question
Accounting profit is equal to total revenue minus
answer
explicit costs
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Economic profit is equal to total revenue minus
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the sum of implicit and explicit costs
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Use the following information to answer question. Madelyn owns a small pottery factory. She can make 1,000 pieces of pottery per year and sell them for $100 each. It costs Madelyn $20,000 for the raw materials to produce the 1,000 pieces of pottery. She has invested $100,000 in her factory and equipment: $50,000 from her savings and $50,000 borrowed at 10 percent (assume that she could have loaned her money out at 10 percent, too). Madelyn can work at a competing pottery factory for $40,000 per year.
The accounting profit at Madelyn's pottery factory is
The accounting profit at Madelyn's pottery factory is
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$75,000
question
Use the following information to answer question. Madelyn owns a small pottery factory. She can make 1,000 pieces of pottery per year and sell them for $100 each. It costs Madelyn $20,000 for the raw materials to produce the 1,000 pieces of pottery. She has invested $100,000 in her factory and equipment: $50,000 from her savings and $50,000 borrowed at 10 percent (assume that she could have loaned her money out at 10 percent, too). Madelyn can work at a competing pottery factory for $40,000 per year.
The economic profit at Madelyn's pottery factory is
The economic profit at Madelyn's pottery factory is
answer
$30,000
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If there are implicit costs of production,
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accounting profit will exceed economic profit
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If a production function exhibits diminishing marginal product, its slope
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becomes flatter as the quantity of the input increases.
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If a production function exhibits diminishing marginal product, the slope of the corresponding total-cost curve
answer
becomes steeper as the quantity of output increases.
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Which of the following is a variable cost in the short run?
a. Salaries paid to upper management
b. Rent on the factory
c. Interest payments on borrowed financial capital
d. Payment on the lease for factory equipment
e. Wages paid to factory labor
a. Salaries paid to upper management
b. Rent on the factory
c. Interest payments on borrowed financial capital
d. Payment on the lease for factory equipment
e. Wages paid to factory labor
answer
e. Wages paid to factory labor
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When marginal costs are below average total costs,
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average total costs are falling
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If marginal costs equal average total costs,
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average total costs are minimized
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If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal-cost curve will
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be U-shaped
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n the long run, if a very small factory were to expand its scale of operations, it is likely that it would initially experience
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economies of scale
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The efficient scale of production is the quantity of output that minimizes
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average total cost.
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Which of the following statements is true?
a. All costs are fixed in the long run.
b. All costs are variable in the long run.
c. All costs are variable in the short run.
d. All costs are fixed in the short run.
a. All costs are fixed in the long run.
b. All costs are variable in the long run.
c. All costs are variable in the short run.
d. All costs are fixed in the short run.
answer
b. All costs are variable in the long run.
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Cindy's Car Wash has average variable costs of $2 and average fixed costs of $3 when it produces 100 units of output (car washes). The firm's total cost is
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$500
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Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that when four units of output are produced, the total cost is $175, and the average variable cost is $33.75. What would the average fixed cost be if ten units were produced?
answer
$4
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Average total cost is increasing whenever
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marginal cost is greater than average total cost
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In the short run, a firm that produces and sells house paint can adjust
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how many workers to hire
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The most likely explanation for economies of scale is
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specialization of labor
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In the long run a company that produces and sells popcorn incurs total costs of $1,050 when output is 90 canisters and $1,200 when output is 120 canisters. The popcorn company exhibits
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economies of scale because average total cost is falling as output rises.
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When a firm experiences diseconomies of scale,
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long-run average total cost increases as output increases.
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Billy's Bean Bag Emporium produced 300 bean bag chairs but sold only 275 of the units it produced. The average cost of production for each unit of output produced was $100. The price for each of the 275 units sold was $95. Total profit for Billy's Bean Bag Emporium would be
answer
−$3,875.
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Jacqui decides to open her own business and earns $50,000 in accounting profit the first year. When deciding to open her own business, she withdrew $20,000 from her savings, which earned 5 percent interest. She also turned down three separate job offers with annual salaries of $30,000, $40,000, and $45,000. What is Jacqui's economic profit from running her own business?
answer
$4,000
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Korie wants to start her own business making custom furniture. She can purchase a factory that costs $400,000. Korie currently has $500,000 in the bank earning 3 percent interest per year.
Suppose Korie purchases the factory using $200,000 of her own money and $200,000 borrowed from a bank at an interest rate of 6 percent. What is Korie's annual opportunity cost of purchasing the factory?
