question
The competitive firm's long-run supply curve...
A. Is always perfectly horizontal
B. Includes only that part of the long-run marginal cost curve that lies above long-run average cost
C. Includes only that part of the long-run marginal cost curve that is sloping upwards
D. Is identical to its long-run average cost curve
A. Is always perfectly horizontal
B. Includes only that part of the long-run marginal cost curve that lies above long-run average cost
C. Includes only that part of the long-run marginal cost curve that is sloping upwards
D. Is identical to its long-run average cost curve
answer
B. Includes only that part of the long-run marginal cost curve that lies above long-run average cost
question
When do new firms tend to enter a competitive industry?
A. When the large firms in the industry are earning zero profit
B. When the smaller firms are leaving the industry
C. When the new entrants can earn positive profits
D. When there is an absence of fixed costs in the long run
A. When the large firms in the industry are earning zero profit
B. When the smaller firms are leaving the industry
C. When the new entrants can earn positive profits
D. When there is an absence of fixed costs in the long run
answer
C. When the new entrants can earn positive profits
question
An industry's output is produced at the lowest possible cost when?
A. Firm's marginal costs are equal
B. Firms minimize their average costs
C. All firms earn the same profit
D. Output is evenly divided among the industry's firms
A. Firm's marginal costs are equal
B. Firms minimize their average costs
C. All firms earn the same profit
D. Output is evenly divided among the industry's firms
answer
A. Firm's marginal costs are equal
question
How are a firm's short-run and long-run average cost curves related?
A. SRAC is greater than LRAC, which forces the LRAC curve to be upward sloping
B. SRAC and LRAC slope up or down together, but SRAC is always steeper
C. The SRAC curve is tangent to and lies above the LRAC curve
D. The LRAC curve just touches the SRAC curve at its minimum point
A. SRAC is greater than LRAC, which forces the LRAC curve to be upward sloping
B. SRAC and LRAC slope up or down together, but SRAC is always steeper
C. The SRAC curve is tangent to and lies above the LRAC curve
D. The LRAC curve just touches the SRAC curve at its minimum point
answer
C. The SRAC curve is tangent to and lies above the LRAC curve
question
If the marginal rate of technical substitution of labor for capital (MRTSlk) exceeds the relative price of labor in terms of capital (Pl/Pk), then?
A. The firm's long-run average cost curve is rising
B. The firm is producing its output at the least possible cost, but the firm should reduce its output level to increase its profits
C. The firm has increased its output level beyond the point of diminishing marginal returns
D. The firm needs to use less capital and more labor to reach its expansion path
A. The firm's long-run average cost curve is rising
B. The firm is producing its output at the least possible cost, but the firm should reduce its output level to increase its profits
C. The firm has increased its output level beyond the point of diminishing marginal returns
D. The firm needs to use less capital and more labor to reach its expansion path
answer
D. The firm needs to use less capital and more labor to reach its expansion path
question
Which of the following is not classified as a capital input?
A. A John Deere factory
B. A Hewlett-Packard laser printer
C. A cement mixer
D. 500 shares of General Motors stock
A. A John Deere factory
B. A Hewlett-Packard laser printer
C. A cement mixer
D. 500 shares of General Motors stock
answer
D. 500 shares of General Motors stock
question
Marginal benefit is defined as?
A. The net gain from a particular level of an activity
B. The additional benefit gained from the last unit of an activity
C. The difference between total benefits and total costs of a particular level of an activity
D. The difference between variable costs and fixed costs
A. The net gain from a particular level of an activity
B. The additional benefit gained from the last unit of an activity
C. The difference between total benefits and total costs of a particular level of an activity
D. The difference between variable costs and fixed costs
answer
B. The additional benefit gained from the last unit of an activity
question
As more of an activity is undertaken, it is reasonable to assume that?
A. The total benefits will decline
B. The marginal benefits will decline
C. The fixed costs will decline
D. The marginal benefits will increase
A. The total benefits will decline
B. The marginal benefits will decline
C. The fixed costs will decline
D. The marginal benefits will increase
answer
B. The marginal benefits will decline
question
Marginal cost is defined as?
