Question

1:

Suppose a local hardware store has explicit costs of $2 million per year and implicit costs of $44,000 per year. If the store earned an economic profit of $50,000 last year, this means that the store's accounting profit equaled:

		a: $2,000,000
		b: $2,050,000
		c: $94,000
		d: $2,044,000

2:

The producer's surplus is

		a: demand price plus market price
		b: market price less supply price
		c: market price plus supply price
		d: demand price less market price

3:

Marginal cost is only related to

		a: total fixed cost
		b: average fixed cost
		c: total variable cost
		d:long run fixed cost

4:

A firm in a perfectly competitive market

		a: has a perfectly elastic demand curve
		b: is a price taker
		c: both a and b
		d: b only

5:

Cobb-Douglas production function lend easy interpretation of

		a: price of input
		b: price of output
		c: price of input and output
		d: input elasticity

Answer 1

1.

An implicit cost can be defined as the opportunity cost equal to what a firm give up for using the factor of production which it already owns and thus does not pay rent for it. Hence factory space is explicit cost.

An explicit cost is defined as the direct payment made to others for using the resources and running a business. For instance, wage, rent and materials.

TR=P*Q

Explicit cost=$2 million per year

Implicit cost=$44,000

Economic profit=$50,000

Accounting profit=TR-Explicit cost

Economic profit=TR- explicit cost- (implicit cost)

Accounting profit= economic profit + implicit cost

=50,000+44,000

=$94,000

Hence option c is the correct answer.

2.

Since the consumer surplus is the area below the demand curve and above the price. In other words, the consumer surplus is the difference of maximum willingness to pay for any good and price of that good.

Since producer surplus is the area below the price and above the supply curve.

Total surplus=consumer surplus+ producer surplus.

It means producer’s surplus is market price less supply price.

Hence option b is the correct answer.

3.

Marginal cost is the addition in total variable cost due to producing an extra unit of output. It means when an additional unit of output is produced and there is an addition in the total variable cost, then this additional cost is called marginal cost.

MC=TVCn-TVCn-1

Hence it can be said that marginal cost is only related to total variable cost.

Hence option c is the correct answer.

4.

Since in the perfectly competitive firm, there are large number of buyers and sellers and they sell identical product and price is determined by industry and not by the firm. So any firm or any buyers can buy or sell any quantity of goods at the market price. It means there is no effect of the individual demand or supply of goods on the market price. It means production decisions cannot affect the market price. There is perfect information about the product to the buyers and sellers.

The profit-maximizing condition of perfectly competitive firm is

P=MC

Or

P>MC

MR and Price are same in the perfectly competitive firm.

The perfectly competitive market has a perfectly elastic demand curve and it is a price taker. It means options a and b are both correct.

Hence option C is the correct answer.