E4P - L2 - Lesson 2

What do marginal costs include?

• Variable costs

• Fixed costs

• Both variable and fixed costs

• Neither variable nor fixed costs

Answer explanation

Marginal costs include only variable costs, as they represent the additional costs incurred from producing one more unit. Fixed costs do not change with production levels and are not included in marginal cost calculations.

What do marginal costs exclude?

• Variable costs

• Fixed costs

• Both variable and fixed costs

• Neither variable nor fixed costs

Answer explanation

Marginal costs focus on the additional costs incurred from producing one more unit. They exclude fixed costs, which do not change with production levels, while variable costs are included as they vary with output.

What are variable costs?

• Costs that vary with the quantity of output

• Costs that remain the same regardless of output

• Costs that are irrelevant to marginal cost

• Costs that are fixed and unchanging

Answer explanation

Variable costs are expenses that change in direct proportion to the level of production or output. Therefore, the correct choice is 'Costs that vary with the quantity of output'.

What are fixed costs?

• Costs that don’t vary with the quantity of output

• Costs that vary with the quantity of output

• Costs that are additional variable costs

• Costs that are irrelevant to marginal cost

Answer explanation

Fixed costs are expenses that remain constant regardless of the level of production or output. This means they do not vary with the quantity of goods produced, making the correct choice "Costs that don’t vary with the quantity of output."

Which of the following is an example of a fixed cost?

• Refinery building

• Buying more chemical additives

• Paying workers overtime

• Buying more crude oil

Answer explanation

A fixed cost does not change with production levels. The refinery building is a long-term investment that remains constant regardless of output, unlike variable costs such as buying crude oil or paying overtime.

Which cost is paid regardless of production expansion?

• Fixed costs

• Variable costs

• Marginal costs

• Additional costs

Answer explanation

Fixed costs are expenses that do not change with production levels, meaning they are incurred regardless of whether production is expanded or not. This distinguishes them from variable costs, which fluctuate with production.

What informs the price you are willing to sell each unit for?

• The demand for the product.

• The marginal cost of producing that unit.

• The total cost of production.

• The market trends.

Answer explanation

The marginal cost of producing each unit directly influences the price you set for it. It reflects the cost incurred to produce one more unit, ensuring you cover expenses and maintain profitability.

What is a diminishing marginal product?

• Marginal product of an input declines as you use more of that input

• Marginal product increases with more input

• Marginal product stays the same

• Marginal product is unrelated to input

Answer explanation

A diminishing marginal product occurs when the marginal product of an input declines as more of that input is used. This means that adding additional units of the input results in smaller increases in output.

In the restaurant example, what is needed to increase production?

• Hire more cooks

• Reduce kitchen size

• Decrease production

• Close the restaurant

Answer explanation

To increase production in a restaurant, hiring more cooks is essential. This allows for more meals to be prepared simultaneously, directly boosting output. The other options would either reduce capacity or close the business.

What do sellers do to see how it affects their profits?

• Produce a bit more or a bit less each week

• Stop producing completely

• Change their product entirely

• Sell at a loss

Answer explanation

Sellers adjust their production levels weekly to analyze how changes impact their profits. This allows them to find the optimal production quantity without completely halting operations or incurring losses.