A. The additional cost attributable to the last unit produced
B. The change in fixed costs associated with the production of one more unit of output
C. The difference between total revenue and total cost
D. Price times quantity
A. The additional cost attributable to the last unit produced
B. The change in fixed costs associated with the production of one more unit of output
C. The difference between total revenue and total cost
D. Price times quantity
answer
A. The additional cost attributable to the last unit produced
question
Costs that are independent of the firm's level of output are called?
A. Fixed costs
B. Marginal costs
C. Opportunity costs
D. Sunk costs
A. Fixed costs
B. Marginal costs
C. Opportunity costs
D. Sunk costs
answer
A. Fixed costs
question
If an activity is worth pursuing at all, then it should be pursued up to the point where?
A. Total cost equals total benefit
B. Average cost equals average benefit
C. Marginal cost equals marginal benefit
D. Sunk costs equal zero
A. Total cost equals total benefit
B. Average cost equals average benefit
C. Marginal cost equals marginal benefit
D. Sunk costs equal zero
answer
C. Marginal cost equals marginal benefit
question
When should a firm increase its production?
A. When it is earning a positive profit
B. When its revenues are too low to cover the firm's fixed costs
C. When there is a fall in the price of its product
D. When its marginal revenue exceeds its marginal cost
A. When it is earning a positive profit
B. When its revenues are too low to cover the firm's fixed costs
C. When there is a fall in the price of its product
D. When its marginal revenue exceeds its marginal cost
answer
D. When its marginal revenue exceeds its marginal cost
question
The government authorized $10 M to build bridges on an interstate. After $8 M were spent, serious engineering flaws were discovered. At that point, experts testified that the government must authorize another $10 M in funding to make the bridges safe, bringing the project's total cost to $20 M. The government should authorize the additional funding as long as the benefits from the completed bridges exceed?
A. $10 M
B. $12 M
C. $18 M
D. $20 M
A. $10 M
B. $12 M
C. $18 M
D. $20 M
answer
A. $10 M
question
What do economists mean by the phrase "sunk costs are sunk?"
A. Sunk costs are irretrievable, but they do lower profits and thus affect the firm's output level
B. Sunk costs are a primary reason why marginal costs tend to increase
C. Sunk costs cannot be recovered and are irrelevant to future decision making
D. Sunk costs lower consumer welfare, because producers "pass on" these costs in the form of higher prices
A. Sunk costs are irretrievable, but they do lower profits and thus affect the firm's output level
B. Sunk costs are a primary reason why marginal costs tend to increase
C. Sunk costs cannot be recovered and are irrelevant to future decision making
D. Sunk costs lower consumer welfare, because producers "pass on" these costs in the form of higher prices
answer
C. Sunk costs cannot be recovered and are irrelevant to future decision making
question
Economists use the term variable costs to refer to?
A. Prices of inputs that are subject to sudden change, like fuel
B. An increase in the price of any input
C. Costs that vary with the type of final product being produced
D. Costs that vary with the quantity of output produced
A. Prices of inputs that are subject to sudden change, like fuel
B. An increase in the price of any input
C. Costs that vary with the type of final product being produced
D. Costs that vary with the quantity of output produced
answer
D. Costs that vary with the quantity of output produced
question
An increase in fixed costs will lower a firm's...
A. Total cost
B. Output
C. Prices
D. Profit
A. Total cost
B. Output
C. Prices
D. Profit
answer
D. Profit
question
Consider a firm that produces peanut butter. An increase in the price of peanuts will cause the firm to lower its output because?
A. Fixed costs will rise
B. Marginal cost will rise
C. The price of peanut butter will rise
D. Marginal revenue will fall
A. Fixed costs will rise
B. Marginal cost will rise
C. The price of peanut butter will rise
D. Marginal revenue will fall
answer
B. Marginal cost will rise
question
Suppose the government increases the annual cost of the liquor permit that a tavern needs to serve alcohol. What effect will this increased cost have on the tavern's production and pricing decisions?
A. None—the tavern will maintain its current prices
B. The tavern will raise its prices to cover the higher cost
C. The tavern will scale back its operations
D. The tavern will cut its prices to increase its sales
A. None—the tavern will maintain its current prices
B. The tavern will raise its prices to cover the higher cost
C. The tavern will scale back its operations
D. The tavern will cut its prices to increase its sales
answer
A. None—the tavern will maintain its current prices
question
A firm will increase its production when?
