question
Marginal Product
answer
Extra output due to the addition of one more unit of input
question
Principle of Diminishing Returns
answer
When 1 factor is fixed... increased input leads to eventually no change in quantity
question
marginal cost
answer
extra cost of producing an additional unit
question
MC equation
answer
TC/Q
question
Except AFC, when MC are below average costs...
answer
average costs are falling
question
When MC are above average costs...
answer
average costs are rising
question
When MC = average costs
answer
average costs are constant
question
MC crosses ATC curve and AVC at...
answer
minimum points
question
sunk costs
answer
cost that has already been incurred and cannot be recovered.
question
Supply Curve (Short Run)
answer
the portion of the MC curve above intersection with AVC curve
question
If P< ATC but > AVC...
answer
firm will produce because variable costs are still covered
question
Economies of Scale occur if...
answer
average costs are declining... specialization can occur
question
Constant Returns to Scale occur if...
answer
average costs are constant. Cost/unit does not change either
question
Diseconomies of Scale occur if...
answer
average costs are increasing
question
Accounting profit
answer
TR - (explicit costs)
question
Economic profit
answer
TR - (explicit + implicit)
question
Firms will choose to produce up to the point where ....
answer
MR = MC
question
If MR > MC
answer
Increase production
question
If MR < MC
answer
decrease production
question
In perfect competition: MR =
answer
MR = P = AR = TR/Q
question
In perfect competition (SR) : & If P > ATC...
answer
profits exist and firm will produce to where P crosses MC, which is Q
question
In perfect competition (SR) & If P < ATC
answer
If P > AVC , firm will produce at a loss
If P < AVC, firm will shut down
If P < AVC, firm will shut down
question
Short Run Supply Curve
answer
portion of MC above its intersection AVC
question
Shutdown point
answer
where MC crosses AVC
question
Normal profit
answer
A profit that allows a business to survive and grow
question
Result if Monopoly wants to increase Qsold
answer
must lower P
question
At Q where MR = 0
answer
TR is maximized, elasticity of demand is unitary elastic
question
For Monopoly: How many Q to produce?
answer
MR = MC
question
Monopoly: Profit results
answer
P > ATC> AVC
question
Monopoly: Produce at a loss
answer
ATC > P > AVC
question
Reasons why Monopolies are inefficient
answer
1- Monopolists produce where P > MC
2- Monopolists produce less at Higher Price than would be produced under perfect competition
2- Monopolists produce less at Higher Price than would be produced under perfect competition
question
Natural Monopoly conditions
answer
single firm can supply market and LRAC is still falling
question
(P.C)
IF TR > TC
IF TR = TC
IF TR < TC
IF TR > TC
IF TR = TC
IF TR < TC
answer
profitable
breaks even
incurs loss
breaks even
incurs loss
question
Shutdown
answer
short run decision not to produce anything because of market decisions
question
Exit
answer
Long run decision to leave the market
question
benefits of shut down
answer
Savings: VC
cost: TR
cost: TR
question
benefits of exit
answer
Savings: TC
cost: TR
cost: TR
question
When to shut down short run
answer
IF TR < VC
(P < AVC)
(P < AVC)
question
When to exit long run
answer
TR < TC
(P < ATC)
(P < ATC)
question
When to enter market long run
answer
TR > TC
(P > ATC)
(P > ATC)
question
What happens to existing firms in (P.C.) when Economic profit is earned (when new firms enter...)
answer
Supply shifts right
P falls
loss of profits
slowed entry
P falls
loss of profits
slowed entry
question
What happens to existing firms in (P.C.) when loss is incurred (some firms exit)...
answer
supply shifts left
p rises
reducing remaining firms losses
p rises
reducing remaining firms losses
question
ZERO ECONOMIC PROFIT
answer
P = MR = MC
P = MC = ATC
MC intersects ATC @ ATCmin
P = ATC min
P = MC = ATC
MC intersects ATC @ ATCmin
P = ATC min
question
Characteristics of Competitive Firm
answer
1 of many producers
price TAKER
horizontal demand curve
higher Q =/ lower P
MR = P
price TAKER
horizontal demand curve
higher Q =/ lower P
MR = P
question
Characteristics of Monopoly
answer
Sole producer
price MAKER
Higher Q = lower P
reduce P to increase sales
price MAKER
Higher Q = lower P
reduce P to increase sales
question
For monopoly : Increasing Q has 2 results
answer
1. Output Effect- Higher Q = Higher Rev
2. Price Effect- lower P = Lower Rev
2. Price Effect- lower P = Lower Rev
question
Monopoly max profit
answer
MR = MC
Q leads to MR = MC
Q -> Max WTP, P found from demand curve
Q leads to MR = MC
Q -> Max WTP, P found from demand curve
question
competitive market equilibrium price
answer
P = MC, TS is maximized
question
Monopoly equilibrium price
answer
P > MR = MC
question
6. If the accounting profit for a firm is negative:
A) the economic profit must be positive.
