question
The competitive firm will not sell at a price lower than the market price because they can sell all they want at the market price.
T/F
T/F
answer
T
A competitive firm could sell at a lower price than the market price but would be irrational to do so. The firm can sell all it wants at the higher competitve price.
A competitive firm could sell at a lower price than the market price but would be irrational to do so. The firm can sell all it wants at the higher competitve price.
question
A competitive firm cannot sell at a price __________ the market price because __________ will sell at the market price and the original firm will not sell any of its product
below; competition
below; firms
above; competition
above; the government
below; competition
below; firms
above; competition
above; the government
answer
above; competition
When a firm tries to sell at a price above the market, competition from other firms drives them out of business. Other firms would sell all they produce at the lower, market price and a firm trying to sell at a higher price would sell zero.
When a firm tries to sell at a price above the market, competition from other firms drives them out of business. Other firms would sell all they produce at the lower, market price and a firm trying to sell at a higher price would sell zero.
question
In competition, the firm is a
price maker.
price taker.
price creator.
price setter.
price maker.
price taker.
price creator.
price setter.
answer
price taker.
In competition, the firm takes the market price set by supply and demand; therefore, it is a price taker. The firm is a price taker because in a perfectly competitve market, one firm controls such a small portion of the market that it cannot influence the price.
In competition, the firm takes the market price set by supply and demand; therefore, it is a price taker. The firm is a price taker because in a perfectly competitve market, one firm controls such a small portion of the market that it cannot influence the price.
question
A firm is in a competitive market when
it is unable to influence the price of its product.
the firm takes as given the price of its product set by supply and demand in the market.
A and B
none of the above
it is unable to influence the price of its product.
the firm takes as given the price of its product set by supply and demand in the market.
A and B
none of the above
answer
A and B
Firms are competitive when they cannot influence price and must take the market price. This effect happens in a competititve market because there are many firms and no one firm can influence the price.
Firms are competitive when they cannot influence price and must take the market price. This effect happens in a competititve market because there are many firms and no one firm can influence the price.
question
__________ is a type of industry characterized by having only one seller.
Monopoly
Monopolistic competition
Oligopoly
Perfect competition
Monopoly
Monopolistic competition
Oligopoly
Perfect competition
answer
Monopoly
A monopoly has only one firm in a market.
A monopoly has only one firm in a market.
question
Which of the following is not a barrier to entry for a market that exhibits market power?
copyrights
patents
sole ownership of a strategic resource
perfect competition
copyrights
patents
sole ownership of a strategic resource
perfect competition
answer
perfect competition
In a situation of perfect competition, no firm has market power and there are no barriers to entry.
In a situation of perfect competition, no firm has market power and there are no barriers to entry.
question
Monopolistic competition is an industry structure in which
all firms sell the same product.
each firm has to react to what the others do.
each firm tries to gain market power by slightly diffrentiating a similar product.
the market has significant barriers to entry.
all firms sell the same product.
each firm has to react to what the others do.
each firm tries to gain market power by slightly diffrentiating a similar product.
the market has significant barriers to entry.
answer
each firm tries to gain market power by slightly diffrentiating a similar product.
Firms try to convince consumers that their product is unique from similar products. If it is successful, it can exercise a mild form of monopoly.'
Firms try to convince consumers that their product is unique from similar products. If it is successful, it can exercise a mild form of monopoly.'
question
Under the kinked-demand curve model of oligopoly, you could predict that
if a firm raises its price, other firms do the same.
if a firm lowers its price, other firms do the same.
if a firm raises its price, it acts alone.
both b and c.
if a firm raises its price, other firms do the same.
if a firm lowers its price, other firms do the same.
if a firm raises its price, it acts alone.
both b and c.
answer
both b and c.
if a firm lowers its price, other firms do the same.
if a firm raises its price, it acts alone.
The kinked-demand curve predicts that when firms raise their prices, other firms will not follow, but when it lowere s its prices, other firms do exactly the same.
if a firm lowers its price, other firms do the same.
if a firm raises its price, it acts alone.
The kinked-demand curve predicts that when firms raise their prices, other firms will not follow, but when it lowere s its prices, other firms do exactly the same.
question
For a perfectly competitive firm, marginal revenue is less than price.
T/F
T/F
answer
false
Marginal revenue is the same as price because of the firm's perfectly elastic demand curve.
Marginal revenue is the same as price because of the firm's perfectly elastic demand curve.
question
Which of the following is not an assumption of perfectly competitive markets?
barriers to entry
imperfect information
homogenous products
many firms
barriers to entry
imperfect information
homogenous products
many firms
answer
barriers to entry
This market has no barriers to entry.
This market has no barriers to entry.
question
Price-taking firms can charge whatever price they need in order to recover their costs and make a profit.
T/F
T/F
answer
false
Price taking means that the firm has to sell its product at whatever price the market sets. If it tries to sell at a higher price, it will sell nothing because every other firm sells exactly the same product.
Price taking means that the firm has to sell its product at whatever price the market sets. If it tries to sell at a higher price, it will sell nothing because every other firm sells exactly the same product.
question
Situations of perfect competition possess the steepest possible demand curve.
T/F
T/F
answer
false
This statement is false. In a situation of perfect competition, the demand curve is perfectly flat.
This statement is false. In a situation of perfect competition, the demand curve is perfectly flat.
question
Which of the following is an opportunity (implicit) cost?
Tom buys $100 of material for his business.
Tom pays the electricity bill he received.
Tom pays his income taxes.
Tom, who could work for another business, works for himself.
Tom buys $100 of material for his business.
Tom pays the electricity bill he received.
Tom pays his income taxes.
Tom, who could work for another business, works for himself.
answer
Tom, who could work for another business, works for himself.
The opportunity cost is the salary Tom could make working elsewhere. He chooses to work for himself.
The opportunity cost is the salary Tom could make working elsewhere. He chooses to work for himself.
question
If explicit costs are $60,000, opportunity costs are $90,000, and accounting profit equals $46,000, then total revenue is _________and economic profit is___________.
$106,000; $16,000
$196,000; 0
$106,000; -$44,000
$106,000; $46,000
$106,000; $16,000
$196,000; 0
$106,000; -$44,000
$106,000; $46,000
answer
$106,000; $16,000
Economic profit is total revenue minus opportunity costs. Accounting profit is total revenue minus explicit costs. In this problem, explicit costs are $60,000 and accounting profit is $46,000. Total revenue must be $106,000. To find economic profit, subtract opportunity costs from total revenue. Economic profit is $16,000.
Economic profit is total revenue minus opportunity costs. Accounting profit is total revenue minus explicit costs. In this problem, explicit costs are $60,000 and accounting profit is $46,000. Total revenue must be $106,000. To find economic profit, subtract opportunity costs from total revenue. Economic profit is $16,000.
question
Which statement is false?
The opportunity cost of labor is often less than the explicit cost.
Opportunity costs are real costs.
Explicit costs are the only costs accounted for by accounting methodology.
Monetary payment must be made before a cost is incurred.
The opportunity cost of labor is often less than the explicit cost.
Opportunity costs are real costs.
Explicit costs are the only costs accounted for by accounting methodology.
