Chapter 9

Sort the descriptions below into whether they are characteristics of productive or allocative efficiency. ALLOCATIVE EFFIENCY: can have multiple answers -the maximum output is obtained with given resources -goods and services are produced at their lowest opportunity -the price consumers pay is equal to the marginal cost of producing the good -production represents consumer preferences

the price consumers pay is equal to the marginal cost of producing the good; production represents consumer preferences

Price equals marginal revenue for a competitive firm because: -the production of marginal units affects the value of other units. -total revenue is constant. -marginal cost is constant. -the price does not change when the firm changes output.

the price does not change when the firm changes output.

Average cost equals: -total cost divided by output. -the cost of producing one additional unit. -total revenue divided by quantity. -price.

total cost divided by output.

In a perfectly competitive market, average revenue is equal to the market price. True False

true

Economic profit is -always zero. -typically lower than accounting profit. -typically higher than accounting profit.

typically lower than accounting profit.

A firm's ___________________ are costs that increase as quantity produced increases. These costs often show _______________________ by increasing at an increasing rate. -variable costs; constant returns to scale -variable costs; diminishing marginal returns -fixed costs; opportunity costs -fixed costs; technological changes

variable costs; diminishing marginal returns

They have heard that the market for organic eggplant is perfectly competitive. What does that mean in terms of long‑run profit? -Firms will earn positive economic profit in the long run. -Firms will earn negative economic profit in the long run. -Firms will earn zero economic profit in the long run. -Firms will earn zero accounting profit in the long run.

Firms will earn zero economic profit in the long run

Suppose the firms in the market for bacon, also a perfectly (or purely) competitive industry, experienced losses last quarter due to people becoming increasingly concerned about how high-fat diets negatively impact health. What do you expect to happen in the long run for the bacon industry? -Seeing this as an opportunity to monopolize a fledging industry, firms will enter the industry, shifting supply to the right. -Profits will remain negative, which will result in the closing down of the industry as a whole. -Profits will be equal to zero. -None of the above.

Profits will be equal to zero.

Which of the following markets is an example of a perfectly competitive market? -Apple computers -Fast-food hamburgers -Shares of McDonald's stock -Dining chairs

Shares of McDonald's stock

When sellers exit a market in which the average seller has losses, what results? -The remaining sellers have higher demand but also face cost curves that shift upward. -The market demand shrinks as consumers avoid struggling sellers. -The losses shrink or disappear as the market demand is spread over a smaller number of sellers. -The sellers that exit avoid the losses that the remaining market sellers continue to suffer.

The losses shrink or disappear as the market demand is spread over a smaller number of sellers.

In a perfectly competitive market, marginal revenue is equal to the market price. True False

True

In general, an individual firm in a perfectly competitive market faces a perfectly elastic demand curve. False True

True

Whenever marginal cost is greater than the average total cost: -average cost is falling. -average cost is constant. -average cost is rising. -marginal cost is falling.

average cost is rising.

If market price exceeds (variable/ fixed/ marginal/ average) cost, profit will be (negative/ zero/ positive)

average; positive

Suppose that the market for cab rides is initially in long-run equilibrium. Subsequently, an increase in population increases the demand for cab rides. In the long run, cab drivers will _____ the market, driving the price of cab rides _____ and the profits of individual drivers _____. -enter; up; back to zero -enter; down; back to zero -leave; up; up -leave; up; back to zero

enter; down; back to zero

Average fixed costs will -fall as output rises. -fall then rise as output rises. -rise as output rises. -rise then fall as output rises.

fall as output rises.

A firm's ___________________ are costs that are incurred even if there is no output. In the short run, these costs ___________________ as production increases. -variable costs; do not change -fixed costs; increase -fixed costs; do not change -variable costs; increase

fixed costs; do not change

Classify each cost below as an implicit cost or an explicit cost. forgone yearly salary of $40,000

implicit cost

The main difference between the short run and the long run is that -in the long run, the firm is making a constrained decision about how to use existing plant and equipment efficiently. -in the short run the firm varies all of its inputs to find the least-cost combination of inputs. -in the short run, at least one of the firm's inputs is fixed. -in the short run all inputs are fixed, while in the long run all inputs are variable.

in the short run, at least one of the firm's inputs is fixed.

