Econ202 Module 9 - Assignment Essays

question

What is the goal of all firms?

answer

Profit maximization

question

What is profit?

answer

total revenue - total cost

question

Inputs have _______.

answer

cost

question

Output generate ____________.

answer

revenue

question

Do fixed costs remain constant as output changes?

answer

yes

question

Do variable costs remain constant as output changes?

answer

question

Define short-run:

answer

- firms can't change fixed costs
- firms can't change technology
- can make adjustments to variable inputs (workers)

question

Define long-run:

answer

- can change production technology
- everything is variable in the long-run

question

What are explicit costs?

answer

- costs in which a firm spends money to buy things
ex. wages for workers, lease payment on a store

question

Explicit costs are also known as ________________ costs.

answer

accounting

question

What are implicit costs?

answer

non-monetary opportunity costs
ex. $50,000 you gave up to run a business

question

What is economic cost?

answer

explicit + implicit cost

question

True or False: Economic profits are usually less than accounting profits.

answer

True

question

What tells you the true value of a firm?

answer

Economic profits

question

Economic costs of production differ from accounting costs in that

A. accounting costs are always larger than the economic cost.
B. economic costs include expenditures for hired resources while accounting costs do not.
C. accounting costs include expenditures for hired resources while economic costs do not.
D. economic costs add the opportunity costs of a firm using its own resources while accounting costs do not.

answer

D. economic costs add the opportunity costs of a firm using its own resources while accounting costs do not.

question

Which of the following is TRUE about the long run?

A. All resources are fixed.
B. At least one resource is fixed.
C. All resources are variable.
D. none of the above

answer

C. All resources are variable.

question

If your business earns $20,000 in revenues, has explicit costs of $7,000, and implicit costs of $5,000, your accounting profit is

A. $32,000
B. -$8,000
C. $8,000
D. $13,000

answer

D. $13,000

question

Implicit costs can be defined as

A. accounting profit minus explicit cost.
B. the non-monetary opportunity cost of using the firm's own resources.
C. the deferred cost of production.
D. total cost minus fixed costs.

answer

B. the non-monetary opportunity cost of using the firm's own resources.

question

The rules of accounting generally require that ________ costs be used for purposes of keeping a company's financial records and for paying taxes. These costs are sometimes called ________ costs.

A. economic; legal
B. total; economic
C. explicit; accounting
D. real; explicit

answer

C. explicit; accounting

question

Economic profit is

A. an opportunity cost of operating the firm.
B. equal to the firm's total revenue minus its normal profit.
C. equal to the firm's total revenue minus its opportunity costs.
D. the average return for supplying entrepreneurial ability.

answer

C. equal to the firm's total revenue minus its opportunity costs.

question

McDonald's is a fast-food restaurant chain. Which of the following would be a long-run decision for McDonald's?

A. supply more hamburgers in one restaurant
B. open a new restaurant in a city
C. hire one more worker in a restaurant location
D. replace the manager of a restaurant

answer

B. open a new restaurant in a city

question

If you're producing a quantity of zero do you still have to pay fixed costs?

answer

yes

question

What is marginal cost?

answer

The cost of producing one more unit of a good

question

How do you calculate marginal cost?

answer

change in total cost / change in quantity

question

How do you calculate average total cost?

answer

total cost / quantity

question

How do you calculate average variable cost?

answer

variable cost / quantity

question

Marginal cost is equal to

A. change in total cost divided by change in output.
B. change in total variable cost divided by change in output.
C. total variable cost divided by the quantity of output.
D. Both A and B are correct.

answer

D. Both A and B are correct.

question

Which of the following statements regarding the relationship between average and marginal costs is INCORRECT?

A. When marginal costs are greater than average costs, the latter must rise.
B. When marginal costs are less than average costs, the latter must fall.
C. There is no way for average variable costs to fall when marginal costs are falling.
D. There is always a definite relationship between average and marginal cost.

answer

C. There is no way for average variable costs to fall when marginal costs are falling.

question

The change in total variable cost which accompanies one extra unit of output is

A. the average total cost.
B. the average fixed cost.
C. marginal cost.
D. the average variable cost.

answer

C. marginal cost.

question

If total costs are $50,000 when 1000 units are produced, and total costs are $50,100 when 1001 units are produced, we can conclude that

A. average fixed costs are $100.
B. marginal costs are $100.
C. average total costs are $100.
D. average variable costs are $100.

