question
Suppose that in 2015, you inherited from your grandfather a small planetarium that had been closed for several years. Your planetarium has a maximum capacity of 75 people and all the equipment is in working order. You decide to reopen the planetarium on the weekends as a new laser-tag venture called Shoot for the Stars, and much to your delight it has become an instant success, with admission tickets selling out quickly for each day you are open.
What decision must you make in the long run?
What decision must you make in the long run?
answer
whether to build a larger area for laser tag
question
A firm earning zero economic profits is probably suffering losses from the standpoint of general accounting principles. Do you agree or disagree with this argument?
It is actually earning a ________ given the extent of the risks involved. The full economic cost, including opportunity costs, is included in _______ cost but not in _______ cost.
It is actually earning a ________ given the extent of the risks involved. The full economic cost, including opportunity costs, is included in _______ cost but not in _______ cost.
answer
normal rate of return (or profit); economic; accounting
question
What is meant by the "opportunity cost of capital"?
answer
implicit cost of capital
question
Explain why opportunity costs are "real" costs even though they do not necessarily involve out-of-pocket expenses.
answer
The capital could have instead earned a normal rate of return invested in risk- free government bonds OR the capital could have instead earned a normal rate of return invested in bank certificates of deposit
question
An article on cnet.com reported on the findings of the marketing research firm IHS in its investigation of the cost of the components used to produce the 128GB Apple iPad Air 2 model with wifipluscellular. The firm found that this iPad model costs $358 to produce, 57 percent less than its retail price of $829.
Does this mean that Apple is making a profit of $471 on each of these iPad Air 2 models?
Does this mean that Apple is making a profit of $471 on each of these iPad Air 2 models?
answer
No, because the opportunity costs related to the production of the iPad Air 2 must be subtracted from total revenue.
question
Diminishing returns occur when:
answer
the marginal product of the variable input decreases when additional units are added to the production process.
question
Does the table indicate a situation of diminishing returns?
answer
Yes, because the marginal product of labor falls as labor increases.
question
Since the end of World War II, manufacturing firms in the United States and in Europe have been moving farther and farther outside of central cities. At the same time, firms in finance, insurance, and other parts of the service sector have been locating near downtown areas in tall buildings.
What kinds of buildings represent substitution of capital for land?
What kinds of buildings represent substitution of capital for land?
answer
skyscrapers
question
One major reason seems to be that manufacturing firms find it difficult to substitute capital for land, while service-sector firms that use office space do not. Why do you think it is relatively harder for a manufacturing firm to substitute capital for land?
answer
Since people can take stairs or elevators, offices can be stacked; assembly lines cannot.
question
Why is the demand for land likely to be very high near the center of a city?
answer
Easy accessibility using various modes of public and private transportation.
question
One of the reasons for substituting capital for land near the center of a city is that land is more expensive near the center. What is true about the relative supply of land near the center of a city? (Hint: Consider the formula for the area of a circle.)
answer
It's smaller. The area of land increases with the square of distance from the center. If a city grows from a radius of 1 mile to a radius of 5 miles, the new area is 25 times as large as the original.
question
production
answer
the process by which inputs are combined, transformed, and turned into outputs
question
firm
answer
an organization that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand
question
three decisions that all firms must make
answer
1. how much output to supply
2. which production technology to use
3. how much of each input to demand
2. which production technology to use
3. how much of each input to demand
question
economic profit
answer
accounts for both explicit costs and opportunity costs
question
total revenue
answer
The amount received from the sale of the product (q x P).
question
Total Cost (TC)
answer
the total of out-of-pocket costs (accounting costs) and opportunity cost of all inputs or factors of production
question
normal rate of return
answer
A rate of return on capital that is just sufficient to keep owners and investors satisfied. For relatively risk-free firms, it should be nearly the same as the interest rate on risk-free government bonds.
