Test3 - Assignment Essays

question

In considering the behavior of firms in the marketplace, we differentiate between the short run and the long run. The distinction between these two time horizons is that:

answer

in the long run no inputs are fixed whereas in the short run at least one input is fixed

question

Which of the following may be determined from a long-run production function?
i. the cost to produce a given quantity of output
ii. the quantity of output resulting from all combinations of inputs (e.g., capital and labor)
iii. the different combinations of inputs (e.g., capital and labor) that yield the same quantity of output

answer

ii and iii

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Consider a pizzeria that bakes and sells pizzas using machinery and labor. Which of the following best describes one of its short run variable costs?

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total per-period (e.g., weekly) payments made to laborers

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The law of diminishing marginal product (or returns) states that:

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as more and more of a variable input, such as labor, is employed to a short-run production process, beyond a point output will increase at a decreasing rate

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Consider a firm's per-period (e.g., hourly) production process. If it employs 1 unit of labor, then 4 units of output will be produced; if it employs 2 units of labor, then 10 units of output will be produced; and if it employs 3 units of labor, then 18 units of output will be produced. It follows that:

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total output is increasing at an increasing rate and the marginal product of labor is increasing

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From a firm's short run production function, the marginal product of labor and the average product of labor may be determined. The marginal product of labor is the:

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change in total output attributed to employing an additional worker

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Which of the following is correct regarding the relationship between the marginal product of labor (MPL) and the average product of labor (APL)?
i. if APL is less than MPL, then MPL will be decreasing
ii. if APL is greater than MPL, then MPL will be increasing
iii. if MPL is less than APL, then APL will be decreasing
iv. if MPL is greater than APL, then APL will be increasing

answer

iii and iv

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It was noted in class that a production function identifies the maximum amount of output that can be obtained from a given amount of input. That is, workers are assumed not to shirk. If workers were to shirk, then:
i. the level of output per period will be less than the level of output if workers do not shirk
ii. MPL and APL will be greater than MPL and APL if workers do not shirk
iii. the total labor costs required to produce a given level of output will be greater than if workers do not shirk but total fixed costs will be unaffected

answer

i and iii

question

Suppose a firm's production process undergoes a technological improvement. It follows that:
a. a given amount of input may be produced with fewer inputs
b. a given amount of inputs will yield more output
c. the short run production function (or total product curve) will rotate upward
d. total variable cost and average variable cost will be reduced at all positive levels of output

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all of the above

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If the price of one of a firm's variable inputs increases, such as the hourly wage rate it pays its workers, then:

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marginal cost, average variable cost, and average total cost will increase

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The law of diminishing marginal product is reflected in a firm's short run production function and also several of its costs curves. The shapes of which cost curves reflect the law of diminishing marginal product?

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total cost, total variable cost, average variable cost, average total cost, and marginal cost

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A firm's marginal cost of production is the:
i. change in total variable cost that results from producing each additional unit of output
ii. change in total cost that results from producing each additional unit of output
iii. change in total fixed cost that results from producing each additional unit of output
iv. change in average variable cost that results from producing each additional unit of output
v. change in average total cost that results from producing each additional unit of output
vi. change in average fixed cost that results from producing each additional unit of output

answer

i and ii

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A fixed cost is:

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any cost which does not change when the firm changes the amount of output it produces

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Suppose that a firm's total fixed costs increase due to an increase in the monthly rent that it is charged. It follows that:

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average fixed costs and average total costs will increase

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Consider a firm whose production function is Q = 0.25K^0.5 L^0.5. Its level of capital is fixed at 16 units, the price of labor is PL = $8 per unit, and the price of capital is PK = $10 per unit. Given this information, the firm's total cost (TC = TFC + TVC) function is:

answer

TC = 160 + 8Q^2

question

Which of the following is not a characteristic of a perfectly competitive firm's demand curve?
i. it is the same as the market demand curve
ii. it lies above the firm's marginal revenue curve
iii. it is perfectly inelastic at all prices
iv. it is the same as the firm's average revenue and marginal revenue curves

answer

i, ii, and iii

question

Consider a perfectly competitive market described by the supply function P = 10 + 0.2Q and demand function P = 60 - 0.3Q. If the market is in equilibrium, then an individual firm's total revenue (TR), average revenue (AR) and marginal revenue (MR) functions are:

answer

TR = 30Q, AR = 30, and MR = 30

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Suppose a perfectly competitive firm produces 20 units of output per-period (e.g., daily) and sells all units for the market price of $4. If average fixed cost is $1, average variable cost is $2, and marginal cost is $4, then the firm:
i. is maximizing total profit by producing and selling 20 units of output
ii. earns a per-period total profit of $20
iii. earns a per-period total profit of $80
iv. should close down in the short run and suffer a loss equal to $20

answer

i and ii

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In which of the following cases would a monopoly increase its per-period total profits by raising price and reducing output:

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if it were producing a level of output such that MC > MR

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For a uniform-price monopolist _______________; and for a perfectly competitive firm _______________ :

answer

P = AR > MR; P = MR = AR

question

If a monopolist or a perfectly competitive firm is producing at a break-even point, then:
i. average revenue is equal to average variable cost
ii. average revenue is equal to average total cost
iii. total revenue is equal to total variable cost
iv. total revenue is equal to total cost

answer

ii and iv

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The principle that a firm should produce up to the point where the marginal revenue (MR) from the sale of an extra unit of output is equal to the marginal cost (MC) of producing the extra unit applies:

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to both perfectly competitive firms and monopolies

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A 'natural' monopoly, such as a local electricity provider, is the result of:
i. a firm owning or controlling a key input used in the production process
ii. economies of scale existing over a wide range of output
iii. long-run average total costs declining continuously as output increases
iv. long-run total costs declining continuously as output increases
i

answer

ii and iii

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What do economies of scale, the exclusive ownership of essential raw materials used in the production process, and patents have in common?

answer

they are all barriers to entry

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A monopoly is producing a level of output such that marginal revenue is equal to marginal cost. The firm is selling its output at a price of $10 per unit and is incurring average variable costs of $5 per unit and average total costs of $8 per unit. Given this information, it may be concluded that the firm:

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is operating at maximum total profit

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Suppose the demand function for a profit maximizing monopolist's good is P = 120 - 0.2Q, its total cost function is TC = 40 + 4Q + Q2, and its marginal cost function is MC = 4 + 2Q. If the firm uses a uniform pricing strategy, then rounded to the nearest unit of output and to the nearest dollar the firm will:

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produce 48 units of output, charge a price of $110, and earn a total profit of $2744

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technology

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the processes a firm uses to turn inputs into outputs of goods and services

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technological change

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a change in the ability of a firm to produce a given level of output with a given quantity of inputs

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short run

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period of time during which at least one of a form's inputs is fixed

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long run

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a firm can vary all of its inputs

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variable costs

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costs that change as output changes

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fixed costs

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costs that remain constant as output changes

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total cost

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the cost of all the inputs a firm uses in production

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explicit cost

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a cost that involves spending money

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implicit cost

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a nonmonetary cost

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production function

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the relationship between the inputs employed and the maximum output from those inputs

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marginal product of labor

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the additional output a firm produces as a result of hiring one more worker

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law of diminishing returns

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At some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline

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average product of labor

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calculated as the total output produced by a firm divided by the quantity of workers

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marginal cost

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the change in a firm's total cost from producing one more unit of a good or service

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average fixed cost

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fixed cost divided by the quantity of output produced

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average variable cost

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variable cost divided by the quantity of output produced

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long-run average cost curve

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shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed

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economies of scale

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the firm's long-run average costs falling as it increases the quantity of output it produces

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minimum efficient scale

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the lowest level of output at which all economies of scale are exhausted

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constant returns to scale

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its long-run average cost remains unchanged as it increases output

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diseconomies of scale

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a situation in which a firm's long-run average costs rise as the firm increases output

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isoquant

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a curve showing all combinations of two inputs, such as capital and labor, that will produce the same level of output

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isocost line

answer

all the combinations of two inputs, such as capital and labor, that have the same total cost

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expansion path

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a curve that shows the firm's cost-minimizing combination of inputs for every level of output

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perfectly competitive market

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many buyers and sellers, all firms sell identical products, no barriers to new firms entering the market

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price takers

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unable to affect the market price

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average revenue

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total revenue divided by the quantity of the product sold

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marginal revenue

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change in total revenue from selling one more unit of a product