answer

B. marginal costs are $100.

question

In the long run,

A. the firm is more profitable than it is in the short run.
B. all of the firm's costs are variable costs.
C. the firm's fixed costs are greater than its fixed costs in the short run.
D. all of the firm's costs are explicit costs; there are no implicit costs of production.

answer

B. all of the firm's costs are variable costs.

question

If average total cost is $50 and average fixed cost is $15 when output is 20 units, then the firm's total variable cost at that level of output is

A. $1,000.
B. $700.
C. $300.
D. impossible to determine without additional information.

answer

B. $700.

question

Marginal cost is defined as the change in ________ cost when output changes by one unit. In the short run, marginal cost can also be measured by the change in ________ cost when output changes by one unit.

A. total; variable
B. fixed; variable
C. total; fixed
D. variable; fixed

answer

A. total; variable

question

Which of the following statements is true?

A. When marginal cost is greater than average fixed cost, average fixed cost increases.
B. As output increases, average fixed cost becomes smaller and smaller.
C. Average fixed cost does not change as output increases.
D. The marginal cost curve intersects the average fixed cost curve at its minimum point.

answer

B. As output increases, average fixed cost becomes smaller and smaller.

question

In the short run, average total cost is

A. sometimes higher and sometimes lower than average variable cost.
B. equal to average variable cost.
C. less than average variable cost.
D. higher than average variable cost.

answer

D. higher than average variable cost.

question

What are the 3 conditions of perfect competition?

answer

1. Many buyers and sellers, all small
2. Sell identical products
3. No barriers to entry or exit

question

Are firms in a perfectly competitive market price takers or price makers?

answer

Price takers (they can't not set the market price)

question

How to calculate marginal revenue:

answer

change in total revenue / change in quantity

question

In __________ _______________, P=MR (price = marginal revenue).

answer

perfect competition

question

Marginal revenue is _____________ in perfect competition.

answer

constant

question

How to calculate total revenue:

answer

Q x MR (P=MR)

question

How do you find profit maximizing quantity?

answer

MR=MC

question

Assume goods X and Y are complements and are produced in perfectly competitive markets. All else constant, an increase in demand for good X would cause:

A. a decrease in the number of firms that produce good X.
B. a decrease in the number of firms that produce good Y.
C. an increase in the number of firms that produce good Y.
D. no effect on the number of firms that produce either good.

answer

C. an increase in the number of firms that produce good Y.

question

An increase in a firm's fixed cost will not change the firm's profit-maximizing output in the short run.

A. True
B. False

answer

A. True

question

Industry Y is a perfectly competitive industry. Assume that as a result of changes in other markets there is a twenty percent increase in the price of variable inputs used by firms in industry Y. After all adjustments have taken place, we would expect the equilibrium price in industry Y to:

A. increase and the number of firms to decrease.
B. increase and the number of firms to increase.
C. decrease and the number of firms to increase.
D. decrease and the number of firms to decrease.

answer

A. increase and the number of firms to decrease.

question

A perfectly competitive firm's marginal revenue

A. may be either greater or less than its price, depending on the quantity sold.
B. is greater than its price.
C. is less than price because a firm must lower its price to sell more.
D. is equal to its price.

answer

D. is equal to its price.

question

The demand curve faced by the individual perfectly competitive firm is:

A. perfectly elastic.
B. perfectly inelastic.
C. elastic or inelastic depending on price.
D. unit elastic.

answer

A. perfectly elastic.

question

In a perfectly competitive market, which of the following is the main factor that affects consumers' decisions on which firm to purchase a good from?

A. price
B. reputation
C. customer service
D. quality

answer

A. price

question

The demand curve faced by the individual perfectly competitive firm is:

A. vertical.
B. upward sloping.
C. downward sloping.
D. horizontal.

answer

D. horizontal.

question

Being a price taker essentially means

A. a firm can influence the market price.
B. the firm cannot legally set its price above the market price.
C. a firm cannot influence the market price.
D. the firm cannot legally set its price below the market price.

answer

C. a firm cannot influence the market price.

question

When P>ATC this means you have an ______________ _________.

answer

economic profit

question

When P<ATC this means you have an ______________ ______.

answer

economic loss

question

When P=ATC this means you're _______________ _______.

answer

breaking even

question

What is a sunk cost?

answer

A cost that has been paid and can not be recovered.

