question
Suppose that a firm produces 200,000 units a year and sells them all for $10 each. The explicit costs of production are $1,500,000 and the implicit costs of production are $300,000. The firm earns an accounting profit of ________ and an economic profit of ________.
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$500,000; $200,000
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If the marginal cost curve is below the average variable cost curve
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both average total cost and average variable cost are decreasing.
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Use the following figure to answer the next question.
At which point is marginal cost (MC) at its minimum?
At which point is marginal cost (MC) at its minimum?
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Point A
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Use the following table to answer this question, which provides information on the production of a product that requires one variable input.
The average product generated with 5 units of the input is
The average product generated with 5 units of the input is
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10
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The marginal cost associated with the production of the third unit of output is
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7
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The total variable cost associated with the production of 5 units of output is
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63
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Implicit costs are
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opportunity costs of using owned resources.
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Which of the following constitutes an implicit cost to the Asarta Manufacturing Company?
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foregone interest income from using savings to pay for operating expenses
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Accounting profit equals total revenue minus
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explicit costs
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Use the following graphs to answer the next question.
"The bigger the volume, the lower the cost, and we pass the savings on to you" is a familiar slogan. Its idea is illustrated in which of the above graphs?
"The bigger the volume, the lower the cost, and we pass the savings on to you" is a familiar slogan. Its idea is illustrated in which of the above graphs?
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Graph 1
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The larger the diameter of a natural gas pipeline is, the lower is the average total cost of transmitting 1,000 cubic feet of gas 1,000 miles. This is an example of one reason for
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economies of scale.
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Imagine that a firm expands the size of its plant, doubling its total cost of production but more than doubling its output. This situation is known as
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economies of scale
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Economic profit is
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equal to the difference between accounting profit and implicit costs.
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If you know that total fixed cost is $200, total variable cost is $600, and total product is 4 units, then average total cost must be
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$200
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Use the following graphs to answer the next question.
The graphs show the long-run average total cost (LRATC) curve for cars. For which graph is the output level Q0 at minimum efficient scale?
The graphs show the long-run average total cost (LRATC) curve for cars. For which graph is the output level Q0 at minimum efficient scale?
answer
Graph 1
question
Jose owns his own business. The first three employees can create 10, 12, and 11 widgets per hour. When Jose hires the 4th worker the total production from all employees increased to 40 total widgets per hour. What was the marginal product of the 4th worker?
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7 widgets
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The ability of Intel to spread product development costs over a larger number of units of output arises from
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economies of scale.
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Use the following table to answer this question, which provides information on the production of a product that requires one variable input.
The average product of the 40th input item is
The average product of the 40th input item is
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20.5
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Marginal Cost
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equals both average variable cost and average total cost at their respective minimums.
question
Use the following information to answer the next question.
Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 each. Of the $75, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building.
The explicit costs of Harvey's firm in the first year were
Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 each. Of the $75, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building.
The explicit costs of Harvey's firm in the first year were
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$605,000.
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A perfectly competitive firm does not try to raise its price above the market price because
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it would not be able to sell its output.
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Use the following graph for a perfectly competitive firm generating a loss in the short run to answer the next question.
Which area in the graph represents the portion of total cost that the firm can recoup by continuing to produce rather than shutting down?
Which area in the graph represents the portion of total cost that the firm can recoup by continuing to produce rather than shutting down?
answer
0beg
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Use the following graph to answer the next question.
The perfectly competitive firm will maximize profits if it produces and sells output at
The perfectly competitive firm will maximize profits if it produces and sells output at
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C
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Suppose an increase in market demand occurs in a constant-cost industry. As a result
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perfectly competitive firms will eventually enter the industry.
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In perfect competition, the demand faced by a single firm is perfectly
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elastic, because many other firms produce the same standardized product.
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A firm sells a product in a perfectly competitive market. The marginal cost of the product at the current output level of 1,000 units is $2.50. The minimum possible average variable cost is $2. The market price of the product is $2.50. To maximize profits, the firm should
answer
continue producing 1,000 units.
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Use the following graphs for a perfectly competitive market in the short run to answer the next question.
The graphs suggest that in the long run, as automatic market adjustments occur, the demand faced by the perfectly competitive firm will
The graphs suggest that in the long run, as automatic market adjustments occur, the demand faced by the perfectly competitive firm will
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shift down.
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If a perfectly competitive firm is facing a situation where the price of its product is lower than the average total cost, which of the following statements is true?
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The firm is generating a loss, and if things are not expected to improve the firm will leave the industry.
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The lowest point on a perfectly competitive firm's short-run supply curve corresponds to the minimum point on its
answer
AVC curve.
