question
True or False?
It is reasonable to assume that charitable organizations have a goal to maximize profits.
It is reasonable to assume that charitable organizations have a goal to maximize profits.
answer
True.
Although charitable organizations are "not-for-profit", they still want to maximize donations and resources so that they may use their "profits" to achieve the goals outlined in their missions rather than distributing profits to owners and investors. It is reasonable to assume that such organizations want to get as much as they can from their resources. The more "profit" they earn, the more funds they have available to achieve the goals outlined by their respective missions.
Although charitable organizations are "not-for-profit", they still want to maximize donations and resources so that they may use their "profits" to achieve the goals outlined in their missions rather than distributing profits to owners and investors. It is reasonable to assume that such organizations want to get as much as they can from their resources. The more "profit" they earn, the more funds they have available to achieve the goals outlined by their respective missions.
question
Suppose you are evaluating the profit earned by a pharmaceutical company that produces three different medicines.
a. What values below will help you determine the company's revenue?
- Price
-Variable Cost
- Fixed Cost
-Marginal Cost
-Quantity
b. What values below will help you determine the company's total cost?
- Price
-Variable Cost
- Fixed Cost
-Marginal Cost
-Quantity
a. What values below will help you determine the company's revenue?
- Price
-Variable Cost
- Fixed Cost
-Marginal Cost
-Quantity
b. What values below will help you determine the company's total cost?
- Price
-Variable Cost
- Fixed Cost
-Marginal Cost
-Quantity
answer
a. Price & Quantity
b. Variable Cost, Fixed Cost, Quantity
Profit is calculated as total revenue minus total cost. The company would need to know the price and quantity sold for each medicine as well as the total costs (fixed costs plus variable costs) associated with producing all three medicines.
b. Variable Cost, Fixed Cost, Quantity
Profit is calculated as total revenue minus total cost. The company would need to know the price and quantity sold for each medicine as well as the total costs (fixed costs plus variable costs) associated with producing all three medicines.
question
Suppose that a pharmaceutical company has the following costs. Which costs do you expect to be fixed in the short run?
-Chemicals
-paper and plastic packaging
-Researchers salaries
-Warehouse
-Chemicals
-paper and plastic packaging
-Researchers salaries
-Warehouse
answer
-Researchers salaries
-Warehouse
You would expect researchers' salaries and warehouses to be fixed in the short run. These costs do not depend on the quantity of output produced. Chemicals and packaging could be variable in the short run, as these costs would either increase or decrease with changes in the output produced.
-Warehouse
You would expect researchers' salaries and warehouses to be fixed in the short run. These costs do not depend on the quantity of output produced. Chemicals and packaging could be variable in the short run, as these costs would either increase or decrease with changes in the output produced.
question
Dustin is planning to open a catering business. Indicate if each of the following examples represents a one-time fixed cost, an ongoing fixed cost, or a variable cost that his new catering business might incur.
The van he purchases to transport food and equipment to catering jobs is ________
The cardboard boxes he uses when delivering boxed lunches are a _________
The kitchen space he rents to prep meals is an ongoing ________
The monthly ad in a local magazine is an ________
The groceries he purchases for the meals he makes is a ________
The van he purchases to transport food and equipment to catering jobs is ________
The cardboard boxes he uses when delivering boxed lunches are a _________
The kitchen space he rents to prep meals is an ongoing ________
The monthly ad in a local magazine is an ________
The groceries he purchases for the meals he makes is a ________
answer
ongoing fixed cost.
variable cost.
ongoing fixed cost.
ongoing fixed cost.
variable cost.
A one-time fixed cost for Dustin's catering business might be a van he purchases to transport food and equipment to catering jobs. Ongoing fixed costs might be a kitchen space he rents to prep meals or a running advertisement. Variable costs would include packaging and the groceries he purchases for the meals he makes.
variable cost.
ongoing fixed cost.
ongoing fixed cost.
variable cost.
A one-time fixed cost for Dustin's catering business might be a van he purchases to transport food and equipment to catering jobs. Ongoing fixed costs might be a kitchen space he rents to prep meals or a running advertisement. Variable costs would include packaging and the groceries he purchases for the meals he makes.
question
A shopkeeper explains to you that she keeps down the cost of running her business because her husband works in the shop for free. The consequence of the shopkeeper not paying her husband is that:
-both the explicit and implicit costs are kept down.
-the cost is kept down, but so is the total revenue.
-the explicit cost is kept down, but not the implicit.
-the implicit cost is kept down, but not the explicit.
-both the explicit and implicit costs are kept down.
-the cost is kept down, but so is the total revenue.
-the explicit cost is kept down, but not the implicit.
-the implicit cost is kept down, but not the explicit.
answer
the explicit cost is kept down, but not the implicit.
Her worker is not really free because there is an opportunity cost to his time. Presumably the shopkeeper's husband could be earning paychecks elsewhere if he was not working in her shop. The shopkeeper should take into account this implicit cost, which is not changed whether she pays her husband or not.