A. Its marginal revenue rises
B. Its marginal cost rises
C. Its fixed costs fall
D. The demand for its product falls
A. Its marginal revenue rises
B. Its marginal cost rises
C. Its fixed costs fall
D. The demand for its product falls
answer
A. Its marginal revenue rises
question
Suppose a new Dunkin' Donuts shop has opened in town. Its main competitor, Doughnut Delite, will likely?
A. Begin to produce more doughnuts
B. Experience higher marginal costs
C. Reduce its prices and production
D. Make no changes in its pricing and production decisions
A. Begin to produce more doughnuts
B. Experience higher marginal costs
C. Reduce its prices and production
D. Make no changes in its pricing and production decisions
answer
C. Reduce its prices and production
question
If a firm can adjust its employment of all inputs, then it is?
A. Experiencing the economies of scale
B. In the long run
C. Off its expansion path
D. Limited only by the capacity of its fixed capital
A. Experiencing the economies of scale
B. In the long run
C. Off its expansion path
D. Limited only by the capacity of its fixed capital
answer
B. In the long run
question
The marginal product of labor is defined to be?
A. The additional output attributable to the last unit of labor employed
B. The amount of output obtained, on average, from each unit of labor employed
C. The percentage increase in output caused by a 1% rise in labor usage
D. The amount of capital that the firm can use to replace one unit of labor
A. The additional output attributable to the last unit of labor employed
B. The amount of output obtained, on average, from each unit of labor employed
C. The percentage increase in output caused by a 1% rise in labor usage
D. The amount of capital that the firm can use to replace one unit of labor
answer
A. The additional output attributable to the last unit of labor employed
question
Which of the following is most likely to be a variable cost in the short run?
A. A fee paid to obtain a license
B. The cost of owning machinery
C. The energy costs of running a factory
D. Rent payments for office space
A. A fee paid to obtain a license
B. The cost of owning machinery
C. The energy costs of running a factory
D. Rent payments for office space
answer
C. The energy costs of running a factory
question
In the short run, a firm's marginal cost tends to rise as more is produced because of?
A. Diminishing marginal returns
B. The implicit costs of production
C. Diseconomies of scale
D. Rising input costs
A. Diminishing marginal returns
B. The implicit costs of production
C. Diseconomies of scale
D. Rising input costs
answer
A. Diminishing marginal returns
question
If information about the total cost is not given for every possible 1 unit change in quantity, marginal cost can still be computed as?
A. The price of labor divided by the quantity of labor
B. The price of labor divided by the marginal product of labor
C. Fixed cost divided by the marginal product of labor
D. Variable cost divided by the marginal product of labor
A. The price of labor divided by the quantity of labor
B. The price of labor divided by the marginal product of labor
C. Fixed cost divided by the marginal product of labor
D. Variable cost divided by the marginal product of labor
answer
B. The price of labor divided by the marginal product of labor
question
If the average cost curve is downward sloping, then?
A. Marginal cost is smaller than average cost
B. The marginal cost curve is also downward sloping
C. There are increasing marginal returns to labor
D. Wages and other input prices are falling
A. Marginal cost is smaller than average cost
B. The marginal cost curve is also downward sloping
C. There are increasing marginal returns to labor
D. Wages and other input prices are falling
answer
A. Marginal cost is smaller than average cost
question
The marginal cost curve crosses...
A. Only the average variable cost curve at its bottom
B. Both the average cost curve and the average variable costs curve at their bottoms
C. Only the average cost curve at its bottom
D. The marginal product curve at its maximum
A. Only the average variable cost curve at its bottom
B. Both the average cost curve and the average variable costs curve at their bottoms
C. Only the average cost curve at its bottom
D. The marginal product curve at its maximum
answer
B. Both the average cost curve and the average variable costs curve at their bottoms
question
The marginal rate of technical substitution for capital (MRTSlk) measures?
