True/False Questions

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

   <<feedback>>Incorrect. Because economic profit includes both explicit costs (paid to another economic entity) and implicit costs (the opportunity cost, not otherwise captured, of resources supporting the business), this example would produce a loss ($100,000 − $50,000 − $60,000 = −$10,000).

   <<*>>False

   <<feedback>>Good job! Because economic profit includes both explicit costs (paid to another economic entity) and implicit costs (the opportunity cost, not otherwise captured, of resources supporting the business), this example would produce a loss ($100,000 − $50,000 − $60,000 = −$10,000).

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

   True

   <<feedback>>Incorrect. Because this business is recovering at least a portion of its fixed costs by selling the excess factory, the fixed costs associated with the factory are not a sunk cost. Sunk costs are not recoverable.

   <<*>>False

   <<feedback>>Right! Because this business is recovering at least a portion of its fixed costs by selling the factory, the fixed costs associated with the factory are not a sunk cost. Sunk costs are not recoverable.

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 of unit is $25.

   <<*>>True

   <<feedback>>Right answer! The marginal cost for a unit of output is the additional cost the firm incurs to produce that additional unit.

   False

   <<feedback>>Incorrect. The marginal cost for a unit of output is the additional cost the firm incurs to produce that additional unit