question
For a price taker, market equilibrium price is $50. At 1,000 units, MR = MC, ATC = $45, and AVC = $30. This price taker will
A. earn $50,000 profits if it produces 1,000 units of the good.
B. maximize its profits if it produces more than 1,000 units.
C. maximize its profits if it produces fewer than 1,000 units.
D. earn $5,000 profits if it produces 1,000 units.
E. shut down its operation, and by doing this minimize its losses.
A. earn $50,000 profits if it produces 1,000 units of the good.
B. maximize its profits if it produces more than 1,000 units.
C. maximize its profits if it produces fewer than 1,000 units.
D. earn $5,000 profits if it produces 1,000 units.
E. shut down its operation, and by doing this minimize its losses.
answer
D. earn $5,000 profits if it produces 1,000 units.
question
Which of the following statements is true?
A. A monopolist is assured of positive economic profits.
B. A monopolist may be able to increase its profits by increasing its price.
C. In the monopoly market structure, there are low barriers to entry.
D. A monopolist can charge whatever price it wants without losing any customers, by virtue of its monopoly position.
A. A monopolist is assured of positive economic profits.
B. A monopolist may be able to increase its profits by increasing its price.
C. In the monopoly market structure, there are low barriers to entry.
D. A monopolist can charge whatever price it wants without losing any customers, by virtue of its monopoly position.
answer
B. A monopolist may be able to increase its profits by increasing its price.
question
The percentage change in the quantity demanded of good X is 20 percent and the percentage change in the price of good Y is 10 percent. It follows that the __________ elasticity of demand is __________ and that the two goods are __________.
A. cross; 2.00; substitutes
B. income; 0.50; substitutes
C. cross; 2.00; complements
D. cross; 0.50; substitutes
E. price; 2.00; substitutes
A. cross; 2.00; substitutes
B. income; 0.50; substitutes
C. cross; 2.00; complements
D. cross; 0.50; substitutes
E. price; 2.00; substitutes
answer
A. cross; 2.00; substitutes
question
Average fixed cost
A. is usually greater at higher levels of output than at lower levels of output.
B. exists only in the long run.
C. is greater at lower levels of output than at higher levels.
D. does not change as output changes.
A. is usually greater at higher levels of output than at lower levels of output.
B. exists only in the long run.
C. is greater at lower levels of output than at higher levels.
D. does not change as output changes.
answer
C. is greater at lower levels of output than at higher levels.
question
A good will tend to have a low price elasticity of demand if
A. a person has a long period of time to adjust to price changes.
B. the good has few substitutes.
C. a person spends a high percentage of his or her budget on the good.
D. the good is a luxury.
A. a person has a long period of time to adjust to price changes.
B. the good has few substitutes.
C. a person spends a high percentage of his or her budget on the good.
D. the good is a luxury.
answer
B. the good has few substitutes.
question
If income elasticity of demand for a good is negative, the good is a(n) __________ good.
A. inferior
B. positive
C. normal
D. complementary
E. substitute
A. inferior
B. positive
C. normal
D. complementary
E. substitute
answer
A. Inferior
question
As the marginal physical product curve rises,
A. the total cost curve rises.
B. the total cost curve falls.
C. the marginal cost curve rises.
D. the marginal cost curve falls.
A. the total cost curve rises.
B. the total cost curve falls.
C. the marginal cost curve rises.
D. the marginal cost curve falls.
answer
D. the marginal cost curve falls.
question
Rent seeking occurs when the seller
A. charges a uniform price per unit for one specific quantity, a lower price for an additional quantity, and so on.
B. spends resources to influence public policy in the hope of transferring income to themselves from others.
C. charges different prices for the product it sells, and the price differences do not reflect cost differences.
D. charges the highest price each consumer would be willing to pay for the product rather than go without it.
A. charges a uniform price per unit for one specific quantity, a lower price for an additional quantity, and so on.
B. spends resources to influence public policy in the hope of transferring income to themselves from others.
C. charges different prices for the product it sells, and the price differences do not reflect cost differences.
D. charges the highest price each consumer would be willing to pay for the product rather than go without it.
answer
B. spends resources to influence public policy in the hope of transferring income to themselves from others.
question
A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand increases. This causes existing firms in the market to __________ and __________. As a result of the latter, the market supply curve shifts __________.