A. The amount of capital that can replace a unit of labor without affecting the firm's output
B. The additional output attributable to a 1% increase in labor and capital usage
C. The rate at which the firm can exchange labor for capital in the input markets
D. The slope of the firm's expansion path
A. The amount of capital that can replace a unit of labor without affecting the firm's output
B. The additional output attributable to a 1% increase in labor and capital usage
C. The rate at which the firm can exchange labor for capital in the input markets
D. The slope of the firm's expansion path
answer
A. The amount of capital that can replace a unit of labor without affecting the firm's output
question
The set of all baskets of inputs that can be employed at a given cost defines a(n)?
A. Isoquant curve
B. Isocost curve
C. Expansion path
D. Production function exhibiting constant returns to scale
A. Isoquant curve
B. Isocost curve
C. Expansion path
D. Production function exhibiting constant returns to scale
answer
B. Isocost curve
question
The set of tangencies between isoquants and isocosts is the firm's?
A. Production function
B. Returns to scale
C. Output maximization curve
D. Expansion path
A. Production function
B. Returns to scale
C. Output maximization curve
D. Expansion path
answer
D. Expansion path
question
Suppose a firm doubles its employment of all inputs in the long run. If this action more than doubles the amount of output produced, then this firm is experiencing?
A. Increasing returns to scale
B. Diminishing marginal returns
C. Technological progress
D. Positive marginal revenue
A. Increasing returns to scale
B. Diminishing marginal returns
C. Technological progress
D. Positive marginal revenue
answer
A. Increasing returns to scale
question
Decreasing returns to scale implies that the long-run average cost curve is?
A. Downward sloping
B. Horizontal
C. Upward sloping
D. U-shaped
A. Downward sloping
B. Horizontal
C. Upward sloping
D. U-shaped
answer
C. Upward sloping
question
The marginal revenue curve of a competitive firm is?
A. U-shaped
B. A ray from the origin
C. A horizontal line at the market price
D. Downward sloping
A. U-shaped
B. A ray from the origin
C. A horizontal line at the market price
D. Downward sloping
answer
C. A horizontal line at the market price
question
The demand curve faced by a competitive firm is?
A. Horizontal
B. Downward sloping
C. Upward sloping
D. Nonexistant
A. Horizontal
B. Downward sloping
C. Upward sloping
D. Nonexistant
answer
A. Horizontal
question
Any firm, competitive or not, desiring to maximize profits, will choose its quantity according to the rule, produce that quantity at which?
A. Marginal revenue=price
B. Marginal revenue=marginal cost
C. Average variable cost is at its minimum
D. Marginal cost is at its minimum
A. Marginal revenue=price
B. Marginal revenue=marginal cost
C. Average variable cost is at its minimum
D. Marginal cost is at its minimum
answer
B. Marginal revenue=marginal cost
question
A competitive firm's short-run supply curve is determined by?
A. Its marginal costs
B. The market price
C. The zero-profit condition
D. Its fixed input
A. Its marginal costs
B. The market price
C. The zero-profit condition
D. Its fixed input
answer
A. Its marginal costs
question
A firm will shut down in the short run if its revenues fail to cover its?
A. Fixed costs
B. Variable costs
C. Total costs
D. Sunk costs
A. Fixed costs
B. Variable costs
C. Total costs
D. Sunk costs
answer
B. Variable costs
question
Ultimately, short-run supply curves are upward sloping because of?
A. The irrelevance of fixed costs to the firm's decision making
B. The factor-price effect
C. Diminishing marginal returns to the variable inputs
D. The equality of demand and marginal revenue for competitive firms
A. The irrelevance of fixed costs to the firm's decision making
B. The factor-price effect
C. Diminishing marginal returns to the variable inputs
D. The equality of demand and marginal revenue for competitive firms
answer
C. Diminishing marginal returns to the variable inputs
question
In the short run...
A. Firms can enter the industry but no firm can exit
B. Firms can exit the industry but no firm can enter
C. Firms can enter and exit the industry
D. No firm can enter or exit the industry
A. Firms can enter the industry but no firm can exit
B. Firms can exit the industry but no firm can enter
C. Firms can enter and exit the industry
D. No firm can enter or exit the industry
answer
D. No firm can enter or exit the industry
question
A factor-price effect occurs when increases in the industry's output...