Her worker is not really free because there is an opportunity cost to his time. Presumably the shopkeeper's husband could be earning paychecks elsewhere if he was not working in her shop. The shopkeeper should take into account this implicit cost, which is not changed whether she pays her husband or not.
question
Dustin is planning to open a catering business. Indicate if each of the following examples represent an explicit cost or an implicit cost that his new catering business might incur.
The wages Dustin pays his employees is an __________.
The interest Dustin could have earned on the savings he used to invest in starting his business is an __________.
The kitchen space he rents to prep meals is an __________.
The monthly ad in a local magazine is an __________.
The uncompensated time Dustin spends keeping the books for his new business is an __________.
The wages Dustin pays his employees is an __________.
The interest Dustin could have earned on the savings he used to invest in starting his business is an __________.
The kitchen space he rents to prep meals is an __________.
The monthly ad in a local magazine is an __________.
The uncompensated time Dustin spends keeping the books for his new business is an __________.
answer
explicit cost.
implicit cost.
explicit cost.
explicit cost.
implicit cost.
Explicit costs would include the wages Dustin pays his employees, the kitchen rent, and running an ad. Examples of implicit costs would be the forgone interest Dustin could have earned on the savings he used to invest in his business and any uncompensated time he spends working for the business. Note that implicit costs do not involve any actual payments, but are the next best alternative uses of resources that are sacrificed when used to run the business.
implicit cost.
explicit cost.
explicit cost.
implicit cost.
Explicit costs would include the wages Dustin pays his employees, the kitchen rent, and running an ad. Examples of implicit costs would be the forgone interest Dustin could have earned on the savings he used to invest in his business and any uncompensated time he spends working for the business. Note that implicit costs do not involve any actual payments, but are the next best alternative uses of resources that are sacrificed when used to run the business.
question
Imagine you're in a meeting with the owner of a restaurant who is trying to decide whether to keep his restaurant open or to invest his time and money another way. In order to make the correct decision, the restaurant owner needs to consider his_________
answer
economic profit.
Accounting profit and economic profit both calculate revenues the same way. However, accounting profit considers only explicit costs while economic profit considers both explicit and implicit costs. It is important to consider the profitability of an enterprise using economic profit. The owner of the restaurant should consider not just whether his restaurant is turning an accounting profit; he also should consider the opportunity cost of using his resources of time and money for his restaurant. If there is another opportunity that would earn him more accounting profit, his economic profit for the restaurant would be negative and he should pursue that opportunity instead.
Accounting profit and economic profit both calculate revenues the same way. However, accounting profit considers only explicit costs while economic profit considers both explicit and implicit costs. It is important to consider the profitability of an enterprise using economic profit. The owner of the restaurant should consider not just whether his restaurant is turning an accounting profit; he also should consider the opportunity cost of using his resources of time and money for his restaurant. If there is another opportunity that would earn him more accounting profit, his economic profit for the restaurant would be negative and he should pursue that opportunity instead.
question
Self-employed business owners frequently overestimate their profit levels because they __________
answer
underestimate their implicit costs.
Self-employed business owners often overestimate their profit levels because they calculate accounting profits and do not always take into consideration the implicit costs of their time and resources. If a person is self-employed, there is an implicit opportunity cost in the forgone wages he or she would have earned working elsewhere.
Self-employed business owners often overestimate their profit levels because they calculate accounting profits and do not always take into consideration the implicit costs of their time and resources. If a person is self-employed, there is an implicit opportunity cost in the forgone wages he or she would have earned working elsewhere.
question
Imagine a restaurant in which tables are spread over a large area and there is only one server. If the manager hires a second server it is likely that the marginal product of labor would be _________
answer
increasing.
Hiring only one server means that she or he has to cover a lot of ground in a large restaurant, thereby wasting a lot of time walking to and from customers. Working alone, the server will be much slower to take orders, deliver food, get refills, drop checks, and deliver change than if she or he were covering a section of the dining room rather than the entire floor. Hiring another server could increase marginal product. If the two divide the room into sections, they should be able to sell more meals and turn more tables in an hour than the one server could do alone.
Hiring only one server means that she or he has to cover a lot of ground in a large restaurant, thereby wasting a lot of time walking to and from customers. Working alone, the server will be much slower to take orders, deliver food, get refills, drop checks, and deliver change than if she or he were covering a section of the dining room rather than the entire floor. Hiring another server could increase marginal product. If the two divide the room into sections, they should be able to sell more meals and turn more tables in an hour than the one server could do alone.
question
True or False?
If a firm experiences diminishing marginal product, then it means that total output decreases with additional variable inputs.
If a firm experiences diminishing marginal product, then it means that total output decreases with additional variable inputs.
answer
False.
Diminishing marginal product means that the increase in total output is getting smaller, not that total output is getting smaller. Each additional input adds less to the total output than the previous unit of input added.
