Multiple Choice Questions

1. Explicit costs are:
   1. A. the same as implicit costs.

      <<feedback>>Incorrect. Think about how costs like labor and raw materials might be described.

   2. <<*>>B. those paid to some other economic entity.

      <<feedback>>Good job! Explicit costs (also called accounting costs) are typically documented by a receipt or invoice. Examples of explicit costs include labor and raw materials.

   3. C. the opportunity costs of the resources used in the business.

      <<feedback>>Incorrect. Think about how costs like labor and raw materials might be described.

   4. D. costs that cannot be documented by a receipt.

      <<feedback>>Incorrect. Think about how costs like labor and raw materials might be described.

2. Implicit costs are the:
   1. A. additional costs of producing an additional unit.

      <<feedback>>Incorrect. Consider the value of all of the resources used in a business even if such value is not captured in a firm's accounting statements.

   2. B. costs that change with the level of output.

      <<feedback>>Incorrect. Consider the value of all of the resources used in a business even if such value is not captured in a firm's accounting statements.

   3. <<*>>C. opportunity costs of the resources used by the firm.

      <<feedback>>Right answer! While not recognized in an accountant’s profit and loss statement, economists view the opportunity costs of resources (not otherwise captured) deployed in a business as relevant to assessment of the performance of the enterprise. The outside compensation business owners give up to work in their business is an example of an implicit cost.

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

      <<feedback>>Incorrect. Consider the value of all of the resources used in a business even if such value is not captured in a firm's accounting statements.

3. A firm earning zero economic profit is:
   1. A. failing and will shortly close.

      <<feedback>>Incorrect. Think about the components of explicit and implicit costs.

   2. <<*>>B. meeting its investors' minimum expectations and covering its opportunity costs.

      <<feedback>>Correct! A firm earning zero economic profit has sufficient revenue to cover its costs, both explicit (paid to another economic entity) and implicit (opportunity cost of all of the resources in the business not otherwise captured). Because implicit costs include the return investors give up to invest in this business rather than in other opportunities, investors' expectations are met with a zero economic profit.

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

      <<feedback>>Incorrect. Think about the components of explicit and implicit costs.

   4. D. not operating.

      <<feedback>>Incorrect. Think about the components of explicit and implicit costs.

4. A fixed cost:
   1. <<*>>A. doesn’t change with the level of output in the short run.

      <<feedback>>Good job! While in the short run fixed costs don’t change as the level of output changes, this is not the case in the long run.

   2. B. includes only sunk costs.

      <<feedback>>Incorrect. What type of cost is incurred whether the level of output is zero or higher?

   3. C. grows as the level of output grows.

      <<feedback>>Incorrect. What type of cost is incurred whether the level of output is zero or higher?

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

      <<feedback>>Incorrect. What type of cost is incurred whether the level of output is zero or higher?

5. _____ costs increase as the level of production increases.
   1. A. Implicit

      <<feedback>>Incorrect: Consider how labor and raw material costs change as the firm’s level of output grows.

   2. B. Fixed

      <<feedback>>Incorrect: Consider how labor and raw material costs change as the firm’s level of output grows.

   3. <<*>>C. Variable

      <<feedback>>Correct! Variable costs change with the level of production. They include items such as labor and raw materials. As production increases, the level of total variable costs increases, and as production declines, the level of total variable costs declines.

   4. D. Sunk

      <<feedback>>Incorrect: Consider how labor and raw material costs change as the firm’s level of output grows.

6. The additional cost of producing one more unit of a good is:
   1. A. average variable cost.

      <<feedback>>Incorrect. Consider what happens to total cost when one additional unit is produced.

   2. B. total cost.

      <<feedback>>Incorrect. Consider what happens to total cost when one additional unit is produced.

   3. C. variable cost

      <<feedback>>Incorrect. Consider what happens to total cost when one additional unit is produced.

   4. <<*>>D. marginal cost.

      <<feedback>>Good job! All marginal concepts in economics involve a change in an amount caused by changing a related variable. In this case, cost is increased by increasing the level of output by one unit.

7. A firm’s profit is maximized at the output level where:
   1. <<*>>A. marginal cost equals marginal revenue.

      <<feedback>>Right answer! When marginal revenue equals marginal cost, no other output level yields a higher profit; that is, profit is maximized.

   2. B. average fixed cost is minimized.

      <<feedback>>Incorrect. Consider how costs and revenues change as output varies.

   3. C. variable cost is maximized.

      <<feedback>>Incorrect. Consider how costs and revenues change as output varies.

   4. D. sunk cost is eliminated.

      <<feedback>>Incorrect. Consider how costs and revenues change as output varies.