Technology, Production, And Costs Practice Problems Microeconomics Worksheet Page 2
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107. Which of the following statements is true?
A) Opportunity cost = explicit cost - implicit cost.
B) Total cost = fixed cost + implicit cost.
C) Total cost = fixed cost + variable cost.
D) Variable cost = wages + salaries + benefits.
8. Bill owns "Bill's Home of Blues" a store that specializes in selling CDs and DVDs of blues
musicians of the 1960s and 1970s. Bill took out a loan from his bank to pay for his store and its
initial inventory. Bill pays the bank $900 per week for his loan. The $900 bank payment
A) is a long-run implicit cost.
B) is a fixed cost.
C) is a short-run implicit cost.
D) is a variable cost.
9. Sally quit her job as an auto mechanic earning $50,000 per year to start her own business. To
save money she operates her business out of a small building she owns which, until she started
her own business, she had rented out for $10,000 per year. She also invested her $20,000 savings
(which earned a market interest rate of 5% per year) in her business. You are given the following
information about the first year of her operations.
Total revenue
$120,000
Cost of labor
40,000
Cost of materials
15,000
Equipment rental
5,000
a. Calculate her economic costs.
b. Calculate her accounting costs.
c. Calculate her implicit costs.
d. Sally tells you that she would really like to move to a location closer to town but she decided
against it because "right now I don't pay any rent and it will cost me $10,000 a year to rent near
town." Do you agree with her reasoning?
10. The law of diminishing marginal returns states
A) that at some point, adding more of a fixed input to a given amount of variable inputs will
cause the marginal product of the variable input to decline.
B) that at some point, adding more of a variable input to a given amount of a fixed input will
cause the marginal product of the variable input to decline.
C) that in the presence of a fixed factor, at some point average product of labor starts to fall as
more and more variable inputs are added.
D) average total costs of production initially fall and after some point starts to rise at a
decreasing rate as output increases.
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