question

Should sunk costs effect your decision of whether you produce or not?

answer

No, because they've already been paid. All that matters is if you can make any money off of what you do sell, ignoring the fixed costs. (variable costs)

question

When P>AVC you should _________________________.

answer

stay in business in the short-run

question

When P<AVC you should _____________________.

answer

shut down right away

question

When P=AVC you're at the ______________________.

answer

shutdown point

question

Jennifer's Bakery Shop produces baked goods in a perfectly competitive market. If Jennifer decides to produce her 100th batch of cookies, the marginal cost is $120. She can sell this batch of cookies at a market price of $110. To maximize her profit, Jennifer should

A. produce this batch of cookies because their MR exceeds their MC.
B. not produce this additional batch.
C. shut down.
D. charge $120 for this batch.
E. produce this batch of cookies because they will help lower her average fixed cost.

answer

B. not produce this additional batch.

question

Peter's Pencils is a perfectly competitive company producing pencils. Suppose Peter is producing 1,000 pencils an hour. If the total cost of 1,000 pencils is $500, the market price per pencil is $2, and the marginal cost is $2, then Peter

A. is not maximizing his profit but is making zero economic profit anyway.
B. should decrease his output to increase his profit.
C. should increase his output to increase his profit.
D. is maximizing his profit and is making an economic profit.
E. makes an economic profit because marginal revenue is equal to marginal cost at this output level.

answer

D. is maximizing his profit and is making an economic profit.

question

When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell

A. any positive output the entrepreneur decides upon because all of it can be sold.
B. the output where average total cost equals price.
C. nothing at all; the firm shuts down.
D. the output where marginal revenue equals marginal cost

answer

C. nothing at all; the firm shuts down.

question

In analyzing the decision to shut down in the short run we assume that the firm's fixed costs are

A. implicit costs.
B. capital costs.
C. sunk costs.
D. nonmonetary opportunity costs.

answer

C. sunk costs.

question

In comparing accounting profit with economic profit, we generally find that

A. economic profit and accounting profit are the same in the short run.
B. accounting profit is less than economic profit.
C. accounting profit is greater than economic profit.
D. economic profit exceeds accounting profit by the amount of opportunity costs.

answer

C. accounting profit is greater than economic profit.

question

If price is equal to average variable cost, then a perfectly competitive firm breaks even.

A. True
B. False

answer

B. False (it is at the shutdown point)

question

If a firm shuts down in the short run,

A. its loss equals zero.
B. its loss equals its fixed cost.
C. its total revenue is not large enough to cover its fixed cost.
D. it makes zero economic profit.

answer

B. its loss equals its fixed cost.

question

All else constant, as the amount of a firm's implicit costs increases, the difference between economic profit and accounting profit will:

A. increase.
B. decrease.
C. stay the same.
D. cannot be determined without more information.

answer

A. increase.

question

Economic profits lead to firm _______.

answer

entry

question

Economic losses lead to firm ______.

answer

exit

question

If anyone can do it, you can't make money off if it in the _________.

answer

long-run

question

When firms exit a perfectly competitive industry, the market supply curve shifts to the left.

A. True
B. False

answer

A. True

question

If perfectly competitive firms are making an economic profit, then

A. some firms will exit the market.
B. the market might be in a long-run equilibrium but not a short-run equilibrium.
C. the market cannot be in either a short-run or a long-run equilibrium.
D. the market must be in long-run equilibrium but cannot be in a short-run equilibrium.
E. new firms will enter the market.

answer

E. new firms will enter the market.

question

In long-run perfectly competitive equilibrium, which of the following is false?

A. Firms earn economic profit.
B. Economies of scale are exhausted.
C. Economic surplus is maximized.
D. There is efficient, low-cost production at the minimum efficient scale.

answer

A. Firms earn economic profit.

question

In the long run, a perfectly competitive market will

A. generate a long-run equilibrium where the typical firm operates at a loss.
B. supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve.
C. produce only the quantity of output that yields a long-run profit for the typical firm.
D. supply whatever amount consumers will buy at a price which earns the market an economic profit.

answer

B. supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve.

question

The rutabaga market is perfectly competitive. Research is published claiming that eating rutabagas leads to gaining weight and so the demand for rutabagas permanently decreases. The permanent decrease in demand results in a