Monetary payment must be made before a cost is incurred.
answer
Monetary payment must be made before a cost is incurred.
An opportunity cost does not require a monetary payment but is a real cost just the same.
An opportunity cost does not require a monetary payment but is a real cost just the same.
question
Jen runs her own plumbing business. Last year she earned $100,000 in total revenue and paid $65,000 to her employees and suppliers. Last year she received offers to work for other plumbers, the highest offer being $40,000 per year. What is Jen's accounting profit?
0
$35,000
−$5,000
$40,000
0
$35,000
−$5,000
$40,000
answer
$35,000
Jen's accounting profit is her total revenue minus her explicit costs, which are $65,000. $100,000 − $65,000 = $35,000
Jen's accounting profit is her total revenue minus her explicit costs, which are $65,000. $100,000 − $65,000 = $35,000
question
Jen runs her own plumbing business. Last year she earned $100,000 in total revenue and paid $65,000 to her employees and suppliers. $15,000 of that amount was economic rent. Last year she received offers to work for other plumbers, the highest offer being $40,000 per year. What is Jen's economic profit?
0
$35,000
−$5,000
$10,000
0
$35,000
−$5,000
$10,000
answer
$10,000
If $15,000 of the $65,000 was economic rent, that means that $50,000 of it was opportunity cost. Add that to the opportunity cost of Jen's alternative offer of $40,000 for a total opportunity cost of $90,000. Therefore, her economic profit was $100,000 minus $90,000, or $10,000.
If $15,000 of the $65,000 was economic rent, that means that $50,000 of it was opportunity cost. Add that to the opportunity cost of Jen's alternative offer of $40,000 for a total opportunity cost of $90,000. Therefore, her economic profit was $100,000 minus $90,000, or $10,000.
question
An unrecoverable cost that economists recommend that decision makers ignore in current or future decisions is called a(n) ______________ cost.
explicit
opportinity
fixed
sunk
explicit
opportinity
fixed
sunk
answer
sunk
Sunk costs are unrecoverable. Theyshould be ignored in decisions.
Sunk costs are unrecoverable. Theyshould be ignored in decisions.
question
Accounting records almost always account for opportunity costs.
T/F
T/F
answer
false
Accounting ignores opportunity costs. Accounting keeps track of dollar expenditures and receipts and valuation of assets.
Accounting ignores opportunity costs. Accounting keeps track of dollar expenditures and receipts and valuation of assets.
question
Suppose a firm builds a factory to produce cars. It then discovers that the market for cars has become poor because of new environmental regulations, heavy taxes on gasoline, and mass transit construction. The firm should
procede with auto manufacturing.
abandon automobile manufacturing and find another product.
wait until the automobile market improves and then manufactue cars.
declare bankruptcy.
procede with auto manufacturing.
abandon automobile manufacturing and find another product.
wait until the automobile market improves and then manufactue cars.
declare bankruptcy.
answer
abandon automobile manufacturing and find another product.
The plant is a sunk cost and should not affect future planning. The firm should abandon the plant and make other plans.
The plant is a sunk cost and should not affect future planning. The firm should abandon the plant and make other plans.
question
Economic rent is how ___________ is disbursed.
accounting profite
conomic profit
the cost of leasing a building
labor costs
accounting profite
conomic profit
the cost of leasing a building
labor costs
answer
economic profit
Economic profit is all profit greater than opportunity costs. This profit is called rent.
Economic profit is all profit greater than opportunity costs. This profit is called rent.
question
At point B, all of the following are true except
MC is less than P.
P is less than MC.
MC is less than MR.
the firm should produce a larger quantity.
MC is less than P.
P is less than MC.
MC is less than MR.
the firm should produce a larger quantity.
answer
P is less than MC.
At point B, marginal cost is less than price. The firm should produce a larger quantity.
At point B, marginal cost is less than price. The firm should produce a larger quantity.
question
To produce at the profit-maximizing point, the marginal cost curve must be downward sloping at that point.
T/F
T/F
answer
false
When a firm is at a profit maximizing output, the marginal cost curve must be upward sloping at the point. Marginal cost increases as production increases. Therefore the profit-maximizing output level is at a point where the MC curve slopes upward.
When a firm is at a profit maximizing output, the marginal cost curve must be upward sloping at the point. Marginal cost increases as production increases. Therefore the profit-maximizing output level is at a point where the MC curve slopes upward.
question
The slope of the total revenue curve for a competitive firm is equal to __________, which is equal to __________.
marginal revenue; price
marginal cost; price
marginal revenue; quantity
marginal cost; quantity
marginal revenue; price
marginal cost; price
marginal revenue; quantity
marginal cost; quantity
answer
marginal revenue; price
The slope of the total revenue curve is the change in revenue at each quantity divided by the change in quantity, or marginal revenue. It is equal to price.
The slope of the total revenue curve is the change in revenue at each quantity divided by the change in quantity, or marginal revenue. It is equal to price.
question
The total revenue curve __________ at a __________ rate.
rises; increasing
rises; decreasing
rises; constant
plummets; constant
rises; increasing
rises; decreasing
rises; constant
plummets; constant
answer
rises; constant
The total revenue curve rises at a constant rate. Therefore, at each quantity of output produced, the total revenue is taken by multiplying the price times the quantity.
The total revenue curve rises at a constant rate. Therefore, at each quantity of output produced, the total revenue is taken by multiplying the price times the quantity.
question
Using the graph, at which quantity will the firm maximize its profits?
A
B
C
D
A
B
C
D
answer
C
The firm maximizes profits at point C, where MR = MC. At any point less than that, a new sale adds more to revenue than to costs; at any point greater than that, an additional unit adds more to costs than to revenue.
The firm maximizes profits at point C, where MR = MC. At any point less than that, a new sale adds more to revenue than to costs; at any point greater than that, an additional unit adds more to costs than to revenue.
question
Examine the graph below. At point A,
marginal cost is greater than marginal revenue.
marginal revenue is greater than marginal cost.
marginal revenue equals marginal cost.
marginal revenue is greater than the price.
marginal cost is greater than marginal revenue.
marginal revenue is greater than marginal cost.
marginal revenue equals marginal cost.
marginal revenue is greater than the price.
answer
marginal revenue is greater than marginal cost.
Marginal revenue, or the change in total revenue from another unit of output, is the same as the price. At point a, marginal revenue is greater than marginal cost, or the cost of producing an additional unit.
Marginal revenue, or the change in total revenue from another unit of output, is the same as the price. At point a, marginal revenue is greater than marginal cost, or the cost of producing an additional unit.
question
At the output level at point d, if the firm wants to maximize its profits, it should increase its output.
T/F
T/F
answer
F
At point d, marginal cost is greater than marginal revenue, and the firm should decrease output to point c, where marginal cost equals price.
At point d, marginal cost is greater than marginal revenue, and the firm should decrease output to point c, where marginal cost equals price.
question
The firm adjusts _______________ to the level that ___________________ by comparing marginal revenue and marginal cost.
production, minimizes cost
prices, maximizes profit
production, maximizes profit
prices, minimizes cost
production, minimizes cost
prices, maximizes profit
production, maximizes profit
prices, minimizes cost
answer
production, maximizes profit
By comparing marginal revenue and marginal cost, the firm adjusts production to maximize profits. If it is a price-taker, it cannot adjust its prices.
