ECON test 3 Chp 8 and 9 - Assignment Essays

question

What does the business firm do ?

answer

- Convert resources into products
product value > resource cost

question

What is the incentive for the business firm to convert resources into products?

answer

Owners have the right to any revenue after costs have been paid
- profit

question

What is profit?

answer

the difference between revenue and costs

question

What is total revenue?

answer

the amount a firm receives from the sale of goods and services

question

What is total costs?

answer

the amount a firm spends in order to produce and sell those goods and services

question

How is profit (or loss) calculated?

answer

TR - TC

question

What are explicit costs?

answer

Tangible, out-of- pocket expenses
- wages, food costs, utilities

question

What are implicit costs?

answer

- opportunity costs of doing business
- opportunity cost of capital
- opportunity cost of owner's time

question

How do you calculate the accounting profit?

answer

Revenues - explicit costs

question

How do you calculate Economic Profit?

answer

Revenues - (Explicit + Implicit costs)
Accounting Profit - Implicit costs

question

Which of the following is an example of an
implicit cost?
A. wages paid to employees
B. Cost of food delivery
C. The opportunity cost of the owner's time
D. monthly insurance premiums

answer

C. The opportunity cost of the owner's time

question

What is output?

answer

the product that the firm creates

question

What are factors of production?

answer

- Resources used in the production process

question

What is production function?

answer

Describes the relationship between inputs and outputs

question

What is marginal product?

answer

the change in output associated with one additional unit of an input

question

What is Diminishing Marginal Product?

answer

Occurs when successive increases in inputs are associated with a slower rise in output

question

Total output with seven workers is Q = 70. Total
output with eight workers is Q = 82. What is the
marginal product of the eighth worker?
A. 12
B. 10
C. 82
D. 8

answer

A. 12

question

short run

answer

period of production in which at least one input is fixed
- defined by how long it takes to change all factors

question

Long run

answer

period of production in which all inputs are variable

question

What are the costs firms consider in the short run?

answer

- variable costs (
- fixed costs

question

Why will the economic profit always be less than the accounting profit?

answer

because the calculation of economic profits starts with accounting profit and subtracts more costs

question

Variable costs _______ with output

answer

vary

question

Fixed costs are _____ in the short run. They do not change no matter what the level of output

answer

fixed

question

What is the formula for the total cost in the short run?

answer

TC = TVC + TFC

question

What is the formula for the average total costs for short run?

answer

AVC + AFC
just divide the total costs by the number of units

question

What is marginal costs? forumula?

answer

Change in total costs to produce 1 more unit
change in total cost divided by the change in quantity of output

question

My marginal _ _ starts going up when the marginal ______ starts going down

answer

cost, output

question

Increasing input = ______ total costs

answer

increasing

question

Average Fixed Costs go _____ for every unit of additional production

answer

down

question

What costs are U shaped on the curve? Why?

answer

AVC, ATC, And MC
- those costs go down initially due to specialization allowing increasing marginal output. Then diminishing returns cause the cost to turn up

question

The lowest point on the Average Total Cost Curve is the most _____________

answer

efficient point

question

What is the most efficient point on the ATC Curve?

answer

the scale of business that allows you the best chance to make the most profit

question

How do we make the decision about how big we want our business to be?

answer

use a Long Run Average Total Cost Curve

question

True or False: there are no fixed cost in the long run

answer

True

question

Where is the efficient point on the LRATC?

answer

the level of output where ATC is minimized

question

What are the economic of Scale (long run)?

answer

when getting bigger givers a lower cost
- workers specialization
- mass production techniques
- Purchasing Leverage

question

What are Diseconomies of scale (long run)?

answer

When getting bigger gives a higher cost
- More managers
- Highly specialized workers
- Coordination process to pull everything together
- Layers of management expand (Bureaucracy)

question

True or False: the idea is to get bigger until you reach the lowest point

answer

true

question

What does economies of scale look like?

answer

building more than one house at the same time

question

What does diseconomies of scale look like?

answer

the Bureaucracy of a large hospital makes the cost higher and price to patience higher

question

What does a constant economy of scale look like?

answer

the local Olive Garden restaurant may. be larger than Mario's nerighborhood restaurant but the prices are very similar

question

Economies of scale

answer

ATC falls when production expands

question

Diseconomies of scale

answer

ATC rises when production expands

question

Constant returns to scale

answer

ATC doesn't change when production expands

question

What is total costs?