Diminishing marginal product means that the increase in total output is getting smaller, not that total output is getting smaller. Each additional input adds less to the total output than the previous unit of input added.
question
A firm is trying to decide whether it could earn higher profits by increasing its output. The firm's manager needs to consider the _________and the _________ of the next unit of output to make this decision.
answer
Marginal cost.
Marginal revenue.
Looking at average total cost, average variable cost, and average fixed cost will tell the manager the cost of a typical unit, spreading out costs equally over all units. When deciding whether to increase production, however, the manager should look at the marginal cost. What the manager really needs to know is what the cost of the next unit will be so she can compare this to the marginal revenue from that unit. If the marginal cost of producing the next unit is less than the marginal revenue from that unit, it makes sense to increase production by another unit.
Marginal revenue.
Looking at average total cost, average variable cost, and average fixed cost will tell the manager the cost of a typical unit, spreading out costs equally over all units. When deciding whether to increase production, however, the manager should look at the marginal cost. What the manager really needs to know is what the cost of the next unit will be so she can compare this to the marginal revenue from that unit. If the marginal cost of producing the next unit is less than the marginal revenue from that unit, it makes sense to increase production by another unit.
question
A firm's output and total costs are given in the table below.
Quantity Total Cost ($)
0 40
1 64
2 86
3 111
4 139
5 169
Going from a quantity of 3 to a quantity of 4, the marginal product must be ________ because ___________.
Quantity Total Cost ($)
0 40
1 64
2 86
3 111
4 139
5 169
Going from a quantity of 3 to a quantity of 4, the marginal product must be ________ because ___________.
answer
decreasing because the total cost is increasing.
Marginal product is decreasing. We can see this by calculating marginal cost and noting that marginal cost is increasing when production increases from 3 units to 4 units. If marginal cost is increasing, marginal product is decreasing.
Quantity Total Cost ($) Marginal Cost ($)
0 40 -
1 64 24
2 86 22
3 111 25
4 139 28
5 169 30
Marginal product is decreasing. We can see this by calculating marginal cost and noting that marginal cost is increasing when production increases from 3 units to 4 units. If marginal cost is increasing, marginal product is decreasing.
Quantity Total Cost ($) Marginal Cost ($)
0 40 -
1 64 24
2 86 22
3 111 25
4 139 28
5 169 30
question
Which of the following statements about fixed costs is true?
Fixed costs are always fixed, hence the name.
Fixed costs increase with increased production.
Fixed costs are only fixed in the short run.
Fixed costs are only fixed in the long run.
Fixed costs are always fixed, hence the name.
Fixed costs increase with increased production.
Fixed costs are only fixed in the short run.
Fixed costs are only fixed in the long run.
answer
Fixed costs are only fixed in the short run.
In the long run, there are no fixed costs, because any cost can be changed over a long enough timeframe. A cost we would consider fixed in the short run, such as a lease on space, can be adjusted once the period of the lease is over. The long run specifically refers to the timeframe over which all costs can be changed.
In the long run, there are no fixed costs, because any cost can be changed over a long enough timeframe. A cost we would consider fixed in the short run, such as a lease on space, can be adjusted once the period of the lease is over. The long run specifically refers to the timeframe over which all costs can be changed.
question
Suppose that a pharmaceutical company wants to grow in size but is constrained in the short run by its production capacity. What are some of the steps the company can take in the long run to overcome these constraints?
Hire additional workers.
Build more factories.
Use cheaper materials.
Expand the size of current factories.
Hire additional workers.
Build more factories.
Use cheaper materials.
Expand the size of current factories.
answer
-Build more factories.
-Use cheaper materials.
In the long run, the pharmaceutical company can increase its production capacity by expanding the size of current factories or building more factories. Almost anything that is limiting production capacity in the short run can simply be increased in the long run to achieve greater capacity. However, note that variable inputs such as material and labor can always be changed in the short run and is therefore not considered a short run constraint.
-Use cheaper materials.
In the long run, the pharmaceutical company can increase its production capacity by expanding the size of current factories or building more factories. Almost anything that is limiting production capacity in the short run can simply be increased in the long run to achieve greater capacity. However, note that variable inputs such as material and labor can always be changed in the short run and is therefore not considered a short run constraint.
question
An industry experiencing constant returns to scale is sometimes said to be "just the right size" because:
it will not decrease average total costs by either expanding or shrinking.
it has grown large enough that it has exhausted any economies of scale and diseconomies of scale it could gain by expanding.
it is large enough to achieve some economies of scale, but is still small enough to operate manageably.
the marginal cost of expanding is neither positive or diminishing.
it will not decrease average total costs by either expanding or shrinking.
it has grown large enough that it has exhausted any economies of scale and diseconomies of scale it could gain by expanding.
it is large enough to achieve some economies of scale, but is still small enough to operate manageably.
the marginal cost of expanding is neither positive or diminishing.
answer
it will not decrease average total costs by either expanding or shrinking.