By comparing marginal revenue and marginal cost, the firm adjusts production to maximize profits. If it is a price-taker, it cannot adjust its prices.
question
The fact that average revenue equals price is a characteristic of
price-taking firms.
price-setting firms
monopolies
all profit-maximizing firms.
price-taking firms.
price-setting firms
monopolies
all profit-maximizing firms.
answer
all profit-maximizing firms.
Average revenue is total revenue divided by output. For all firms, average revenue equals price.
Average revenue is total revenue divided by output. For all firms, average revenue equals price.
question
To determine its profitability, a competitive firm must compare its average total cost to the product price.
T/F
T/F
answer
true
Average total cost is the firm's per-unit total cost. If the product price is greater than firm's average total cost, the firm is making an economic profit in the short run.
Average total cost is the firm's per-unit total cost. If the product price is greater than firm's average total cost, the firm is making an economic profit in the short run.
question
Total profit for a firm is
total revenue minus total cost.
total revenue plus total cost.
pxq-TC.
a and c.
total revenue minus total cost.
total revenue plus total cost.
pxq-TC.
a and c.
answer
a and c.
total revenue minus total cost.
pxq-TC.
A firm's profit is total revenue minus its total cost. To calculate total revenue, multiply price by the quantity sold, or pxq.
total revenue minus total cost.
pxq-TC.
A firm's profit is total revenue minus its total cost. To calculate total revenue, multiply price by the quantity sold, or pxq.
question
A firm in a competitive industry will try to produce the output level for which
average variable cost is at a minimum.
average total cost is at a minimum.
average fixed cost is at a minimum.
marginal cost equals marginal revenue.
average variable cost is at a minimum.
average total cost is at a minimum.
average fixed cost is at a minimum.
marginal cost equals marginal revenue.
answer
marginal cost equals marginal revenue.
The firm will always try to equate marginal cost with marginal revenue. As long as the sale of an additional unit increases marginal revenue more then marginal cost, the firm will expand its output.
The firm will always try to equate marginal cost with marginal revenue. As long as the sale of an additional unit increases marginal revenue more then marginal cost, the firm will expand its output.
question
What is profit?
Profit is the difference between total cost (TC) and total revenue (TR).
Profit is the difference between average total cost (ATC) and average total revenue (ATR).
Profit is the number of units sold times the price per unit.
Profit is the same as total revenue (TR).
Profit is the difference between total cost (TC) and total revenue (TR).
Profit is the difference between average total cost (ATC) and average total revenue (ATR).
Profit is the number of units sold times the price per unit.
Profit is the same as total revenue (TR).
answer
Profit is the difference between total cost (TC) and total revenue (TR).
Total revenue (TR) is the income a firm receives when it sells its output. Profit is what is left of TR after the firm pays the total costs, all of the expenses it incurred in producing the output.
Total revenue (TR) is the income a firm receives when it sells its output. Profit is what is left of TR after the firm pays the total costs, all of the expenses it incurred in producing the output.
question
Which of the following statements is true in determining the level of output a firm should target to maximize profit (π )?
Profit is maximum when marginal cost is minimum.
Profit is maximum when average variable cost is minimum.
Profit is maximum when marginal cost (MC) equals price and MC is increasing.
There is a wide range of output levels that maximize profit.
Profit is maximum when marginal cost is minimum.
Profit is maximum when average variable cost is minimum.
Profit is maximum when marginal cost (MC) equals price and MC is increasing.
There is a wide range of output levels that maximize profit.
answer
Profit is maximum when marginal cost (MC) equals price and MC is increasing.
The level of output at which marginal cost (MC) equals price and MC is increasing is the same level of output that maximizes the difference between total cost (TC) and total revenue (TR) and at which TR is greater than TC.
The level of output at which marginal cost (MC) equals price and MC is increasing is the same level of output that maximizes the difference between total cost (TC) and total revenue (TR) and at which TR is greater than TC.
question
Is the following statement true or false? A firm that produces output at the level where marginal cost (MC) equals price and MC is increasing will be profitable (not operating at a loss).
T/F
T/F
answer
false
False. If the price is less than the average total cost (ATC) at the production level where marginal cost (MC) equals price and MC is increasing, then the firm is operating at minimum loss.
False. If the price is less than the average total cost (ATC) at the production level where marginal cost (MC) equals price and MC is increasing, then the firm is operating at minimum loss.
question
In 2001, producing widgets cost the firm $100,000. The firm sold the widgets for $125,000. What was the firm's profit or loss?
$25,000 loss
$25,000 profit
$225,000 profit
There is not enough information to determine the firm's profit or loss.
$25,000 loss
$25,000 profit
$225,000 profit
There is not enough information to determine the firm's profit or loss.
answer
$25,000 profit
Profit is total revenue ($125,000) minus total costs ($100,000). $125,000 − $100,000 = $25,000.
Profit is total revenue ($125,000) minus total costs ($100,000). $125,000 − $100,000 = $25,000.
question
Walton's Widget Works, Ltd. produced 10,000 widgets at an average total cost of $5.50, and sold total production at $7.95 per widget. What was the firm's profit?
$2.45
$24,500
$55,000
$79,500
$2.45
$24,500
$55,000
$79,500
answer
$24,500
Profit is total revenue ($7.95 per widget times 10,000 widgets) minus total costs ($5.50 per widget times 10,000 widgets).
Profit is total revenue ($7.95 per widget times 10,000 widgets) minus total costs ($5.50 per widget times 10,000 widgets).
question
The competitive firm produces at the output at which the firm's marginal revenue (the product price) equals its marginal cost and at which its marginal cost is decreasing.
T/F
T/F
answer
false
The firm equates marginal cost with marginal revenue, but the profit-maximizing output level is on the increasing portion of the marginal cost curve.
The firm equates marginal cost with marginal revenue, but the profit-maximizing output level is on the increasing portion of the marginal cost curve.
question
Examine the graph below. If the price for this firm's product is $40, and the firm is maximizing profits, what is the firm's total revenue? Assume that the firm is a price taker.
$3750
$2000
$6000
$10000
$3750
$2000
$6000
$10000
answer
$6000
If the price is $40, the firm maximizes its profit at the level at which MC = MR. This output level is 150 units. It's total revenue is pxq or $40 × 150 = $6000.
If the price is $40, the firm maximizes its profit at the level at which MC = MR. This output level is 150 units. It's total revenue is pxq or $40 × 150 = $6000.
question
Examine the graph below. If the price for this firm's product is $40, and the firm is maximizing profits, what are the firm's total costs? Assume that the firm is a price taker.
$4800
$6000
$3000
$10000
$4800
$6000
$3000
$10000
answer
$4800
At the profit-maximizing output level, the firm's total costs are $35 per unit as shown by the firm's ATC curve. Total costs are $32 × 150 = $4800.
At the profit-maximizing output level, the firm's total costs are $35 per unit as shown by the firm's ATC curve. Total costs are $32 × 150 = $4800.
question
Examine the graph below. If the price for this firm's product is $40, and the firm is maximizing profits, what is the firm's profit? Assume that the firm is a price taker.
