Ch7A - ECO 105: Principles of Economic Theory Chapter 7...

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ECO 105: Principles of Economic Theory Chapter 7 Answer Key for Sample Multiple-Choice Questions 1. b) is the correct answer. Economic profit is the difference between the firm’s total revenue and all opportunity costs, both implicit and explicit. 2. a) is the correct answer. Since the owner could earn $30,000 working for another company, we know that implicit costs are at least $30,000. Therefore, the firm’s total costs are at least $75,000 + $30,000 = $105,000. Therefore the firm is incurring an economic loss of at least $5,000. This illustrates the difference between economic profit and accounting profit. 3. c) is the correct answer. If economic profits are positive, even if they are small, the resources owned by the firm are earning more than they could in any alternative use. That is, the resources are earning more than their opportunity cost n what they could be earning in their next best alternative. 4. d) is the correct answer. Accounting profits are equal to total revenue less explicit costs. This is an important point, since accounting profits are what people normally consider to be profits, whereas the economist is interested in economic profits. 5. c) is the correct answer. Price takers face a horizontal demand curve and sell all they can produce so long as it is at the market price. 6. c) is the correct answer. P x Q is total revenue. Marginal revenue is the change in total revenue due to a one unit change in output. 7. d) is the correct answer. Since price searchers face a downward sloping demand curve, they must lower price in order to sell more output. When price is lowered it is not only for the extra units which will be sold, but it is for all the previous units of output as well. Therefore, the marginal revenue of each additional unit of output is the price of the additional unit of output less the reduction in price for each of the previous units; price and marginal
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This note was uploaded on 05/16/2008 for the course HIST 101 taught by Professor Wormer during the Spring '08 term at Wake Forest.

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Ch7A - ECO 105: Principles of Economic Theory Chapter 7...

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