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sunk costs

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costs that have already been paid and cannot be recovered

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long-run competitive equilibrium

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the situation in which the entry and exit of firms has resulted in the typical firm breaking even

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long-run supply curve

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a curve that shows the relationship in the long run between market price and the quantity supplied

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productive efficiency

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a situation in which a good or service is produced at the lowest possible cost

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allocative efficiency

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a state of the economy in which production represents consumer preferences

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monopoly

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a market structure consisting of a firm that is the only seller of a good or service that does not have a close substitute

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patents

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exclusive right to produce a product for a period of 20 years from the date the patent is filled with the government

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copyrights

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provide the exclusive right to produce and sell creative works like books and films

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public franchise

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a government designation that a firm is the only legal provider of a good or service

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network externalities

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product characteristic whereby the usefulness of a product increases with the number of consumers who use it

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natural monopoly

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economies of scale are so large that one firm can supply the entire market at a lower average total cost than can two or more firms

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market power

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the ability of a firm to charge a price greater than marginal cost

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collusion

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an agreement among firms to charge the same price or otherwise not to compete

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antitrust laws

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laws aimed at eliminating collusion and promoting competition among firms

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horizontal mergers

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mergers between firms in the same industry

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vertical mergers

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mergers between two firms at different stages of the production process

question

Which of the following is not correct regarding a short run production process?
A) if marginal product is greater than average product, then average product is increasing
B) if total product is at a maximum, then average product is also at a maximum
C) if marginal product is zero, then total product is at a maximum
D) if marginal product is less than average product, then average product is decreasing

answer

B) if total product is at a maximum, then average product is also at a maximum

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The first, second, and third workers employed by a firmadd 12, 6, and 3 units to total product, respectively. Therefore:
A) marginal product of the third worker is 3
B) average product of the three workers is 7
C) total product of the three workers is 216
D) A and B
E) A, B, and C

answer

D) A and B

question

The law of diminishing marginal product (or returns) describes the:
A) relationship between total costs and total revenues
B) profit-maximizing position of a firm
C) relationship between resource inputs and product outputs in the short run
D) relationship between resource inputs and product outputs in the long run

answer

C) relationship between resource inputs and product outputs in the short run

question

If a firm's total variable costs decrease, then:
A)average fixed costs and average total costs will decline
B)average fixed costs and average variable costs will decline
C)average fixed costs will increase and marginal costs will decline
D)marginal cost, average variable cost, and average total costs will decline

answer

D)marginal cost, average variable cost, and average total costs will decline

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A firm's total variable costs will depend upon:
A) the prices of its variable inputs
B) the production techniques that are used
C) the amount of output produced
D) all of the above are correct

answer

D) all of the above are correct

question

Consider a short run production process where MPL increases initially and then decreases. As output continuously increases from zero:
A) TVC will increase initially at a decreasing rate but will eventually increase at an increasing rate
B) TFC will increase by a constant amount
C) the sum of TVC and TFC will increase initially at an increasing rate but will eventually increase at a decreasing rate
D) TVC will increase initially at an increasing rate but will eventually increase at a decreasing rate

answer

A) TVC will increase initially at a decreasing rate but will eventually increase at an increasing rate

question

Assume a firm closes down in the short run and produces no output. As a result:
A) TFC is positive, but TVC and TC are zero
B) TFC and TC are positive, but TVC is zero
C) TVC is positive, but TFC and TC are zero
D) TFC, TVC, and TC will all be positive

answer

B) TFC and TC are positive, but TVC is zero

question

Suppose a perfectly competitive firm is producing a level of output where MR=$8.50; ATC=$6.00; AVC=$4.00;
MC=$7.50. In order to maximize profit, the firm should _________________.
A) increase both output and price
B) increase price but not output
C) increase output but not price
D) shut down

answer

C) increase output but not price

question

If production is occurring where price exceeds marginal cost, the purely competitive firm will:
A) maximize profits, but inputs will be underallocated to the product (i.e., not enough is produced)
B) fail to maximize profits and inputs will be overallocated to the product (i.e., too much is produced)
C) fail to maximize profits and inputs will be underallocated to the product (i.e., not enough is produced)
D) maximize profits, but inputs will be overallocated to the product (i.e., too much is produced)

answer

C) fail to maximize profits and inputs will be underallocated to the product (i.e., not enough is produced)