$6000
$4800
$1200
$2000
$6000
$4800
$1200
$2000
answer
$1200
You must subtract total costs from total revenue. Total revenue is $6000; total costs are $150 × 32 = $4800. Profit is the difference, $6000 − $4800 = $1200.
You must subtract total costs from total revenue. Total revenue is $6000; total costs are $150 × 32 = $4800. Profit is the difference, $6000 − $4800 = $1200.
question
A firm has fixed costs of $50,000 per month. In January, the firm's variable costs to produce 1,000 widgets was $200 per widget; in February, its variable costs to produce 1,100 widgets was $202 per widget; and in March, its variable costs to produce 1,200 widgets was $205 per widget. The price for widgets was $275 per widget for the entire quarter. What was the firm's profit for the quarter?
$3,300
$89,300
$818,200
$907,500
$3,300
$89,300
$818,200
$907,500
answer
$89,300
Total product (TP) for the quarter is the sum of the monthly product (1,000 + 1,100 + 1,200), or 3,300. Total revenue (TR) for the quarter is TP (3,300) times price ($275), or $907,500. Fixed costs (TFC) for the quarter are $50,000 per month times 3 months, or $150,000. Variable costs (TVC) for the quarter are $200,000 for January ($200 per widget times 1,000 widgets) plus $222,200 for February ($202 per widget times 1,100 widgets) plus $246,000 for March ($205 per widget times 1,200 widgets), or $668,200. Total costs (TC) for the quarter are TFC ($150,000) plus VC ($668,200), or $818,200. Profit for the quarter is TR ($907,500) minus TC ($818,200), or $89,300.
Total product (TP) for the quarter is the sum of the monthly product (1,000 + 1,100 + 1,200), or 3,300. Total revenue (TR) for the quarter is TP (3,300) times price ($275), or $907,500. Fixed costs (TFC) for the quarter are $50,000 per month times 3 months, or $150,000. Variable costs (TVC) for the quarter are $200,000 for January ($200 per widget times 1,000 widgets) plus $222,200 for February ($202 per widget times 1,100 widgets) plus $246,000 for March ($205 per widget times 1,200 widgets), or $668,200. Total costs (TC) for the quarter are TFC ($150,000) plus VC ($668,200), or $818,200. Profit for the quarter is TR ($907,500) minus TC ($818,200), or $89,300.
question
A firm has $12,000 in fixed costs. Its average variable cost (AVC) to produce 10,000 widgets is $1.50. If the price of widgets is $3.95, what is the firm's profit?
$1.20
$12,500
$27,000
$39,500
$1.20
$12,500
$27,000
$39,500
answer
$12,500
Total costs (TC) equals variable costs (VC) plus fixed costs (FC). VC equals $1.50 per widget times 10,000 widgets, or $15,000, and FC equals $12,000, so TC equals $15,000 plus $12,000, or $27,000. Total revenue (TR) equals $3.95 per widget times 10,000 widgets, or $39,500. Profit is TR minus TC, or $12,500.
Total costs (TC) equals variable costs (VC) plus fixed costs (FC). VC equals $1.50 per widget times 10,000 widgets, or $15,000, and FC equals $12,000, so TC equals $15,000 plus $12,000, or $27,000. Total revenue (TR) equals $3.95 per widget times 10,000 widgets, or $39,500. Profit is TR minus TC, or $12,500.
question
As production increases, what happens to the average variable cost (AVC) curve and the average total cost (ATC) curve?
The average variable cost (AVC) curve and the average total cost (ATC) curve intersect at the minimum cost.
The average variable cost (AVC) curve and the average total cost (ATC) curve approach each other asymptotically.
The average total cost (ATC) curve and the average variable costs (AVC) curve both approach zero (0).
They both increase to a maximum and then slowly decrease as price increases.
The average variable cost (AVC) curve and the average total cost (ATC) curve intersect at the minimum cost.
The average variable cost (AVC) curve and the average total cost (ATC) curve approach each other asymptotically.
The average total cost (ATC) curve and the average variable costs (AVC) curve both approach zero (0).
They both increase to a maximum and then slowly decrease as price increases.
answer
The average variable cost (AVC) curve and the average total cost (ATC) curve approach each other asymptotically.
As production increases, the average fixed costs (AFC) curve decreases. As the average fixed costs (AFC) curve decreases, the average variable cost (AVC) curve and the average total cost (ATC) curve approach each other asymptotically. They get closer and closer together, but they will never intersect.
As production increases, the average fixed costs (AFC) curve decreases. As the average fixed costs (AFC) curve decreases, the average variable cost (AVC) curve and the average total cost (ATC) curve approach each other asymptotically. They get closer and closer together, but they will never intersect.
question
On this graph, what area represents economic profit?
R
S
T
R and S
R
S
T
R and S
answer
T
T is economic profit. The width of the rectangle is production and the height is price. Price times units of product equals total revenue (TR). R is variable costs (VC) and S is fixed costs (FC), so R pus S is total costs (TC). TR minus TC equals economic profit.
T is economic profit. The width of the rectangle is production and the height is price. Price times units of product equals total revenue (TR). R is variable costs (VC) and S is fixed costs (FC), so R pus S is total costs (TC). TR minus TC equals economic profit.
question
Examine the graph below. If the product price is $40, the firm's fixed cost is
$4800.
$3300.
$6000.
$1500
$4800.
$3300.
$6000.
$1500
answer
$1500
The firm would produce 150 units. Its fixed cost is the difference between the ATC and the AVC, $10, multiplied by the output.
The firm would produce 150 units. Its fixed cost is the difference between the ATC and the AVC, $10, multiplied by the output.
question
Examine the graph below. If the product price is $20, the firm's loss is
$1500.
$2250.
$2000.
$6000.
$1500.
$2250.
$2000.
$6000.
answer
$1500.
When the price is $20, the firm produces 100 units of output. 100 units is where MC = P. At this output, total revenue is $2000, ATC is $35, and total costs are $3500. The loss is $1500.
When the price is $20, the firm produces 100 units of output. 100 units is where MC = P. At this output, total revenue is $2000, ATC is $35, and total costs are $3500. The loss is $1500.
question
A profit-maximizing competitive firm sells its product for $9. Its average total cost of producing this product is $10. The firm's profit maximizing output level is 10 units. How much total profit does this firm earn?
$200
−$200
−$10
None of the above.
$200
−$200
−$10
None of the above.
answer
−$10
The firm's average total cost is $1 more than the price of the product. The firm takes a $1 loss on each unit for a total loss of $10.
The firm's average total cost is $1 more than the price of the product. The firm takes a $1 loss on each unit for a total loss of $10.
question
When a firm is not making a profit, what should it do in the short run?
The firm should shut down immediately.
The firm should stay open if the price is less than AVC.
The firm should raise the price it charges for its product.
The firm should remain open if the price at least covers average variable cost.
The firm should shut down immediately.
The firm should stay open if the price is less than AVC.
The firm should raise the price it charges for its product.
The firm should remain open if the price at least covers average variable cost.
answer
The firm should remain open if the price at least covers average variable cost.