Clark grows corn and is a price‑taker. For each scenario, decide what Clark should do to his price. Higher taxes, fuel prices, and wages are driving costs up for all corn farmers. (increase/no change/decrease) Clark's wife wants to buy a new house. She argues that raising the price of his corn by a few cents per bushel would pay for it in no time. (increase/no change/decrease) A bumper crop results in a much higher supply of corn this year. (increase/no change/decrease)

increase; no change;

The change in total variable cost which accompanies one extra unit of output is -the average total cost. -marginal cost. -the average fixed cost. -the average variable cost.

marginal cost.

When firms in a market with free entry and exit have economic profits, then: -new companies will enter the market, reducing average company profits. -new companies will enter the market, raising average company profits. -some companies will exit the market, reducing average company profits. -some companies will exit the market, raising average company profits.

new companies will enter the market, reducing average company profits.

Which statements are correct for the following situation Firms enter the market -price is greater than average cost -price is less than average cost -no firms earn economic profit -firms earn both economic profit and accounting profit -firms earn an economic loss

price is greater than average cost; firms earn both economic profit and accounting profit

A company's profit margin per unit sold equals: -total cost minus total revenue. -price minus average cost. -average cost minus price. -total revenue minus total cost.

price minus average cost.

In the graph, the slope of the total cost (TC) curve is calculated as ____.This value is also referred to as _________.

ΔTC/ΔQ; marginal cost

Which statements are correct for the following situation Firms exit the market -price is greater than average cost -price is less than average cost -no firms earn economic profit -firms earn both economic profit and accounting profit -firms earn an economic loss

price is less than average cost; firms earn an economic loss

Scott and Madeleine want to know the quantity they should produce to maximize profit. As their economic advisor, you recommend that they -produce until marginal cost is equal to marginal revenue. -produce as much as possible, regardless of cost. -produce until price falls below average variable cost. -produce until marginal revenue is equal to price.

produce until marginal cost is equal to marginal revenue.

Classify each cost below as an implicit cost or an explicit cost. using office space to run your business that was previously rented out for income

implicit cost

Which statements are correct for the following situation Number of firms remains stable -price is greater than average cost -price is less than average cost -no firms earn economic profit -firms earn both economic profit and accounting profit -firms earn an economic loss

no firms earn economic profit

A year ago, you graduated from college and decided to open your own computer software company. Over the past year, your firm generated $500,000 in revenue. You hired two software engineers and paid each of them $150,000 over the past year. You also purchased computer equipment that cost a total of $30,000. To save money, you decided to use the basement of your house for the business. Previously, you had rented this space to a tenant for $6,000 per year. Instead of opening your own business, you could have gone to work for Microsoft and earned $200,000 over the past year. a. What were your accounting profits of your firm over the past year? b. What were the economic profits of your firm over the past year? c. Given this information, you (should/ should not) have launched your own business.

170000; -36000; should not

Classify each statement or equation according to whether it describes average variable cost, marginal cost, or average (total) cost. (TC is total cost; VC is variable cost; Q is quantity.) ΔTC/ΔQ

Marginal Cost

Classify each statement or equation according to whether it describes average variable cost, marginal cost, or average (total) cost. (TC is total cost; VC is variable cost; Q is quantity.) The change in total cost divided by the change in output

Marginal Cost

Suppose that the market for pizzas in your town is perfectly (or purely) competitive, with a market price of $16 per pizza in long run equilibrium. A local pizza restaurant, Pizzazzy, signs a one‑year lease in a new building in town and continues selling pizzas at this price. People in your town view Pizzazzy pizzas as the same as other pizzas. Suppose that a couple of months after the new pizza restaurant opens, the local government institutes a $12 per pizza price ceiling. If you buy a $12 pizza from Pizzazzy a week later (and assuming Pizzazzy is behaving rationally), what do you know about the marginal cost, average total cost, and average variable cost at the profit maximizing point of production after the price ceiling is imposed? marginal cost average total cost average variable cost Answer Bank no higher than $12 no higher than $16 but maybe higher than $12 higher than $16 no higher than $16 but definitely higher than $12

no higher than $12; higher than $16; no higher than $12

Jennifer's Bakery Shop produces baked goods in a perfectly competitive market. If Jennifer decides to produce her 100th batch of cookies, the marginal cost is $120. She can sell this batch of cookies at a market price of $110. To maximize her profit, Jennifer should -produce this batch of cookies because their MR exceeds their MC. -charge $120 for this batch. -shut down. -produce this batch of cookies because they will help lower her average fixed cost. -not produce this additional batch.

not produce this additional batch.