A. produce more output; new firms to enter the market; rightward
B. produce less output; new firms to enter the market; rightward
C. produce more output; some existing firms to exit the market; leftward
D. expand their plant size; some existing firms to exit the market; leftward
A. produce more output; new firms to enter the market; rightward
B. produce less output; new firms to enter the market; rightward
C. produce more output; some existing firms to exit the market; leftward
D. expand their plant size; some existing firms to exit the market; leftward
answer
A. produce more output; new firms to enter the market; rightward
question
If economies of scale are so pronounced in an industry that only one firm can survive in the industry, this firm is called a(n) __________ monopoly.
A. natural
B. financial
C. structured
D. independent
A. natural
B. financial
C. structured
D. independent
answer
A. natural
question
Suppose the demand for a particular good is perfectly inelastic and the government decides to impose a tax on the production of this good. Who will pay the greater share of such a tax?
A. The buyers will pay the entire share.
B. The buyers and the sellers will pay equal shares.
C. The sellers will bear the greater share of the tax.
D. The sellers will pay the entire share.
A. The buyers will pay the entire share.
B. The buyers and the sellers will pay equal shares.
C. The sellers will bear the greater share of the tax.
D. The sellers will pay the entire share.
answer
A. The buyers will pay the entire share.
question
Which of the following is not an example of a legal barrier to entry?
A. a public franchise
B. a patent
C. a beautician's license
D. a copyright
E. exclusive ownership of raw materials
A. a public franchise
B. a patent
C. a beautician's license
D. a copyright
E. exclusive ownership of raw materials
answer
E. exclusive ownership of raw materials
question
A perfectly competitive firm can produce its current level of output at an average total cost of $10 and a marginal cost of $8. If the market price of the product is currently $8, what should the firm do?
A. The firm should continue to produce, but they should decrease production in order to increase profit.
B. The firm should definitely shut down since average total cost exceeds price.
C. The firm should increase production in order to increase profit.
D. The answer depends upon the relationship between price and average variable cost. The firm should shut down if average variable cost is $8 or greater, but the firm should continue to produce the current level of output if average variable cost is less than $8.
A. The firm should continue to produce, but they should decrease production in order to increase profit.
B. The firm should definitely shut down since average total cost exceeds price.
C. The firm should increase production in order to increase profit.
D. The answer depends upon the relationship between price and average variable cost. The firm should shut down if average variable cost is $8 or greater, but the firm should continue to produce the current level of output if average variable cost is less than $8.
answer
D. The answer depends upon the relationship between price and average variable cost. The firm should shut down if average variable cost is $8 or greater, but the firm should continue to produce the current level of output if average variable cost is less than $8.
question
Which of the following is true?
A. The price elasticity of demand for Royal Crown Cola is lower than the price elasticity of demand for soft drinks in general.
B. It is invalid to make interproduct elasticity comparisons.
C. The price elasticity of demand for Royal Crown Cola is equal to the price elasticity of demand for soft drinks in general.
D. The price elasticity of demand for Royal Crown Cola is higher than the price elasticity of demand for soft drinks in general.
A. The price elasticity of demand for Royal Crown Cola is lower than the price elasticity of demand for soft drinks in general.
B. It is invalid to make interproduct elasticity comparisons.
C. The price elasticity of demand for Royal Crown Cola is equal to the price elasticity of demand for soft drinks in general.
D. The price elasticity of demand for Royal Crown Cola is higher than the price elasticity of demand for soft drinks in general.
answer
D. The price elasticity of demand for Royal Crown Cola is higher than the price elasticity of demand for soft drinks in general.
