Mastery Exam On Microeconomics

The production function is a concept in economics that illustrates the relationship between the quantity of inputs (such as labor, capital, and raw materials) used in the production process and the resulting quantity of output. It helps to understand how changes in input quantities affect output levels. Therefore, the statement "The production function shows the relationship between quantity of inputs and quantity of output" is true.

The term "marginal cost" refers to the cost of producing one extra unit of output. It is calculated by determining the change in total cost when one unit is increased. This concept is important in determining the optimal level of production for a firm, as it helps to analyze the additional costs incurred by producing additional units. By comparing the marginal cost with the price of the product, a firm can make informed decisions about whether it is profitable to increase production.

Unlimited liability refers to the legal responsibility of a business owner to pay off all debts and liabilities of the business, even if it means using personal assets. In a sole proprietorship, the owner and the business are considered as one entity, meaning the owner is personally liable for all business debts. This is a disadvantage because it puts the owner's personal assets at risk and there is no limit to the amount of debt they may have to repay. Therefore, the statement that unlimited liability is not an advantage of a sole proprietorship is true.

The average variable cost is calculated by dividing the total variable cost by the number of units of output. This formula helps determine the cost per unit of producing a good or service, taking into account only the variable costs that change with the level of production. It does not include fixed costs, which remain constant regardless of the level of output. By dividing the total variable cost by the number of units, we can determine how much each unit contributes to the overall variable cost.

Depreciation cost of machinery is not an example of an explicit cost because it is a non-cash expense. Explicit costs are the actual out-of-pocket expenses that a company incurs, such as rent, wages, and payment of materials. Depreciation cost, on the other hand, represents the decrease in value of an asset over time, but it does not involve any actual cash outflow. Therefore, it is not considered an explicit cost.

Shutting down the operations of a factory effectively eliminates fixed costs because fixed costs are those that do not change regardless of the level of output. By reducing the output to zero, there will be no need for expenses such as rent, utilities, or salaries, resulting in the elimination of fixed costs. Therefore, the statement is true.

An example of a sunk cost is advertising and marketing materials used by the company. Sunk costs are costs that have already been incurred and cannot be recovered. In this case, once the advertising and marketing materials have been used, the company cannot get the money spent on them back. Therefore, it is considered a sunk cost. Depreciation cost of machinery, wages or salaries to the workers, and rent of the company are not examples of sunk costs as they are ongoing expenses that can be recovered or avoided in the future.

Cost refers to all expenses incurred during the economic activity or production of goods and services. This includes expenditures for the utilization of various factors of production in the creation of goods.

A sole proprietorship refers to the simplest business entity and the easiest to form or put up. It is a type of business structure where an individual owns and operates the business on their own. This means that there is no legal distinction between the owner and the business, and the owner has complete control and responsibility for all aspects of the business. It is easy to form a sole proprietorship as it typically requires minimal paperwork and legal formalities compared to other business structures such as partnerships or corporations.

The given statement is false because the formula to calculate the average variable cost is the total variable cost divided by the quantity of output produced, not the number of variable costs. The average variable cost represents the cost per unit of producing a good or service, taking into account only the variable costs that change with the level of production.

In a market economy, households play the starring role as economic decision-makers. They are responsible for consuming goods and services, as well as supplying labor to businesses. Households make decisions on what to buy, how much to save, and where to allocate their resources. They also determine the demand for goods and services, which influences the prices in the market. Overall, households are crucial in driving the economy forward by their consumption and production choices.

Explicit cost refers to the opportunity cost that involves a monetary payment or some other form of compensation. It represents the actual out-of-pocket expenses incurred by a firm or an individual in order to produce or acquire a good or service. These costs are easily measurable and can be easily accounted for in financial statements. Examples of explicit costs include wages paid to employees, rent for a workspace, cost of raw materials, and payments for utilities or equipment.

A corporation is a type of firm that has a legal entity on its own, separate and distinct from its owners. This means that the corporation is treated as a separate legal entity, with its own rights and responsibilities. The owners of the corporation, known as shareholders, have limited liability and are not personally responsible for the debts or actions of the corporation. This is in contrast to other types of business entities, such as sole proprietorships or partnerships, where the owners are personally liable for the business's debts and actions.

Investment is not an example of the uses of personal income of a household because it refers to the allocation of funds into financial assets or ventures with the expectation of generating future income or profit. Personal income is typically used for savings, consumption, and paying taxes, whereas investment involves using income to generate additional income or capital appreciation.

Variable costs are the costs that vary directly with the level of production or the quantity of output. These costs are incurred on variable factor inputs, which are inputs that can be easily adjusted or changed in response to changes in production. Examples of variable factor inputs include raw materials, direct labor, and direct utilities. As the level of production increases, the quantity of these inputs required also increases, resulting in higher variable costs. Therefore, variable costs are incurred on variable factor inputs.

The economist does not view the revenue of a firm as based on economic profit + accounting profit. Economic profit is the total revenue of a firm minus both explicit and implicit costs, while accounting profit only takes into account explicit costs. Therefore, the economist's view is that revenue is based on economic profit alone, not a combination of economic and accounting profit.

Total fixed cost refers to the cost that does not vary as output varies and must be paid even if the output is zero. This means that regardless of how much or how little is produced, the fixed cost remains constant. It includes expenses such as rent, insurance, salaries, and utilities that are incurred regardless of the level of production. These costs are considered fixed because they do not change with the volume of output.

Long run cost refers to the accumulated cost when firms change their production levels over time in response to expected economic profits or losses. It takes into account the adjustments and changes that a firm makes in its production process in order to optimize its profitability in the long run. This includes decisions related to input quantities, technology, and scale of production. By considering the long run cost, firms can make informed decisions about their production levels and adjust accordingly to maximize their economic profits or minimize their losses.

Average total cost refers to the per-unit total that includes all fixed costs and all variable costs. It is calculated by dividing the total cost by the quantity produced. This cost includes both the fixed costs, which are constant regardless of the level of production, and the variable costs, which change with the level of production. By considering both fixed and variable costs, average total cost provides a comprehensive measure of the cost per unit of production.

A cooperative refers to the type of business entity that is not organized for profit but to make its members individually profitable or save money. In a cooperative, members pool their resources and work together to achieve common goals, such as purchasing goods and services at discounted prices or collectively marketing their products. The main objective of a cooperative is to benefit its members rather than generating profits for external shareholders.