ECON 200 UOFA EXAM 3
COMPREHENSIVE REVIEW QUESTIONS
AND ANSWERS VERIFIED SET
●● What does an accounting profit track?
Answer: All the money that goes in and out of your business
●● What is an economic profit?
Answer: Total revenue - explicit financial costs - entrepreneur's implicit
opportunity costs
●● What is the annual payment needed for it to be worth investing your
time and money into starting a new business called?
Answer: The sum of all your opportunity costs
●● What is the difference between an accounting profit and and
economic profit?
Answer: Accounting profit equals total revenue less explicit costs.
Economic profit equals total revenue less economic costs (explicit and
implicit).
An economic profit takes into account implicit opportunity costs
,●● What is average revenue?
Answer: total revenue / quantity sold = price
The revenue per unit, which is calculated as the total revenue divided by
the quantity supplied...this is equal to the price if you charge everyone
the same price
●● What does the firm's demand curve show?
Answer: The price you can charge for any given quantity
●● What curve is the same as the firm's demand curve?
Answer: The average revenue curve
●● What is the average cost?
Answer: Cost per unit which is calculated as your total costs (including
fixed and variable costs) divided by the quantity produced
Average cost = total cost/quantity = (fixed cost/quantity) + (variable
cost/quantity)
●● What are fixed costs?
Answer: Expenses that do not vary with the quantity produced.
,Ex: cost of land, capital equipment, rent for store front
●● What are variable costs?
Answer: Expenses that vary with the quantity produced.
Ex: raw materials/ingredients, electricity, worker time
●● What shape does the average cost curve have?
Answer: A U-shape
●● Why does the average cost curve have this shape? (1-2)
Answer: 1. The spreading of fixed costs
2. Rising variable costs
●● Please explain the spreading of fixed costs:
Answer: As you produce more, fixed costs get "spread" over more and
more units. therefore, when measuring on a per unit basis, they become
smaller and smaller (decline curve)
●● Please explain the rising variable costs:
Answer: These reflect emerging inefficiencies such as:
1. Diminishing marginal product reducing the productivity of your
workers
, 2. Rising input costs per unit such as paying workers overtime
* Rising curve
●● What is the profit margin per unit?
Answer: Profit margin = Price - Average cost.
Profit margin = Average revenue - average cost
*Price and average revenue are the same
●● On a graph, where can the profit margin be located?
Answer: It is the gap between your firm's demand curve and it's average
cost curve
●● Graphically, when can we tell that there is profit?
Answer: Anytime the demand lies above the average cost curve!
●● When is it worth entering a new market?
Answer: When the benefits exceed the costs
●● What measures the difference between benefits and costs?
Answer: Economic profit
COMPREHENSIVE REVIEW QUESTIONS
AND ANSWERS VERIFIED SET
●● What does an accounting profit track?
Answer: All the money that goes in and out of your business
●● What is an economic profit?
Answer: Total revenue - explicit financial costs - entrepreneur's implicit
opportunity costs
●● What is the annual payment needed for it to be worth investing your
time and money into starting a new business called?
Answer: The sum of all your opportunity costs
●● What is the difference between an accounting profit and and
economic profit?
Answer: Accounting profit equals total revenue less explicit costs.
Economic profit equals total revenue less economic costs (explicit and
implicit).
An economic profit takes into account implicit opportunity costs
,●● What is average revenue?
Answer: total revenue / quantity sold = price
The revenue per unit, which is calculated as the total revenue divided by
the quantity supplied...this is equal to the price if you charge everyone
the same price
●● What does the firm's demand curve show?
Answer: The price you can charge for any given quantity
●● What curve is the same as the firm's demand curve?
Answer: The average revenue curve
●● What is the average cost?
Answer: Cost per unit which is calculated as your total costs (including
fixed and variable costs) divided by the quantity produced
Average cost = total cost/quantity = (fixed cost/quantity) + (variable
cost/quantity)
●● What are fixed costs?
Answer: Expenses that do not vary with the quantity produced.
,Ex: cost of land, capital equipment, rent for store front
●● What are variable costs?
Answer: Expenses that vary with the quantity produced.
Ex: raw materials/ingredients, electricity, worker time
●● What shape does the average cost curve have?
Answer: A U-shape
●● Why does the average cost curve have this shape? (1-2)
Answer: 1. The spreading of fixed costs
2. Rising variable costs
●● Please explain the spreading of fixed costs:
Answer: As you produce more, fixed costs get "spread" over more and
more units. therefore, when measuring on a per unit basis, they become
smaller and smaller (decline curve)
●● Please explain the rising variable costs:
Answer: These reflect emerging inefficiencies such as:
1. Diminishing marginal product reducing the productivity of your
workers
, 2. Rising input costs per unit such as paying workers overtime
* Rising curve
●● What is the profit margin per unit?
Answer: Profit margin = Price - Average cost.
Profit margin = Average revenue - average cost
*Price and average revenue are the same
●● On a graph, where can the profit margin be located?
Answer: It is the gap between your firm's demand curve and it's average
cost curve
●● Graphically, when can we tell that there is profit?
Answer: Anytime the demand lies above the average cost curve!
●● When is it worth entering a new market?
Answer: When the benefits exceed the costs
●● What measures the difference between benefits and costs?
Answer: Economic profit