An industry experiencing constant returns to scale is just the right size because it is has grown large enough that it has exhausted any and all economies of scale that it could gain by expanding, but it has not expanded so much as to create any diseconomies of scale. An industry experiencing constant returns to scale will not decrease average total costs by either expanding or shrinking. Note that being small enough to be manageable is not an economic concern, nor is there anything suggesting that marginal cost would not be positive.
An industry experiencing constant returns to scale is just the right size because it is has grown large enough that it has exhausted any and all economies of scale that it could gain by expanding, but it has not expanded so much as to create any diseconomies of scale. An industry experiencing constant returns to scale will not decrease average total costs by either expanding or shrinking. Note that being small enough to be manageable is not an economic concern, nor is there anything suggesting that marginal cost would not be positive.
question
Which of the following statements explains why the pharmaceutical industry is characterized by large economies of scale?
There are high variable costs in producing pharmaceuticals.
There are a very large number of competitors producing pharmaceuticals.
There are high fixed costs in producing pharmaceuticals.
There are economic profits in producing pharmaceuticals.
There are high variable costs in producing pharmaceuticals.
There are a very large number of competitors producing pharmaceuticals.
There are high fixed costs in producing pharmaceuticals.
There are economic profits in producing pharmaceuticals.
answer
There are high fixed costs in producing pharmaceuticals.
The pharmaceutical industry is characterized by large economies of scale because there are high fixed costs in producing pharmaceuticals. Industries with high fixed costs will see their average total costs fall over a wide range of production as those fixed costs are spread out over units of output. These high fixed costs and the resulting economies of scales explain the limited number of competitors in the pharmaceutical industry today. Note that economic profit is by no means guaranteed with economies of scale.
The pharmaceutical industry is characterized by large economies of scale because there are high fixed costs in producing pharmaceuticals. Industries with high fixed costs will see their average total costs fall over a wide range of production as those fixed costs are spread out over units of output. These high fixed costs and the resulting economies of scales explain the limited number of competitors in the pharmaceutical industry today. Note that economic profit is by no means guaranteed with economies of scale.
question
A hair salon offers three services: haircuts, color treatment, and styling. The salon charges $40 for a cut, $65 for color, and $30 for styling. Last month, the salon sold 68 haircuts, 30 color treatments, and 22 styling sessions. If the salon's costs for the month totaled $2,847, what was its profit?
answer
$2,483
Total revenue = (Q1 × P1) + (Q2 × P2) + ... + (Qn × Pn)
Profit = Total revenue - Total cost
For the hair salon, then:
Profit = [(68 × $40) + (30 × $65) + (22 × $30)] - $2,847
Profit = ($2,720 + $1,950 + $660) - $2,847
Profit = $5,330 - $2,847
Profit = $2,483
Total revenue = (Q1 × P1) + (Q2 × P2) + ... + (Qn × Pn)
Profit = Total revenue - Total cost
For the hair salon, then:
Profit = [(68 × $40) + (30 × $65) + (22 × $30)] - $2,847
Profit = ($2,720 + $1,950 + $660) - $2,847
Profit = $5,330 - $2,847
Profit = $2,483
question
Isaiah runs a cake shop. His monthly expenses are listed below. For each cost, indicate whether the cost is a fixed cost or a variable cost of producing cakes in the short run.
a. Ingredients (flour, butter, sugar):
b. Bakers (cooks) paid hourly:
c. Rent:
d. Payments for equipment (ovens):
e. Interest payments for borrowed capital:
a. Ingredients (flour, butter, sugar):
b. Bakers (cooks) paid hourly:
c. Rent:
d. Payments for equipment (ovens):
e. Interest payments for borrowed capital:
answer
a. Variable cost
b. Variable cost
c. Fixed cost
d. Fixed cost
e. Fixed cost
Variable costs depend on the quantity of output produced. Fixed costs do not depend on the quantity of output produced.
b. Variable cost
c. Fixed cost
d. Fixed cost
e. Fixed cost
Variable costs depend on the quantity of output produced. Fixed costs do not depend on the quantity of output produced.
question
An auto repair shop faces the following weekly costs: rent, $500; labor, $400 per worker; parts and supplies, $40 per repair. Each worker can repair 4 cars per week.
Quantity of Repairs Variable Costs ($) Total Costs ($)
0 - -
4 - -
8 - -
12 - -
16 - -
20 - -
24 - -
28 - -
32 - -
b. If the shop repairs 16 cars in a week, the total costs are: $
c. If the shop repairs 0 cars in a week, the total costs are: $
Quantity of Repairs Variable Costs ($) Total Costs ($)
0 - -
4 - -
8 - -
12 - -
16 - -
20 - -
24 - -
28 - -
32 - -
b. If the shop repairs 16 cars in a week, the total costs are: $
c. If the shop repairs 0 cars in a week, the total costs are: $
answer
Quantity of Repairs Variable Costs ($) Total Costs ($)
0 0 500
4 560 1,060
8 1,120 1,620
12 1,680 2,180
16 2,240 2,740
20 2,800 3,300
24 3,360 3,860
28 3,920 4,420
32 4,480 4,980
b. $2,740.
c. $500.