A. lower price, economic losses by rutabaga farmers, and exit from the market.
B. higher price, economic profits for rutabaga farmers, and entry into the market.
C. lower price, economic losses by rutabaga farmers, and entry into the market.
D. higher price, economic losses by rutabaga farmers, and exit from the market.
E. lower price, economic profits for rutabaga farmers, and entry into the market.

answer

A. lower price, economic losses by rutabaga farmers, and exit from the market.

question

If, in a perfectly competitive industry, the market price facing a firm is above its average total cost at the output where marginal revenue equals marginal cost, then

A. market supply will remain constant.
B. existing firms will exit the industry.
C. new firms are attracted to the industry.
D. firms are breaking even.

answer

C. new firms are attracted to the industry.

question

Assume a perfectly competitive firm is in long-run equilibrium and there is a decrease in market demand for the firm's output. Which of the following will occur?

A. Existing firms will reduce output in the short run.
B. Market price will be above its original level.
C. Existing firms will maintain the original level of output, but they will shift their cost functions down in the short run.
D. Existing firms will raise price to cover the reduction in quantity demanded and maintain total revenue in the short run.

answer

A. Existing firms will reduce output in the short run.

question

If a typical firm in a perfectly competitive industry is earning profits, then

A. new firms will enter in the long run causing market supply to increase, market price to fall, and profits to decrease.
B. new firms will enter in the long run causing market supply to
C. decrease, market price to rise, and profits to increase.
D. all firms will continue to earn profits.
E. the number of firms in the industry will remain constant in the long run.

answer

A. new firms will enter in the long run causing market supply to increase, market price to fall, and profits to decrease.

question

A firm could continue to operate for years without ever earning a profit as long as it is producing an output where

A. MR < ATC.
B. AFC < AVC.
C. MR > AVC.
D. ATC > AVC.

answer

C. MR > AVC.

question

Alice, Bud, and Celia can produce rubber bands in a perfectly competitive market. If they enter the market, the minimum average total cost for a bundle of rubber bands, for the three of them is $2, $3, and $4, respectively. If the market price is $2.10 per bundle, then

A. Alice and Bud will enter the market.
B. only Alice will enter the market.
C. all three of them will enter the market.
D. Bud and Celia will enter the market.
E. Alice and Celia will enter the market.

answer

B. only Alice will enter the market.

question

What is productive efficiency?

answer

The idea that goods and services are produced at the lowest possible cost.

question

What is allocative efficiency?

answer

Where production represents consumer preferences.

question

In the long run, the entry of new firms in an industry

A. benefits consumers by forcing prices down to the level of total cost.
B. benefits consumers by forcing prices down to the level of average cost.
C. harms consumers by forcing prices up above the level of total cost
D. harms consumers by forcing prices up above the level of average cost

answer

B. benefits consumers by forcing prices down to the level of average cost.

question

A perfectly competitive industry achieves allocative efficiency when

A. firms carry production surpluses.
B. goods and services are produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.
C. it produces where market price equals marginal production cost.
D. goods and services are produced at the lowest possible cost.

answer

B. goods and services are produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.

question

A perfectly competitive industry achieves allocative efficiency in the long run. What does allocative efficiency mean?

A. Each firm produces up to the point where the price of the good equals the marginal cost of producing the last unit.
B. Each firm produces up to the point where all scale economies are exhausted.
C. Firms use an input combination that minimizes cost and maximizes output.
D. Production occurs at the lowest average total cost.

answer

A. Each firm produces up to the point where the price of the good equals the marginal cost of producing the last unit.

question

A teenaged babysitter is similar to a firm in a perfectly competitive industry in that, for both

A. there are many other suppliers of similar goods or services.
B. fixed costs are lower than variable costs.
C. average costs of production do not change when their industry expands.
D. the implicit costs of production exceed the explicit costs of production.

answer

A. there are many other suppliers of similar goods or services.

question

Describe allocative efficiency:

A. It refers to a situation in which resources are allocated such that the last unit of output produced provides a marginal benefit to consumers equal to the marginal cost of producing it.
B. It refers to a situation in which resources are allocated fairly to all consumers in a society.
C. It refers to a situation in which resources are allocated such that goods can be produced at their lowest possible average cost.
D. It refers to a situation in which resources are allocated to their highest profit use.

answer

A. It refers to a situation in which resources are allocated such that the last unit of output produced provides a marginal benefit to consumers equal to the marginal cost of producing it.

question

Assume that the 4K and OLED television sets industry is perfectly competitive. Suppose a producer develops a successful innovation that enables it to lower its cost of production. What happens in the short run and in the long run?

