Question

Question 1

Which of the following is true regarding accounting profit?

a.

It is typically smaller than economic profit.

b.

It includes all explicit and implicit cost of production.

c.

It includes depreciation.

d.

All of the above.

 

Question 2

Fixed inputs are_____:

a.

those inputs to production that have a fixed price.

b.

those inputs to production that result in a fixed variable product.

c.

those inputs to production that cannot be varied in the short run.

d.

those inputs to production that have a fixed market.

 

Question 3

Firms that compete in perfectly competitive markets must decide_____:

a.

the quantity to produce.

b.

the price to charge.

c.

the price to charge and the quantity to produce.

d.

none of the above.

 

Question 4

The law of diminishing marginal productivity pertains to_____:

a.

the short run.

b.

the long run.

c.

both the short run and the long run.

d.

the short run for small firms, and the long run for large firms.

 

Answer 1

An implicit cost can be defined as the opportunity cost equal to what a firm give up for using the factor of production which it already owns and thus does not pay rent for it.

An explicit cost is defined as the direct payment made to others for using the resources and running a business. For instance, wage, rent and materials.

TR=P*Q

Accounting profit=TR-Explicit cost

Economic profit=TR- explicit cost- (implicit cost)

When accounting profit is positive, then economic profit may be zero, positive and negative, it depends on the value of implicit cost.

Hence it can be said that economic profit differ from accounting profits in that economic profit also include implicit costs.

Hence it can be said that accounting profit includes depreciation which is part of the explicit costs.

Hence option c is the correct answer.

2.

Since fixed inputs are those factors of production which does not change in the short-run with the change in the output level.

Hence option c is the correct answer.

3.

Since in the perfectly competitive firm, there are large number of buyers and sellers and they sell identical product and price is determined by industry and not by the firm. So any firm or any buyers can buy or sell any quantity of goods at the market price. It means there is no effect of the individual demand or supply of goods on the market price. It means production decisions cannot affect the market price. So firm is price taker, so its demand curve is perfectly elastic because price is same for each unit of output. So a firm can sell as much as it want at the given price, so the firm produces according to the profit-maximizing condition and it is

P=MC

Hence it can be said that a competitive firm is assumed to take price as given. It means competitive firm is a price taker.

It means that Firms that compete in perfectly competitive markets must decide the quantity to produce.

Hence option a is the correct answer.

4.

Since fixed inputs are those factors of production which does not change in the short-run with the change in the output level.

Since in the short-run some factors are fixed and some are variable. Hence with the increase in the only variable inputs, leads to decreasing marginal product of the additional labor.

Hence it can be said that the law of diminishing marginal productivity pertains to short-run.

Hence option a is the correct answer.