Economic Profit and Production Decisions

What is economic profit?

• Total revenue minus explicit costs

• Total revenue minus total economic costs

• Total revenue minus opportunity costs

• Total revenue minus fixed costs

Which of the following is NOT a decision a profit-maximizing firm must make?

• How much output to supply

• How to produce the output

• What price to charge for its product

• How much of each input to demand

What is the opportunity cost of capital?

• The interest rate on government bonds

• The return foregone from the next best alternative investment

• The fixed cost of production in the short run

• The total cost of all inputs in production

If a firm earns a normal rate of return, its economic profit is:

• Positive

• Zero

• Negative

• Equal to accounting profit

Which factor is typically fixed in the short run?

• Labor

• Capital

• Raw materials

• Technology

The law of diminishing returns implies that as more units of a variable input are added to fixed inputs, the marginal product will eventually:

• Increase continuously

• Decrease continuously after a certain point

• Remain constant regardless of input levels

• Become negative immediately after the first unit is added

What happens when marginal product equals average product?

• Average product is at its maximum.

• Marginal product exceeds average product.

• Average product starts declining.

• Marginal product becomes zero.

Which production technology would be optimal in a labor-abundant economy?

• Capital-intensive technology

• Labor-intensive technology

• Isoquant-based technology only

• Technology with high opportunity costs of labor and capital combined

What does an isoquant represent?

• All combinations of inputs that yield the same level of output

• The relationship between cost and output levels in the long run

• The marginal rate of substitution between two goods for consumers

• All combinations of outputs that maximize profit at given input prices

The slope of an isoquant represents:

• Marginal cost divided by total cost

• Marginal rate of technical substitution between inputs

• Average product per unit of input

• Opportunity cost of producing one more unit