0 0 500
4 560 1,060
8 1,120 1,620
12 1,680 2,180
16 2,240 2,740
20 2,800 3,300
24 3,360 3,860
28 3,920 4,420
32 4,480 4,980
b. $2,740.
c. $500.
question
Paola is thinking of opening her own business. For each of the production inputs listed below, indicate whether the input incurs an implicit cost, explicit cost, or no cost.
a. Rent:
b. Wages:
c. Owned equipment:
a. Rent:
b. Wages:
c. Owned equipment:
answer
Explicit costs require a firm to spend money. Implicit costs do not require a firm to spend money or take on obligations.
a. Explicit cost: Rent
b. Explicit cost: Wages
c. Implicit cost: Owned equipment
a. Explicit cost: Rent
b. Explicit cost: Wages
c. Implicit cost: Owned equipment
question
Paola is thinking of opening her own business. For each of the production inputs listed below, indicate whether the input incurs an implicit cost, explicit cost, or no cost.
a. Borrowed capital:
b. Investment from savings:
c. Donated supplies:
a. Borrowed capital:
b. Investment from savings:
c. Donated supplies:
answer
Explicit costs require a firm to spend money. Implicit costs do not require a firm to spend money or take on obligations.
a. Explicit cost: Borrowed capital
b. Implicit cost: Investment from savings
c. Implicit cost: Donated supplies
a. Explicit cost: Borrowed capital
b. Implicit cost: Investment from savings
c. Implicit cost: Donated supplies
question
Keri owns a landscaping business. For each of Keri's inputs given in the list below, indicate whether the associated cost is fixed or variable, explicit or implicit, and whether the cost affects accounting profit only, economic profit only, or both.
a. Landscapers
Fixed or Variable Cost: Variable cost
Explicit or Implicit Cost: Explicit cost
Accounting or Economic Profit: both
b. Plants taken from her home garden
Fixed or Variable Cost: Variable cost
Explicit or Implicit Cost: Implicit cost
Accounting or Economic Profit: Economic profit
c. Truck rental
Fixed or Variable Cost: Fixed cost
Explicit or Implicit Cost: Explicit cost
Accounting or Economic Profit: both
d. Owned lawn mowers
Fixed or Variable Cost: Fixed cost
Explicit or Implicit Cost: Implicit cost
Accounting or Economic Profit: Economic profit
a. Landscapers
Fixed or Variable Cost: Variable cost
Explicit or Implicit Cost: Explicit cost
Accounting or Economic Profit: both
b. Plants taken from her home garden
Fixed or Variable Cost: Variable cost
Explicit or Implicit Cost: Implicit cost
Accounting or Economic Profit: Economic profit
c. Truck rental
Fixed or Variable Cost: Fixed cost
Explicit or Implicit Cost: Explicit cost
Accounting or Economic Profit: both
d. Owned lawn mowers
Fixed or Variable Cost: Fixed cost
Explicit or Implicit Cost: Implicit cost
Accounting or Economic Profit: Economic profit
answer
...
question
Last year, Jarod left a job that pays $60,000 to run his own bike repair shop. Jarod's shop charges $75 for a repair, and last year the shop performed 3,000 repairs. Jarod's production costs for the year included rent, wages, and equipment. Jarod spent $50,000 on rent and $120,000 on wages for his employees. Jarod keeps whatever profit the shop earns but does not pay himself an official wage. Jarod used $20,000 of his savings to buy a machine for the business. His savings were earning an annual interest rate of 5 percent.
a. What is Jarod's annual accounting profit?
b. What is Jarod's annual economic profit?
a. What is Jarod's annual accounting profit?
b. What is Jarod's annual economic profit?
answer
a. Accounting profit = Total revenue - Explicit costs
Accounting profit = ($75 × 3,000) - ($50,000 + $120,000)
Accounting profit = $225,000 - $170,000
Accounting profit = $55,000
b. Economic profit = Total revenue - (Explicit costs + Implicit costs)
Economic profit = ($75 × 3,000) - ($50,000 + $120,000 + Forgone interest on savings + Forgone wages)
Economic profit = ($75 × 3,000) - [$50,000 + $120,000 + (0.05 × $20,000) + $60,000]
Economic profit = -$6,000
Accounting profit = ($75 × 3,000) - ($50,000 + $120,000)
Accounting profit = $225,000 - $170,000
Accounting profit = $55,000
b. Economic profit = Total revenue - (Explicit costs + Implicit costs)
Economic profit = ($75 × 3,000) - ($50,000 + $120,000 + Forgone interest on savings + Forgone wages)
Economic profit = ($75 × 3,000) - [$50,000 + $120,000 + (0.05 × $20,000) + $60,000]
Economic profit = -$6,000
question
Webby Inc. is a web development company. Webby's monthly production function for developing websites is given in the table below.
a. Fill in the marginal product column.
