Question

5) Steve is deciding between starting a business that will have $70,000 in revenues and $40,000 in explicit costs, or instead accepting a job offer than will pay him $50,000. What is the economic profit of the business?

Group of answer choices

a -$30,000

b -$20,000

c $20,000

d $30,000

6)

Which of the following must be true if a firm is operating with decreasing marginal returns?

Group of answer choices

a Output will increase at an increasing rate as variable inputs are added

b Marginal costs will increase as output expands

c Total costs will increase at a decreasing rate as output expands

d Average variable costs will decrease as output expands

Answer 1

Economic profit = Total revenue - implicit cost - explicit cost = $70,000 - $40,000 - $50,000 = -$20,000.

The correct option is

b. -$20,000.

One consequence of the law of diminishing returns is that producing one more unit of output will eventually cost increasingly more, due to inputs being used less and less effectively. The marginal cost curve will initially be downward sloping, representing added efficiency as production increases.

b. Marginal costs will increase as output expands.