m2f08_key - KEY 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13....

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KEY 1. (B) This is the definition of opportunity cost. 2. (C) Time spent in high school is sunk and cannot be recovered, regardless of Fred’s decision at this point. Therefore, this should not be considered. On the other hand, going to UA has a substantial opportunity cost: Fred is losing the opportunity to earn years of salary. 3. (C) Economic costs include $80,000 of direct costs for things yet to be purchased, $20,000 in opportunity cost for the owner’s labor, and and $10,000 in opportunity costs for the costumes already purchased. It is an accident that the numbers are essentially the same as in the quiz question. 4. (AE) Economic costs include the direct cost of insurance and the opportunity cost of using the building, but they do not include the sunk cost of supplies. Therefore, economic profit is $55,000 - $40,000 - $20,000 = ! $5,000. If economic profits are negative, then the owners are better off by shutting down. 5. (C) The LDR implies that excessive use of any single input causes the return on that input eventually to decline, as the production process gets saturated with that input. Answers (A) and (E) are about returns to scale. 6. (B) A competitive firm is so small that it has essentially no effect on the price of its output. Answers (C) and (D) cannot be correct, because they are statements about cost only, ignoring revenue. 7. (A) A competitive firm faces an infinitely elastic demand curve, so its optimal market is 1/ 4 =0. The elasticity of the market demand curve is essentially irrelevant to the individual firm. 8. (D) The easiest way to see this is to draw the picture. Producing on the firm’s supply curve means producing on the upward-sloping part of its marginal cost curve, and earning a positive profit means that it must be producing above the point of minimum average cost.9. 9.
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m2f08_key - KEY 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13....

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