Unit 3

Question 1

the principle of marginal
analysis

Answer 1

every activity should continue until
marginal benefit equals marginal cost.

Question 2

Marginal revenue

Answer 2

is the change in total
revenue generated by an additional unit
of output.

Question 2

optimal output rule

Answer 2

The optimal output rule says that profit
is maximized by producing the quantity
of output at which the marginal revenue
of the last unit produced is equal to its
marginal cost.

Question 3

The marginal cost curve

Answer 3

shows how the cost of producing one more unit depends on the quantity that has already been produced.

Question 4

The marginal revenue curve

Answer 4

shows how marginal revenue varies as output varies

Question 5

An explicit cost

Answer 5

is a cost that involves actually laying out money.

Question 6

An implicit cost

Answer 6

does not require an outlay of money; it is
measured by the value, in dollar terms, of
benefits that are forgone.

Question 7

The accounting profit of a business

Answer 7

is the business’s total revenue minus the
explicit cost and depreciation.

Question 8

The economic profit of a business

Answer 8

is the business’s total revenue minus the
opportunity cost of its resources. It is usually
less than the accounting profit.

Question 9

The implicit cost of capital

Answer 9

is the opportunity cost of the capital used by a
business—the income the owner could have
realized from that capital if it had been used
in its next best alternative way.

Question 10

An economic profit

Answer 10

equal to zero is also known as a normal profit. It is an economic profit just high enough to keep a firm engaged in its current activity.

Question 11

The long-run average total cost
curve

Answer 11

shows the relationship between
output and average total cost when
fixed cost has been chosen to minimize
average total cost for each level of output.

Question 12

There are economies of scale when…

Answer 12

long-run average total cost declines as output
increases.

Question 13

There are increasing returns to scale
when…

Answer 13

output increases more than in
proportion to an increase in all inputs. For
example, with increasing returns to scale,
doubling all inputs would cause output to
more than double.

Question 14

There are diseconomies of scale when
long-run…

Answer 14

average total cost increases as
output increases.

Question 15

There are decreasing returns to
scale when…

Answer 15

output increases less
than in proportion to an increase in
all inputs.

Question 16

There are constant returns to
scale when…

Answer 16

output increases directly in
proportion to an increase in all inputs.

Question 17

A sunk cost

Answer 17

is a cost that has already
been incurred and is nonrecoverable.
A sunk cost should be ignored in a
decision about future actions.

Question 18

A fixed cost

Answer 18

is a cost that does not depend
on the quantity of output produced. It is the
cost of the fixed input.

Question 19

A variable cost

Answer 19

is a cost that depends on
the quantity of output produced. It is the cost
of the variable input.

Question 20

The total cost curve

Answer 20

shows how total cost depends on the quantity of output.

Question 20

The total cost

Answer 20

of producing a given quantity
of output is the sum of the fixed cost and
the variable cost of producing that quantity
of output.

Question 21

Average total cost

Answer 21

often referred to as simply
as average cost, is total cost divided by
quantity of output produced.

Question 22

A U-shaped average total cost
curve

Answer 22

falls at low levels of output and
then rises at higher levels.

Question 23

Average fixed cost

Answer 23

is the fixed cost per
unit of output.

Question 24

Average variable cost

Answer 24

is the variable cost
per unit of output.

Question 25

The minimum-cost output

Answer 25

is the quantity of output at which the average
total cost is lowest—it corresponds to the
bottom of the U-shaped average total cost
curve.

Question 26

A production function

Answer 26

is the relationship
between the quantity of inputs a firm uses
and the quantity of output it produces.

Question 27

A fixed input

Answer 27

is an input whose quantity is
fixed for a period of time and cannot be
varied.

Question 28

A variable input

Answer 28

is an input whose quantity
the firm can vary at any time.

Question 29

The long run

Answer 29

is the time period in which all
inputs can be varied.

Question 30

The short run

Answer 30

is the period in which at least one input is fixed.

Question 31

The marginal product of an input

Answer 31

is the additional quantity of output produced
by using one more unit of that input.

Question 32

The total product curve

Answer 32

shows how the quantity of output depends on the quantity of the variable input, for a given
quantity of the fixed input.

Question 33

There are diminishing returns to an
input when…

Answer 33

an increase in the quantity
of that input, holding the levels of all
other inputs fixed leads to a decline in
the marginal product of that input.