quizzes
Here is a quiz on Accounting vs. Economic Costs. Be sure and refer to previous pages for help or explanations for answers. Good luck!
1. Sunk Costs
a) Are used in decision making process.
b) Are the same as historic costs.
c) Must be ignored in future decision making.
d) Costs of sunk ships.
ANSWER: c) Must be ignored in future decision making
2. If a firm makes zero economic profit, then the firm
a) Earns revenue that exceeds its economic costs.
b) Must shut down.
c) Can be earning positive accounting profit.
d) Has no fixed costs.
ANSWER: c) can be earning positive accounting profit.
1. Sunk Costs
a) Are used in decision making process.
b) Are the same as historic costs.
c) Must be ignored in future decision making.
d) Costs of sunk ships.
ANSWER: c) Must be ignored in future decision making
2. If a firm makes zero economic profit, then the firm
a) Earns revenue that exceeds its economic costs.
b) Must shut down.
c) Can be earning positive accounting profit.
d) Has no fixed costs.
ANSWER: c) can be earning positive accounting profit.
QUIZ on Short Run Costs (Bized.co.uk):
1. When MC are below ATC then
a) AFC is rising.
b) ATC is falling.
c) ATC is rising.
d) ATC is minimized.
ANSWER: b) ATC is falling.
2. Which statement below is TRUE?
a) MC curve first increases then decreases.
b) The difference between TC and VC curve is decreasing over time.
c) Without TFC, ATC is equal to AVC.
d) AFC curve decreases over time because amount of FC constantly decreases over the period.
ANSWER: c) Without TFC, ATC is equal to AVC.
3. If the AC is falling then
a) MC is falling.
b) MC is rising.
c) MC is equal to average costs.
d) It is impossible to tell if MC is rising or falling.
ANSWER: d) It is impossible to tell if MC is rising or falling.
4. A firm's ATC is £30 at 5 units of output and £32 at 6 units of output. The MC of producing the 6th unit is:
a) £2
b) £12
c) £32
d) £42
ANSWER: d) £42
5. A firm producing 7 units of output has an ATC of £15 and has to pay £35 to its fixed factors of production whether it produces or not. How much of the ATC is made up of AVC?
a) £70
b) £7
c) £20
d) £10
ANSWER: d) £10
1. When MC are below ATC then
a) AFC is rising.
b) ATC is falling.
c) ATC is rising.
d) ATC is minimized.
ANSWER: b) ATC is falling.
2. Which statement below is TRUE?
a) MC curve first increases then decreases.
b) The difference between TC and VC curve is decreasing over time.
c) Without TFC, ATC is equal to AVC.
d) AFC curve decreases over time because amount of FC constantly decreases over the period.
ANSWER: c) Without TFC, ATC is equal to AVC.
3. If the AC is falling then
a) MC is falling.
b) MC is rising.
c) MC is equal to average costs.
d) It is impossible to tell if MC is rising or falling.
ANSWER: d) It is impossible to tell if MC is rising or falling.
4. A firm's ATC is £30 at 5 units of output and £32 at 6 units of output. The MC of producing the 6th unit is:
a) £2
b) £12
c) £32
d) £42
ANSWER: d) £42
5. A firm producing 7 units of output has an ATC of £15 and has to pay £35 to its fixed factors of production whether it produces or not. How much of the ATC is made up of AVC?
a) £70
b) £7
c) £20
d) £10
ANSWER: d) £10
QUIZ on Long Run Costs:
1. Which of the followings graphs illustrate what LRAC curve can be in a certain period of time ?
1. Which of the followings graphs illustrate what LRAC curve can be in a certain period of time ?
ANSWER: d)
2. Which firms are experiencing economies of scale?
2. Which firms are experiencing economies of scale?
ANSWER: a)
3. In the long run, if a very small factory were to expand its scale of operations, it is likely that it would initially experience
a) A decrease in fixed costs.
b) Diseconomies of scale.
c) Economies of scale.
d) Constant returns to scale.
ANSWER: c) Economies of scale.
4. When is the long run Marginal Cost less than long run Average Cost?
a) In economies of scale.
b) In diseconomies of scale.
c) In constant returns to scale.
d) Never.
ANSWER: a) In economies of scale.
5. In the long run, when the output increases, the FC
a) Increase.
b) Decrease.
c) No changes.
d) It is always 0.
ANSWER: d) It is always 0.
3. In the long run, if a very small factory were to expand its scale of operations, it is likely that it would initially experience
a) A decrease in fixed costs.
b) Diseconomies of scale.
c) Economies of scale.
d) Constant returns to scale.
ANSWER: c) Economies of scale.
4. When is the long run Marginal Cost less than long run Average Cost?
a) In economies of scale.
b) In diseconomies of scale.
c) In constant returns to scale.
d) Never.
ANSWER: a) In economies of scale.
5. In the long run, when the output increases, the FC
a) Increase.
b) Decrease.
c) No changes.
d) It is always 0.
ANSWER: d) It is always 0.
QUESTIONS on Transaction Cost Theory and Coase Theorem
Consider the following example (Econpage.com):
A firm locates next to a lake and produces good X. Rather than pay for waste removal; the firm dumps its waste into the lake. Fishermen, who earn their livelihood in the lake, are affected because the waste kills many of the lake's fish. The cheapest way to eliminate the pollution problem is to buy pollution control equipment, which costs £1,000 per year to operate and maintain.
Question 1: What type of externality is this?
