1

Steve is deciding between starting a business that will have $70,000 in revenues and $40,000 in explicit costs, or instead accepting a job offer than will pay him $50,000. What is the economic profit of the business?

a) Economic profit = $30,000

b) Economic profit = $20,000

c) Economic profit = -$20,000

d) Economic profit = -$30,000

2

Cindy is trying to decide between two options. She can either start up a telephone psychic hotline using her $300,000 in savings to purchase equipment or take a job at an advertising agency for $60,000/year. If she takes the job she will put her $300,000 savings into the market and earn a 10% annual rate. If she starts up the psychic hotline she expects to earn $310,000 a year in revenue while having annual explicit costs of $220,000. What is the economic profit per year of starting up the telephone psychic hotline?

a) Economic profit = $0

b) Economic profit = $30,000

c) Economic profit = $60,000

d) Economic profit = $90,000

e) Economic profit = $180,000

3

Suppose a firm faces the following costs:

Quantity	0	1	2	3	4	5
TFC	400	400	400	400	400	400
TC	400	600	700	850	1100	1400

What is the average variable cost at a quantity of 4 units?

a) AVC = 100

b) AVC = 175

c) AVC = 275

d) AVC = 375

4

The following table describes the costs of production for a firm.

Quantity	0	1	2	3	4	5	6
Average Total Cost	---	600	325	240	205	196	200
TVC	0	?	?	220	?	?	?

What is the average variable cost at a production level of 4 units?

a) AVC = 80

b) AVC = 100

c) AVC = 185

d) AVC = 320

e) None of these answers

5

Suppose a firm has the following costs:

Quantity	0	1	2	3	4	5	6
AVC	Undef.	500	450	400	?	?	?
AFC	Undef.	?	?	?	250	?	?

What is the total cost of producing 3 units?

a) Total Cost = 650

b) Total Cost = 1950

c) Total Cost = 2200

d) Total Cost = 450

6

Mr. Hudson notes that if he produces 10 pairs of shoes per day, his average fixed cost (AFC) is $14, and his marginal cost is $8; if he produces 20 pairs of shoes per day, his MC is $15. What is his AFC when output is 20 pairs of shoes per day?

a) AFC = 15

b) AFC = 7

c) AFC = 8

d) AFC = 5

7

Given the following information, what is the marginal cost of the 5th unit?

Quantity	0	1	2	3	4	5
AVC	---	80	60	50	55	60
AFC	---	300	150	100	75	60

a) MC = 5

b) MC = 15

c) MC = 80

d) MC = 120

e) MC = 300

8

When producing its 5th unit a firm's total variable costs increased from 300 to 340. If a firm is facing increasing marginal returns, which answer could be the total variable cost of producing 6 units?

a) TVC = 320

b) TVC = 360

c) TVC = 380

d) TVC = 400

9

Which of the following must be true if a firm is operating with decreasing marginal returns?

a) Total costs will increase at a decreasing rate as output expands

b) Average variable costs will decrease as output expands

c) Output will increase at an increasing rate as variable inputs are added

d) Marginal costs will increase as output expands

10

As a firm's production increases:

a) Its total variable costs increase initially and eventually decrease

b) Average fixed costs will increase

c) Average variable costs increase initially and eventually decrease

d) Total fixed costs will decrease

e) Average total costs decrease initially and eventually increase