question
If a firm earns normal profit, then it has generated revenues
A. sufficient to cover explicit costs, but not implicit costs.
B. equal to the sum of implicit and explicit costs.
C. sufficient to cover implicit costs, but not explicit costs.
D. greater than total opportunity costs.
A. sufficient to cover explicit costs, but not implicit costs.
B. equal to the sum of implicit and explicit costs.
C. sufficient to cover implicit costs, but not explicit costs.
D. greater than total opportunity costs.
answer
B. equal to the sum of implicit and explicit costs.
question
Suppose that one fixed and one variable input are used to produce good X. As the marginal physical product of the variable input increases, the marginal cost
A. increases.
B. decreases.
C. remains constant.
D. There is not enough information to answer the question.
A. increases.
B. decreases.
C. remains constant.
D. There is not enough information to answer the question.
answer
B. decreases.
question
In long-run competitive equilibrium, firms
A. earn positive economic profits.
B. earn losses on some units of the good they produce and sell.
C. do not produce the quantity of output at which MR = MC.
D. have no incentive to make any changes.
A. earn positive economic profits.
B. earn losses on some units of the good they produce and sell.
C. do not produce the quantity of output at which MR = MC.
D. have no incentive to make any changes.
answer
D. have no incentive to make any changes.
question
Equilibrium price is $25 in a perfectly competitive market. For a perfectly competitive firm, MR = MC at 2,000 units of output. At 2,000 units, ATC is $33, and AVC is $27. The best policy for this firm is to __________ in the short run. Also, total fixed cost equals __________ and total variable cost equals __________ for this firm.
A. shut down; $66,000; $54,000
B. continue to produce; $150; $1,500
C. continue to produce; $12,000; $54,000
D. shut down; $12,000; $54,000
E. There is not enough information to answer all parts of the question.
A. shut down; $66,000; $54,000
B. continue to produce; $150; $1,500
C. continue to produce; $12,000; $54,000
D. shut down; $12,000; $54,000
E. There is not enough information to answer all parts of the question.
answer
D. shut down; $12,000; $54,000
TVC= $27(2000)= $54,000
TC= $33(2000)= $66,000
TFC= $66,000-$54,000= $12,000
The firm would shut down because the total revenue is less than the total variable costs.
TVC= $27(2000)= $54,000
TC= $33(2000)= $66,000
TFC= $66,000-$54,000= $12,000
The firm would shut down because the total revenue is less than the total variable costs.
question
If, for a perfectly competitive firm, marginal cost is greater than marginal revenue for the 100th unit, then it follows that
A. marginal cost must equals marginal revenue for the 99th unit produced and sold.
B. producing the 100th unit adds more to total revenue than it does to total cost.
C. marginal cost must equal marginal revenue for the 101st unit produced and sold.
D. the firm is not maximizing profit, or minimizing losses, if it produces the 100th unit.
A. marginal cost must equals marginal revenue for the 99th unit produced and sold.
B. producing the 100th unit adds more to total revenue than it does to total cost.
C. marginal cost must equal marginal revenue for the 101st unit produced and sold.
D. the firm is not maximizing profit, or minimizing losses, if it produces the 100th unit.
answer
D. the firm is not maximizing profit, or minimizing losses, if it produces the 100th unit.
question
In the theory of perfect competition, the market demand curve is __________ and the firm faces a demand curve that is __________.
A. perfectly elastic; downward sloping
B. perfectly elastic; perfectly elastic
C. downward sloping; perfectly elastic
D. downward sloping; downward sloping
E. perfectly inelastic; downward sloping
A. perfectly elastic; downward sloping
B. perfectly elastic; perfectly elastic
C. downward sloping; perfectly elastic
D. downward sloping; downward sloping
E. perfectly inelastic; downward sloping
answer
C. downward sloping; perfectly elastic
question
If a monopoly firm produces the quantity of output at which MR = MC, and charges a price greater than average total cost, it necessarily
A. maximizes total revenue.
B. maximizes the difference between total fixed cost and total variable cost.
C. earns profit.
D. minimizes the difference between total fixed cost and total variable.
A. maximizes total revenue.
B. maximizes the difference between total fixed cost and total variable cost.
C. earns profit.
D. minimizes the difference between total fixed cost and total variable.
answer
C. earns profit.
question
The reason the change in total cost divided by the change in output is equal to the change in total variable cost divided by the change in output, is because