question
short run
answer
the period of time for which two conditions hold: the firm is operating under a fixed scale/fixed factor of production, and a firm can neither enter nor exit the industry
question
long run
answer
That period of time for which there are no fixed factors of production: Firms can increase or decrease the scale of operation, and new firms can enter and existing firms can exit the industry.
question
optimal method of production
answer
the production method that minimizes cost for a given level of output
question
production technology
answer
the quantitative relationship between inputs and outputs
question
labor-intensive technology
answer
technology that relies heavily on human labor instead of capital
question
capital-intensive technology
answer
technology that relies heavily on capital instead of human labor
question
total production function
answer
A numerical or mathematical expression of a relationship between inputs and outputs. It shows units of total product as a function of units of inputs.
question
marginal product
answer
The additional output that can be produced by adding one more unit of a specific input, ceteris paribus.
question
law of diminishing returns
answer
When additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines.
question
average product
answer
the average amount produced by each unit of a variable factor of production (total product divided by total units of labor)
question
fixed cost
answer
Any cost that does not depend on the firms' level of output. These costs are incurred even if the firm is producing nothing. There are no fixed costs in the long run.
question
variable costs
answer
a cost that depends on the level of production chosen
question
total cost
answer
total fixed costs + total variable costs
question
total fixed costs (TFC) or overhead
answer
the total of all costs that do not change with output even if output is zero
question
Average Fixed Cost (AFC)
answer
total fixed costs divided by quantity of output
question
spreading overhead
answer
The process of dividing total fixed costs by more units of output. Average fixed cost declines as quantity rises.
question
Total Variable Cost (TVC)
answer
the total of all costs that vary with output in the short run
question
marginal cost
answer
the increase in total cost that arises from an extra unit of production
question
Average Variable Cost (AVC)
answer
total variable costs divided by quantity of output
question
Total Cost
answer
total fixed costs plus total variable costs
question
Economic profit can be calculated as
answer
total revenue minus−(explicit costs + implicit costs).
question
The normal rate of return on capital is the opportunity cost of capital.
answer
True
question
In economics, the short run is a timeframe
answer
in which firms are operating under a fixed scale of production
question
The long run is a time period for which there are no fixed factors of production.
answer
true
question
The optimal level of production is the production level that maximizes cost for a given level of output.
answer
false
question
During the early phases of industrialization, the number of people engaged in agriculture usually drops sharply, even as agricultural output is growing. Given what you know about production technology and production functions, explain this seeming inconsistency.
Output increases with less labor because:
Output increases with less labor because:
answer
added capital delays how quickly labor's returns become diminishing.
question
Following is information on the production levels of three different firms.
Firm A is currently producing at a quantity where it is experiencing increasing returns.
Firm B is currently producing at a quantity where it is experiencing diminishing returns.
Firm C is currently producing at a quantity where it is experiencing negative returns.
If each of the firms cuts back on its labor force, what will happen to its marginal product of labor?
Firm A is currently producing at a quantity where it is experiencing increasing returns.
Firm B is currently producing at a quantity where it is experiencing diminishing returns.
Firm C is currently producing at a quantity where it is experiencing negative returns.
If each of the firms cuts back on its labor force, what will happen to its marginal product of labor?
answer
For Firm A, MPL falls
For Firm B, MPL rises
For Firm C, MPL rises
For Firm B, MPL rises
For Firm C, MPL rises
question
When total product reaches its highest level, marginal product
answer
is zero
question
If one worker can produce 30 units of output and two workers can produce a total of 50 units of output, the average product for the two workers is ________ units of output and the marginal product of the second worker is ________ units of output.
answer
25; 20
question
In general, additional capital increases the productivity of labor.
answer
true
question
Consider the following costs of owning and operating a car. A $19 ,500 Fiat 500 Pop financed over 60 months at 9 percent interest means a monthly payment of $405. Insurance costs $120 a month regardless of how much you drive. The car gets 25 miles per gallon and uses regular-grade gasoline that costs $2.50 per gallon. Finally, suppose that wear and tear on the car costs about $0.15 a mile.