Suppose Korie purchases the factory using $200,000 of her own money and $200,000 borrowed from a bank at an interest rate of 6 percent. What is Korie's annual opportunity cost of purchasing the factory?
answer
$18,000
question
If a firm uses labor to produce output, the firm's production function depicts the relationship between
answer
the number of workers and the quantity of output.
question
Which of the following costs of publishing a book is a fixed cost?
a. Shipping and postage expenses
b. Author royalties of 5 percent per book
c. Composition, typesetting, and jacket design for the book
d. The costs of paper and binding
a. Shipping and postage expenses
b. Author royalties of 5 percent per book
c. Composition, typesetting, and jacket design for the book
d. The costs of paper and binding
answer
c. Composition, typesetting, and jacket design for the book
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Tom's Tent Company has total fixed costs of $300,000 per year. The firm's average variable cost is $80 for 10,000 tents. At that level of output, the firm's average total costs equal
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$110
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A firm produces 400 units of output at a total cost of $1,200. If total variable costs are $1,000,
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average fixed cost is 50 cents.
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Why doesn't the total cost curve begin at the origin (the point 0,0)?
answer
Because fixed costs are positive when output is zero
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The average fixed cost curve
answer
always declines with increased levels of output
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The Three Amigo's company produced and sold 500 dog beds. The average cost of production per dog bed was $50. Each dog bed can be sold for a price of $65. The Three Amigo's total costs are
answer
$25,000
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A firm's opportunity costs of production are equal to its
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explicit costs + implicit costs
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Pete owns a shoe-shine business. His accountant most likely includes which of the following costs on his financial statements?
a. Shoe polish and wages Pete could earn delivering newspapers
b. Wages Pete could earn delivering newspapers and interest that Pete's money was earning before he spent his savings to set up the shoe-shine business
c. Shoe polish and rent on the shoe stand
d. Rent on the shoe stand and interest that Pete's money was earning before he spent his savings to set up the shoe-shine business
a. Shoe polish and wages Pete could earn delivering newspapers
b. Wages Pete could earn delivering newspapers and interest that Pete's money was earning before he spent his savings to set up the shoe-shine business
c. Shoe polish and rent on the shoe stand
d. Rent on the shoe stand and interest that Pete's money was earning before he spent his savings to set up the shoe-shine business
answer
c. Shoe polish and rent on the shoe stand
question
Bev is opening her own court-reporting business. She financed the business by withdrawing money from her personal savings account. When she closed the account, the bank representative mentioned that she would have earned $300 in interest next year. If Bev hadn't opened her own business, she would have earned a salary of $25,000. In her first year, Bev's revenues were $30,000, and she spent $1,000 on materials and supplies. Which of the following statements is correct?
a. Bev's accounting profits exceed her economic profits by $300.
b. Bev's total explicit costs are $26,300.
c. Bev's total implicit costs are $300.
d. Bev's economic profit is $3,700.
a. Bev's accounting profits exceed her economic profits by $300.
b. Bev's total explicit costs are $26,300.
c. Bev's total implicit costs are $300.
d. Bev's economic profit is $3,700.
answer
d. Bev's economic profit is $3,700.
question
Jane was a partner at a law firm earning $223,000 per year. She left the firm to open her own law practice. In the first year of business she generated revenues of $347,000 and incurred explicit costs of $163,000. Jane's economic profit from her first year in her own practice is
answer
−$39,000.
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Kate is a florist. Kate can arrange 20 bouquets per day. She is considering hiring her husband William to work for her. Together Kate and William can arrange 35 bouquets per day. What is William's marginal product?
answer
15 bouquets
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Eldin is a house painter. He can paint three houses per week. He is considering hiring his friend Murphy. Murphy can paint five houses per week. What is the maximum total output possible if Eldin hires Murphy?
answer
8 houses per week
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Ms. Joplin sells colored pencils. The colored-pencil industry is competitive. Ms. Joplin hires a business consultant to analyze her company's financial records. The consultant recommends that Ms. Joplin increase her production. The consultant must have concluded that , at her current level of production, Ms. Joplin's
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marginal revenue exceeds her marginal cost.
