Booklet 4

Question 1

What is profit over and above normal profit called?

Answer 1

Abnormal/supernormal/economic profit

Question 2

What is the average cost of producing one unit of output called?

Answer 2

Average (unit) cost

Question 3

What is the amount of output produced per unit of a variable factor of production (i.e. productivity) called?

Answer 3

Average return

Question 4

What is the average revenue a firm generates per unit sold called?

Answer 4

Average revenue

Question 5

What is the acquisition of a business that is at an earlier stage of production (i.e. closer to the source of the raw material) in the same industry?

Answer 5

A backward vertical merger

Question 6

What is a factor that makes it more difficult and/or expensive for new firm to enter a new market?

Answer 6

A barrier to entry

Question 7

What is a factor that makes it more difficult and/or expensive to leave a market?

Answer 7

A barrier to exit

Question 8

What is an economic system where the means of production are controlled by the private sector and operated in the pursuit of profit?

Answer 8

Capitalism

Question 9

What is a merger between two firms with no common business interest?

Answer 9

A conglomerate merger

Question 10

What is an increase in the quantity of all factors of production employed leads to a proportionate increase in output (e.g. 10% more factor inputs employed leads to a 10% increase in output) called?

Answer 10

Constant returns to scale

Question 11

What is a market free from barriers to entry and exit?

Answer 11

A contestable market

Question 12

What is the process where barriers to entry are removed from markets (usually by technological advances), allowing new firms to replace older ones and creating new markets out of nothing?

Answer 12

Creative destruction

Question 13

What is a situation where an increase in the quantity of all factors of production employed leads to a less than proportionate increase in output (e.g. 10% more factor inputs employed leads to a 5% increase in output)?

Answer 13

Decreasing returns to scale

Question 14

What is a situation where an increase in the quantity of one variable leads to a smaller increase in output that the addition of the previous unit called?

Answer 14

Diminishing marginal returns

Question 15

What is an increase in long-run average costs arising from an increase in a firm’s scale of operations called?

Answer 15

Diseconomies of scale (internal)

Question 16

What is an increase in long-run average costs arising from an increase in the size of an industry called?

Answer 16

Diseconomies of scale (external)

Question 17

What is a scenario where the people who own a firm are not the same people that run it called?

Answer 17

The divorce between ownership and control

Question 18

What is a reduction in long-run average costs arising from an increase in a firm’s scale of operations called?

Answer 18

Economies of scale (internal)

Question 19

What is a reduction in long-run average costs arising from the growth of an industry as a whole called?

Answer 19

Economies of scale (external)

Question 20

What is the growth of a firm through mergers and acquisitions called?

Answer 20

External growth

Question 21

What are costs that do not vary with output?

Answer 21

Fixed costs

Question 22

What is the acquisition of a business that is at a later stage of production (i.e. closer to the consumer) in the same industry called?

Answer 22

A forward vertical merger

Question 23

What is a merger between two firms at the same stage of production in the same industry called?

Answer 23

A horizontal merger

Question 24

What is a situation when an increase in the quantity of one variable input leads to a larger increase in output than the addition of the previous unit called?

Answer 24

Increasing marginal returns

Question 25

What is an increase in the quantity of all factors of production employed leads to a more than proportionate increase in output (e.g. 10% more factor inputs employed leads to a 20% increase in output) called?

Answer 25

Increasing returns to scale

Question 26

What is the exploitation of invention to create a product that can be marketed?

Answer 26

(Product) Innovation

Question 27

What is the growth of a firm without mergers or takeovers, e.g. through successful advertising or building additional factories called?

Answer 27

Internal (or organic) growth

Question 28

What is the discovery of new technology through research and development called?

Answer 28

Invention

Question 29

What is the period of time in which all factors of production become variable in quantity?

Answer 29

The Long run

Question 30

What is the change in total cost from the production of an additional unit of output (change in total cost/change in quantity sold)?

Answer 30

Marginal cost

Question 31

What is the change in total output from an additional unit of a variable factor of production?

Answer 31

Marginal return

Question 32

What is the change in total revenue from the sale of an additional unit of output (change in total revenue/change in quantity sold) called?

Answer 32

Marginal revenue

Question 33

What is the smallest scale of production at which average cost is minimised (the lowest point of the LRAC curve)?

Answer 33

The minimum efficient scale of production

Question 34

What is a level of profit which is just enough to cover the opportunity cost of the factors of production being used in their current employment called?

Answer 34

Normal profit

Question 35

What is a scenario where the agents (e.g. managers) appointed by the principal (e.g. shareholders) do not act as the principal would wish because they face different incentives called?

Answer 35

The principal-agent problem

Question 36

What is the exploitation of invention to create new ways of producing goods or services?

Answer 36

Process innovation

Question 37

What, in purely accounting terms, is an excess of revenue over costs?

Answer 37

Profit

Question 38

What is the period of time in which at least one factor of production is fixed in quantity?

Answer 38

The Short run

Question 39

What is the sum of total fixed costs and total variable costs?

Answer 39

Total cost

Question 40

What is the total output produced from a given quantity of a variable factor of production?

Answer 40

Total return

Question 41

What are the total receipts of a firm from the sale of its product (selling price x quantity sold) called?

Answer 41

Total revenue

Question 42

What are costs that vary directly with output?

Answer 42

Variable costs

Question 43

What is a firm that is able to continue operating without becoming insolvent, but constrained by large debts that it may only be able to pay the interest on called?

Answer 43

A Zombie company/firm