Which costs are fixed, and which are variable?
Which costs are fixed, and which are variable?
answer
Fixed costs are the monthly car payment and the cost of insurance; variable costs are the cost of gasoline and costs associated with wear and tear.
question
In deciding whether to drive from Atlanta to Las Vegas (about 2,000 miles round-trip) to visit a friend, which costs would you consider? Why?
answer
Variable costs, because they will increase with each mile driven.
question
While charging a general admission price of $15 for adults most days of the week, the Museum of Fine Arts in Houston offers free admission every Thursday.
Why do you suppose that museums often price this way, offering free admissions on one day during the week?
Why do you suppose that museums often price this way, offering free admissions on one day during the week?
answer
The marginal cost of admitting additional visitors is almost zero.
question
Which of the following is true regarding the relationship between marginal cost and average variable cost?
answer
The average variable cost of production is initially decreasing with output but eventually increases.
question
Initially, the number of additional inputs needed to produce additional output is _____________; however, after a certain point, additional inputs are needed to produce an additional unit of output.
answer
decreasing; more
question
The fixed factor of production for a movie theater is most likely:
answer
projection equipment and seating
question
A company receives notice of a 5% increase in its property insurance rate
answer
average fixed cost and average total cost will increase; average variable cost and marginal cost will remain the same
question
If the total variable cost of production is the sum of the marginal cost of each additional unit of output, we can calculate the marginal cost by taking the total variable cost of production and dividing it by the quantity of output produced.
answer
false, it is confusing marginal cost with average variable cost
question
As output increases, total fixed cost ________ and average fixed cost ________.
answer
does not change; decreases
question
As output increases, average fixed cost will eventually reach zero.
answer
false
question
As output increases, total variable cost ________ and average variable cost ________.
answer
increases; decreases and then increases
question
The slope of the total variable cost curve is
answer
marginal cost
question
The vertical distance between the total variable cost curve and the total cost curve represents
answer
total fixed cost
question
If marginal cost is above average total cost, average total cost
answer
will increase
question
Because of diminishing returns, marginal cost curves are likely to rise and then fall.
answer
false
question
In the short run
answer
all firms have costs that they must bear regardless of their output.
question
Total cost is calculated as
answer
the sum of total fixed cost and total variable cost.
question
The Lawn Ranger, a landscaping company, has total costs of $4,000 and total variable costs of $1,000.
The Lawn Ranger's total fixed costs are
The Lawn Ranger's total fixed costs are
answer
$3,000
question
Which of the following is most likely to be a variable cost for a firm?
answer
The payroll taxes that are paid on employee wages
question
________ are likely a fixed cost of a firm
answer
Lease payments for office space
question
Marginal cost
answer
is the increase in total cost resulting from producing one more unit.
question
The main decision for a profit maximizing perfectly competitive firm is not what ________ but what ________.
answer
price to charge; level of output to produce
question
Marginal revenue is the
answer
added revenue that a firm takes in when it increases its output by one unit
question
Assume Robbie's Robots operates in a perfectly competitive market producing 3,000 robots per day. At this output level, the selling price is $800 per robot and the marginal cost is $625 per robot. It follows that producing one more robot will cause this firm's
answer
profit to increase
question
Assume Robbie's Robots operates in a perfectly competitive market producing 3,000 robots per day. At this output level, the selling price is $800 per robot and the marginal cost is $625 per robot. To maximize profits, Robbie's Robots should
answer
increase their output
question
Assume Robbie's Robots operates in a perfectly competitive market producing 3,000 robots per day. At this output level, the selling price is $800 per robot and the marginal cost is $825 per robot. To maximize profits, Robbie's Robots should
answer
decrease their output
question
Assume Robbie's Robots operates in a perfectly competitive market producing 3,000 robots per day. At this output level, the selling price is $800 per robot and the marginal cost is $800 per robot. To maximize profits, Robbie's Robots should
answer
make no adjustments as they are already maximizing their profits
question
Strawberries are produced in a perfectly competitive market. Average consumer incomes decrease.
