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The most important goal of the firm is to
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maximize its profits
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A firm's opportunity costs ________.
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include the cost of using resources owned by the firm
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Technological efficiency occurs when the firm produces a given output
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by using the least amount of inputs
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In order to maximize profits, firms organize their production using
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a combination of command and incentive systems
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A proprietorship is a firm with
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a single owner who has unlimited liability
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When costs decrease as output increases, there are
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economies of scale
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A market structure in which many firms are selling an identical product is called
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perfect competition
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The short run is a period of time in which
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the quantity of at least one factor of production is fixed
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At that amount of output where diminishing marginal returns first sets in
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marginal product will begin to decline
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When long-run average costs increase as output increases, there are
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diseconomies of scale
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A market is perfectly competitive if
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there are many firms in it, each selling an identical product
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In perfect competition
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firms face no restrictions on entry into market
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Which of the following is ALWAYS true for a perfectly competitive firm?
answer
P = MR
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A perfectly competitive firm's marginal revenue exceeds its marginal cost at its current output. To increase its
profit, the firm will
profit, the firm will
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increase its output
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For a perfectly competitive firm, as its output increases its marginal revenue ________ and its marginal cost
________.
________.
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does not change; changes
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A barrier to entry is
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a natural or legal impediment that makes it difficult for new firms to enter a market
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A natural monopoly
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is an industry in which economies of scale exist so that one firm can supply the market at the lowest possible cost
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Which of the following is NOT a characteristic of a monopoly?
answer
easy entry and exit
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In the monopoly, the firm's marginal revenue curve is ________, while in a perfectly competitive market, each
firm's marginal revenue curve is ________.
firm's marginal revenue curve is ________.
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downward sloping; horizontal
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Compared to a similar perfectly competitive industry, a single-price monopoly
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creates a deadweight loss and decreases consumer surplus
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Price discrimination takes place when a firm
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charges different prices for different units of its products
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Which types of firms have limited liability?
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corporations
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When an average cost pricing rule is imposed on a natural monopoly, ________.
answer
the monopoly makes zero economic profit
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Formula for Total Economic Profit
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total economic profit =
total revenue - total costs
total revenue - total costs
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_________ is the way we can use inputs (capital + labor) to produce a given quantity of output
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production function
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____________ occurs when a firm produces a given level of output at the least cost
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economic efficiency
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In the short run, to increase output the firm must increase
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the quantity of variable factors it uses
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________ cannot be changed in the short run
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fixed factors
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______________ can be varied at any point
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variable factors of production
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The ___________________ is a time frame in which the quantities of all factors of production can be varied.
This means that the firm can change its plant size, as well as the quantity of all its other factors in the long run.
This means that the firm can change its plant size, as well as the quantity of all its other factors in the long run.
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long run
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The _______ is a time frame in which the quantity of at least one factor of production is fixed.
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short run
question
___________ are costs incurred by the firm and cannot be changed.
The firm's investment in its plant is an example of this.
The firm's investment in its plant is an example of this.
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sunk costs
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________________ is the maximum output that a given quantity of labor can produce.
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total product
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____________ which is the increase in total product that results from a one-unit increase in the quantity of labor employed with all other inputs remaining the same.
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marginal product of labor
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___________ equals total product divided by the quantity of labor employed
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average product of labor
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When the marginal product of an additional worker exceeds the marginal product of the previous worker, the marginal product of labor curve rises as the quantity of labor increases. The firm experiences ___________
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increasing marginal returns
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When the marginal product of an additional worker is less than the marginal product of the previous worker, the marginal product of labor curve falls as the quantity of labor increases. The firm experiences ________________
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diminishing marginal returns
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_____________ the cost of all factors of production
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total cost
question
_______ is the cost of the firm's fixed factors.
Fixed costs do not change with output.
Fixed costs do not change with output.
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total fixed costs
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___________ is the cost of the firm's variable factors. Variable costs change with output.Hence, the reason they are called variable.
answer
total variable cost
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Total cost formula
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TC= TFC+ TVC
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___________ is the increase in total cost that results from a one-unit increase in output.
answer
marginal cost
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___________ is total cost per unit of output.
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average total cost
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______________ is total fixed cost per unit of output.
answer
average fixed cost
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__________ is total variable cost per unit of output.
answer
average variable cost
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average total cost formula
answer
ATC = AFC + AVC
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__________ is the change in total product divided by the change in capital when the quantity of labor is constant.
answer
marginal product of capital
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_____________ is the relationship between the lowest attainable ATC and output when both the plant size and labor are varied.
answer
long run average cost
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_______________ are features of a firm's technology that lead to constantlong-run average cost as output increases.
answer
constant returns to scale
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_____________ describes an industry in which:Many firms sell identical products to many buyers.There are no restrictions to entry into the industry.Established firms have no advantages over new ones.Sellers and buyers are well informed about prices.
answer
perfect competition
question
in __________ each firm is a price taker
answer
perfect competition
question
a _____________ is a firm that cannot influence the market price and sets its own price at the market price.
answer
price taker
question
formula for total economic profit
answer
Total revenue - Total Costs
question
what is always true about marginal revenue and marginal cost
answer
they are equal
MR = MC
MR = MC
question
these are characteristics of a ____________
1.One firm in the industry.