A. total variable cost rises as output rises.
B. of the law of diminishing marginal returns.
C. total fixed cost does not change as output changes.
D. total cost does not change as output changes.
A. total variable cost rises as output rises.
B. of the law of diminishing marginal returns.
C. total fixed cost does not change as output changes.
D. total cost does not change as output changes.
answer
C. total fixed cost does not change as output changes.
question
The law of diminishing marginal returns states that as ever larger amounts of a variable input are combined with
A. other variable inputs, eventually the marginal physical product of the variable input declines.
B. other variable inputs, the marginal physical product of the variable input declines.
C. fixed inputs, eventually the marginal physical product of the variable input declines.
D. fixed inputs, the marginal physical product of the variable input rises.
A. other variable inputs, eventually the marginal physical product of the variable input declines.
B. other variable inputs, the marginal physical product of the variable input declines.
C. fixed inputs, eventually the marginal physical product of the variable input declines.
D. fixed inputs, the marginal physical product of the variable input rises.
answer
C. fixed inputs, eventually the marginal physical product of the variable input declines.
question
If the cross elasticity of demand is +2.0, this means that
A. if quantity demanded of a product fell by 1 percent, price of another product would fall by 2 percent.
B. if price of one product was raised 2 percent, quantity demanded of another product would rise 2 percent.
C. the percentage change in quantity demanded of a product is 2 times the percentage change in price of some other product.
D. if price of one product was raised by 2 percent, quantity demanded of another product would fall by 2 percent.
E. the percentage change in quantity demanded of a product is 2 times the percentage change in the price of that product.
A. if quantity demanded of a product fell by 1 percent, price of another product would fall by 2 percent.
B. if price of one product was raised 2 percent, quantity demanded of another product would rise 2 percent.
C. the percentage change in quantity demanded of a product is 2 times the percentage change in price of some other product.
D. if price of one product was raised by 2 percent, quantity demanded of another product would fall by 2 percent.
E. the percentage change in quantity demanded of a product is 2 times the percentage change in the price of that product.
answer
C. the percentage change in quantity demanded of a product is 2 times the percentage change in price of some other product.
question
Resource allocative efficiency occurs when a firm
A. produces the quantity of output at which price exceeds average total cost by the greatest amount.
B. produces the quantity of output at which price equals average variable cost.
C. minimizes costs of production yet charges the highest possible price.
D. produces the quantity of output at which price equals marginal cost.
E. produces the quantity of output at which price equals average total cost.
A. produces the quantity of output at which price exceeds average total cost by the greatest amount.
B. produces the quantity of output at which price equals average variable cost.
C. minimizes costs of production yet charges the highest possible price.
D. produces the quantity of output at which price equals marginal cost.
E. produces the quantity of output at which price equals average total cost.
answer
D. produces the quantity of output at which price equals marginal cost.
question
If the price of good X falls and the demand for good X is unit elastic, then the percentage rise in quantity demanded is __________ the percentage fall in price, and total revenue __________.
A. greater than; rises
B. less than; falls
C. greater than; falls
D. equal to; remains constant
E. less than; rises
A. greater than; rises
B. less than; falls
C. greater than; falls
D. equal to; remains constant
E. less than; rises
answer
D. equal to; remains constant
question
Situation 21-4: Joe is the owner-operator of Joe's Haircuts Unlimited. Last year he earned $200,000 in total revenues and paid $125,000 to his employees and suppliers. During the course of the year, he received three offers to work for other barbers, with the highest offer being $50,000 per year.
Refer to Situation 21-4. Is Joe earning a normal profit?
A. Yes, but his economic profit is $0 and that is not good.
B. No, he is earning an above-normal profit.
C. We cannot be sure, because "normal" profit is a subjective judgment.
D. No, but he is earning an accounting profit and that is all that matters.
E. No, his economic profit is negative.
Refer to Situation 21-4. Is Joe earning a normal profit?