answer

the amount a firm spends in order to produce and sell those goods and services

question

How is profit and loss calculated?

answer

Profits = revenues - cost
- costs can be explicit or implicit
- accounting profit versus economic profit

question

How much should a firm produce?

answer

Firms must effectively combine labor and capital in the right quantities
- In the short run with a fixed amount of capital, the marginal product of labor begins to decline
- Even if the MPL falls, it may still be profitable to hire additional workers

question

What costs do firms consider in the short run and the long run?

answer

- In the short run, firms consider both variable and fixed costs
- MC, AVC, and ATC are U-shaped
- MC initially decreases due to increased specialization, and when the point of diminishing marginal product is reached, MC begins to increase
- AFC always declines
- So the difference between ATC and AVC gets smaller and smaller
- In the long run, firms can experience economies of scale, constant returns to scale, or diseconomies of scale

question

What are characteristics of a competitive market?

answer

1. There is no control over price since there are a large number of firms, each selling identical products
2. Profits lead to other firms entering the market; losses lead to exit
3. If the market is competitive , social welfare is maximized. you achieve efficiency
4. A perfectly competitive market is one in which: There are large numbers of buyers and sellers producing identical goods, There is easy entry and exit from the market, Firms are price takers

question

What is the profit-maximizing rule?

answer

- A firm will maximize profit by producing where MR= MC
- Profit = (P-AVC) x Q

question

What are the operational rules in the short run?

answer

In the short run there are 3 profitable cases:
P>ATC : Economic profit
P<ATC, but > AVC economic loss, but can stay open
P < AVC : Firm should shut down

question

What does the Long Run Adjustment process ensure?

answer

That firms earn zero economic profit in the long run

question

competitive market

answer

- Many buyers and sellers
- Similar goods
- Firms are price takers
- free entry and exit

question

Profit maximizing rule

answer

profit is maximized by choosing the level of output such that MR = MC

question

True or False: Shutting down is not the same as going out of business and exiting the industry

answer

true

question

When should a firm shut down?

answer

if it can not cover variable costs

question

Short run :
P > ATC whats the outcome

answer

the firm makes a profit

question

Short run:
ATC > P > AVC whats the outcome

answer

The firm will operate to minimize loss

question

Short run:
AVC > P whats the outcome

answer

The firm will temporarily shut down

question

Long run:
P > ATC what is the outcome

answer

The firm makes a profit

question

Long run:
P < ATC what is the outcome

answer

The firm should shut down

question

What are sunk costs?

answer

Unrecoverable costs that have been incurred as a result of past decisions

question

What is sunk cost fallacy?

answer

Considering sunk costs when making new decisions at the margin

question

A competitive firm will shut down and produce output level Q = 0 if

answer

price < min. AVC

question

Steve runs a competitive sandwich shop. Right now, he is producing output at a level where MR > MC.

answer

A.produce more output.

question

Suppose a competitive firm is faced with a price in the short run that is below ATC but above AVC. In the short run, this firm should

answer

A.produce at the output level where MR = MC.

question

When firms make zero economic profit, the market is in _____________ equilibrium.

answer

long-run

question

________________ convey information about the profitability of various markets

answer

signals

question

LR supply may be upward-sloping:

answer

•Resources may be limited.
•Opportunity costs of labor.

question

If a competitive industry is making positive economic profits, what will eventually happen in this industry?

answer

The market supply will shift to the right.

question

What do you suppose is one of the main reasons that competitive firms all earn zero economic profits in the long run?

answer

Free entry and exit in the industry.

question

In the long run, a firm in a perfectly competitive market earns

answer

- positive accounting profits
- Zero economic profits

question

Profits and losses act as ______________ in a perfectly competitive market

answer

signals

question

What is marginal revenue?

answer

Additional revenue from selling one more unit
MR = change in total revenue divided by change in quanity

question

What is marginal cost?

answer

additional costs of producing one more unit
MC = change in total costs divided by change in quanity

question

What is marginal analysis?

answer

compare the revenue (MR) from one more unit to the cost (MC) of one more unit

question

Profit is maximized by choosing the level of output such that

answer

MR = MC

question

What should a firm do if MR > MC?

answer

product that unit

question

What should the firm do if MR<MC do not produce

answer

...