2.There are no close substitutes for the product.
3.Entry of new firms is not feasible.I.e. barriers to entry.
1.One firm in the industry.
2.There are no close substitutes for the product.
3.Entry of new firms is not feasible.I.e. barriers to entry.
answer
monopoly
question
Economies of scale can lead to a ___________
answer
natural monopoly
question
A ____________ can occur if AC is decreasing, so that a single firm can produce for the entire market at a lower AC than two or more firms producing for the same market.
answer
natural monopoly
question
a monopoly is a ___________
answer
price maker
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the monopolist can choose price or quantity but not _________
answer
both
question
the marginal revenue curve lies ________ the demand curve
answer
below
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A profit maximizing monopolist will produce output at a point where ________
answer
MR = MC
question
A loss of consumer or producer surplus that is not balanced by a gain to someone else
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deadweight loss
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Monopoly is _______ to Perfect Competition
answer
inferior
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under monopoly, there is a __________ to society
answer
deadweight loss
question
Under a _____________, single-firm production is cheapest
answer
natural monopoly
question
the selling of different units of a good or service for different prices
answer
price discrimination
question
Profit-maximization rule under price discrimination
answer
MRa= MRb
question
occurs if a firm is able to sell each unit of output for the highest price anyone is willing to pay for it.
answer
Perfect price discrimination
question
the outcome of perfect price discrimination is characterized by:
answer
Economic profit increases above that earned by a single-price monopoly firm.
question
Under ___________ , the consumer group with the less elastic demand will be charged with a higher price for the product. The firm can do so as it's harder for these consumers to find substitutesf or the product.
answer
price discrimination
question
Under a monopoly, a price ceiling set below the free market price may
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either raise or lower output.
question
Under _______________, a firm must justify its price by showing that its return on capital doesn't exceed a specified target rate.
answer
rate of return regulation
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A ____________ is a price ceiling.
answer
price cap regulation
question
A ______ is an institution that hires factors of production and organizes them to produce and sell goods and services.
answer
firm
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formula for total economic profit
answer
Total revenue -Total Costs
question
economic profits are distinct from ________
answer
accounting profits
question
is any method of producing a good or service.
answer
technology
question
the way that we can use inputs (capital and labor) to produce a given quantity of output.
answer
production function
question
occurs when the firm produces a given level of output at the least cost.
answer
economic efficiency
question
a __________ organizes production using a managerial hierarchy.
answer
command system
question
a ___________ is a method of organizing production that uses a market-like mechanism inside the firm.
answer
incentive system (paid by piece)
question
he problem of devising compensation rules that induce an agent to act in the best interests of a principal.
answer
principal-agent problem
question
__________ is often offered to managers, gives the managers an incentive to maximize the firm's profits, which is the goal of the owners, the principals to cope with principal-agent problem
answer
ownership
question
____________ links managers' or workers' pay to the firm's performance and helps align the managers' and workers' interests with those of the owners, the principal
answer
incentive pay
question
____________ can tie managers' or workers' long-term rewards to the long-term performance of the firm. This encourages the agents work in the best long-term interests of the firm owners, the principals
answer
long-term contracts
question
___________ is a firm with two or more owners who have unlimited liability. Partners must agree on a management structure and how to divide up the profits. Profits from partnerships are taxed as the personal income of the owners.
answer
partnership
question
____________ is owned by one or more stockholders with limited liability, which means the owners who have legal liability only for the initial value of their investment. The personal wealth of the stockholders is not at risk if the firm goes bankrupt. Corporate retained earnings are taxed twice, once at the corporate level and once again when they generate capital gains for the firm's owners.
answer
corporation
question
a market structure with many firms, each selling an identical product, many buyers, no restrictions on entry of new firms to the industry, and both firms and buyers are all well informed of the prices of the products of each firm in the industry.
answer
perfect competition
question
a market structure with many firms producing similar but slightly different products. This difference can be either tangible or merely perceived by the consumer. Making a product slightly different is called product differentiation and it gives the firm an element of market power.
answer
monopolistic competition
question
a market structure in which a small number of firms compete. They might produce almost identical goods or they might produce differentiated goods.
answer
oligopoly
question
a market structure in which there is only one firm, which produces a good with no close substitutes and in which
the firm is protected by a barrier that prevents the entry of new firms.
the firm is protected by a barrier that prevents the entry of new firms.
answer
monopoly
question
costs arising from finding someone with whom to do business, reaching agreement on the price and other aspects of the exchange, and ensuring that the terms of the agreement are fulfilled
answer
transaction costs
question
occurs when the cost of producing a unit falls as its output rate increases
answer
economies of scale
question
where one firm can use specialized inputs to produce a range of goods and services.
answer
economies of scope
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