Question

4)

Tom is considering whether he’d like to start up a cattle ranch or start up his own law firm. He expects the cattle ranch to bring in revenues of $2 million a year and to incur yearly explicit costs of $500,000 in feed, $1 million in labor, and $300,000 in taxes. His law firm will be expected to make $4 million in revenues per year and have yearly explicit costs of $1,500,000 in office materials, $2 million in labor, and $100,000 in other miscellaneous explicit costs. Assuming all explicit costs have been listed, what is the expected economic profit of the law firm?

Group of answer choices

a -200,000

b 200,000

c 600,000

d 400,000

7)

Which one of the following is not true if a firm is operating with increasing marginal returns?

Group of answer choices

a Producing an additional unit will increase total costs by more than the previous unit

b Each additional unit of output requires less additional variable inputs than the previous unit of output

c The marginal cost of each unit will decrease as output increases

d Total cost will increase as output increases

e Total variable costs will increase as output increases, but at a decreasing rate

Answer 1

4) option D is correct. Economic profit from the cattle ranch (difference between total revenue and total cost) is 2 million - 1.8 million = 200000. Economic profit from the law firm = 4 million -3.6 million = 400000. Since economic profit is greater from the law firm we will consider this opportunity

7) option A is incorrect. Increasing marginal returns means decreasing cost. total cost increases but at a decreasing rate which means each additional unit of output increases the cost buy a lesser value than the previous one.