Programmers Websites Marginal Product
0 0 —
1 4 4
2 9 5
3 15 6
4 20 5
5 24 4
6 26 2
b. Marginal product diminishes after the _____programmer.
a. Fill in the marginal product column.
Programmers Websites Marginal Product
0 0 —
1 4 4
2 9 5
3 15 6
4 20 5
5 24 4
6 26 2
b. Marginal product diminishes after the _____programmer.
answer
b. third
question
Webby Inc. is a web development company. Webby's monthly production function for developing websites is given in the table below. Webby pays $4,000 a month in rent for office space and equipment. It pays each programmer $2,000 a month. There are no other production costs. Fill in the table of production costs.
answer
The variable costs in this case are only the cost of additional programmers.
Total cost = Variable cost + Fixed cost. Fixed cost = $4,000 rent.
Average fixed cost = Fixed cost/Quantity = Fixed cost/Number of websites.
Average variable cost = Variable cost/Quantity = Variable cost/Number of websites.
Average total cost = Total cost/Quantity = Total cost/Number of websites.
Marginal cost = Change in total cost/Change in total quantity.
For row 2, MC = ($6,000 - $4,000)/(2 - 0) = $1,000.
For row 3, MC = ($8,000 - $6,000)/(6 - 2) = $500.
Total cost = Variable cost + Fixed cost. Fixed cost = $4,000 rent.
Average fixed cost = Fixed cost/Quantity = Fixed cost/Number of websites.
Average variable cost = Variable cost/Quantity = Variable cost/Number of websites.
Average total cost = Total cost/Quantity = Total cost/Number of websites.
Marginal cost = Change in total cost/Change in total quantity.
For row 2, MC = ($6,000 - $4,000)/(2 - 0) = $1,000.
For row 3, MC = ($8,000 - $6,000)/(6 - 2) = $500.
question
A firm's output, variable costs, and total costs are given in the table below.
a. Calculate marginal cost using the formula given in the chapter: ΔTotal cost/ΔQuantity.
b. Calculate ΔVariable cost/ΔQuantity.
a. Calculate marginal cost using the formula given in the chapter: ΔTotal cost/ΔQuantity.
b. Calculate ΔVariable cost/ΔQuantity.
answer
a. Marginal cost using the formula given in the chapter: ΔTotal cost/ΔQuantity.
• At Q = 1, MC = ($150 - $100)/(1 - 0) = 50
• At Q = 2, MC = ($220 - $150)/(2 - 1) = 70
• At Q = 3, MC = ($300 - $220)/(3 - 2) = 80
• At Q = 4, MC = ($400 - $300)/(4 - 3) = 100
• At Q = 5, MC = ($520 - $400)/(5 - 4) = 120
b. Note that using the change in variable cost as the numerator yields the same result as using the change in total cost as the numerator.
• At Q = 1, MC = ($150 - $100)/(1 - 0) = 50
• At Q = 2, MC = ($220 - $150)/(2 - 1) = 70
• At Q = 3, MC = ($300 - $220)/(3 - 2) = 80
• At Q = 4, MC = ($400 - $300)/(4 - 3) = 100
• At Q = 5, MC = ($520 - $400)/(5 - 4) = 120
b. Note that using the change in variable cost as the numerator yields the same result as using the change in total cost as the numerator.
question
The dean of a college faces the following costs: graders, faculty, classroom space, and chalk. Of these costs, which are likely to be variable in the long run?
Classroom space
Chalk
Faculty
Graders
Classroom space
Chalk
Faculty
Graders
answer
-Classroom space
-Chalk
-Faculty
-Graders
-Chalk
-Faculty
-Graders
question
In the pet industry, would you expect the long run to be longer for a pet store or a veterinary clinic?
answer
Veterinary clinic
You would expect the long run to be longer for a veterinary clinic than for a pet store. A veterinary clinic has specialized labor (veterinarians) and specialized equipment, which would mean that it would take longer to increase (or decrease) the inputs than it would for a pet store.
You would expect the long run to be longer for a veterinary clinic than for a pet store. A veterinary clinic has specialized labor (veterinarians) and specialized equipment, which would mean that it would take longer to increase (or decrease) the inputs than it would for a pet store.
question
Consider a firm that increases its inputs by 15 percent. For each scenario, state whether the firm experiences economies of scale, diseconomies of scale, or constant returns to scale.
a. Outputs increase 15 percent:
b. Outputs increase by less than 15 percent:
c. Outputs increase by greater than 15 percent:
a. Outputs increase 15 percent:
b. Outputs increase by less than 15 percent:
c. Outputs increase by greater than 15 percent:
answer
a. Constant returns to scale: Outputs increase 15 percent.
b. Diseconomies of scale: Outputs increase by less than 15 percent.
