Core Economics 3e

Cost Analysis

Multiple Choice Questions

After watching the Cost Analysis video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Explicit costs are:

the same as implicit costs.

those paid to some other economic entity.

the opportunity costs of the resources used in the business.

costs that cannot be documented by a receipt.

Question

2. Implicit costs are the:

additional costs of producing an additional unit.

costs that change with the level of output.

opportunity costs of the resources used by the firm.

costs that don’t change with the level of output in the short run.

Question

3. A firm earning zero economic profit is:

failing and will shortly close.

meeting its investors' minimum expectations and covering its opportunity costs.

earning a positive accounting profit but not covering the opportunity costs of all of the resources employed in the business.

not operating.

Question

4. A fixed cost:

doesn’t change with the level of output in the short run.

includes only sunk costs.

grows as the level of output grows.

refers only to costs for assets that don’t move.

Question

5. _____ costs increase as the level of production increases.

Implicit

Fixed

Variable

Sunk

Question

6. The additional cost of producing one more unit of a good is:

average variable cost.

total cost.

variable cost

marginal cost.

Question

7. A firm’s profit is maximized at the output level where:

marginal cost equals marginal revenue.

average fixed cost is minimized.

variable cost is maximized.

sunk cost is eliminated.

True/False Questions

After watching the Cost Analysis video lecture, consider the question(s) below. Then “submit” your response.

Question

1. If a business has revenue of $100,000, explicit costs of $50,000, and implicit costs of $60,000, it is earning an economic profit.

True

False

Question

2. When a business sells an excess factory, it is incurring a sunk cost.

True

False

Question

3. If a firm’s total cost increases by $25 when it produces an additional unit of output, an economist would say that the marginal cost for that unit is $25.

True

False

Short Answer/Discussion Questions

After watching the Cost Analysis video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Explain the difference between accounting profit and economic profit.

Suggested solution: Accounting profit is defined as revenue minus explicit costs (those paid to another economic entity and typically documented by a receipt or invoice). Economic profit is calculated by subtracting both explicit and implicit costs (opportunity costs associated with the resources supporting the firm) from revenue. An example of such an opportunity cost is the interest that business owners could have earned on the cash that they put into their business.

Question

2. Are all fixed costs sunk costs? Explain.

Suggested solution: No. Fixed costs do not change in the short run as the level of output in the firm changes. Sunk costs are fixed costs that once spent cannot be recovered in whole or part. For example, college tuition (a fixed cost, since it doesn’t vary no matter how much one studies) is a sunk cost; once spent, it cannot be transferred to benefit another student or (after add/drop) refunded. A physical textbook (a fixed cost, since its cost doesn’t vary whether one reads it or not) is not a sunk cost: typically it can be sold on the used book market to recover at least part of the purchase price. (Answers may vary.)

Question

3. How would a business owner use information about marginal revenue versus marginal cost and price versus average total cost?

Suggested solution: The profit maximizing rule (marginal revenue equal to marginal cost) tells the business owner the level of output and price that will maximize the firm's profits, though not its level of profits (or losses). Price less average total cost indicates to the business owner the level of profit (or loss) per unit of output the firm is realizing. (Answers may vary.)