B) the economic profit must be negative.
C) the firm should produce more.
D) the firm will not owe any taxes.
A) the economic profit must be positive.
B) the economic profit must be negative.
C) the firm should produce more.
D) the firm will not owe any taxes.
answer
B) the economic profit must be negative.
question
20. The term diminishing returns/product refers to:
A) a falling interest rate that can be expected as one's investment in a single asset
increases.
B) a reduction in profits caused by increasing output beyond the optimal point.
C) a decrease in total output due to the firm hiring uneducated workers.
D) a decrease in the extra output due to the use of an additional unit of a variable input
when all other inputs are held constant.
A) a falling interest rate that can be expected as one's investment in a single asset
increases.
B) a reduction in profits caused by increasing output beyond the optimal point.
C) a decrease in total output due to the firm hiring uneducated workers.
D) a decrease in the extra output due to the use of an additional unit of a variable input
when all other inputs are held constant.
answer
D) a decrease in the extra output due to the use of an additional unit of a variable input
when all other inputs are held constant.
when all other inputs are held constant.
question
28. Which of the following statements is FALSE?
A) When the marginal product of labor is upward-sloping, the marginal cost curve is
upward-sloping.
B) The average fixed cost curve is downward-sloping and approaches the horizontal
axis.
C) The marginal cost curve intersects the average variable cost curve at the minimum
of average variable cost.
D) When the marginal cost curve is above the average cost curve, the average cost
curve is upward-sloping.
A) When the marginal product of labor is upward-sloping, the marginal cost curve is
upward-sloping.
B) The average fixed cost curve is downward-sloping and approaches the horizontal
axis.
C) The marginal cost curve intersects the average variable cost curve at the minimum
of average variable cost.
D) When the marginal cost curve is above the average cost curve, the average cost
curve is upward-sloping.
answer
A) When the marginal product of labor is upward-sloping, the marginal cost curve is
upward-sloping.
upward-sloping.
question
For most restaurants, the average total cost curve _____ at _____ levels of output, then
_____ at _____ levels.
A) falls; low; rises; high
B) rises; low; falls; high
C) rises; high; rises; low
D) falls; high; falls; low
_____ at _____ levels.
A) falls; low; rises; high
B) rises; low; falls; high
C) rises; high; rises; low
D) falls; high; falls; low
answer
A) falls; low; rises; high
question
4. (Figure: Long-Run and Short-Run Average Cost Curves) Look at the figure Long-Run
and Short-Run Average Cost Curves. If a firm is producing at point C on the ATC2 but
anticipates increasing output to 225,000 units in the long run, the firm will build a
_____ plant and have _____ of scale.
A) smaller; economies
B) smaller; diseconomies
C) bigger; economies
D) bigger; diseconomies
and Short-Run Average Cost Curves. If a firm is producing at point C on the ATC2 but
anticipates increasing output to 225,000 units in the long run, the firm will build a
_____ plant and have _____ of scale.
A) smaller; economies
B) smaller; diseconomies
C) bigger; economies
D) bigger; diseconomies
answer
D) bigger; diseconomies
question
10. The demand curve for a perfectly competitive firm is:
A) perfectly inelastic.
B) perfectly elastic.
C) downward-sloping.
D) relatively but not perfectly elastic.
A) perfectly inelastic.
B) perfectly elastic.
C) downward-sloping.
D) relatively but not perfectly elastic.
answer
B) perfectly elastic.
question
11. Marginal revenue:
A) is the slope of the average revenue curve.
B) equals the market price in perfect competition.
C) is the change in quantity divided by the change in total revenue.
D) is the price divided by the change in quantity
A) is the slope of the average revenue curve.
B) equals the market price in perfect competition.
C) is the change in quantity divided by the change in total revenue.
D) is the price divided by the change in quantity
answer
B) equals the market price in perfect competition
question
15. The equilibrium price of a guidebook is $35 in the perfectly competitive guidebook
industry. Our firm produces 10,000 guidebooks for an average total cost of $38,
marginal cost of $30, and average variable cost of $30. Our firm should:
A) raise the price of guidebooks, because the firm is losing money.
B) keep output the same, because the firm is producing at minimum average variable
cost.
C) produce more guidebooks, because the next guidebook produced increases profit
by $5.
D) shut down, because the firm is losing money
industry. Our firm produces 10,000 guidebooks for an average total cost of $38,
marginal cost of $30, and average variable cost of $30. Our firm should:
A) raise the price of guidebooks, because the firm is losing money.
B) keep output the same, because the firm is producing at minimum average variable
cost.