c. Economies of scale: Outputs increase by greater than 15 percent.
b. Diseconomies of scale: Outputs increase by less than 15 percent.
c. Economies of scale: Outputs increase by greater than 15 percent.
question
A firm's long run total costs are given in the table below.
a. Fill in the long run average total cost column.
b. Over what production range does this firm experience economies of scale?
c. Over what production range does this firm experience constant returns to scale?
d. Over what production range does this firm experience diseconomies of scale?
a. Fill in the long run average total cost column.
b. Over what production range does this firm experience economies of scale?
c. Over what production range does this firm experience constant returns to scale?
d. Over what production range does this firm experience diseconomies of scale?
answer
a. See the table for the long run average total costs.
b. 0-5 units: This firm experiences economies of scale over the production range of 0-5 units. Long run average total cost is decreasing over this range.
c. 5-6 units: This firm experiences constant returns to scale over the production range of 5-6 units. Long run average total cost is constant over this range.
d. 6-8 units: This firm experiences diseconomies of scale over the production range of 6-8 units. Long run average total cost is increasing over this range.
b. 0-5 units: This firm experiences economies of scale over the production range of 0-5 units. Long run average total cost is decreasing over this range.
c. 5-6 units: This firm experiences constant returns to scale over the production range of 5-6 units. Long run average total cost is constant over this range.
d. 6-8 units: This firm experiences diseconomies of scale over the production range of 6-8 units. Long run average total cost is increasing over this range.
question
You stop by a craft fair and you notice consumers haggling with vendors over prices. Suppose you plan to go to a farmers' market next, where you expect to find ______haggling compared to the crafts fair. This is because____________, and so the crafts fair is ________than the farmers' market.
answer
less.
unlike the farmers' market, the crafts fair does not sell standardized goods.
less competitive than.
unlike the farmers' market, the crafts fair does not sell standardized goods.
less competitive than.
question
a. In the market for gold jewelry (unlike the market for gold ore), products come in a range of designs, styles, and levels of quality. Which of the following characteristics of a competitive market is violated in the jewelry market?
There are many sellers.
The buyers and sellers are not fully informed.
There are high transaction costs.
The goods are not standardized.
b. What does this imply for consumers' willingness to buy from different producers?
That buyers are price takers.
The gold jewelry is perfectly competitive.
That buyers will pay whatever price sellers set.
Consumers are more willing to shop around for a better price. Correct
There are many sellers.
The buyers and sellers are not fully informed.
There are high transaction costs.
The goods are not standardized.
b. What does this imply for consumers' willingness to buy from different producers?
That buyers are price takers.
The gold jewelry is perfectly competitive.
That buyers will pay whatever price sellers set.
Consumers are more willing to shop around for a better price. Correct
answer
a. The goods are not standardized.
b. Consumers are more willing to shop around for a better price.
b. Consumers are more willing to shop around for a better price.
question
Suppose that the manager of a donut shop tells you that he sold 250 donuts today, for a total revenue of $250, Then the average revenue would be $___
answer
$1
question
Suppose an individual firm is one of many firms in a perfectly competitive market. Which of the following describes why this means that the firm's marginal revenue will be equal to the market price?
The firm can only sell more units when it lowers its price below the equilibrium market price.
Both the firm's price and output quantity change as more units are sold.
The firm is only profitable when price equals marginal revenue.
The firm can always sell one more unit at the existing market price.
The firm can only sell more units when it lowers its price below the equilibrium market price.
Both the firm's price and output quantity change as more units are sold.
The firm is only profitable when price equals marginal revenue.
The firm can always sell one more unit at the existing market price.
answer
The firm can always sell one more unit at the existing market price.
question
The manager of the donut shop tells you that he sells donuts for $1 each. If he were to make additional donuts, based on his current level of output, it would cost him $0.80 per donut.
Based on this information, the manager should:
decrease the number of donuts he makes.
continue to produce at the existing output.
increase the number of donuts he makes.
Based on this information, the manager should:
decrease the number of donuts he makes.
continue to produce at the existing output.
increase the number of donuts he makes.
answer
increase the number of donuts he makes.
question
Suppose a firm is operating in a competitive market and is maximizing profit by producing at the point where marginal revenue equals marginal cost. Now suppose that consumer wealth decreases in this market (and the good is a normal good). What might you expect to happen to the price and the profit-maximizing output quantity for the firm?
multiple choice
Price in the market would decrease, and the firm's profit-maximizing output would increase.
Price in the market would increase, and the firm's profit-maximizing output would decrease.
Price in the market would increase, and the firm's profit-maximizing output would increase.
Price in the market would decrease, and the firm's profit-maximizing output would decrease.
multiple choice
Price in the market would decrease, and the firm's profit-maximizing output would increase.
Price in the market would increase, and the firm's profit-maximizing output would decrease.
Price in the market would increase, and the firm's profit-maximizing output would increase.