A. Initially, the firm will be able to increase its profit significantly, but in the long run its profits will still be greater than zero but lower than its short-run profits because other firms would also innovate.
B. The firm will probably incur losses temporarily because of the high cost of the innovation, but in the long run it will start earning positive profits.
C. The firm will be able to increase its economic profits temporarily, but in the long run its economic profits will be eliminated as other firms copy the innovation.
D. This firm will be able to earn above normal profits indefinitely if it obtains a patent for its innovation.

answer

C. The firm will be able to increase its economic profits temporarily, but in the long run its economic profits will be eliminated as other firms copy the innovation.

question

If productive efficiency characterizes a market

A. firms use the best technology available to produce the good.
B. firms produce the goods that consumers desire most.
C. the marginal cost of production is minimized.
D. the output is being produced at the lowest possible cost.

answer

D. the output is being produced at the lowest possible cost.

question

Which of the following describes a situation in which every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it?

A. productive efficiency
B. allocative efficiency
C. marginal efficiency
D. profit maximization

answer

B. allocative efficiency

question

In a perfectly competitive market, a(n) ________ occurs because ________.

A. efficient outcome; the fair rules condition is met
B. efficient outcome; total surplus is maximized
C. deadweight loss; firms minimize average minimum cost
D. deadweight loss; total surplus is minimized
E. deadweight loss; firms must be price takers

answer

B. efficient outcome; total surplus is maximized

question

The perfectly competitive market structure benefits consumers because

A. firms add a much smaller markup over average cost than firms in any other type of market structure.
B. firms do not produce goods at the lowest possible price in the long run.
C. firms are forced by competitive pressure to be as efficient as possible.
D. firms produce high-quality goods at low prices.

answer

C. firms are forced by competitive pressure to be as efficient as possible.

question

What are the conditions of a monopoly?

answer

1. one seller
2. unique product, with no close substitute
3. barriers to entry

question

Do monopolies have the ability to set price?

answer

yes

question

What causes a monopoly?

answer

1. government action:
- copyrights or patents
- public franchise
2. control of a key resource
3. network externalities: the value of a product increases the more people use it
4. natural monopoly:
- economies of scale
- one firm can supply more cheaply than multiple firms

question

A public franchise

A. is a government designation that a private firm is the only legal producer of a good or service.
B. results from ownership of a key raw material.
C. is a corporation that is owned by stockholders.
D. is an unregulated monopoly necessary for the public good.

answer

A. is a government designation that a private firm is the only legal producer of a good or service.

question

A natural monopoly is most likely to occur in which of the following industries?

A. the diamond mining and marketing industry because one firm can control a key resource
B. the software industry because of the importance of network externalities
C. an industry where fixed costs are very large relative to variable costs
D. the pharmaceutical industry because the development and approval of new drugs through the Food and Drug Administration can take more than 10 years

answer

C. an industry where fixed costs are very large relative to variable costs

question

Which one of the following about a monopoly is false?

A. A monopoly could break even in the long run.
B. A monopoly must have some kind of government privilege or government-imposed barrier to maintain its monopoly.
C. A monopoly could make profits in the long run.
D. A monopoly status could be temporary.

answer

B. A monopoly must have some kind of government privilege or government-imposed barrier to maintain its monopoly.

question

What happens when a monopoly increases its price?

answer

1. sells fewer units
2. receives more revenue per unit

question

The monopolist's marginal revenue curve

A. is identical to the demand curve.
B. lies above the demand curve.
C. doesn't exist.
D. lies below the demand curve.

answer

D. lies below the demand curve.

question

The demand curve for a monopoly is

A. upward sloping.
B. horizontal because the demand is perfectly elastic.
C. undefined because it is the only supplier in the market.
D. vertical because the demand is perfectly inelastic.
E. downward sloping.

answer

E. downward sloping.

question

A profit-maximizing monopoly's price is

A. not consistently related to price that would prevail if the market was perfectly competitive.
B. greater than the price that would prevail if the industry was perfectly competitive.
C. the same as the price that would prevail if the industry was perfectly competitive.
D. less than the price that would prevail if the industry was perfectly competitive.

answer

B. greater than the price that would prevail if the industry was perfectly competitive.

question

If a monopolist's marginal revenue is $35 per unit and its marginal cost is $25, then

A. to maximize profit the firm should decrease output.
B. to maximize profit the firm should continue to produce the output it is producing.
C. to maximize profit the firm should increase output.
D. Not enough information is given to say what the firm should do to maximize profit.

answer

C. to maximize profit the firm should increase output.

question

Which of the following statements applies to a monopolist but not to a perfectly competitive firm at their profit-maximizing outputs?