question

P* stands for

answer

profit max rule for perfect competition

question

When should you forget sunk costs?

answer

when you are making decisions about what to do next

question

Postive profits

answer

more firms will enter the industry

question

Negative profits

answer

firms will exit the industry

question

What do economist do?

answer

break cost into explicit costs and implicit costs and consider economic profit

question

When is economic profit earned?

answer

when value of production is greater than cost of all resources used

question

True or False: Implicit costs are always paid out of pocket

answer

false, implicit costs are opportunity cost and explicit costs are out of pocket

question

true or false: accounting profit is equal to explicit costs plus implicit costs

answer

false, accounting profit is total revenue minus explicit costs

question

true or false: Total revenue minus total cost is equal to profit

answer

true

question

true or false: the three primary factors of production are capital, interest, and savings.

answer

false: land, labor, and capital

question

true or false: the change in total output divided by the change in input is known as marginal cost

answer

false: marginal product

question

true or false: if a firm's long-run average total costs increase as it increases its scale of production, the firm is experiencing diminishing marginal product

answer

false: diseconomies of scale

question

True or false: an example of a long - run cost for a manufacturing firm is the purchase of additional raw materials.

answer

false: short run

question

true or false: in competitive markets, market forces are much stronger than individual firms are.

answer

true

question

true or false: a Perfectly competitive firm's break-even output level is where MR = MC

answer

false: P=ATC

question

True or false: When revenue is greater than variable costs, the firm will earn a profit.

answer

False: atc

question

True or False: Firms will always make a positive economic profit if P>ATC.

answer

true

question

True or False: In the short run, a firm does NOT have any fixed costs

answer

false: long run

question

True or False: in the long run, if a firm is making a loss, it will continue to operate if it covers its fixed costs.

answer

false: short-run, variable

question

true or false: A firm's accounting profit is always greater than its economic profit.

answer

true because economic profit considers implicit costs

question

true or false; a restaurant owner just found out that his pizza bistro is losing money because the costs and the revenue aren't both being maximized

answer

false: costs minimized

question

True or false: as a firm hires more labor and each worker is able to specialize, each additional worker's marginal productivity decreases continuously.

answer

false: it increases then diminishes over time

question

true or false: by looking at the full set of short-run cost curves for a firm, we can determine the level of output with the cost-minimizing level of output

answer

true

question

true or false: a firm in a competitive market selling a homogenous product and captures some market power

answer

false: no market power

question

True or false: a competitive market has many buyers and sellers, differentiated products, easy entry into the market

answer

false: similar products

question

True or false: in the short run, a firm should shut down when MR<MC

answer

False: should reduce output

1 of 105

question

What does the business firm do ?

answer

- Convert resources into products
product value > resource cost

question

What is the incentive for the business firm to convert resources into products?

answer

Owners have the right to any revenue after costs have been paid
- profit

question

What is profit?

answer

the difference between revenue and costs

question

What is total revenue?

answer

the amount a firm receives from the sale of goods and services

question

What is total costs?

answer

the amount a firm spends in order to produce and sell those goods and services

question

How is profit (or loss) calculated?

answer

TR - TC

question

What are explicit costs?

answer

Tangible, out-of- pocket expenses
- wages, food costs, utilities

question

What are implicit costs?

answer

- opportunity costs of doing business
- opportunity cost of capital
- opportunity cost of owner's time

question

How do you calculate the accounting profit?

answer

Revenues - explicit costs

question

How do you calculate Economic Profit?

answer

Revenues - (Explicit + Implicit costs)
Accounting Profit - Implicit costs

question

Which of the following is an example of an
implicit cost?
A. wages paid to employees
B. Cost of food delivery
C. The opportunity cost of the owner's time
D. monthly insurance premiums

answer

C. The opportunity cost of the owner's time

question

What is output?

answer

the product that the firm creates

question

What are factors of production?

answer

- Resources used in the production process

question

What is production function?

answer

Describes the relationship between inputs and outputs

question

What is marginal product?

answer

the change in output associated with one additional unit of an input

question

What is Diminishing Marginal Product?

answer

Occurs when successive increases in inputs are associated with a slower rise in output

question

Total output with seven workers is Q = 70. Total
output with eight workers is Q = 82. What is the
marginal product of the eighth worker?
A. 12
B. 10
C. 82
D. 8

answer

A. 12

question

short run

answer

period of production in which at least one input is fixed
- defined by how long it takes to change all factors

question

Long run

answer

period of production in which all inputs are variable

question

What are the costs firms consider in the short run?