Price in the market would decrease, and the firm's profit-maximizing output would decrease.
answer
Price in the market would decrease, and the firm's profit-maximizing output would decrease.
question
A restaurant owner is trying to decide whether to stay open at lunchtime. She has far fewer customers at lunch than at dinner and the revenue she brings in from lunch covers her expenses to buy food and pay the staff, but not much more.
The restaurant owner should:
close for lunch, as the revenue from staying open for lunch will not yield any profit.
open for lunch, as the extra revenue from staying open covers the variable costs of staying open for lunch.
close for lunch, as the revenue from staying open for lunch will only cover the variable cost of staying open and not the fixed cost.
open for lunch, as the revenue from staying open for lunch covers the total costs of staying open for a full day.
The restaurant owner should:
close for lunch, as the revenue from staying open for lunch will not yield any profit.
open for lunch, as the extra revenue from staying open covers the variable costs of staying open for lunch.
close for lunch, as the revenue from staying open for lunch will only cover the variable cost of staying open and not the fixed cost.
open for lunch, as the revenue from staying open for lunch covers the total costs of staying open for a full day.
answer
open for lunch, as the extra revenue from staying open covers the variable costs of staying open for lunch.
question
Which of the following is a way that profit-maximizing and loss-minimizing are the same?
a. They both mean that marginal revenue must equal or exceed ATC.
They both mean increasing production until total revenue equals total cost.
They both mean that price must equal or exceed AVC.
They both mean increasing production until marginal revenue equals marginal cost.
Which of the following is a way that profit-maximizing and loss-minimizing are different?
b. Profit maximization involves marginal values while loss-minimizing involves average values.
Profit maximization involves average total values while loss-minimizing involves average variable values.
Only profit maximization involves increasing production until marginal revenue equals marginal cost.
Loss-minimizing involves the shutdown condition that price must equal or exceed AVC.
a. They both mean that marginal revenue must equal or exceed ATC.
They both mean increasing production until total revenue equals total cost.
They both mean that price must equal or exceed AVC.
They both mean increasing production until marginal revenue equals marginal cost.
Which of the following is a way that profit-maximizing and loss-minimizing are different?
b. Profit maximization involves marginal values while loss-minimizing involves average values.
Profit maximization involves average total values while loss-minimizing involves average variable values.
Only profit maximization involves increasing production until marginal revenue equals marginal cost.
Loss-minimizing involves the shutdown condition that price must equal or exceed AVC.
answer
a. They both mean increasing production until marginal revenue equals marginal cost.
b. Loss-minimizing involves the shutdown condition that price must equal or exceed AVC.
b. Loss-minimizing involves the shutdown condition that price must equal or exceed AVC.
question
Suppose that the profit-maximizing quantity of output for a firm in the competitive textile industry is 1 million yards of cloth. If this firm is representative of all the others in the industry, which of the following expressions describe total supply in the market?
Total supply (yards of cloth) in the market =
Total supply (yards of cloth) in the market =
answer
1 million times the number of firms
question
What would you expect to happen to market supply if variable costs decreased for individual firms in the market?
Total market supply would increase because MR would equal MC at a higher quantity for each firm.
Total market supply would decrease. While some existing firms would produce a higher quantity, other firms will leave the market.
Total market supply would remain constant, but the profit of each individual firm would increase.
Total market supply would increase. While each existing firm continues to produce the same quantity, new firms will enter the market.
Total market supply would increase because MR would equal MC at a higher quantity for each firm.
Total market supply would decrease. While some existing firms would produce a higher quantity, other firms will leave the market.
Total market supply would remain constant, but the profit of each individual firm would increase.
Total market supply would increase. While each existing firm continues to produce the same quantity, new firms will enter the market.
answer
Total market supply would increase because MR would equal MC at a higher quantity for each firm.
question
Suppose that the airline industry is in long-run equilibrium when the price of gasoline increases, raising the cost of operating airplanes. In the long run, the number of airlines in business should:
decrease.
increase.
remain constant with lower profits.
remain constant with constant profits.
decrease.
increase.
remain constant with lower profits.
remain constant with constant profits.
answer
decrease
question
Corn farmers in Iowa are producers in a highly competitive global market for corn. They also have some of the most fertile, productive land in the entire world. Could Iowa's farmers be earning a positive economic profit in the long run?
multiple choice
Yes, as long as the Iowa farms differ enough in cost structure compared to the rest of the world.
No, long run economic profits are never possible in competitive markets such as corn.
No, as long as the global long run supply curve for corn is upward sloping.
Yes, as long as the global long run supply curve for corn is perfectly elastic.
multiple choice
Yes, as long as the Iowa farms differ enough in cost structure compared to the rest of the world.
No, long run economic profits are never possible in competitive markets such as corn.
No, as long as the global long run supply curve for corn is upward sloping.
Yes, as long as the global long run supply curve for corn is perfectly elastic.
answer
Yes, as long as the Iowa farms differ enough in cost structure compared to the rest of the world.
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