A. Marginal revenue is less than price.
B. Marginal revenue equals marginal cost.
C. Average revenue equals average cost.
D. Price equals marginal cost.

answer

A. Marginal revenue is less than price.

question

Which of the following is most accurate?

A. In all cases, competitive markets yield more consumer surplus than would be enjoyed in a monopoly market with the same cost structure.
B. In some cases, competitive markets can yield less consumer surplus than would be enjoyed in a monopoly market with the same cost structure.
C. In all cases, competitive markets yield less consumer surplus than would be enjoyed in a monopoly market with the same cost structure.
D. In all cases, competitive markets yield the same consumer surplus that would be enjoyed in a monopoly market with the same cost structure.

answer

A. In all cases, competitive markets yield more consumer surplus than would be enjoyed in a monopoly market with the same cost structure.

question

Why does a monopoly cause a deadweight loss?

A. because it appropriates a portion of consumer surplus for itself
B. because it stops producing output at a point where price is above marginal cost
C. because it increases producer surplus at the expense of consumer surplus
D. because it does not produce some output for which demand exceeds supply

answer

B. because it stops producing output at a point where price is above marginal cost

question

What are the conditions of monopolistic competition?

answer

1. many firms
2. low barriers to entry
3. differentiated products

question

What are the conditions of an oligopoly?

answer

1. few firms
2. some barriers to entry
3. identical or differentiated products

question

What determines the competitiveness of an industry?

answer

1. competition of existing firms
2. threat from potential entrance
3. competition from substitutes
4. bargaining power of buyers
5. bargaining power of suppliers

question

Is a firm under monopolistic competition a price taker?

answer

question

Suppose a perfectly competitive firm faces the following cost and revenue conditions: ATC = $25.50; AVC = $20.50; MC = $25.50; MR = $28.50. The firm should

A. continue to produce its current output.
B. increase output.
C. shut down.
D. decrease output.

answer

B. increase output.

question

The demand curve for a perfectly competitive industry is

A. unit elastic.
B. perfectly elastic.
C. perfectly inelastic.
D. downward sloping.

answer

D. downward sloping.

question

Assume a perfectly competitive firm is in long-run equilibrium and there is a decrease in market demand for the firm's output. Which of the following will occur?

A. Existing firms will raise price to cover the reduction in quantity demanded and maintain total revenue in the short run.
B. Market price will be above its original level.
C. Existing firms will maintain the original level of output, but they will shift their cost functions down in the short run.
D. Existing firms will reduce output in the short run.

answer

D. Existing firms will reduce output in the short run.

question

A monopolist's profit-maximizing price and output correspond to the point on a graph

A. where average total cost is minimized.
B. where price is as high as possible.
C. where marginal revenue equals marginal cost and charging the price on the market demand curve for that output.
D. where total costs are the smallest relative to price.

answer

C. where marginal revenue equals marginal cost and charging the price on the market demand curve for that output.

1 of 113

question

What is the goal of all firms?

answer

Profit maximization

question

What is profit?

answer

total revenue - total cost

question

Inputs have _______.

answer

cost

question

Output generate ____________.

answer

revenue

question

Do fixed costs remain constant as output changes?

answer

yes

question

Do variable costs remain constant as output changes?

answer

question

Define short-run:

answer

- firms can't change fixed costs
- firms can't change technology
- can make adjustments to variable inputs (workers)

question

Define long-run:

answer

- can change production technology
- everything is variable in the long-run

question

What are explicit costs?

answer

- costs in which a firm spends money to buy things
ex. wages for workers, lease payment on a store

question

Explicit costs are also known as ________________ costs.

answer

accounting

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What are implicit costs?

answer

non-monetary opportunity costs
ex. $50,000 you gave up to run a business

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What is economic cost?

answer

explicit + implicit cost

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True or False: Economic profits are usually less than accounting profits.

answer

True

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What tells you the true value of a firm?

answer

Economic profits

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D. economic costs add the opportunity costs of a firm using its own resources while accounting costs do not.

