ECO 101 Final Exam Revision

Question 1:

Define and explain the differences between Accounting Profit and Economic Profit.
What is the Normal Profit?

Accounting Profit Economic Profit

# Normal Profit
(AP) (EP)
The most common profit
The difference between a Is the profit that
idea. It is the difference
firm’s total revenue and the occurs when
Definition between a firm’s total
sum of explicit and implicit Economic Profits are
revenue and its explicit
costs. costs. equal to Zero.

Total Revenue - Explicit Cost

- Implicit Cost
Total Revenue - Explicit
Equation N/A
Cost
Accounting Profit - Implicit
Cost

Question 2:

What is the difference between the Explicit Cost and the Implicit Cost?

Explicit Costs Implicit Costs

Payments firms make to purchase resources

The opportunity cost of the resources supplied
and products.
by the firm’s owners and it’s difficult to
measure.
There are two types: Fixed & Variable.
Question 3:

Explain when a firm should take a decision to Continue or to Shut-down?

To continue To shut-down

➢ If the losses when continuing is bigger than

➢ If the losses when shutting down is the losses if shutting down
bigger than the losses if continuing ➢ Revenue ˂ VC
➢ Revenue ≥ VC ➢ Price ˂ AVC

Question 4:

What is the difference between the Short Run and the Long Run?

Short Run Long Run

Is the period of time when at least one of Is the period of time in which all inputs are
the firm’s factors of production is fixed. variable.

Question 5:

What is the difference between the Fixed Cost and the Variable Cost?

Fixed Costs Variable Costs

The costs that a firm should pay even if it
didn’t start the production such as salaries,
rent, interest on loans, taxes etc..
The costs that a firm will pay after it starts
production such as bills, raw materials,
transport etc..
The firm pay more when produce more
production.
Question 6:

What should a firm do if it realizes the following:

a) The Marginal Revenue is less than Marginal Cost? Decrease output.

b) The Marginal Revenue is greater than Marginal Cost? Increase output.
c) The Marginal Cost is less than the Price? Increase output.
d) The Marginal Cost is greater than the Price? Decrease output.

Question 7:

When should we consider a firm is profitable?

Firm is profitable when:

➢ TR ˃ TC
➢ Price ˃ ATC

Question 8:

The below table contains information about different levels of production and the
total cost for each level. The marginal revenue (marginal benefit) of producing any
extra unit equals ($105).

Quantity (Q) Total Cost (TC) Average Total Cost (ATC) Marginal Cost (MC)

0 $45 - -
1 $90 $90 $45
2 $129 $64.5 $39
3 $225 $75 $96
4 $360 $90 $135
5 $525 $105 $165

a) Find the missing values in the table.

b) Indicate the levels of production that satisfy the cost-benefit test.

ATC = TC ÷ Q MC = TC2 – TC1 OR (TC2 – TC1) ÷ (Output2 – Output1)

Since the MR = MB = $105, then the first three levels (1,2, & 3) of production are satisfying
the cost-benefit test.
Question 9:

Complete the below table based on the relationships among the various cost
functions.

Total Total Average Average Average

Total Fixed Variable Total Fixed Variable Marginal
Output Cost Cost
Cost Cost Cost Cost Cost
(TC) (MC)
(TFC) (TVC) (ATC) (AFC) (AVC)

0 $100 $100 $0 $0 $0 $0 $0
1 $130 $100 $30 $130 $100 $30 $30
2 $160 $100 $60 $80 $50 $30 $30
3 $210 $100 $110 $70 $33.33 $36.66 $50
4 $320 $100 $220 $80 $25 $55 $110
5 $400 $100 $300 $80 $20 $60 $80

TC = TFC + TVC OR ATC × Output

TFC = TC – TVC OR AFC × Output

TVC = TC – TFC OR AVC × Output

ATC = TC ÷ Output

AFC = TFC ÷ Output

AVC = TVC ÷ Output

MC = TC2 – TC1 OR (TC2 – TC1) ÷ (Output2 – Output1)

Question 10:

a) Explain what are the meaning of Economies of Scale, Constant Returns to Scale,
and Diseconomies of Scale?

Economies of scale: When all inputs are changed by a given proportion, output changes
by more than that proportion.

Constant returns to scale: When all inputs are changed by a given proportion, output
changes by the same proportion.

Diseconomies of scale: When all inputs are changed by a given proportion, output
changes by less than that proportion.

b) Indicate the levels of production that satisfy the cost-benefit test.

Output TC Firm 1 TC Firm 2 TC Firm 3

$1,000 $800 $800
1
1,000 ÷ 1 = 1,000 800 ÷ 1 = 800 800 ÷ 1 = 800
$1,800 $2,000 $1,600
2
1,800 ÷ 2 = 900 2,000 ÷ 2 = 1,000 1,600 ÷ 2 = 800
$2,550 $3,300 $2,400
3
2,550 ÷ 3 = 850 3,300 ÷ 3 = 1,100 2,400 ÷ 3 = 800
$3,300 $5,000 $3,200
4
3,300 ÷ 4 = 825 5,000 ÷ 4 = 1,250 3,200 ÷ 4 = 800
$3,900 $7,500 $4,000
5
3,900 ÷ 5 = 780 7,500 ÷ 5 = 1,500 4,000 ÷ 5 = 800
$4,200 $12,000 $4,800
6
4,200 ÷ 6 = 700 12,000 ÷ 6 = 2,000 4,800 ÷ 6 = 800

Formula: ATC = TC ÷ Output

➢ TC Firm 1 → Diseconomies of scale

➢ TC Firm 2 → Economies of scale

➢ TC Firm 3 → Constant returns to scale