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Use the following graph showing short-run cost curves for a perfectly competitive firm to answer the next question.
At what price would the firm generate the same profit or loss whether it chooses to produce or not?
At what price would the firm generate the same profit or loss whether it chooses to produce or not?
answer
P3
question
The long-run perfectly competitive equilibrium
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results in normal profits.
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In long-run equilibrium, a perfectly competitive firm will operate where price is
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equal to MR, MC, and the minimum ATC.
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Which of the following is true under conditions of perfect competition?
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No single firm can influence the market price.
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Which idea is inconsistent with perfect competition?
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product differentiation
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In a perfectly competitive industry, each firm
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can easily enter or exit the industry.
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The table shows cost data for a perfectly competitive firm. If the market price for the firm's product is $80, the firm will
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produce 4 units to maximize profits.
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Use the following table to answer the next question. The table shows the total costs associated with varying levels of output produced by a perfectly competitive firm.
If the product sells for $1,200 a unit, the firm's profit-maximizing output is
If the product sells for $1,200 a unit, the firm's profit-maximizing output is
answer
4
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Use the following graphs for a perfectly competitive market in the short run to answer the next question.
What will happen in the long run to market supply and the equilibrium price of the product?
What will happen in the long run to market supply and the equilibrium price of the product?
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Market supply will decrease and equilibrium price will increase.
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The table shows cost data for a perfectly competitive firm. If the market price for the firm's product is $6, what output level will the firm produce to maximize profits?
answer
14
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In a perfectly competitive industry
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economic profits may exist in the short run but not in the long run.
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Which case below best represents a case of third-degree price discrimination?
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A major airline sells tickets to senior citizens at lower prices than to other passengers.
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One argument for having the government regulate natural monopolies is that without regulation
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these monopolies produce at a level where price is greater than marginal cost.
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Use the following graph for a pure monopoly operating in the short run to answer the next question.
At the profit-maximizing level of output, this firm
At the profit-maximizing level of output, this firm
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generates a loss per unit equal to DE.
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What is one major hurdle monopolies face to engage in first-degree price discrimination?
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Finding everyone's willingness to pay is costly and difficult.
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Use the following graph to answer the next question.
A firm that has the long-run cost curves shown in the graph above would not be able to
A firm that has the long-run cost curves shown in the graph above would not be able to
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attain lower unit costs by reducing its output level.
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For a pure monopoly to sell a quantity of 10 units, the price must be $8. Marginal revenue (MR) at this output level will be
answer
< $8.
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Suppose that a pure monopoly calculates that at its present output level, marginal revenue is $1 and marginal cost is $2. The monopoly could maximize profits or minimize losses by
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increasing price and decreasing output.
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Answer the next question based on the following demand and cost data faced by a pure monopoly.
At equilibrium, the pure monopoly will generate
At equilibrium, the pure monopoly will generate
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an economic profit of $6.50.
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Use the following graph showing the demand and marginal revenue curves faced by a pure monopoly to answer the next question.
What price should the pure monopoly charge to maximize total revenue?
What price should the pure monopoly charge to maximize total revenue?
answer
P3
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Use the following graph to answer the question.
What is the profit-maximizing quantity of output for this pure monopoly?
What is the profit-maximizing quantity of output for this pure monopoly?
answer
90
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If the government regulated the pure monopoly and made it produce the level of output that would achieve allocative efficiency, what price and quantity of output levels would we observe in the short run?
answer
P2 and Q3
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A nondiscriminating pure monopoly must decrease the price on all units of a product to sell more units. This explains why
answer
a pure monopoly's marginal revenue curve is below its demand curve.
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Use the following graph to answer the next question.
What per-unit profit will this firm receive?
What per-unit profit will this firm receive?
answer
$10
question
Chipotle offered free burritos to celebrate teachers. What type of price discrimination does this demonstrate?
answer
third-degree price discrimination
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Third-degree price discrimination is more common in service industries because
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low price buyers will find it virtually impossible to resell the products of such industries to high price buyers.
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Pure monopolies are said to be allocatively inefficient because
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price is greater than marginal cost.
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Which of the following reasons explain why a natural monopoly might exist?
answer
Extremely high startup costs.
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Use the following graph to answer the next question.
If the government regulated the pure monopoly and made it set a normal profit price, what price and quantity of output levels would we observe in the short run?
If the government regulated the pure monopoly and made it set a normal profit price, what price and quantity of output levels would we observe in the short run?
answer
P3 and Q2
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When compared with a perfectly competitive market with identical costs of production, a pure monopoly will produce
answer
less output and charge a higher price.
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One defining characteristic of pure monopoly is that the
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monopoly produces a product with no close substitutes.
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