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Which of the following is TRUE about the long run?

A. All resources are fixed.
B. At least one resource is fixed.
C. All resources are variable.
D. none of the above

answer

C. All resources are variable.

question

If your business earns $20,000 in revenues, has explicit costs of $7,000, and implicit costs of $5,000, your accounting profit is

A. $32,000
B. -$8,000
C. $8,000
D. $13,000

answer

D. $13,000

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answer

B. the non-monetary opportunity cost of using the firm's own resources.

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answer

C. explicit; accounting

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C. equal to the firm's total revenue minus its opportunity costs.

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answer

B. open a new restaurant in a city

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If you're producing a quantity of zero do you still have to pay fixed costs?

answer

yes

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What is marginal cost?

answer

The cost of producing one more unit of a good

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How do you calculate marginal cost?

answer

change in total cost / change in quantity

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How do you calculate average total cost?

answer

total cost / quantity

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How do you calculate average variable cost?

answer

variable cost / quantity

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answer

D. Both A and B are correct.

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answer

C. There is no way for average variable costs to fall when marginal costs are falling.

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The change in total variable cost which accompanies one extra unit of output is

A. the average total cost.
B. the average fixed cost.
C. marginal cost.
D. the average variable cost.

answer

C. marginal cost.

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answer

B. marginal costs are $100.

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answer

B. all of the firm's costs are variable costs.

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answer

B. $700.

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answer

A. total; variable

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B. As output increases, average fixed cost becomes smaller and smaller.

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D. higher than average variable cost.

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What are the 3 conditions of perfect competition?

answer

1. Many buyers and sellers, all small
2. Sell identical products
3. No barriers to entry or exit

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Are firms in a perfectly competitive market price takers or price makers?

answer

Price takers (they can't not set the market price)

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How to calculate marginal revenue:

answer

change in total revenue / change in quantity

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In __________ _______________, P=MR (price = marginal revenue).

answer

perfect competition

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Marginal revenue is _____________ in perfect competition.

answer

constant

question

How to calculate total revenue:

answer

Q x MR (P=MR)

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How do you find profit maximizing quantity?

answer

MR=MC

question

answer

C. an increase in the number of firms that produce good Y.

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An increase in a firm's fixed cost will not change the firm's profit-maximizing output in the short run.

A. True
B. False

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A. True

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A. increase and the number of firms to decrease.

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answer

D. is equal to its price.

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The demand curve faced by the individual perfectly competitive firm is:

A. perfectly elastic.
B. perfectly inelastic.
C. elastic or inelastic depending on price.
D. unit elastic.

answer

A. perfectly elastic.

question

answer

A. price

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The demand curve faced by the individual perfectly competitive firm is:

A. vertical.
B. upward sloping.
C. downward sloping.
D. horizontal.

answer

D. horizontal.

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answer

C. a firm cannot influence the market price.

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When P>ATC this means you have an ______________ _________.

answer

economic profit

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When P<ATC this means you have an ______________ ______.

answer

economic loss

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When P=ATC this means you're _______________ _______.

answer

breaking even

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What is a sunk cost?

answer

A cost that has been paid and can not be recovered.

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Should sunk costs effect your decision of whether you produce or not?

answer

No, because they've already been paid. All that matters is if you can make any money off of what you do sell, ignoring the fixed costs. (variable costs)

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When P>AVC you should _________________________.

answer

stay in business in the short-run

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When P<AVC you should _____________________.

answer

shut down right away

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When P=AVC you're at the ______________________.

answer

shutdown point

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answer

B. not produce this additional batch.

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answer

D. is maximizing his profit and is making an economic profit.

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answer

C. nothing at all; the firm shuts down.

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In analyzing the decision to shut down in the short run we assume that the firm's fixed costs are

A. implicit costs.
B. capital costs.
C. sunk costs.
D. nonmonetary opportunity costs.

answer

C. sunk costs.

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answer

C. accounting profit is greater than economic profit.

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If price is equal to average variable cost, then a perfectly competitive firm breaks even.