In the short run, a firm will have to pay its fixed costs even if it produces no output. The firm will remain open if the price covers at least variable costs.
In the short run, a firm will have to pay its fixed costs even if it produces no output. The firm will remain open if the price covers at least variable costs.
question
A firm has fixed costs of $10,000, and its variable cost to produce 20,000 widgets is $30,000. If the price of widgets is $1.80, which of the following statements is true?
The firm has a profit of $4,000.
The firm has a profit of $36,000.
The firm has a loss of $4,000.
The firm has a loss of $40,000
The firm has a profit of $4,000.
The firm has a profit of $36,000.
The firm has a loss of $4,000.
The firm has a loss of $40,000
answer
The firm has a loss of $4,000.
The firm has total costs (TC) of $40,000 ($10,000 fixed costs plus $30,000 variable costs) and total revenue (TR) of $36,000 ($1.80 per widget times 20,000 widgets).$36,000 − $40,000 = −$4,000, so the firm has a loss of $4,000.
The firm has total costs (TC) of $40,000 ($10,000 fixed costs plus $30,000 variable costs) and total revenue (TR) of $36,000 ($1.80 per widget times 20,000 widgets).$36,000 − $40,000 = −$4,000, so the firm has a loss of $4,000.
question
A firm produces 1,000 widgets. The firm's average variable costs are $5, and its average fixed costs are $2. If the price of widgets is $6, how much is the firm's profit or loss?
$1,000 profit
$1,000 loss
$6,000 profit
$7,000 loss
$1,000 profit
$1,000 loss
$6,000 profit
$7,000 loss
answer
$1,000 loss
Profit or loss is the difference between total revenue (TR) and total costs (TC). TR is $6,000 ($6 per unit times 1,000 units). TC is variable costs ($5 per unit times 1,000 units) plus fixed costs ($2 per unit times 1,000 units), or $7,000. The difference between TR and TC is $1,000, and since TR is less than TC, the difference is a loss, not a profit.
Profit or loss is the difference between total revenue (TR) and total costs (TC). TR is $6,000 ($6 per unit times 1,000 units). TC is variable costs ($5 per unit times 1,000 units) plus fixed costs ($2 per unit times 1,000 units), or $7,000. The difference between TR and TC is $1,000, and since TR is less than TC, the difference is a loss, not a profit.
question
On this graph, which area represents fixed costs?
R
S
T
S and T
R
S
T
S and T
answer
S and T
Average fixed cost is the difference between average total cost and average variable cost, so fixed costs is S plus T; S is the part of the fixed costs being offset by the revenue that is in excess of the variable costs and T is the amount of fixed costs not being covered (in other words, the loss).
Average fixed cost is the difference between average total cost and average variable cost, so fixed costs is S plus T; S is the part of the fixed costs being offset by the revenue that is in excess of the variable costs and T is the amount of fixed costs not being covered (in other words, the loss).
question
Many recreation parks shut down because in the off season
off-season rates are below average total cost.
off-season rates are below marginal cost.
off-season revenue cannot cover variable cost.
all of the above.
off-season rates are below average total cost.
off-season rates are below marginal cost.
off-season revenue cannot cover variable cost.
all of the above.
answer
off-season revenue cannot cover variable cost.
The firm is willing to lose money in the off season if it can cover variable costs. If it cannot cover variable costs, it shuts down.
The firm is willing to lose money in the off season if it can cover variable costs. If it cannot cover variable costs, it shuts down.
question
If price is less than average variable cost, a firm, in the short run, will
make a profit.
shut down.
operate at a loss.
realize zero profit.
make a profit.
shut down.
operate at a loss.
realize zero profit.
answer
shut down.
A firm will continue to operate only as long as the product price can cover its average variable cost. If the price falls below average variable cost, the firm will shut down in the short run.
A firm will continue to operate only as long as the product price can cover its average variable cost. If the price falls below average variable cost, the firm will shut down in the short run.
question
Assume Joe has a coffee shop in a competitive market. Assume that weak demand has caused the price of coffee to fall below Joe's average variable cost. Joe shuts his business down, so his losses will be
zero.
more than if he remained open.
equal to fixed cost.
equal to variable cost.
zero.
more than if he remained open.
equal to fixed cost.
equal to variable cost.
answer
equal to fixed cost.
A business has fixed costs whether it shuts down or stays open. If it shuts down, it can eliminate all variable costs and lose only its fixed costs.
A business has fixed costs whether it shuts down or stays open. If it shuts down, it can eliminate all variable costs and lose only its fixed costs.
question
In the short run, if a firm shuts down, the firm's total revenue is equal to
fixed cost.
variable cost.
total cost.
zero.
fixed cost.
variable cost.
total cost.
zero.
answer
zero
If the firm shuts down, it produces no revenue. It no longer is selling a product.
If the firm shuts down, it produces no revenue. It no longer is selling a product.
question
When a firm shuts down, it has no costs to cover.
T/F
T/F
answer
false
The firm must continue to cover fixed costs.
The firm must continue to cover fixed costs.
question
When a firm is not making a profit, it should always shut down.
T/f
T/f
answer
false
In the short run, a firm will have to pay its fixed costs even if it produces no output, so if variable costs are less than total revenue, a firm will minimize losses by staying open.
In the short run, a firm will have to pay its fixed costs even if it produces no output, so if variable costs are less than total revenue, a firm will minimize losses by staying open.
question
Which of the following statements about a firm's short-run supply (SS) curve is true?
A firm's short-run supply (SS) curve is the same as the firm's marginal cost (MC) curve above the average variable cost (AVC) curve.
A firm's short-run supply (SS) curve is asymptotic to the horizontal axis.
A firm's short-run supply (SS) curve always has a negative slope.
A firm's short-run supply (SS) curve intersects the firm's total cost (TC) curve at both curves' minimum points.
A firm's short-run supply (SS) curve is the same as the firm's marginal cost (MC) curve above the average variable cost (AVC) curve.
A firm's short-run supply (SS) curve is asymptotic to the horizontal axis.
A firm's short-run supply (SS) curve always has a negative slope.
A firm's short-run supply (SS) curve intersects the firm's total cost (TC) curve at both curves' minimum points.
answer
A firm's short-run supply (SS) curve is the same as the firm's marginal cost (MC) curve above the average variable cost (AVC) curve.
A firm's short-run supply (SS) curve is the same as the firm's marginal cost (MC) curve above the average variable cost (AVC) curve, because the firm produces along the MC curve and will not produce at any level below the AVC curve.
A firm's short-run supply (SS) curve is the same as the firm's marginal cost (MC) curve above the average variable cost (AVC) curve, because the firm produces along the MC curve and will not produce at any level below the AVC curve.
question
Producing 50,000 widgets costs the firm $250,000. The marginal cost of the 50,001st widget is $3. The price of widgets is $4. Should the firm shut down?
Yes, because the price of widgets is less than the cost to produce them.
No, because the marginal cost of the 50,001st widget is less than the price of widgets.
No, because the price of widgets is sure to rise.
There is not enough information given to answer the question.
Yes, because the price of widgets is less than the cost to produce them.