A. Attract new firms to the industry
B. Raise the cost of inputs
C. Cause new subindustries to be developed
D. Result in lower prices for consumers
A. Attract new firms to the industry
B. Raise the cost of inputs
C. Cause new subindustries to be developed
D. Result in lower prices for consumers
answer
B. Raise the cost of inputs
question
A competitive firm's long-run supply curve is?
A. Horizontal at the firm's break-even price
B. Steeper than its long-run marginal cost curve
C. Identical to its long-run average cost curve
D. More elastic than its short-run supply curve
A. Horizontal at the firm's break-even price
B. Steeper than its long-run marginal cost curve
C. Identical to its long-run average cost curve
D. More elastic than its short-run supply curve
answer
D. More elastic than its short-run supply curve
question
Suppose all firms in an industry are identical. In the long run, entry and exit guarantee that all firms will have zero...
A. Marginal cost
B. Average cost
C. Economic profit
D. Accounting profit
A. Marginal cost
B. Average cost
C. Economic profit
D. Accounting profit
answer
C. Economic profit
question
Which of the following could cause an industry to be an increasing-cost industry?
A. The development of subindustries in response to industry growth
B. The factor-price effect
C. Identical break-even prices across firms
D. Substantial economies of scale in production
A. The development of subindustries in response to industry growth
B. The factor-price effect
C. Identical break-even prices across firms
D. Substantial economies of scale in production
answer
B. The factor-price effect
question
When will an industry's long-run supply curve be horizontal at firm's break-even price?
A. When expansion of the industry allows new input markets to develop
B. When some firms are more efficient than others
C. When specialized skills play a significant role in production
D. When firms are identical and there is no factor-price effect
A. When expansion of the industry allows new input markets to develop
B. When some firms are more efficient than others
C. When specialized skills play a significant role in production
D. When firms are identical and there is no factor-price effect
answer
D. When firms are identical and there is no factor-price effect
question
Suppose that the sub sandwich business is a competitive, constant-cost industry. An increase in demand for sub sandwiches, will, in the long-run lead to?
A. An increase in price and industry output, but no increase in the output of existing firms
B. No increase in price, no increase in the output of existing firms but an increase in industry output because of new firms
C. No increase in price and an increase in industry output as each existing firm produces more
D. No changes in price, output of existing firms or the number of firms in the industry
A. An increase in price and industry output, but no increase in the output of existing firms
B. No increase in price, no increase in the output of existing firms but an increase in industry output because of new firms
C. No increase in price and an increase in industry output as each existing firm produces more
D. No changes in price, output of existing firms or the number of firms in the industry
answer
B. No increase in price, no increase in the output of existing firms but an increase in industry output because of new firms
question
Assume dental care is provided by a competitive industry. A new government regulation requires each dentist to take a costly new exam for certification. What happens to the price of dental care?
A. The price of dental care rises in the short run and rises further in the long run
B. The regulation will cause higher prices in the short run, but it will have no long-run impact
C. There is no change in the short run, but dentists will exit and prices will rise in the long run
D. The exam is a sunk cost, so the price of dental care does not change in either the short run or the long run
A. The price of dental care rises in the short run and rises further in the long run
B. The regulation will cause higher prices in the short run, but it will have no long-run impact
C. There is no change in the short run, but dentists will exit and prices will rise in the long run
D. The exam is a sunk cost, so the price of dental care does not change in either the short run or the long run
answer
C. There is no change in the short run, but dentists will exit and prices will rise in the long run
question
The annual insurance premiums for Michael's Machine Shop have permanently risen because of a recent series of thefts by employees, but there is no change in the premiums paid by Michael's competitors. If machine shops are a competitive constant-cost industry, then in the long run?
A. Michael's profit will fall to zero
B. Michael's Machine Shop will be driven out of business
C. The higher fixed costs will have no effect on Michael's pricing and production decisions
D. The demand for service from Michael's Machine Shop will fall
A. Michael's profit will fall to zero
B. Michael's Machine Shop will be driven out of business
C. The higher fixed costs will have no effect on Michael's pricing and production decisions
D. The demand for service from Michael's Machine Shop will fall
answer
B. Michael's Machine Shop will be driven out of business
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