Module 5

Question 1

Explicit costs

Answer 1

Out-Of-Pocket costs like wages, rent, or materials.
Example: $500 paid for raw materials

Question 2

Implicit Costs

Answer 2

Definition: Opportunity costs of using resources the firm owns.
Example: Foregone salary from leaving a job to start a business

Question 3

Accounting Profit

Answer 3

Formula: Total Revenue - Explicit Costs
Example: Revenue = $1,000; Explicit Costs = $600; Profit = $400.

Question 4

Economic Profit

Answer 4

Formula: Total Revenue - (Explicit Costs + Implicit Costs)
Example: Revenue = $1,000; Explicit Costs = $600; Implicit Costs = $200; Profit = $200.

Question 5

Marginal Product (MP)

Answer 5

Formula:
MP=ΔTotalProduct/ΔLabor
Key Point: Initially increases, then decreases due to the Law of Diminishing Marginal Returns

Question 6

Average Product (AP)

Answer 6

Formula: AP=TotalProduct/Labor
Usage: Measures productivity of workers.

Question 7

Total Costs (TC)

Answer 7

Formula: TC=FixedCosts(FC)+VariableCosts(VC)
Example: FC = $500; VC = $300; TC = $800.

Question 8

Marginal Cost (MC)

Answer 8

Formula: MC=ΔTC/ΔQ
Key Point: Initially decreases, then increases due to diminishing returns

Question 9

Perfect Competition Assumptions

Answer 9

Many buyers and sellers.
Homogeneous products.
Free entry and exit.
Perfect information.
Firms are price takers

Question 10

Price Taker

Answer 10

A firm that accepts market prices and cannot influence them.

Question 11

Profit Maximization in Perfect Competition

Answer 11

Rule: Produce where MR=MC.
Key Point: Ensures highest possible profit or smallest loss.

Question 12

Shutdown Point

Answer 12

Definition: When price < Average Variable Cost (AVC).
Key Point: Firm minimizes loss by ceasing production.

Question 13

Efficiency in Perfect Competition

Answer 13

Productive Efficiency: Producing at the lowest cost (minimum ATC).
Allocative Efficiency: Price = Marginal Cost (P = MC).

Question 14

Productive Efficiency

Answer 14

Producing at the lowest cost (minimum ATC).

Question 15

Allocative Efficiency

Answer 15

Marginal Cost (P = MC).

Question 16

Total Revenue (TR)

Answer 16

Formula: TR=Price × QuantitySold
Example: Selling 10 items at $5 each results in TR = $50

Question 17

Short-Run vs. Long-Run Production

Answer 17

Short Run: At least one input (like capital) is fixed.
Long Run: All inputs are variable

Question 18

Fixed vs. Variable Inputs

Answer 18

Fixed Inputs: Cannot change quickly (e.g., machinery).
Variable Inputs: Adjust easily (e.g., labor, materials)​

Question 19

Cost Calculations: Average Total Cost

Answer 19

ATC = TC/Q

Question 20

Shutdown Point

Answer 20

Definition: Occurs when Price<AVC(AverageVariableCost).
Key Point: Minimizes loss by halting production​

Question 21

Profit maximization

Answer 21

MR = MC
Key Point: Ensures maximum profit or smallest loss​