C) produce more guidebooks, because the next guidebook produced increases profit
by $5.
D) shut down, because the firm is losing money
answer
C) produce more guidebooks, because the next guidebook produced increases profit
by $5.
by $5.
question
16. Zoe's Bakery operates in a perfectly competitive industry and has standard cost curves.
The variable costs at Zoe's Bakery increase, so all of the cost curves (except fixed cost)
shift upward. The demand for Zoe's pastries does not change, nor does the firm shut
down. To maximize profits after the variable cost increase, Zoe's Bakery will _____ its
price and _____ its level of production.
A) raise; increase
B) decrease; increase
C) raise; decrease
D) do nothing to; decrease
The variable costs at Zoe's Bakery increase, so all of the cost curves (except fixed cost)
shift upward. The demand for Zoe's pastries does not change, nor does the firm shut
down. To maximize profits after the variable cost increase, Zoe's Bakery will _____ its
price and _____ its level of production.
A) raise; increase
B) decrease; increase
C) raise; decrease
D) do nothing to; decrease
answer
D) do nothing to; decrease
question
7. If the price is greater than average total cost at the profit-maximizing quantity of output
in the short run, a perfectly competitive firm will:
A) produce at a loss.
B) produce at a profit.
C) shut down production.
D) produce more than the profit-maximizing quantity.
in the short run, a perfectly competitive firm will:
A) produce at a loss.
B) produce at a profit.
C) shut down production.
D) produce more than the profit-maximizing quantity.
answer
B) produce at a profit.
question
19. Which of the following is TRUE?
A) Profit per unit is price minus MC.
B) Total economic profit is per-unit profit times quantity.
C) If price is less than ATC, the firm will break even in the short run.
D) If price is less than marginal cost, the perfectly competitive firm should raise the
price and increase output.
A) Profit per unit is price minus MC.
B) Total economic profit is per-unit profit times quantity.
C) If price is less than ATC, the firm will break even in the short run.
D) If price is less than marginal cost, the perfectly competitive firm should raise the
price and increase output.
answer
B) Total economic profit is per-unit profit times quantity.
question
21. The break-even price for a perfectly competitive firm is equal to:
A) the minimum value of average variable cost.
B) the marginal revenue, provided that marginal revenue is equal to marginal cost.
C) the average fixed cost at the given output level.
D) the minimum value of average total cost.
A) the minimum value of average variable cost.
B) the marginal revenue, provided that marginal revenue is equal to marginal cost.
C) the average fixed cost at the given output level.
D) the minimum value of average total cost.
answer
D) the minimum value of average total cost.
question
3. Consider a perfectly competitive firm in the short run. Assume that it is sustaining
economic losses but continues to produce at the profit-maximizing (loss-minimizing)
output. Which statement is FALSE?
A) Marginal cost is less than average total cost.
B) Marginal cost is equal to marginal revenue.
C) Price is equal to marginal cost.
D) Marginal cost is less than average variable cost
economic losses but continues to produce at the profit-maximizing (loss-minimizing)
output. Which statement is FALSE?
A) Marginal cost is less than average total cost.
B) Marginal cost is equal to marginal revenue.
C) Price is equal to marginal cost.
D) Marginal cost is less than average variable cost
answer
D) Marginal cost is less than average variable cost.
question
6. A curve that shows the quantity of a good or service supplied at various prices after all
long-run adjustments to a price change have been completed is a long-run _____ curve.
A) marginal revenue
B) marginal cost
C) industry supply
D) production
long-run adjustments to a price change have been completed is a long-run _____ curve.
A) marginal revenue
B) marginal cost
C) industry supply
D) production
answer
C) industry supply
question
48. In perfectly competitive long-run equilibrium:
A) all firms make positive economic profits.
B) all firms produce at the minimum point of their average total cost curves.
C) the industry supply curve must be upward-sloping.
D) all firms face the same price, but the value of marginal cost will vary directly with
firm size.
A) all firms make positive economic profits.
B) all firms produce at the minimum point of their average total cost curves.
C) the industry supply curve must be upward-sloping.
D) all firms face the same price, but the value of marginal cost will vary directly with
firm size.
answer
B) all firms produce at the minimum point of their average total cost curves.
question
5. De Beers became a monopoly by:
A) establishing control over diamond mines.
B) use of economies of scale.
C) use of technological superiority.
D) ownership of a patent
A) establishing control over diamond mines.
B) use of economies of scale.
C) use of technological superiority.
D) ownership of a patent
answer
A) establishing control over diamond mines.
question
9. Suppose that you build a high-speed, magnetically powered transportation system from
New York to Los Angeles, and you are the only firm providing this service. High fixed
costs resulting from the enormous quantity of capital used in this system enable
decreasing average cost for any conceivable level of demand. Your monopoly would
result from:
A) control of a scarce resource or input.
