Question

Kindly answer all the following questions:

The following are correct statements about Economic Cost vs Accounting Cost, EXCEPT:

Question 1 options:

	A) Accounting Cost measures the explicit payment for the factors of production.
	B) Economic Cost includes the Opportunity Cost of factors not reported in Accounting Cost.
	C) In the long run Accounting Cost is Equal to Economic Cost.
	D) In the long run, under perfect competition, Net Economic Profits are Zero.

Question 2

The following are correct statements about Cost of Production concepts, EXCEPT:

Question 2 options:

	A) Marginal Cost is the extra cost incurred by adding one extra unit of production.
	B) Marginal Cost is always higher than Average Cost.
	C) Marginal Cost initially declines and eventually increases as more units as produced.
	D) Total Cost at certain level of production is the aggregation of Marginal Cost values for the units produced.

Question 3

As presented in class, the following is the CORRECT formula that identifies the connection between MPL and MC:

Note: MC is Marginal Cost of Production, MPL is Marginal Productivity of Labor, W is Market Wage.

Question 3 options:

	A) MC = W * MPL
	B) MC = MPL / Q
	C) MC = W * Q / MPL
	D) MC = W * (1/MPL)

Question 4

The following are the Necessary and Sufficient condition(s) for the Maximization of Economic Profits, under a perfect competitive market:

Note: Pmkt is Market Price, MC is Marginal Cost of Production.

Question 4 options:

	A) Min MC
	B) Pmk > MC
	C) Pmk = MC and Increasing MC
	D) Pmk = MC and Decreasing MC

Answer 1

1. C) In the long run Accounting Cost is Equal to Economic Cost.
(In the long run also, accounting cost is not equal to economic cost. They are two different concepts.)

2. B) Marginal Cost is always higher than Average Cost.
(Marginal cost is higher than average cost when MC cuts AC at its minimum. Below that, MC is less than AC)

3. D) MC = W * (1/MPL)
(Profit maximization requires that MRPL = w where MRPL = MR*MPL and MR = MC when profit is maximized so MC*MPL = w and this MC = w*(1/MPL)

4. C) Pmk = MC and Increasing MC
(For a competitive firm, P = MC is the profit maximizing condition and MC must be increasing because when MC is falling then firm will not produce.)