No, because the marginal cost of the 50,001st widget is less than the price of widgets.
No, because the price of widgets is sure to rise.
There is not enough information given to answer the question.
answer
There is not enough information given to answer the question.
In order to determine whether or not the firm should shut down, we need to know how the $250,000 is divided between fixed costs (FC) and variable costs (VC). If the average variable cost (AVC) is greater than $4, the firm should shut down.
In order to determine whether or not the firm should shut down, we need to know how the $250,000 is divided between fixed costs (FC) and variable costs (VC). If the average variable cost (AVC) is greater than $4, the firm should shut down.
question
A firm that makes widgets has $50,000 in fixed costs. The firm can produce 10,000 widgets at an average total cost of $15. The price of widgets is $12. Should the firm shut down?
No, because the firm is making a profit.
No, because continuing to produce (in the short run) allows the firm to minimize losses.
Yes, because the firm is operating at a loss.
There is not enough information to tell.
No, because the firm is making a profit.
No, because continuing to produce (in the short run) allows the firm to minimize losses.
Yes, because the firm is operating at a loss.
There is not enough information to tell.
answer
No, because continuing to produce (in the short run) allows the firm to minimize losses.
Fixed costs (FC) are $50,000 so the average fixed cost (AFC) to produce 10,000 widgets is $5 ($50,000 ÷ 10,000). Average total costs (ATC) to produce 10,000 widgets are $15, so average variable costs (AVC) are $10 ($15 − $5). The price is $12, which is greater than the AVC, so in the short-run the firm can minimize losses by continuing to produce widgets. The loss if the firm shuts down is the fixed costs, or $50,000; the loss if the firm remains open is only $30,000 ($150,000 − $120,000).
Fixed costs (FC) are $50,000 so the average fixed cost (AFC) to produce 10,000 widgets is $5 ($50,000 ÷ 10,000). Average total costs (ATC) to produce 10,000 widgets are $15, so average variable costs (AVC) are $10 ($15 − $5). The price is $12, which is greater than the AVC, so in the short-run the firm can minimize losses by continuing to produce widgets. The loss if the firm shuts down is the fixed costs, or $50,000; the loss if the firm remains open is only $30,000 ($150,000 − $120,000).
question
A firm that makes widgets has fixed costs of $20,000. If the firm's total cost to produce 1,000 widgets is $50,000, what is the minimum price that makes continuing to produce widgets (in the short run) an economically sound decision?
$70
$50
$30
$20
$70
$50
$30
$20
answer
$30
The average variable cost (AVC) is calculated by subtracting the fixed cost ($20,000) from the total cost ($50,000) and dividing the difference by total product (1,000), so AVC is $30. At any price less than $30, the firm would lose more money by producing widgets than by shutting down.
The average variable cost (AVC) is calculated by subtracting the fixed cost ($20,000) from the total cost ($50,000) and dividing the difference by total product (1,000), so AVC is $30. At any price less than $30, the firm would lose more money by producing widgets than by shutting down.
question
The portion of a firm's marginal cost curve that is above the average variable cost curve is
the firm's long run supply curve.
the firm's short run supply curve.
the firm's short run demand curve.
the firm's long run demand curve.
the firm's long run supply curve.
the firm's short run supply curve.
the firm's short run demand curve.
the firm's long run demand curve.
answer
the firm's short run supply curve.
The marginal cost curve above the average variable cost indicates the firm's willingness to supply a good at every price. This curve is essentially the firm's supply curve. Since the firm would shut down at any price less than the average variable cost, the portion of the marginal cost curve below the AVC is irrelevant as a supply curve.
The marginal cost curve above the average variable cost indicates the firm's willingness to supply a good at every price. This curve is essentially the firm's supply curve. Since the firm would shut down at any price less than the average variable cost, the portion of the marginal cost curve below the AVC is irrelevant as a supply curve.
question
The short-run market supply curve is
the summation of the short-run supply curves of of all firms in the market.
the summation of the supply curves of the three largest suppliers in the market.
the average price and quantity supplied combinations of all firms in the market.
the difference between the largest and smallest suppliers in a market.
the summation of the short-run supply curves of of all firms in the market.
the summation of the supply curves of the three largest suppliers in the market.
the average price and quantity supplied combinations of all firms in the market.
the difference between the largest and smallest suppliers in a market.
answer
the summation of the short-run supply curves of of all firms in the market.
The market supply curve is the horizontal summation of all the supply curves of all firms in the market. To sum the supply curves of all firms, add each firm's quantity supplied at every price.
The market supply curve is the horizontal summation of all the supply curves of all firms in the market. To sum the supply curves of all firms, add each firm's quantity supplied at every price.
question
The ____________ firms there are in the market, the ____________ the market supply curve.
more; more irregular
more; smoother
fewer; smoother
fewer; more predictable
more; more irregular
more; smoother
fewer; smoother
fewer; more predictable
answer
more; smoother
In a market with many firms, the market supply curve tends to be smooth. Because there are many points of entry for each firm. When there are only a few firms, the curve appears to be irregular and broken.
In a market with many firms, the market supply curve tends to be smooth. Because there are many points of entry for each firm. When there are only a few firms, the curve appears to be irregular and broken.
question
If the price for a product falls below the lowest minimum marginal cost of all firms producing that product, which of the following statements is true?
All firms producing that product will shut down.
All firms producing that product will cut production in half.
The most profitable firms producing that product will increase production and the rest will decrease production.
All firms producing that product will increase production.
All firms producing that product will shut down.
All firms producing that product will cut production in half.
The most profitable firms producing that product will increase production and the rest will decrease production.
All firms producing that product will increase production.
answer
All firms producing that product will shut down.
All firms producing that product will shut down because the price would be less than each firm's average variable cost and staying open would increase each firm's loss.
All firms producing that product will shut down because the price would be less than each firm's average variable cost and staying open would increase each firm's loss.
question
Which of the following is not an assumption of the short-run market supply (SS) curve in a competitve market?
Each firm produces at the level where the price of the product equals its marginal cost (MC) and MC is increasing.
All firms are price takers.
Each firm will shut down if the price of the product is less than the firm's average variable cost (AVC).
There are very few firms producing the product.
Each firm produces at the level where the price of the product equals its marginal cost (MC) and MC is increasing.
All firms are price takers.
Each firm will shut down if the price of the product is less than the firm's average variable cost (AVC).
There are very few firms producing the product.
answer
There are very few firms producing the product.
One assumption of the short-run market supply (SS) curve is that there are many producers for the product and none of them is large enough to significantly affect the supply of the product.
One assumption of the short-run market supply (SS) curve is that there are many producers for the product and none of them is large enough to significantly affect the supply of the product.
question
Which of the following statements about the short-run market supply (SS) curve is not true?
The short-run market supply (SS) curve tells the amount of product that producers will offer for sale at any given price.
The short-run market supply (SS) curve is essentially the sum of the short-run supply curves of all of the producers of a given product.
The short run market supply (SS) curve is applicable only to monopolistic firms.
One assumption of the short-run market supply (SS) curve is that each producer of a product will shut down if the product price is below the producer's average variable cost (AVC).
The short-run market supply (SS) curve tells the amount of product that producers will offer for sale at any given price.