This will cause the individual strawberry farmer's marginal revenue to ________ and their profit maximizing level of output to ________.
This will cause the individual strawberry farmer's marginal revenue to ________ and their profit maximizing level of output to ________.
answer
decrease; decrease
question
A firm earning positive profits in the short run always has an incentive to increase its scale of operation in the long run.
answer
Disagree. It has an incentive to expand its scale of operation only if it expects to continue to earn profits.
question
A firm suffering losses in the short run will continue to operate as long as total revenue at least covers fixed cost.
answer
Disagree: It should continue to operate as long as total revenue is greater than variable costs.
question
If a firm is suffering a loss in the short run and total revenue is less than total variable cost, the firm will minimize its losses by shutting down and immediately exiting the industry.
answer
false
question
The short-run industry supply curve for a perfectly competitive industry is the sum of the marginal cost curves above average variable cost for all firms in the industry.
answer
true
question
If total revenue is less than total variable cost in a perfectly competitive industry in the short run, firms will tend to exit that industry in the long run.
answer
true
question
A firm that is breaking even is:
answer
in an industry that is not attracting new firms.
earning a normal rate of return.
earning zero economic profit.
earning a normal rate of return.
earning zero economic profit.
question
In the short run, a firm in a perfectly competitive industry will minimize its losses by shutting down if:
answer
total revenue is less than total variable cost. and
market price falls below the minimum point on the average variable cost (AVC) curve.
market price falls below the minimum point on the average variable cost (AVC) curve.
question
The short-run supply curve of a perfectly competitive firm is:
answer
the portion of the marginal cost curve that lies above minimum average variable cost.
question
The marginal cost curve of any profit minus maximizing firm is the firm's short minus run supply curve.
answer
agree: the MC curve is the supply curve above minimum AVC
question
Which of the following is true regarding the MC curve and the ATC curve and the MC curve and the AVC curve?
answer
MC equals ATC (AVC) when ATC (AVC) is at a minimum.
question
The marginal cost curve of a perfectly competitive firm is the firm's short-run demand curve.
answer
false
question
Assuming it chooses to produce, a profit-maximizing firm in a perfectly competitive industry will produce output where
answer
marginal revenue equals marginal cost.
question
Firms will continue to produce as long as marginal revenue exceeds marginal cost.
answer
true
question
In perfect competition,
answer
price always equals marginal revenue.
question
All of the following are characteristics of firms in a perfectly competitive industry except
answer
they are price makers.
question
When the marginal product is at a maximum, the marginal cost is:
answer
at a minimum
question
A profit-maximizing strategy becomes a loss minimization strategy when a firm in a perfectly competitive industry is producing where
answer
AVC < P < ATC
question
You are hired as an economic consultant to The Pampered Pet Shop. The Pampered Pet Shop operates in a perfectly competitive industry. This firm is currently producing at a point where market price equals its marginal cost. The Shop's total revenue exceeds its total variable cost, but is less than its total cost.
You should advise the firm to
You should advise the firm to
answer
produce in the short run to minimize its loss, but exit the industry in the long run.
question
You are hired as an economic consultant to The Pampered Pet Shop. The Pampered Pet Shop operates in a perfectly competitive industry. This firm is currently producing at a point where market price equals its marginal cost. The market price is less than its average variable cost.
You should advise the firm to
You should advise the firm to
answer
cease production immediately because it is not covering its variable costs of production.
question
Refer to the s
In the short run, if the restaurant shuts down, it _____ variable costs and _____ revenue.
In the short run, if the restaurant shuts down, it _____ variable costs and _____ revenue.
answer
has no; earns no
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