Micro Unit 3 Review

When Yooko Industries makes 2000 widgets, the cost of producing a typical widget is $5, which includes implicit costs of $2. What is Yooko Industries economic profit (or loss) and accounting profit (or loss) if the price of a widget is $4? Choose 1 answer:

• Economic profit = $2000; Accounting profits = $4000

• Economic profit = $4000; Accounting profits = $4000

• Economic profit = -$4000 (a loss); Accounting profit = $2000

• Economic profit = -$2000 (a loss); Accounting profits = $2000

• Economic profit = -$4000 (a loss); Accounting profits = $4000

Answer explanation

Yooko Industries' total revenue from 2000 widgets at $4 each is $8000. Total costs are $10000 (2000 widgets x $5). Economic profit = $8000 - $10000 = -$2000 (loss). Accounting profit = $8000 - $8000 (explicit costs) = $2000.

Which of the following statements regarding accounting profits, opportunity costs, and economic profits is true?

• With positive opportunity costs, a firm can never earn economic profits.

• Accounting profits are equal to economic profits minus opportunity costs.

• If accounting profits are less than opportunity costs, there will be economic losses.

• Economic profits must always be greater than accounting profits.

• When economic profits are positive, accounting profits may be positive or negative.

Answer explanation

If accounting profits are less than opportunity costs, it indicates that the firm is not covering its total costs, leading to economic losses. This statement accurately reflects the relationship between these concepts.

In the short run, which of the following is true of a firm's average total cost of production?

• It is equal to marginal cost plus average variable cost.

• It is equal to marginal cost plus average fixed cost.

• It is equal to average fixed cost plus average variable cost.

• It always increases when a firm increases production.

• It is zero if the firm shuts down.

Answer explanation

A firm's average total cost (ATC) is calculated as the sum of average fixed cost (AFC) and average variable cost (AVC). Therefore, the correct statement is that ATC equals AFC plus AVC.

Which of the following is always true of the relationship between average and marginal costs?

• Average total costs are increasing when marginal costs are increasing.

• Marginal costs are increasing when average variable costs are higher than marginal costs.

• Average variable costs are increasing when marginal costs are increasing.

• Average variable costs are increasing when marginal costs are higher than average variable costs.

• Average total costs are constant when marginal costs are constant.

Answer explanation

The correct choice states that average variable costs increase when marginal costs exceed average variable costs. This is true because when marginal costs are higher, they pull the average variable costs up.

The table above shows the amount of labor inputs necessary to produce given levels of output. If the cost of a unit of labor is $20 and total fixed cost is $100, the average total cost of producing 20 units of output is

• $1

• $2

• $7

• $40

• $120

Answer explanation

To find the average total cost (ATC) for 20 units, calculate total cost (TC) = total fixed cost + variable cost. Fixed cost = $100, labor cost for 20 units = 20 units * $20 = $400. TC = $100 + $400 = $500. ATC = TC/Output = $500/20 = $25.

As its output increases, a firm's short-run marginal cost will eventually increase because of

• diseconomies of scale

• a lower product price

• inefficient production

• the firm's need to break even

• diminishing returns

Answer explanation

As output increases, a firm's short-run marginal cost rises due to diminishing returns. This occurs when adding more inputs results in smaller increases in output, leading to higher costs per additional unit produced.

Which of the following is always true of the relationship between average and marginal costs?

• Average total costs are increasing when marginal costs are increasing.

• Marginal costs are increasing when average variable costs are higher than marginal costs.

• Average variable costs are increasing when marginal costs are increasing.

• Average variable costs are increasing when marginal costs are higher than average variable costs.

• Average total costs are constant when marginal costs are constant.

Answer explanation

The correct choice states that average variable costs increase when marginal costs exceed average variable costs. This is true because when marginal costs are higher, they pull the average up, indicating rising average variable costs.

If a firm's average total cost decreases as the firm increases its output, the firm's marginal cost must be

• greater than the average variable cost

• less than the average fixed cost

• less than the average total cost

• decreasing

• negative

Answer explanation

If a firm's average total cost decreases as output increases, it indicates that the marginal cost of producing an additional unit is less than the average total cost. Thus, the correct choice is that marginal cost is less than average total cost.

If the output of a firm doubles when the firm doubles all of its inputs, the firm must be experiencing

• economies of scale

• increasing returns to scale

• constant returns to scale

• decreasing returns to scale

• diseconomies of scale

Answer explanation

The firm experiences constant returns to scale because doubling all inputs results in a doubling of output. This indicates that the output increases proportionately with the increase in inputs.

At 100 units of a firm's output, average total cost is $10, average variable cost is $8, average fixed cost is $2, and marginal cost is $12. How will each of the following change as the firm's output further increases?

• Average Total Cost: Increase, Average Variable Cost: Increase, Average Fixed Cost: Increase

• Average Total Cost: Increase, Average Variable Cost: Increase, Average Fixed Cost: Decrease

• Average Total Cost: Increase, Average Variable Cost: Decrease, Average Fixed Cost: Decrease

• Average Total Cost: Decrease, Average Variable Cost: Increase, Average Fixed Cost: Increase

• Average Total Cost: Decrease, Average Variable Cost: Decrease, Average Fixed Cost: Decrease

Answer explanation

As output increases, average total cost will rise due to marginal cost being above average total cost. Average variable cost will also increase as more variable inputs are used. Average fixed cost decreases as fixed costs are spread over more units.