question

For a monopolist, marginal revenue is less than price under uniform pricing because:
A) the monopolist's demand curve is perfectly inelastic
B) the monopolist's demand curve is perfectly elastic
C) when a monopolist lowers price to sell more output, the lower price applies to all units sold
D) the monopolist's total revenue curve is linear and upward sloping

answer

C) when a monopolist lowers price to sell more output, the lower price applies to all units sold

question

Suppose a firm has monopoly power in the production of a particular good. If it finds that revenue and cost
conditions are such that at all levels of output the price it can charge in order to sell all of the units is less than the average variable costs then it is in the firm's best interest to:
A) close down because its operating losses will exceed its shut-down losses at all levels of output
B) maximize profits by producing where MR = MC
C) close down because its total operating cost will exceed its total revenue
D) minimize losses by producing where MR = MC

answer

A) close down because its operating losses will exceed its shut-down losses at all levels of output

question

Suppose that a monopolist is producing a level of output (Q) such that AVC = $10, AFC = $2, P = $10, MR = $8, and MC = $6. Based on this information, the firm is realizing:
A) a profit which could be increased by reducing price and increasing output
B) a loss which could be reduced by increasing price and reducing output
C) a profit which could be increased by increasing price and reducing output
D) a loss which could be reduced by reducing price and increasing output

answer

D) a loss which could be reduced by reducing price and increasing output

question

With respect to the pure monopolist's demand curve it can be said that under uniform pricing:
A) the stronger the barriers to entry, the more elastic is the monopolist's demand curve
B) price exceeds marginal revenue at all positive levels of output
C) demand is perfectly inelastic
D) marginal revenue equals price at all levels of output

answer

B) price exceeds marginal revenue at all positive levels of output

1 of 83

question

In considering the behavior of firms in the marketplace, we differentiate between the short run and the long run. The distinction between these two time horizons is that:

answer

in the long run no inputs are fixed whereas in the short run at least one input is fixed

question

answer

ii and iii

question

Consider a pizzeria that bakes and sells pizzas using machinery and labor. Which of the following best describes one of its short run variable costs?

answer

total per-period (e.g., weekly) payments made to laborers

question

The law of diminishing marginal product (or returns) states that:

answer

as more and more of a variable input, such as labor, is employed to a short-run production process, beyond a point output will increase at a decreasing rate

question

answer

total output is increasing at an increasing rate and the marginal product of labor is increasing

question

From a firm's short run production function, the marginal product of labor and the average product of labor may be determined. The marginal product of labor is the:

answer

change in total output attributed to employing an additional worker

question

answer

iii and iv

question

answer

i and iii

question

answer

all of the above

question

If the price of one of a firm's variable inputs increases, such as the hourly wage rate it pays its workers, then:

answer

marginal cost, average variable cost, and average total cost will increase

question

answer

total cost, total variable cost, average variable cost, average total cost, and marginal cost

question

answer

i and ii

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A fixed cost is:

answer

any cost which does not change when the firm changes the amount of output it produces

question

Suppose that a firm's total fixed costs increase due to an increase in the monthly rent that it is charged. It follows that:

answer

average fixed costs and average total costs will increase

question

answer

TC = 160 + 8Q^2

question

answer

i, ii, and iii

question

answer

TR = 30Q, AR = 30, and MR = 30

question

answer

i and ii

question

In which of the following cases would a monopoly increase its per-period total profits by raising price and reducing output:

answer

if it were producing a level of output such that MC > MR

question

For a uniform-price monopolist _______________; and for a perfectly competitive firm _______________ :

answer

P = AR > MR; P = MR = AR

question

answer

ii and iv

question

answer

to both perfectly competitive firms and monopolies

question

answer

ii and iii

question

What do economies of scale, the exclusive ownership of essential raw materials used in the production process, and patents have in common?