B) technological superiority.
C) increasing returns to scale.
D) government-set barriers.
New York to Los Angeles, and you are the only firm providing this service. High fixed
costs resulting from the enormous quantity of capital used in this system enable
decreasing average cost for any conceivable level of demand. Your monopoly would
result from:
A) control of a scarce resource or input.
B) technological superiority.
C) increasing returns to scale.
D) government-set barriers.
answer
C) increasing returns to scale.
question
19. Which of the following is TRUE?
A) A monopoly firm is a price taker.
B) MR > P if the demand curve is downward-sloping.
C) MR = MC is a profit-maximizing rule for any firm.
D) In monopoly P = MC when profits are maximized.
A) A monopoly firm is a price taker.
B) MR > P if the demand curve is downward-sloping.
C) MR = MC is a profit-maximizing rule for any firm.
D) In monopoly P = MC when profits are maximized.
answer
C) MR = MC is a profit-maximizing rule for any firm
question
Wendy has a monopoly in the retailing of motor homes. She can sell five per week at
$21,000 each. If she wants to sell six, she can only charge $20,000 each. The price
effect of selling the sixth motor home is:
A) $20,000.
B) -$15,000.
C) -$5,000.
D) $25,000.
$21,000 each. If she wants to sell six, she can only charge $20,000 each. The price
effect of selling the sixth motor home is:
A) $20,000.
B) -$15,000.
C) -$5,000.
D) $25,000.
answer
C) -$5,000
question
Mr. Porter sells 10 bottles of champagne per week at $50 per bottle. He can sell 11
bottles per week if he lowers the price to $45 per bottle. The quantity and the price
effects on total revenue would be, respectively, an increase of _____ and a decrease of
_____.
A) $450; $500
B) $495; $550
C) $45; $5
D) $45; $50
bottles per week if he lowers the price to $45 per bottle. The quantity and the price
effects on total revenue would be, respectively, an increase of _____ and a decrease of
_____.
A) $450; $500
B) $495; $550
C) $45; $5
D) $45; $50
answer
D) $45; $50
question
23. One of the major differences between a monopolist and a purely competitive firm is that
the monopolist has a _____ demand curve, while the purely competitive firm has a
_____ demand curve.
A) downward-sloping; perfectly elastic
B) perfectly inelastic; perfectly elastic
C) downward-sloping; perfectly inelastic
D) perfectly elastic; downward-sloping
the monopolist has a _____ demand curve, while the purely competitive firm has a
_____ demand curve.
A) downward-sloping; perfectly elastic
B) perfectly inelastic; perfectly elastic
C) downward-sloping; perfectly inelastic
D) perfectly elastic; downward-sloping
answer
A) downward-sloping; perfectly elastic
question
27. (Figure: A Profit-Maximizing Monopoly Firm) Look at the figure A Profit-Maximizing
Monopoly Firm. This firm's profit per unit is:
A) $5.
B) $12.
C) $15.
D) $20
Monopoly Firm. This firm's profit per unit is:
A) $5.
B) $12.
C) $15.
D) $20
answer
B) $12.
question
35. One government policy for dealing with natural monopoly is to:
A) impose a price floor to eliminate the deadweight loss.
B) impose a price ceiling to reduce economic profit.
C) break it up into smaller firms.
D) impose fines on the monopolist.
A) impose a price floor to eliminate the deadweight loss.
B) impose a price ceiling to reduce economic profit.
C) break it up into smaller firms.
D) impose fines on the monopolist.
answer
B) impose a price ceiling to reduce economic profit.
question
36. Price discrimination leads to a _____ price for consumers with a _____ demand.
A) higher; less elastic
B) higher; more elastic
C) higher; perfectly elastic
D) lower; less elastic
A) higher; less elastic
B) higher; more elastic
C) higher; perfectly elastic
D) lower; less elastic
answer
A) higher; less elastic
question
39. Which of the following is NOT an example of price discrimination?
A) a Fourth of July sale
B) a coupon in the newspaper offering a 10% discount on a product
C) a higher price for front row seats at a concert than for seats at the back
D) a lower price charged to the grandfather who bought his airline ticket to Chicago
three weeks in advance and will stay over a Saturday night than to the
businesswoman who bought her ticket the day of the flight and will not stay over
Saturday night
A) a Fourth of July sale
B) a coupon in the newspaper offering a 10% discount on a product
C) a higher price for front row seats at a concert than for seats at the back
D) a lower price charged to the grandfather who bought his airline ticket to Chicago
three weeks in advance and will stay over a Saturday night than to the
businesswoman who bought her ticket the day of the flight and will not stay over
Saturday night
answer
A) a Fourth of July sale
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