A. True
B. False

answer

B. False (it is at the shutdown point)

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If a firm shuts down in the short run,

A. its loss equals zero.
B. its loss equals its fixed cost.
C. its total revenue is not large enough to cover its fixed cost.
D. it makes zero economic profit.

answer

B. its loss equals its fixed cost.

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answer

A. increase.

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Economic profits lead to firm _______.

answer

entry

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Economic losses lead to firm ______.

answer

exit

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If anyone can do it, you can't make money off if it in the _________.

answer

long-run

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When firms exit a perfectly competitive industry, the market supply curve shifts to the left.

A. True
B. False

answer

A. True

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answer

E. new firms will enter the market.

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answer

A. Firms earn economic profit.

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answer

B. supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve.

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answer

A. lower price, economic losses by rutabaga farmers, and exit from the market.

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answer

C. new firms are attracted to the industry.

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answer

A. Existing firms will reduce output in the short run.

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answer

A. new firms will enter in the long run causing market supply to increase, market price to fall, and profits to decrease.

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A firm could continue to operate for years without ever earning a profit as long as it is producing an output where

A. MR < ATC.
B. AFC < AVC.
C. MR > AVC.
D. ATC > AVC.

answer

C. MR > AVC.

question

answer

B. only Alice will enter the market.

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What is productive efficiency?

answer

The idea that goods and services are produced at the lowest possible cost.

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What is allocative efficiency?

answer

Where production represents consumer preferences.

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answer

B. benefits consumers by forcing prices down to the level of average cost.

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answer

B. goods and services are produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.

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answer

A. Each firm produces up to the point where the price of the good equals the marginal cost of producing the last unit.

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answer

A. there are many other suppliers of similar goods or services.

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answer

A. It refers to a situation in which resources are allocated such that the last unit of output produced provides a marginal benefit to consumers equal to the marginal cost of producing it.

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answer

C. The firm will be able to increase its economic profits temporarily, but in the long run its economic profits will be eliminated as other firms copy the innovation.

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answer

D. the output is being produced at the lowest possible cost.

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answer

B. allocative efficiency

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answer

B. efficient outcome; total surplus is maximized

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answer

C. firms are forced by competitive pressure to be as efficient as possible.

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What are the conditions of a monopoly?

answer

1. one seller
2. unique product, with no close substitute
3. barriers to entry

question

Do monopolies have the ability to set price?

answer

yes

question

What causes a monopoly?

answer

question

answer

A. is a government designation that a private firm is the only legal producer of a good or service.

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answer

C. an industry where fixed costs are very large relative to variable costs

question

answer

B. A monopoly must have some kind of government privilege or government-imposed barrier to maintain its monopoly.

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What happens when a monopoly increases its price?

answer

1. sells fewer units
2. receives more revenue per unit

question

The monopolist's marginal revenue curve

A. is identical to the demand curve.
B. lies above the demand curve.
C. doesn't exist.
D. lies below the demand curve.

answer

D. lies below the demand curve.

question

answer

E. downward sloping.

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answer

B. greater than the price that would prevail if the industry was perfectly competitive.

question

answer

C. to maximize profit the firm should increase output.

question

answer

A. Marginal revenue is less than price.

question

answer

A. In all cases, competitive markets yield more consumer surplus than would be enjoyed in a monopoly market with the same cost structure.

question

answer

B. because it stops producing output at a point where price is above marginal cost

question

What are the conditions of monopolistic competition?

answer

1. many firms
2. low barriers to entry
3. differentiated products

question

What are the conditions of an oligopoly?

answer

1. few firms
2. some barriers to entry
3. identical or differentiated products

question

What determines the competitiveness of an industry?

answer

1. competition of existing firms
2. threat from potential entrance
3. competition from substitutes
4. bargaining power of buyers
5. bargaining power of suppliers

question

Is a firm under monopolistic competition a price taker?

answer

question

answer

B. increase output.

question

The demand curve for a perfectly competitive industry is

A. unit elastic.
B. perfectly elastic.
C. perfectly inelastic.
D. downward sloping.

answer

D. downward sloping.

question

Assume a perfectly competitive firm is in long-run equilibrium and there is a decrease in market demand for the firm's output. Which of the following will occur?

A. Existing firms will raise price to cover the reduction in quantity demanded and maintain total revenue in the short run.
B. Market price will be above its original level.
C. Existing firms will maintain the original level of output, but they will shift their cost functions down in the short run.
D. Existing firms will reduce output in the short run.

answer

D. Existing firms will reduce output in the short run.

question

answer

C. where marginal revenue equals marginal cost and charging the price on the market demand curve for that output.

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