Economics 【Reading 15】Sample following, include, example, 2012

Mechanic

Which of the following is an example of an implicit cost?

A) Labor salaries.

B) Rent.

C) The opportunity cost of a firm's equity capital.

---

Implicit costs include the opportunity cost of a firm's equity. Explicit costs are measurable cash flows for operating expenses.

spartan1

Which of the following most completely describes opportunity costs?

A) Opportunity costs include only implicit costs.

B) Opportunity costs include only explicit costs.

C) Opportunity costs include implicit and explicit costs.

---

Opportunity costs include implicit and explicit costs. Normal profit is the opportunity cost of owners’ time, resources, and expertise.

spartan1

Which of the following most accurately describes economic profit? Economic profits are zero when:

A) implied rental rates equal forgone interest.

B) total revenue equals the sum of all opportunity costs.

C) implicit costs equal explicit costs.

---

Economic profit are zero when total revenues are just equal to the sum of all opportunity costs, which includes all implicit and explicit costs.

spartan1

Assume that a firm used $60 million in labor and materials to generate $100 million in total revenues. Other costs included $200,000 in foregone interest, economic depreciation of $40,000, and normal profit of $130,000. The economic profit to this firm is closest to:

A) $39,712,000.

B) $40,000,000.

C) $39,630,000.

---

Economic profit = total revenue – opportunity costs = total revenue – (explicit + implicit costs). In this case, the labor and material cost of $60 million is the explicit cost. Implicit costs include the $200,000 in foregone interest, economic depreciation of $40,000, and normal profit of $130,000. So, total implicit costs equal $370,000 = $200,000 + $40,000 + $130,000. Thus, economic profit is $100,000,000 - $60,000,000 - $370,000 = $39,630,000.

spartan1

A worker is most likely to earn economic rent when the marginal revenue product (MRP) from her labor and the supply curve for her type of labor exhibit which of the following characteristics?

MRP

Supply curve

A) High More elastic

B) Low Less elastic

C) High Less elastic

---

Economic rent is the difference between the price paid for a resource and its opportunity cost in its next-highest-valued employment. To earn economic rent, a worker must generate a high marginal revenue product. The less elastic its supply curve, the more of the wage is economic rent. Popular entertainers and professional athletes, for example, earn economic rent because their services are valued much more highly in those occupations (high MRP) than they would be in their next-best alternative, and very few people possess their specific skills (inelastic supply).

spartan1

Hazel Green, CFA, earned $90,000 last year working as a derivatives analyst. She is also a skilled web page designer. Green could earn $70,000 per year in that occupation, which she has determined is her next-highest paying alternative. The difference between Green’s income as a derivatives analyst and her potential income as a web page designer is best described as:

A) opportunity cost.

B) economic rent.

C) marginal revenue product.

---

Economic rent to a worker is the difference between what she earns and what she could earn in her next highest paying alternative employment. Her potential earnings in her next highest valued employment is her opportunity cost. Marginal revenue product (MRP) is the revenue from selling the output of one additional unit of an input. A high MRP makes it possible for a worker to earn economic rent.

spartan1

Under which pair of conditions is a factor of production least likely to earn economic rent?

Supply curve

Demand curve

A) Perfectly elastic Downward sloping

B) Perfectly inelastic Perfectly elastic

C) Upward sloping Downward sloping

---

If the supply of a productive resource is perfectly elastic, it earns no economic rent. Elasticity of demand is not directly related to economic rent.

spartan1

Marginal revenue is equal to price for firms operating in which market structure(s)?

A) Both perfect competition and imperfect competition.

B) Neither perfect competition nor imperfect competition.

C) Perfect competition only.

---

In perfectly competitive markets, firms can sell the entire quantity they produce at the market price, so marginal revenue is equal to the market price. In imperfect competition, firms are price searchers in that they can increase their quantity sold only by decreasing the selling price per unit. As a result, marginal revenue is less than price.

spartan1

Holding other input quantities constant, which of a firm’s factors of production most likely exhibit diminishing marginal productivity as the firm uses an increasing quantity of the input(s)?

A) Both labor and capital.

B) Labor only.

C) Capital only.

---

Both labor and capital inputs exhibit diminishing marginal productivity as input quantities increase, holding other input quantities constant.

spartan1

A firm realizes that it is producing more than the profit maximizing level of output and makes a short-run decision to decrease its output. Which of the firm’s cost measures is least likely to decrease as a result?

A) Average fixed cost.

B) Average variable cost.

C) Marginal cost.

---

A short-run decrease in output will cause a firm’s average fixed costs to increase because its fixed costs are spread over a smaller number of units. In terms of cost curves, average fixed cost never slopes upward, so a decrease in output never reduces average fixed costs. The average variable cost, average total cost, and marginal cost curves all have upward sloping components along which a lower level of output would result in a lower cost.