Income taxes are calculated on a firm's accounting profit rather than its economic profit.
Correct Answer
True
True. Taxable income is figured from revenue and the explicit costs a firm records. Implicit costs, such as the salary an owner gives up, are not deducted, so taxes follow accounting profit rather than economic profit.
Category: Accounting and Economic Profit
Question 2
Marginal product equals total output divided by the number of workers.
Correct Answer
False
False. Marginal product is the extra output from adding one more worker, the change in total product divided by the change in labor. Total output divided by the number of workers is output per worker, a different measure.
Category: Production in the Short Run
Question 3
As more workers are added to a fixed amount of capital, the marginal product of an additional worker can fall to zero or even become negative.
Correct Answer
True
True. Once the fixed equipment is fully used, an extra worker may add nothing to output, and too many workers can even get in each other's way and reduce it.
Category: Diminishing Marginal Product
Question 4
The dividing line between the short run and the long run is exactly one year in every industry.
Correct Answer
False
False. The short run is the period in which at least one input is fixed, and the long run is when all inputs can change. How long that takes depends on the industry and the input, so there is no fixed calendar length.
Category: Short Run and Long Run
Question 5
A firm's total cost equals its fixed cost plus its variable cost.
Correct Answer
True
True. Every cost is either fixed, staying the same at all output levels, or variable, changing with output, so adding the two gives total cost.
Category: Fixed and Variable Costs
Question 6
A firm's fixed cost rises as it produces more output.
Correct Answer
False
False. Fixed cost, such as rent on a leased building, stays the same no matter how much the firm produces. Costs that rise with output are variable costs.
Category: Fixed and Variable Costs
Question 7
When a firm has some fixed cost, its average variable cost curve lies below its average total cost curve at every output level.
Correct Answer
True
True. Average total cost equals average variable cost plus average fixed cost. With positive fixed cost, average fixed cost is above zero at every output, so average total cost is always higher than average variable cost.
Category: Average Cost Curves
Question 8
The vertical gap between the average total cost curve and the average variable cost curve widens as output increases.
Correct Answer
False
False. The gap equals average fixed cost, which shrinks as the same fixed cost is spread over more units. The two curves therefore move closer together as output rises.
Category: Average Cost Curves
Question 9
Marginal cost depends only on how variable cost changes, because fixed cost does not change with output.
Correct Answer
True
True. Marginal cost is the change in total cost from producing more. Since fixed cost is the same at every output, any change in total cost comes entirely from variable cost.
Category: Marginal and Average Cost
Question 10
Economies of scale are a short-run idea that arises because at least one input is fixed.
Correct Answer
False
False. Economies of scale are a long-run concept, describing falling average cost when a firm expands all of its inputs. The short-run idea tied to a fixed input is diminishing marginal returns.
Category: Costs in the Long Run
Question 11
In the long run, a firm can choose among many short-run average cost curves, each tied to a different level of fixed cost.
Correct Answer
True
True. Because all costs are variable in the long run, the firm can pick any plant size, and each plant size has its own short-run average cost curve. The long-run curve is built from the lowest-cost choice at each output.
Category: Costs in the Long Run
Question 12
Diseconomies of scale appear as the downward-sloping section of the long-run average cost curve.
Correct Answer
False
False. Diseconomies of scale appear as the upward-sloping section on the right, where very large size pushes average cost up. The downward-sloping section on the left reflects economies of scale.
Category: Costs in the Long Run
Question 13
A long-run average cost curve with one clear minimum point suggests that firms in the industry tend to be about the same size.
Correct Answer
True
True. If only one size of operation gives the lowest average cost, competing firms are pushed toward that size. A long flat bottom, by contrast, allows firms of different sizes to compete.
Category: Market Size and Structure
Question 14
Variable costs are the costs a firm must pay even when it produces nothing.
Correct Answer
False
False. Costs that must be paid even at zero output are fixed costs, such as rent under a lease. Variable costs, such as raw materials and hourly labor, are zero when nothing is produced and rise with output.
Category: Fixed and Variable Costs
Question 15
Average profit, or profit per unit, equals price minus average total cost.
Correct Answer
True
True. Average profit is total profit divided by quantity, which is average revenue minus average cost, and average revenue equals price. If price is above average total cost, each unit earns a profit on average.
Category: Accounting and Economic Profit
Question 16
A production function shows how a firm's revenue depends on the price it charges.
Correct Answer
False
False. A production function shows how much output a firm can make from given amounts of inputs such as labor and capital. It describes the physical relationship between inputs and output, not revenue or prices.
Category: Production in the Short Run
Question 17
The marginal product of labor may rise for the first few workers before diminishing marginal productivity sets in.
Correct Answer
True
True. Early workers can sometimes cooperate or use the fixed equipment more fully, so the second worker may add more than the first. Eventually, with capital fixed, each added worker contributes less.
Category: Diminishing Marginal Product
Question 18
Because economic profit subtracts implicit costs, it is larger than accounting profit whenever a firm has implicit costs.
Correct Answer
False
False. Economic profit subtracts implicit costs in addition to explicit costs, so it is smaller than accounting profit whenever implicit costs are positive.
Category: Accounting and Economic Profit
Question 19
New technologies can change the shape of the long-run average cost curve, sometimes favoring larger plants and sometimes smaller ones.
Correct Answer
True
True. The assembly line extended economies of scale to very large plants, while technologies such as small natural gas turbines made smaller plants cost competitive. Either change alters how many firms a market can support.
Category: Market Size and Structure
Question 20
Along the flat section of the long-run average cost curve, expanding all inputs sharply lowers average cost.
Correct Answer
False
False. The flat section reflects constant returns to scale, where expanding all inputs leaves average cost about the same. Sharply falling average cost belongs to the downward-sloping section with economies of scale.
Category: Costs in the Long Run