answer

- variable costs (
- fixed costs

question

Why will the economic profit always be less than the accounting profit?

answer

because the calculation of economic profits starts with accounting profit and subtracts more costs

question

Variable costs _______ with output

answer

vary

question

Fixed costs are _____ in the short run. They do not change no matter what the level of output

answer

fixed

question

What is the formula for the total cost in the short run?

answer

TC = TVC + TFC

question

What is the formula for the average total costs for short run?

answer

AVC + AFC
just divide the total costs by the number of units

question

What is marginal costs? forumula?

answer

Change in total costs to produce 1 more unit
change in total cost divided by the change in quantity of output

question

My marginal _ _ starts going up when the marginal ______ starts going down

answer

cost, output

question

Increasing input = ______ total costs

answer

increasing

question

Average Fixed Costs go _____ for every unit of additional production

answer

down

question

What costs are U shaped on the curve? Why?

answer

AVC, ATC, And MC
- those costs go down initially due to specialization allowing increasing marginal output. Then diminishing returns cause the cost to turn up

question

The lowest point on the Average Total Cost Curve is the most _____________

answer

efficient point

question

What is the most efficient point on the ATC Curve?

answer

the scale of business that allows you the best chance to make the most profit

question

How do we make the decision about how big we want our business to be?

answer

use a Long Run Average Total Cost Curve

question

True or False: there are no fixed cost in the long run

answer

True

question

Where is the efficient point on the LRATC?

answer

the level of output where ATC is minimized

question

What are the economic of Scale (long run)?

answer

when getting bigger givers a lower cost
- workers specialization
- mass production techniques
- Purchasing Leverage

question

What are Diseconomies of scale (long run)?

answer

When getting bigger gives a higher cost
- More managers
- Highly specialized workers
- Coordination process to pull everything together
- Layers of management expand (Bureaucracy)

question

True or False: the idea is to get bigger until you reach the lowest point

answer

true

question

What does economies of scale look like?

answer

building more than one house at the same time

question

What does diseconomies of scale look like?

answer

the Bureaucracy of a large hospital makes the cost higher and price to patience higher

question

What does a constant economy of scale look like?

answer

the local Olive Garden restaurant may. be larger than Mario's nerighborhood restaurant but the prices are very similar

question

Economies of scale

answer

ATC falls when production expands

question

Diseconomies of scale

answer

ATC rises when production expands

question

Constant returns to scale

answer

ATC doesn't change when production expands

question

What is total costs?

answer

the amount a firm spends in order to produce and sell those goods and services

question

How is profit and loss calculated?

answer

Profits = revenues - cost
- costs can be explicit or implicit
- accounting profit versus economic profit

question

How much should a firm produce?

answer

question

What costs do firms consider in the short run and the long run?

answer

question

What are characteristics of a competitive market?

answer

question

What is the profit-maximizing rule?

answer

- A firm will maximize profit by producing where MR= MC
- Profit = (P-AVC) x Q

question

What are the operational rules in the short run?

answer

In the short run there are 3 profitable cases:
P>ATC : Economic profit
P<ATC, but > AVC economic loss, but can stay open
P < AVC : Firm should shut down

question

What does the Long Run Adjustment process ensure?

answer

That firms earn zero economic profit in the long run

question

competitive market

answer

- Many buyers and sellers
- Similar goods
- Firms are price takers
- free entry and exit

question

Profit maximizing rule

answer

profit is maximized by choosing the level of output such that MR = MC

question

True or False: Shutting down is not the same as going out of business and exiting the industry

answer

true

question

When should a firm shut down?

answer

if it can not cover variable costs

question

Short run :
P > ATC whats the outcome

answer

the firm makes a profit

question

Short run:
ATC > P > AVC whats the outcome

answer

The firm will operate to minimize loss

question

Short run:
AVC > P whats the outcome

answer

The firm will temporarily shut down

question

Long run:
P > ATC what is the outcome

answer

The firm makes a profit

question

Long run:
P < ATC what is the outcome

answer

The firm should shut down

question

What are sunk costs?

answer

Unrecoverable costs that have been incurred as a result of past decisions

question

What is sunk cost fallacy?