The short-run market supply (SS) curve is essentially the sum of the short-run supply curves of all of the producers of a given product.
The short run market supply (SS) curve is applicable only to monopolistic firms.
One assumption of the short-run market supply (SS) curve is that each producer of a product will shut down if the product price is below the producer's average variable cost (AVC).
answer
The short run market supply (SS) curve is applicable only to monopolistic firms.
The short-run market supply (SS) curve is applicable only to firms in a perfectly competitive environment.
The short-run market supply (SS) curve is applicable only to firms in a perfectly competitive environment.
question
When will the short-run market supply (SS) curve not exist?
The short-run market supply (SS) curve will not exist when the price of the product falls below the lowest minimum marginal cost of all of the firms.
The short-run market supply (SS) curve will not exist when an increase in demand pushes the price up.
The short-run market supply (SS) curve will not exist when all of the firms producing a given product are price takers.
The short-run market supply (SS) curve will not exist when the price is higher than the average variable cost of each firm.
The short-run market supply (SS) curve will not exist when the price of the product falls below the lowest minimum marginal cost of all of the firms.
The short-run market supply (SS) curve will not exist when an increase in demand pushes the price up.
The short-run market supply (SS) curve will not exist when all of the firms producing a given product are price takers.
The short-run market supply (SS) curve will not exist when the price is higher than the average variable cost of each firm.
answer
The short-run market supply (SS) curve will not exist when the price of the product falls below the lowest minimum marginal cost of all of the firms.
None of the firms will be producing product, so there will be no supply.
None of the firms will be producing product, so there will be no supply.
question
The short-run market supply (SS) curve assumes what about the level of production at which each firm will operate?
Each firm will produce at the level of production that gives it the lowest average total cost.
Each firm will produce at the level where marginal cost equals price.
Each firm will produce at the level where its average variable costs equal the price.
Each firm will produce at the level that provides the largest economic profit in the long run.
Each firm will produce at the level of production that gives it the lowest average total cost.
Each firm will produce at the level where marginal cost equals price.
Each firm will produce at the level where its average variable costs equal the price.
Each firm will produce at the level that provides the largest economic profit in the long run.
answer
Each firm will produce at the level where marginal cost equals price.
The level of production where profit will be maximized is where marginal cost equals price, and the short-run market supply (SS) curve assumes that each firm will want to maximize its profit.
The level of production where profit will be maximized is where marginal cost equals price, and the short-run market supply (SS) curve assumes that each firm will want to maximize its profit.
question
If a firm in a competitive market sees an increase in market demand and makes a short-run profit, it responds to the the profit by increasing output.
T/F
T/F
answer
true
If market demand increases market price also increases. A firm that makes an economic profit as a result of the price increase, increases output to the level where its marginal cost is equal to the new price.
If market demand increases market price also increases. A firm that makes an economic profit as a result of the price increase, increases output to the level where its marginal cost is equal to the new price.
question
Examine the graph below. If the market price for this firm's product increases from $20 to $40, the firm will produce
150 units.
100 units.
50 units.
200 units.
150 units.
100 units.
50 units.
200 units.
answer
150 units.
At a price of $40, the firm increases output to the level where P = MC., At $40, the MC curve intersects at 150 units.
At a price of $40, the firm increases output to the level where P = MC., At $40, the MC curve intersects at 150 units.
question
Examine the graph below. If the price falls from $40 to $30, the firm has an incentive to
decrease production to 125 units.
decrease production to 150 units.
increase production to 50 units
maintain production at 150 units.
decrease production to 125 units.
decrease production to 150 units.
increase production to 50 units
maintain production at 150 units.
answer
decrease production to 125 units.
There is an incentive to change production from 150 units to 125 units.
There is an incentive to change production from 150 units to 125 units.
question
In a perfectly competitive marketplace, the firm determines the price it charges for its product.
T/F
T/F
answer
false
In a perfectly competitive marketplace, the market determines the price according to the law of supply and demand.
In a perfectly competitive marketplace, the market determines the price according to the law of supply and demand.
question
How do firms respond to changes in price?
Firms respond to changes in price by changing their level of output.
If the price for a product rises, more firms enter the market.
If the price for a product falls, some firms exit the market.
All of the above.
Firms respond to changes in price by changing their level of output.
If the price for a product rises, more firms enter the market.
If the price for a product falls, some firms exit the market.
All of the above.
answer
All of the above.
Firms respond to changes in price by changing their level of output.
If the price for a product rises, more firms enter the market.
If the price for a product falls, some firms exit the market.
Firms respond to changes in price in several ways: they increase or decrease production to the level determined by their marginal cost curves, they enter the market, or they exit the market.
Firms respond to changes in price by changing their level of output.
If the price for a product rises, more firms enter the market.
If the price for a product falls, some firms exit the market.
Firms respond to changes in price in several ways: they increase or decrease production to the level determined by their marginal cost curves, they enter the market, or they exit the market.
question
If the demand for a product increases, what happens to the price?
The price decreases.
The increased demand has no effect on the price; the price remains constant.
The price increases.
The effect of increased demand is unpredictable; the price may increase or decrease.
The price decreases.
The increased demand has no effect on the price; the price remains constant.
The price increases.
The effect of increased demand is unpredictable; the price may increase or decrease.
answer
The price increases.
In the short run, an increase in the demand for a product will result in an increase in the price. The price increase will result in economic profits and will encourage existing firms to increase production and new firms to enter the market, which will result in an increase in supply. The increase in supply will cause the prices to fall and a new equilibrium level to be established.
In the short run, an increase in the demand for a product will result in an increase in the price. The price increase will result in economic profits and will encourage existing firms to increase production and new firms to enter the market, which will result in an increase in supply. The increase in supply will cause the prices to fall and a new equilibrium level to be established.
question
What will firms do when demand for a product increases?
Most firms will reduce production.
Firms will increase production only if they can keep their marginal cost constant while they do so.
Firms will find ways to reduce their costs.
Firms will hire additional workers, even if the additional workers result in a decrease in productivity.
Most firms will reduce production.
Firms will increase production only if they can keep their marginal cost constant while they do so.
Firms will find ways to reduce their costs.
Firms will hire additional workers, even if the additional workers result in a decrease in productivity.
answer
Firms will hire additional workers, even if the additional workers result in a decrease in productivity.
The firm can remain profitable in spite of a decrease in productivity because of the increase in price resulting from the increase in demand.
The firm can remain profitable in spite of a decrease in productivity because of the increase in price resulting from the increase in demand.
question
Which of the following statements about economic profit is true?
Economic profit is the minimum amount of profit required to keep a firm from exiting the market.
Economic profit does not exist in the short run.
Opportunity costs are included in economic profit.
Economic profit is the same as accounting profit
Economic profit is the minimum amount of profit required to keep a firm from exiting the market.
Economic profit does not exist in the short run.
Opportunity costs are included in economic profit.
Economic profit is the same as accounting profit
answer
Opportunity costs are included in economic profit.
An economic profit is total revenue that is greater than a firm's fixed and variable costs and its opportunity costs.