A. Yes, but his economic profit is $0 and that is not good.
B. No, he is earning an above-normal profit.
C. We cannot be sure, because "normal" profit is a subjective judgment.
D. No, but he is earning an accounting profit and that is all that matters.
E. No, his economic profit is negative.
answer
B. No, he is earning an above-normal profit.
question
At the level of output at which a single-price monopolist maximizes profit, price is
A. greater than marginal cost.
B. equal to marginal cost.
C. equal to marginal revenue.
D. less than marginal cost.
E. less than marginal revenue.
A. greater than marginal cost.
B. equal to marginal cost.
C. equal to marginal revenue.
D. less than marginal cost.
E. less than marginal revenue.
answer
A. greater than marginal cost.
question
If the price of a good rises and as a result total revenue falls, then it must be true that
A. price elasticity of demand for the good is less than 1.
B. price elasticity of demand for the good is greater than 1.
C. income elasticity of demand for the good is positive.
D. cross elasticity of demand for the good is negative.
E. income elasticity of demand for the good is negative.
A. price elasticity of demand for the good is less than 1.
B. price elasticity of demand for the good is greater than 1.
C. income elasticity of demand for the good is positive.
D. cross elasticity of demand for the good is negative.
E. income elasticity of demand for the good is negative.
answer
B. price elasticity of demand for the good is greater than 1.
question
The longer the period of time allowed for the producer of a good to adjust to a change in the price of the good, the ____________ the price elasticity of supply will be. This statement assumes that the quantity supplied __________ be altered with time.
A. more elastic; can
B. more elastic; cannot
C. more inelastic; can
D. more inelastic; cannot
A. more elastic; can
B. more elastic; cannot
C. more inelastic; can
D. more inelastic; cannot
answer
A. more elastic; can
question
Situation 21-1: Diane's Donuts will begin selling donuts next week. Diane figures that the average variable cost to make each donut will be constant at $0.30. She has already paid $20,000 for the donut-making machinery and one year's rent.
Refer to Situation 21-l. What will Diane's approximate average total costs be if she sells 36,500 donuts in one year?
A. $0.55
B. $0.138
C. $0.30
D. $0.85
Refer to Situation 21-l. What will Diane's approximate average total costs be if she sells 36,500 donuts in one year?
A. $0.55
B. $0.138
C. $0.30
D. $0.85
answer
D. $0.85
(.30)(36,500)=10,950
(10,950+20,000)/36,500= .84794521
(.30)(36,500)=10,950
(10,950+20,000)/36,500= .84794521
question
The price elasticity of demand tends to be higher for goods
A. for which the consumer spends a low percentage of his or her income.
B. that are in abundant supply.
C. for which the consumer spends a high percentage of his or her income.
D. that are in scarce supply.
A. for which the consumer spends a low percentage of his or her income.
B. that are in abundant supply.
C. for which the consumer spends a high percentage of his or her income.
D. that are in scarce supply.
answer
C. for which the consumer spends a high percentage of his or her income.
question
All of the following characterize a perfectly competitive industry except:
A. there are many firms in the industry.
B. firms produce a homogeneous product; that is, any firm's product is a perfect substitute for any other's.
C. there is extreme price competition among the competitors in the industry
D. there is free entry and exit into and out of the industry
E. all of the above describe perfect competition.
A. there are many firms in the industry.
B. firms produce a homogeneous product; that is, any firm's product is a perfect substitute for any other's.
C. there is extreme price competition among the competitors in the industry
D. there is free entry and exit into and out of the industry
E. all of the above describe perfect competition.
answer
C. there is extreme price competition among the competitors in the industry
question
A firm that is maximizing profits under short-run conditions of perfect competition will:
A. set average total cost equal to price.
B. produce the output for which its average cost is at the lowest attainable level.
C. produce the output for which average variable cost is just equal to market price.
D. make its total revenue just equal to its fixed cost.
E. take none of the above actions, necessarily.
A. set average total cost equal to price.
B. produce the output for which its average cost is at the lowest attainable level.
C. produce the output for which average variable cost is just equal to market price.
D. make its total revenue just equal to its fixed cost.
E. take none of the above actions, necessarily.
answer
E. take none of the above actions, necessarily. REMEMBER: short run none
question
The profit-maximizing rule for a firm in perfect competition is "price equal to marginal cost." This rule means that a firm should:
A. increase output until price has risen to equal marginal cost.
B. increase output until price has fallen to equal marginal cost.
C. increase output until marginal cost has fallen to equal price.
D. increase output until marginal cost has risen to equal price.
E. decrease price until price equals marginal cost.
A. increase output until price has risen to equal marginal cost.
B. increase output until price has fallen to equal marginal cost.
C. increase output until marginal cost has fallen to equal price.
D. increase output until marginal cost has risen to equal price.
E. decrease price until price equals marginal cost.
answer
D. increase output until marginal cost has risen to equal price.
question
A firm operates under conditions of perfect competition. At its present level of output, all the following have a value of $1: the price it is charging, its marginal cost, and its average total cost. The marginal cost would rise with any increase in output. This firm:
A. is definitely at its maximum-profit position
B. is definitely not at its maximum-profit position.
C. may or may not be at its maximum-profit position; we need to know average variable cost.
D. may or may not be at its maximum-profit position; we need to know total cost and total revenue.
E. may or may not be at its maximum-profit position; we would need to know total fixed cost.
A. is definitely at its maximum-profit position
B. is definitely not at its maximum-profit position.
C. may or may not be at its maximum-profit position; we need to know average variable cost.
D. may or may not be at its maximum-profit position; we need to know total cost and total revenue.
E. may or may not be at its maximum-profit position; we would need to know total fixed cost.
answer
A. is definitely at its maximum-profit position
question
A firm operating in a perfectly competitive industry is producing a daily output that supports total revenue equal to $5000. That output is its profit-maximizing output. The firm's average total cost is$8, its marginal cost is $10, and its average variable cost is $5. Its daily output is:
A. 200 units.
B. 500 units.
C. 625 units.
D. 1000 units.
E. impossible to tell from the information furnished.
A. 200 units.
B. 500 units.
C. 625 units.
D. 1000 units.
E. impossible to tell from the information furnished.
answer
B. 500 units
question
A firm operating in a perfectly competitive market produces and sells 200 units of output daily at a price of $7.00. Its average cost is $4.99. If it were to increase output and sales to 201 units daily, the average cost would rise to $5.00. To maximize its profit, and from the information supplied, this firm should:
A. increase its output, since marginal cost (MC) is approximately $6.00.
B. reduce its output, since MC is approximately $6.00.
C. remain at its present output, since MC is approximately $7.00.
D. certainly not reduce its output, and probably increase it, since average cost is less than the price.
E. increase its output, since MC is approximately $5.01.
A. increase its output, since marginal cost (MC) is approximately $6.00.
B. reduce its output, since MC is approximately $6.00.
C. remain at its present output, since MC is approximately $7.00.
D. certainly not reduce its output, and probably increase it, since average cost is less than the price.
E. increase its output, since MC is approximately $5.01.
answer
C. remain at its present output, since MC is approximately $7.00.
question
Explicit and Implicit Cost
answer
-Explicit costs are incurred when an actual (monetary) payment is made-Implicit costs represent the value of resources used in production for which no actual payments are made.
question
Law of Diminishing Marginal Returns
answer
As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative
question
A perfectly competitive firm that maximizes profit exhibits resource allocative efficiency because it produces where price
A. equals minimum average total cost.
B. equals marginal revenue.
C. equals marginal cost.
D. is greater than minimum average variable cost.
A. equals minimum average total cost.
B. equals marginal revenue.
C. equals marginal cost.
D. is greater than minimum average variable cost.
answer
C. equals marginal cost.
question
For a perfectly competitive firm, MR = MC at 250 units of output. At 250 units, ATC is greater than AVC. It necessarily follows that
A. the firm should shut down its operation.
B. the marginal cost curve must have an upward-sloping portion and a downward-sloping portion.
C. the firm should continue to produce.
D. b and c
E. none of the above
A. the firm should shut down its operation.
B. the marginal cost curve must have an upward-sloping portion and a downward-sloping portion.
C. the firm should continue to produce.
D. b and c
E. none of the above
answer
E. none of the above
question
If, for a perfectly competitive firm, price is greater than average variable cost, then it follows that
A. total revenue is greater than total cost.
B. total revenue is greater than total variable cost.
C. the firm will lose more or earn less by shutting down in the short run than by continuing to produce.
D. b and c
E. There is not enough information to answer the question.
A. total revenue is greater than total cost.
B. total revenue is greater than total variable cost.
C. the firm will lose more or earn less by shutting down in the short run than by continuing to produce.
D. b and c
E. There is not enough information to answer the question.
answer
A. total revenue is greater than total cost.
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