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Cold Duck Airlines flies between Tacoma and Portland. The company leases planes on a year-long contract at a cost that averages $600 per flight. Other costs (fuel, flight attendants, etc.) amount to $550 per flight. Currently, Cold Duck's revenues are $1,000 per flight. All prices and costs are expected to continue at their present levels. If it wants to maximize profit, Cold Duck Airlines should
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continue flying until the lease expires and then drop the run.
question
A firm that shuts down temporarily has to pay
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its fixed costs but not its variable costs
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The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average
answer
total cost
question
Free entry means that
answer
no legal barriers prevent a firm from entering an industry
question
Which of the following firms is the closest to being a perfectly competitive firm?
a. A grain farmer in Illinois
b. Ford Motor Company
c. Microsoft Corporation
d. The campus bookstore
a. A grain farmer in Illinois
b. Ford Motor Company
c. Microsoft Corporation
d. The campus bookstore
answer
a. A grain farmer in Illinois
question
The intersection of a firm's marginal revenue and marginal cost curves determines the level of output at which
answer
profit is maximized.
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Robin owns a horse stable and riding academy and gives riding lessons for children at "pony camp." His business operates in a competitive industry. Robin gives riding lessons to 20 children per month. His monthly total revenue is $4,000. The marginal cost of pony camp is $250 per child. In order to maximize profits, Robin should
answer
give riding lessons to fewer than 20 children per month.
question
Raiman's Shoe Repair produces custom-made shoes. When Mr. Raiman produces 12 pairs per week, the marginal cost of the 12th pair is $84, and the marginal revenue of the 12th pair is $70. What would you advise Mr. Raiman to do?
answer
Produce fewer custom-made shoes
question
Assume a certain firm in a competitive market is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit. To maximize its profit, the firm should
answer
decrease its output but continue to produce.
question
Which of the following expressions is correct for a competitive firm?
a. Average total cost = total variable cost/quantity of output
b. Average revenue = (marginal revenue) × (quantity of output)
c. Profit = (quantity of output) × (price − average total cost)
d. Marginal revenue = (change in total revenue)/(quantity of output)
a. Average total cost = total variable cost/quantity of output
b. Average revenue = (marginal revenue) × (quantity of output)
c. Profit = (quantity of output) × (price − average total cost)
d. Marginal revenue = (change in total revenue)/(quantity of output)
answer
c. Profit = (quantity of output) × (price − average total cost)
question
Which of the following represents the firm's short-run condition for shutting down?
a. Shut down if TR < FC
b. Shut down if TR < TC
c. Shut down if P < ATC
d. Shut down if TR < VC
a. Shut down if TR < FC
b. Shut down if TR < TC
c. Shut down if P < ATC
d. Shut down if TR < VC
answer
Shut down if TR < VC
question
Victor is the recipient of $1 million from a lawsuit. Victor decides to use the money to purchase a small business in Florida. His business operates in a perfectly competitive industry. If Victor would have invested the $1 million in a risk-free bond fund, he could have earned $100,000 each year. After he bought the small business, Victor quit his job as a market analyst with Research, Inc., where he used to earn $75,000 per year.
What is Victor's opportunity costs of operating his new business?
What is Victor's opportunity costs of operating his new business?
answer
$175,000
question
Suppose a firm in a competitive market reduces its output by 20 percent. As a result, the price of its output is likely to
answer
remain unchanged.
question
Which of the following statements is correct?
a. Only for competitive firms does average revenue equal marginal revenue.
b. For all firms, marginal revenue equals the price of the good.
c. Marginal revenue can be calculated as total revenue divided by the quantity sold.
d. Only for competitive firms does average revenue equal the price of the good.
a. Only for competitive firms does average revenue equal marginal revenue.
b. For all firms, marginal revenue equals the price of the good.
c. Marginal revenue can be calculated as total revenue divided by the quantity sold.
d. Only for competitive firms does average revenue equal the price of the good.
answer
Only for competitive firms does average revenue equal marginal revenue.
question
Whenever a perfectly competitive firm chooses to change its level of output, its marginal revenue
answer
does not change.
question
The fundamental source of monopoly power is
answer
barriers to entry
question
A natural monopoly occurs when
answer
there are economies of scale over the relevant range of output
question
When a firm has a natural monopoly, the firm's
answer
average total cost curve is downward sloping
question
When a monopolist increases the amount of output that it produces and sells, average revenue
answer
decreases, and marginal revenue decreases
question
A monopolist's profits with price discrimination will be
answer
higher than if the firm charged just one price because the firm will capture more consumer surplus.
question
When deciding what price to charge consumers, the monopolist may choose to charge them different prices based on the customers'
answer
geographical location.
question
A perfectly price-discriminating monopolist is able to
answer
maximize profit and produce a socially optimal level of output.
question
Antitrust laws have economic benefits that outweigh the costs if they
answer
prevent mergers that would decrease competition and raise the costs of production.