An economic profit is total revenue that is greater than a firm's fixed and variable costs and its opportunity costs.
question
In a competitive market, a change in the price of the product
will shift the LRAC.
will shift the short run MC curve.
will shift the short run ATC curve.
will cause movement along the short run MC curve.
will shift the LRAC.
will shift the short run MC curve.
will shift the short run ATC curve.
will cause movement along the short run MC curve.
answer
will cause movement along the short run MC curve.
A change in the price will not shift the MC curve. Only a change in a variable outside the graph shifts one of the curves. A change in price causes movement along the SMC curve.
A change in the price will not shift the MC curve. Only a change in a variable outside the graph shifts one of the curves. A change in price causes movement along the SMC curve.
question
In a competitive market, if firms are required to put safety latches on tool boxes to meet government regulations, their costs increase. It is likely that
demand for the tool boxes falls.
the market supply curve shifts to the right.
the market supply curve shifts to the left.
long run economic profit falls.
demand for the tool boxes falls.
the market supply curve shifts to the right.
the market supply curve shifts to the left.
long run economic profit falls.
answer
the market supply curve shifts to the left.
When costs increase because of government regulations, firms decrease supply at every price. This change is a shift to the left.
When costs increase because of government regulations, firms decrease supply at every price. This change is a shift to the left.
question
If a firm's marginal product of of labor increases, its marginal cost must also increase.
T/F
T/F
answer
false
Costs are always a mirror of productivity. When the marginal product of labor increases, the marginal unit of labor is becoming more productive, the marginal cost must decrease.
Costs are always a mirror of productivity. When the marginal product of labor increases, the marginal unit of labor is becoming more productive, the marginal cost must decrease.
question
Using the graph, the long run supply curve is identified as
S
S1
S*
D1
S
S1
S*
D1
answer
S*
The long run supply curve is downward sloping and connects the two short run equilibrium points on this graph.
The long run supply curve is downward sloping and connects the two short run equilibrium points on this graph.
question
The long run supply curve is upward sloping in a decreasing cost industry.
T/F
T/F
answer
false
The long run supply curve for a decreasing cost industry is downward sloping. Costs decrease as supply and demand changes.
The long run supply curve for a decreasing cost industry is downward sloping. Costs decrease as supply and demand changes.
question
Using the graph, which curve represents the long run supply?
S
S*
S1
D
S
S*
S1
D
answer
S*
The long run supply for this graph is S*. It is the compilation of the equilibrium points of all short run supply supply curves. The horizontal short run supply curve represents a constant cost industry.
The long run supply for this graph is S*. It is the compilation of the equilibrium points of all short run supply supply curves. The horizontal short run supply curve represents a constant cost industry.
question
Examine the graph, what type of industry is this?
Constant cost
Increasing cost
Decreasing cost
None of the above
Constant cost
Increasing cost
Decreasing cost
None of the above
answer
Constant cost
This market is a constant cost industry where the long-run supply curve is a horizontal line. It is horizontal because costs remain constant as demand and supply change.
This market is a constant cost industry where the long-run supply curve is a horizontal line. It is horizontal because costs remain constant as demand and supply change.
question
Using the graph, what type of industry is this?
Increasing cost.
Decreasing cost.
Constant cost.
All of the above.
Increasing cost.
Decreasing cost.
Constant cost.
All of the above.
answer
Increasing cost.
An upward-sloping long-run supply curve indicates an increasing cost industry. Costs increase as demand and supply increase because firms may be bidding for scarce resources.
An upward-sloping long-run supply curve indicates an increasing cost industry. Costs increase as demand and supply increase because firms may be bidding for scarce resources.
question
Firms produce efficiently in the long run by
minimizing fixed cost.
maximizing revenue.
producing at the minimum of LRAC.
producing at the maximum of LRAC.
minimizing fixed cost.
maximizing revenue.
producing at the minimum of LRAC.
producing at the maximum of LRAC.
answer
producing at the minimum of LRAC.
The point of efficient scale is at the minimum point in the long-run avwerage cost curve. In the long run, firms would like to operate at that point because it's long-run per-unit cost is at a minimum.
The point of efficient scale is at the minimum point in the long-run avwerage cost curve. In the long run, firms would like to operate at that point because it's long-run per-unit cost is at a minimum.
question
In the long run, a firm in a competive market will operate at
the point at which it can maximize revenue.
at its point of efficient scale.
at any point where TR>TC.
at the point of its minimum marginal cost.
the point at which it can maximize revenue.
at its point of efficient scale.
at any point where TR>TC.
at the point of its minimum marginal cost.
answer
at its point of efficient scale.
The profit-maximizing firm may earn some long-run profits but after adjustments are made in the market, the firm operates where LMC = SMC = the point of efficient scale.
The profit-maximizing firm may earn some long-run profits but after adjustments are made in the market, the firm operates where LMC = SMC = the point of efficient scale.
question
When firms in a competitive industry earn accounting profits, other firms will enter that industry, in the long run.
T/F
T/F
answer
false
Accounting, or normal, profits do not attract firms to enter competitive industries. Economic profits, however, attract firms.
Accounting, or normal, profits do not attract firms to enter competitive industries. Economic profits, however, attract firms.
question
Use the graph to answer this question. Suppose the price of the product increases to p1. In the short run, the firm will produce quantity
qe.
q1.
q2.
indeterminant.
qe.
q1.
q2.
indeterminant.
answer
q1.
The firm produces at this level because it must use its short-run costs as a guide. It produces where SMC = the price.
The firm produces at this level because it must use its short-run costs as a guide. It produces where SMC = the price.
question
In the graph, area abcd represents a perfectly competitive firm's
short-run economic profit.
long-run total revenue.
short-run loss.
long-run loss.
short-run economic profit.
long-run total revenue.
short-run loss.
long-run loss.
answer
long-run total revenue.
Total revenue is P × Q. Total revenue is derived by multiplying p0 by qe. The graph shows long-run equilibrium in that there are no economic profits being made by the firm. However, it is making a normal profit.
Total revenue is P × Q. Total revenue is derived by multiplying p0 by qe. The graph shows long-run equilibrium in that there are no economic profits being made by the firm. However, it is making a normal profit.
question
Use the graph to answer the question. Point c represents the
point of efficient scale.
the long run cost-minimizing point.
long run point of production.
all of the above.
point of efficient scale.
the long run cost-minimizing point.
long run point of production.
all of the above.
answer
all of the above.
point of efficient scale.
the long run cost-minimizing point.
long run point of production.
In the long run, the point at which LRMC = LRAC is the long-run cost-minimizing point. It is the most efficient point in that the firm is minimizing its long-run costs.
point of efficient scale.
the long run cost-minimizing point.
long run point of production.
In the long run, the point at which LRMC = LRAC is the long-run cost-minimizing point. It is the most efficient point in that the firm is minimizing its long-run costs.
question
Examine the graph below. After a price increase to p1, the firm would like to increase output to
q1.
q2.
qe.
0.
q1.
q2.
qe.
0.
answer
q2.
The firm would prefer to produce q2 because profits are higher at this output. This output is at the point where the LMC curve intersects the price.
The firm would prefer to produce q2 because profits are higher at this output. This output is at the point where the LMC curve intersects the price.
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