MICROECONOMICS PRACTICE PROBLEMS
Costs, Production, and Profit Maximization — With Full Worked Solutions
Work each problem before checking the solution. Problems are grouped by topic and roughly ordered from easier to
harder within each section.
Section A — Opportunity Cost & Profit
Problem 1: Accounting vs. Economic Profit
Mia leaves a job paying $50,000/year to run her own bakery. In her first year, the bakery brings in $180,000 in revenue.
Explicit costs (ingredients, rent, utilities, part-time staff) total $120,000. Mia also invested $40,000 of her own savings
that could have earned 5% annually elsewhere.
a) Calculate accounting profit. b) Calculate economic profit. c) Should Mia keep running the bakery, based on
economic profit alone?
Solution
• a) Accounting profit = Revenue − Explicit costs = $180,000 − $120,000 = $60,000
• b) Implicit costs = forgone salary + forgone interest = $50,000 + (0.05 × $40,000) = $50,000 + $2,000 = $52,000
• Economic profit = Accounting profit − Implicit costs = $60,000 − $52,000 = $8,000
• c) Yes — economic profit is positive ($8,000), meaning the bakery earns more than Mia's next-best alternative. If
economic profit were negative, that would signal her resources are earning less here than elsewhere.
Problem 2: Identifying Implicit Costs
A store owner uses a building he already owns rent-free (it could otherwise be rented out for $2,000/month) and works in
the store himself instead of taking a $4,500/month job elsewhere. What are his monthly implicit costs?
Solution
• Implicit costs = forgone rent + forgone wages = $2,000 + $4,500 = $6,500/month
• Note: these costs don't involve any cash payment, which is exactly why they're easy to overlook — but they still
belong in economic profit.
Section B — Costs (FC, VC, TC, Averages, Marginal)
Problem 3: Building a Cost Table
A firm has fixed costs of $100. Variable costs at each output level are: Q=1: VC=$40; Q=2: VC=$70; Q=3: VC=$90;
Q=4: VC=$120; Q=5: VC=$160.
Fill in TC, ATC, AVC, AFC, and MC for each quantity.
Solution
Q FC VC TC AFC AVC ATC MC
1 100 40 140 100.00 40.00 140.00 40
2 100 70 170 50.00 35.00 85.00 30
3 100 90 190 33.33 30.00 63.33 20
4 100 120 220 25.00 30.00 55.00 30
5 100 160 260 20.00 32.00 52.00 40
Costs, Production, and Profit Maximization — With Full Worked Solutions
Work each problem before checking the solution. Problems are grouped by topic and roughly ordered from easier to
harder within each section.
Section A — Opportunity Cost & Profit
Problem 1: Accounting vs. Economic Profit
Mia leaves a job paying $50,000/year to run her own bakery. In her first year, the bakery brings in $180,000 in revenue.
Explicit costs (ingredients, rent, utilities, part-time staff) total $120,000. Mia also invested $40,000 of her own savings
that could have earned 5% annually elsewhere.
a) Calculate accounting profit. b) Calculate economic profit. c) Should Mia keep running the bakery, based on
economic profit alone?
Solution
• a) Accounting profit = Revenue − Explicit costs = $180,000 − $120,000 = $60,000
• b) Implicit costs = forgone salary + forgone interest = $50,000 + (0.05 × $40,000) = $50,000 + $2,000 = $52,000
• Economic profit = Accounting profit − Implicit costs = $60,000 − $52,000 = $8,000
• c) Yes — economic profit is positive ($8,000), meaning the bakery earns more than Mia's next-best alternative. If
economic profit were negative, that would signal her resources are earning less here than elsewhere.
Problem 2: Identifying Implicit Costs
A store owner uses a building he already owns rent-free (it could otherwise be rented out for $2,000/month) and works in
the store himself instead of taking a $4,500/month job elsewhere. What are his monthly implicit costs?
Solution
• Implicit costs = forgone rent + forgone wages = $2,000 + $4,500 = $6,500/month
• Note: these costs don't involve any cash payment, which is exactly why they're easy to overlook — but they still
belong in economic profit.
Section B — Costs (FC, VC, TC, Averages, Marginal)
Problem 3: Building a Cost Table
A firm has fixed costs of $100. Variable costs at each output level are: Q=1: VC=$40; Q=2: VC=$70; Q=3: VC=$90;
Q=4: VC=$120; Q=5: VC=$160.
Fill in TC, ATC, AVC, AFC, and MC for each quantity.
Solution
Q FC VC TC AFC AVC ATC MC
1 100 40 140 100.00 40.00 140.00 40
2 100 70 170 50.00 35.00 85.00 30
3 100 90 190 33.33 30.00 63.33 20
4 100 120 220 25.00 30.00 55.00 30
5 100 160 260 20.00 32.00 52.00 40