answer

Considering sunk costs when making new decisions at the margin

question

A competitive firm will shut down and produce output level Q = 0 if

answer

price < min. AVC

question

Steve runs a competitive sandwich shop. Right now, he is producing output at a level where MR > MC.

answer

A.produce more output.

question

Suppose a competitive firm is faced with a price in the short run that is below ATC but above AVC. In the short run, this firm should

answer

A.produce at the output level where MR = MC.

question

When firms make zero economic profit, the market is in _____________ equilibrium.

answer

long-run

question

________________ convey information about the profitability of various markets

answer

signals

question

LR supply may be upward-sloping:

answer

•Resources may be limited.
•Opportunity costs of labor.

question

If a competitive industry is making positive economic profits, what will eventually happen in this industry?

answer

The market supply will shift to the right.

question

What do you suppose is one of the main reasons that competitive firms all earn zero economic profits in the long run?

answer

Free entry and exit in the industry.

question

In the long run, a firm in a perfectly competitive market earns

answer

- positive accounting profits
- Zero economic profits

question

Profits and losses act as ______________ in a perfectly competitive market

answer

signals

question

What is marginal revenue?

answer

Additional revenue from selling one more unit
MR = change in total revenue divided by change in quanity

question

What is marginal cost?

answer

additional costs of producing one more unit
MC = change in total costs divided by change in quanity

question

What is marginal analysis?

answer

compare the revenue (MR) from one more unit to the cost (MC) of one more unit

question

Profit is maximized by choosing the level of output such that

answer

MR = MC

question

What should a firm do if MR > MC?

answer

product that unit

question

What should the firm do if MR<MC do not produce

answer

...

question

P* stands for

answer

profit max rule for perfect competition

question

When should you forget sunk costs?

answer

when you are making decisions about what to do next

question

Postive profits

answer

more firms will enter the industry

question

Negative profits

answer

firms will exit the industry

question

What do economist do?

answer

break cost into explicit costs and implicit costs and consider economic profit

question

When is economic profit earned?

answer

when value of production is greater than cost of all resources used

question

True or False: Implicit costs are always paid out of pocket

answer

false, implicit costs are opportunity cost and explicit costs are out of pocket

question

true or false: accounting profit is equal to explicit costs plus implicit costs

answer

false, accounting profit is total revenue minus explicit costs

question

true or false: Total revenue minus total cost is equal to profit

answer

true

question

true or false: the three primary factors of production are capital, interest, and savings.

answer

false: land, labor, and capital

question

true or false: the change in total output divided by the change in input is known as marginal cost

answer

false: marginal product

question

true or false: if a firm's long-run average total costs increase as it increases its scale of production, the firm is experiencing diminishing marginal product

answer

false: diseconomies of scale

question

True or false: an example of a long - run cost for a manufacturing firm is the purchase of additional raw materials.

answer

false: short run

question

true or false: in competitive markets, market forces are much stronger than individual firms are.

answer

true

question

true or false: a Perfectly competitive firm's break-even output level is where MR = MC

answer

false: P=ATC

question

True or false: When revenue is greater than variable costs, the firm will earn a profit.

answer

False: atc

question

True or False: Firms will always make a positive economic profit if P>ATC.

answer

true

question

True or False: In the short run, a firm does NOT have any fixed costs

answer

false: long run

question

True or False: in the long run, if a firm is making a loss, it will continue to operate if it covers its fixed costs.

answer

false: short-run, variable

question

true or false: A firm's accounting profit is always greater than its economic profit.

answer

true because economic profit considers implicit costs

question

true or false; a restaurant owner just found out that his pizza bistro is losing money because the costs and the revenue aren't both being maximized

answer

false: costs minimized

question

True or false: as a firm hires more labor and each worker is able to specialize, each additional worker's marginal productivity decreases continuously.

answer

false: it increases then diminishes over time

question

true or false: by looking at the full set of short-run cost curves for a firm, we can determine the level of output with the cost-minimizing level of output

answer

true

question

true or false: a firm in a competitive market selling a homogenous product and captures some market power

answer

false: no market power

question

True or false: a competitive market has many buyers and sellers, differentiated products, easy entry into the market

answer

false: similar products

question

True or false: in the short run, a firm should shut down when MR<MC

answer

False: should reduce output

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