Answer: This is a negative externality because the waste clearly involves external damage that is inflicted upon the fishermen. The firm is not bearing the entire cost of producing good X. The marginal cost to society of producing good X is higher than the firm's marginal cost of producing good X.
Question 2: How does the allocation of property rights affect this problem?
Answer: Assume that a judge allows the firm to continue dumping (in effect granting property rights to the firm), which lowers the fishermen's profits by £2,000 per year. Assume further that the firm will allow fishing in the lake as long as the fishing doesn't affect the firm's profits.
In this setting, the fishermen must decide what they want to do. The firm will undoubtedly continue to dump their waste in the lake. If the fishermen remain in the fishing market, they must decide whether it is better to continue losing £2,000 per year or whether it is better to buy pollution control equipment themselves (since the firm is not obligated to do so in this setting). The end result: the fishermen will purchase the pollution control equipment because the cost is only £1,000 compared to the £2,000 they are currently losing.
Suppose instead that the judge actually granted the property rights of the lake to the fishermen. In this case, changing the allocation of property rights puts the fishermen in the driver's seat. Assuming that the firm decides to remain in the market for producing good X, they are faced with a choice between paying for pollution control of £1,000 per year and compensating the fishermen at £2,000 per year. The end result: the firm will purchase the pollution control equipment because that option is cheaper. Therefore, the allocation of property rights determines who is responsible for purchasing the pollution control equipment, the firm or the fishermen.
Question 3: If the fishermen's losses were around £800 per year - instead of £2,000 - do the outcomes of questions 1 and 2 change?
If the firm has the property rights to the lake, then the fishermen will either continue absorbing their £800 annual loss or buy pollution control equipment themselves for £1,000 per year. It is better to simply absorb the loss. Additionally, the fishermen also understand that it may be possible to "bribe" the firm to reduce output. A lower output level would decrease the external cost of the pollution that affects the fishermen. Clearly, these fishermen have an incentive to bribe the firm up to the amount of the fishermen's loss. In this manner, the externality could be internalized as well.
If the fishermen obtain property rights to the lake, then the firm must decide whether to purchase the pollution control equipment for £1,000 or compensate the fishermen for their £800 loss. It is clearly better to choose the latter.
Thus, in both cases, the company continues polluting the lake in this scenario.
A firm locates next to a lake and produces good X. Rather than pay for waste removal; the firm dumps its waste into the lake. Fishermen, who earn their livelihood in the lake, are affected because the waste kills many of the lake's fish. The cheapest way to eliminate the pollution problem is to buy pollution control equipment, which costs £1,000 per year to operate and maintain.
Question 1: What type of externality is this?
Answer: This is a negative externality because the waste clearly involves external damage that is inflicted upon the fishermen. The firm is not bearing the entire cost of producing good X. The marginal cost to society of producing good X is higher than the firm's marginal cost of producing good X.
Question 2: How does the allocation of property rights affect this problem?
Answer: Assume that a judge allows the firm to continue dumping (in effect granting property rights to the firm), which lowers the fishermen's profits by £2,000 per year. Assume further that the firm will allow fishing in the lake as long as the fishing doesn't affect the firm's profits.
In this setting, the fishermen must decide what they want to do. The firm will undoubtedly continue to dump their waste in the lake. If the fishermen remain in the fishing market, they must decide whether it is better to continue losing £2,000 per year or whether it is better to buy pollution control equipment themselves (since the firm is not obligated to do so in this setting). The end result: the fishermen will purchase the pollution control equipment because the cost is only £1,000 compared to the £2,000 they are currently losing.
Suppose instead that the judge actually granted the property rights of the lake to the fishermen. In this case, changing the allocation of property rights puts the fishermen in the driver's seat. Assuming that the firm decides to remain in the market for producing good X, they are faced with a choice between paying for pollution control of £1,000 per year and compensating the fishermen at £2,000 per year. The end result: the firm will purchase the pollution control equipment because that option is cheaper. Therefore, the allocation of property rights determines who is responsible for purchasing the pollution control equipment, the firm or the fishermen.
Question 3: If the fishermen's losses were around £800 per year - instead of £2,000 - do the outcomes of questions 1 and 2 change?
If the firm has the property rights to the lake, then the fishermen will either continue absorbing their £800 annual loss or buy pollution control equipment themselves for £1,000 per year. It is better to simply absorb the loss. Additionally, the fishermen also understand that it may be possible to "bribe" the firm to reduce output. A lower output level would decrease the external cost of the pollution that affects the fishermen. Clearly, these fishermen have an incentive to bribe the firm up to the amount of the fishermen's loss. In this manner, the externality could be internalized as well.
If the fishermen obtain property rights to the lake, then the firm must decide whether to purchase the pollution control equipment for £1,000 or compensate the fishermen for their £800 loss. It is clearly better to choose the latter.
Thus, in both cases, the company continues polluting the lake in this scenario.
Works Cited for This Page
Bized.co.uk (2011) Biz/ed - Firms: Short run costs - Question Bank | Biz/ed. [online] Available at: http://www.bized.co.uk/learn/economics/qbank/firms1.htm [Accessed: 27 Dec 2012].
Econpage.com (n.d.) Applying the Coase Theorem. [online] Available at: http://www.econpage.com/201/handouts/coase.html [Accessed: 27 Dec 2012].
Econpage.com (n.d.) Applying the Coase Theorem. [online] Available at: http://www.econpage.com/201/handouts/coase.html [Accessed: 27 Dec 2012].