question
If government regulation sets the maximum price for a natural monopoly equal to its marginal cost, then the natural monopolist will
answer
earn economic losses.
question
Which of the following would be most likely to have monopoly power?
answer
A local cable TV provider
question
If the distribution of water is a natural monopoly, then
answer
multiple firms would likely each have to pay large fixed costs to develop their own network of pipes.
question
Monopoly firms face
answer
downward-sloping demand curves, so they can sell only the specific price-quantity combinations that lie on the demand curve.
question
Bob's Butcher Shop is the only place within 100 miles that sells bison burgers. Assuming that Bob is a monopolist and maximizing his profit, which of the following statements is true?
answer
The price of Bob's bison burgers will exceed Bob's marginal cost.
question
A firm cannot price discriminate if
answer
it operates in a competitive market
question
A movie theater can increase its profits through price discrimination by charging a higher price to adults and a lower price to children if it
answer
can prevent children from buying the lower-priced tickets and selling them to adults.
question
Suppose a monopolist is able to charge each customer a price equal to that customer's willingness-to-pay for the product. Then the monopolist is engaging in
answer
perfect price discrimination.
question
The process of buying a good in one market at a low price and selling the good in another market for a higher price in order to profit from the price difference is known as
answer
arbitrage
question
Which of the following is not one of the ways that antitrust laws promote competition?
a. Antitrust laws allow the government to shut down a firm if the government believes the firm has monopoly power.
b. Antitrust laws prevent companies from coordinating their activities in ways that make markets less competitive.
c. Antitrust laws allow the government to break up big companies into smaller ones.
d. Antitrust laws allow the government to prevent mergers.
a. Antitrust laws allow the government to shut down a firm if the government believes the firm has monopoly power.
b. Antitrust laws prevent companies from coordinating their activities in ways that make markets less competitive.
c. Antitrust laws allow the government to break up big companies into smaller ones.
d. Antitrust laws allow the government to prevent mergers.
answer
Antitrust laws allow the government to shut down a firm if the government believes the firm has monopoly power.
question
In order for antitrust laws to raise social welfare, the government must
answer
be able to determine which mergers are desirable and which are not.
question
Which of the following is an example of public ownership of a monopoly?
a. DeBeers
b. Microsoft
c. U.S. Postal Service
d. AT&T
a. DeBeers
b. Microsoft
c. U.S. Postal Service
d. AT&T
answer
U.S. Postal Service
question
Liana consumes only beer and chips. Her indifference curves are all bowed inward. Consider the bundles (2,6), (4,4), and (6,2). If Liana is indifferent between (2,6) and (6,2), then Liana must
answer
prefer (4,4) to (6,2)
question
Bundle J contains 10 units of good X and 5 units of good Y. Bundle K contains 5 units of good X and 10 units of good Y. Bundle L contains 10 units of good X and 10 units of good Y. Assume that the consumer's preferences satisfy the four properties of indifference curves. The price of X is $1, the price of Y is $2, and the consumer has an income of $20. Which bundle will the consumer choose?
answer
Bundle J
question
A consumer consumes two normal goods, popcorn and Pepsi. The price of Pepsi rises. The substitution effect, by itself, suggests that the consumer will consume
answer
more popcorn and less Pepsi.
question
Ryan experiences an increase in her wages. The hours of labor that she supplies to the market would increase if
answer
the substitution effect is larger than the income effect.
question
Assume that a consumer's indifference curve is bowed inward and negatively sloped. As the consumer moves from left to right along the horizontal axis, the consumer's marginal rate of substitution
answer
decreases.
question
A good is an inferior good if the consumer buys less of it when
answer
his income rises.
question
On a graph we draw a consumer's budget constraint, measuring the number of pineapples on the horizontal axis and the number of pencils on the vertical axis. If the slope of the budget constraint is -6, thenq
answer
a pineapple costs six times as much as a pencil.
question
Consider the indifference curve map and budget constraint for two goods, beef and potatoes. Suppose the good measured on the horizontal axis, potatoes, is a Giffen good. Beef is measured on the vertical axis and is a normal good. When the price of potatoes increases, the substitution effect causes
answer
a decrease in the consumption of potatoes, and the income effect causes an increase in the consumption of potatoes. The substitution effect is less than the income effect.
question
Suppose Reta is planning for retirement in a two-period world. In the first period, Reta is young and earns $1 million and in the second period, Reta is old and retired and earns nothing. The interest rate is initially 10 percent, but then it falls to 7 percent. After the interest rate falls, the
answer
substitution effect will induce Reta to consume more when she is young.
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