ANSWERS TO End-of chapter QUESTIONS AND exercises
Answers to Questions for Review
1. (Explicit and Implicit Costs) Amos McCoy is currently raising corn on his 100-acre farm and earning an accounting profit of $100 per acre. However, if he raised soybeans, he could earn $200 per acre. Is he currently earning an economic profit? Why or why not?

Amos McCoy is not currently making an economic profit, despite the fact that he is making an accounting profit. This is so, because the accounting profit calculation does not take into account an important implicit cost—the opportunity cost of not raising soybeans. Actually, McCoy is experiencing an economic loss. According to our theory, he should get out of the corn business and begin …show more content…

If so, how will it affect your decisions?

The law of diminishing marginal returns says that the more of a variable resource that is combined with a given amount of a fixed resource (land in this case) marginal product (crop) will eventually decline.

Diminishing returns will result from growing crops too close together or planting too many times in one year. Placing crops too close together deprives them of sufficient nutrients to grow. More plants grow, but each produces smaller and fewer fruits or vegetables. If crops are not rotated and sufficient time is not allowed for the soil to regain its nutrients, subsequent harvests will be smaller. For this reason, farmers often allow a field to go fallow, planting it with grass or nitrogen-rich plants.

7. (Marginal Cost) What is the difference between fixed cost and variable cost? Does each type of cost affect short-run marginal cost? If yes, explain how each affects marginal cost. If no, explain why each does or does not affect marginal cost.

Fixed cost is a short-run phenomenon. It does not vary as output varies, and the firm must pay fixed costs in the short run even if output is zero. Variable cost is associated with the firm’s variable resources. As output varies, usage of the variable resources varies. Thus, variable cost rises as output rises and falls as output falls. If output is zero, variable cost is zero. Since marginal cost measures the change in total cost as output changes by