answer

they are all barriers to entry

question

answer

is operating at maximum total profit

question

answer

produce 48 units of output, charge a price of $110, and earn a total profit of $2744

question

technology

answer

the processes a firm uses to turn inputs into outputs of goods and services

question

technological change

answer

a change in the ability of a firm to produce a given level of output with a given quantity of inputs

question

short run

answer

period of time during which at least one of a form's inputs is fixed

question

long run

answer

a firm can vary all of its inputs

question

variable costs

answer

costs that change as output changes

question

fixed costs

answer

costs that remain constant as output changes

question

total cost

answer

the cost of all the inputs a firm uses in production

question

explicit cost

answer

a cost that involves spending money

question

implicit cost

answer

a nonmonetary cost

question

production function

answer

the relationship between the inputs employed and the maximum output from those inputs

question

marginal product of labor

answer

the additional output a firm produces as a result of hiring one more worker

question

law of diminishing returns

answer

At some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline

question

average product of labor

answer

calculated as the total output produced by a firm divided by the quantity of workers

question

marginal cost

answer

the change in a firm's total cost from producing one more unit of a good or service

question

average fixed cost

answer

fixed cost divided by the quantity of output produced

question

average variable cost

answer

variable cost divided by the quantity of output produced

question

long-run average cost curve

answer

shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed

question

economies of scale

answer

the firm's long-run average costs falling as it increases the quantity of output it produces

question

minimum efficient scale

answer

the lowest level of output at which all economies of scale are exhausted

question

constant returns to scale

answer

its long-run average cost remains unchanged as it increases output

question

diseconomies of scale

answer

a situation in which a firm's long-run average costs rise as the firm increases output

question

isoquant

answer

a curve showing all combinations of two inputs, such as capital and labor, that will produce the same level of output

question

isocost line

answer

all the combinations of two inputs, such as capital and labor, that have the same total cost

question

expansion path

answer

a curve that shows the firm's cost-minimizing combination of inputs for every level of output

question

perfectly competitive market

answer

many buyers and sellers, all firms sell identical products, no barriers to new firms entering the market

question

price takers

answer

unable to affect the market price

question

average revenue

answer

total revenue divided by the quantity of the product sold

question

marginal revenue

answer

change in total revenue from selling one more unit of a product

question

sunk costs

answer

costs that have already been paid and cannot be recovered

question

long-run competitive equilibrium

answer

the situation in which the entry and exit of firms has resulted in the typical firm breaking even

question

long-run supply curve

answer

a curve that shows the relationship in the long run between market price and the quantity supplied

question

productive efficiency

answer

a situation in which a good or service is produced at the lowest possible cost

question

allocative efficiency

answer

a state of the economy in which production represents consumer preferences

question

monopoly

answer

a market structure consisting of a firm that is the only seller of a good or service that does not have a close substitute

question

patents

answer

exclusive right to produce a product for a period of 20 years from the date the patent is filled with the government

question

copyrights

answer

provide the exclusive right to produce and sell creative works like books and films

question

public franchise

answer

a government designation that a firm is the only legal provider of a good or service

question

network externalities

answer

product characteristic whereby the usefulness of a product increases with the number of consumers who use it

question

natural monopoly

answer

economies of scale are so large that one firm can supply the entire market at a lower average total cost than can two or more firms

question

market power

answer

the ability of a firm to charge a price greater than marginal cost

question

collusion

answer

an agreement among firms to charge the same price or otherwise not to compete

question

antitrust laws

answer

laws aimed at eliminating collusion and promoting competition among firms

question

horizontal mergers

answer

mergers between firms in the same industry

question

vertical mergers

answer

mergers between two firms at different stages of the production process

question

answer

B) if total product is at a maximum, then average product is also at a maximum

question

answer

D) A and B

question

answer

C) relationship between resource inputs and product outputs in the short run

question

answer

D)marginal cost, average variable cost, and average total costs will decline

question

A firm's total variable costs will depend upon:
A) the prices of its variable inputs
B) the production techniques that are used
C) the amount of output produced
D) all of the above are correct

answer

D) all of the above are correct

question

answer

A) TVC will increase initially at a decreasing rate but will eventually increase at an increasing rate

question

answer

B) TFC and TC are positive, but TVC is zero

question

answer

C) increase output but not price

question

answer

C) fail to maximize profits and inputs will be underallocated to the product (i.e., not enough is produced)

question

answer

C) when a monopolist lowers price to sell more output, the lower price applies to all units sold

question

answer

A) close down because its operating losses will exceed its shut-down losses at all levels of output

question

answer

D) a loss which could be reduced by reducing price and increasing output

question

answer

B) price exceeds marginal revenue at all positive levels of output

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