter as the quantity of the input increases. In other words, the rate at which output increases per unit increase in input decreases, resulting in a flatter slope.

The statement is false because the average-total-cost curve does not necessarily cross the marginal-cost curve at the minimum of the marginal-cost curve. In fact, the average-total-cost curve is U-shaped, while the marginal-cost curve is typically U-shaped as well but intersects the average-total-cost curve at its minimum point. Therefore, the correct answer is false.

The statement is false because if the production function exhibits diminishing marginal product, it means that as the quantity of output expands, the additional output produced from each additional unit of input decreases. This implies that the firm will have to use more and more inputs to produce the same amount of additional output. As a result, the total cost of production will increase at an increasing rate, causing the total-cost curve to become steeper, not flatter.

When a small factory expands its scale of operations, it is likely to experience economies of scale. This means that as the factory increases its production, it can benefit from cost advantages such as lower average costs per unit. This can be due to factors like increased specialization, improved efficiency, and better utilization of resources. As the factory grows, it can spread its fixed costs over a larger output, leading to lower average total costs and increased profitability. Therefore, the correct answer is economies of scale.

The given statement is false. In the long run, as a firm expands its production facilities, it generally experiences economies of scale first, followed by constant returns to scale, and finally diseconomies of scale. Economies of scale occur when the firm's average cost per unit decreases as production increases. Constant returns to scale occur when the firm's average cost per unit remains constant as production increases. Diseconomies of scale occur when the firm's average cost per unit increases as production increases. Therefore, the correct order is economies of scale, constant returns to scale, and then diseconomies of scale.

The efficient scale for a firm is the quantity of output that maximizes its profits, not minimizes marginal cost. While minimizing marginal cost can be a factor in achieving efficiency, it is not the sole determinant. The efficient scale considers the balance between production costs and revenue to determine the optimal level of output that maximizes profitability. Therefore, the given statement is false.