Economic costs and accounting costs differ because accountants include -only explicit costs. -neither explicit nor implicit costs. -only implicit costs. -both explicit and implicit costs.

only explicit costs.

Harrison owns a flower shop. Generally, when preferences for a good rise, demand for the good rises. Holding all else constant, this will result in a higher market price, which will lead to _____ in the industry. The latter will in turn _____, leading the price to _____. -positive economic profits; attract new firms into; fall -economic losses; attract new firms into; fall -positive economic profits; cause some firms to leave; rise further -economic losses; cause some firms to leave; rise further

positive economic profits; attract new firms into; fall

You are considering opening a small flower store. You anticipate that you will earn $100,000 each year in revenue. It will cost you $30,000 each year to rent the space necessary to run your business. Additionally, you will need to spend $10,000 each year on flower seeds, utilities, and other expenses necessary to operate your flower shop. You have just graduated from college with a degree in economics and have received an offer to work for a firm with a yearly salary of $70,000. What is your anticipated economic profit of opening the flower shop? Based on this information you (should/should not) open the flower store.

-10000; should not

Slider owns a hamburger restaurant. Slider's minimum average variable cost is $10$⁢10 at a quantity of 100 hamburgers, and his minimum average total cost is $15$⁢15 at a quantity of 200 hamburgers. His total fixed cost is $300$⁢300 . Use this information to answer the questions. What is Slider's AVC when he sells 200 hamburgers? Slider's AVC: $ At a quantity of 250 hamburgers, the average total cost curve is -increasing. -decreasing. -below average variable cost. -not able to be calculated from the information given. Or, none of the other answers are correct.

13.50; increasing

In the short run, perfectly (or purely) competitive firms will maximize their profit by producing which of the choices? Select all that apply. 1) any quantity where marginal revenue > marginal cost 2) the quantity where marginal revenue = marginal cost 3) the largest quantity possible, not considering costs or revenues 4) a small quantity to drive up the price 5) the quantity where price equals marginal cost

2) the quantity where marginal revenue = marginal cost; 5) the quantity where price equals marginal cost

Which of the following conditions is present for all sellers in a perfectly competitive market? -All sellers are selling identical products. -The number of sellers is small. -All sellers have an equal and high level of market power. -The product price varies across the sellers.

All sellers are selling identical products.

Classify each statement or equation according to whether it describes average variable cost, marginal cost, or average (total) cost. (TC is total cost; VC is variable cost; Q is quantity.) TC/Q

Average (total) cost

Classify each statement or equation according to whether it describes average variable cost, marginal cost, or average (total) cost. (TC is total cost; VC is variable cost; Q is quantity.) The total cost divided by the quantity of output

Average (total) cost

Classify each statement or equation according to whether it describes average variable cost, marginal cost, or average (total) cost. (TC is total cost; VC is variable cost; Q is quantity.) VC/Q

Average Variable cost

Classify each statement or equation according to whether it describes average variable cost, marginal cost, or average (total) cost. (TC is total cost; VC is variable cost; Q is quantity.) The sum of all costs that change as output changes divided by the number of units produced

Average variable cost

Which statement is false? -Marginal cost and marginal productivity are inversely related. -Marginal cost is the change in a firm's variable cost due to a one unit change in output. -A marginal cost curve will always intersect the average variable cost curve at the minimum average variable cost. -Costs that are small and unimportant with little impact on profits are called marginal costs.

Costs that are small and unimportant with little impact on profits are called marginal costs.

In general, the market demand curve in a perfectly competitive market is perfectly elastic. False True

False

Which of the following statements is TRUE? I. If a competitive firm sells its product at a price of $80, the firm should increase production from 100 to 101 units if the total cost rises from $2,000 to $2,066. II. If the marginal cost of the tenth unit is $14 and the marginal revenue is $10, the firm should produce the tenth unit to increase profits by $4. III. For competitive firms, profits are maximized at MR = MC or P = MC, since P = MR. -I, II, and III -III only -I and III only -II only

I and III only

Which situation gives the best example of a price‑taker as it pertains to perfect competition? -Carol sells used furniture. Sometimes customers want to haggle with her over her prices, but she typically responds, "That's the price, hon. Take it or leave it." -The city government has set a maximum price Alice can charge for her garage apartment, so she must take that price or not rent it out at all. -Bob is having trouble selling his old car. When Cindy offers him $1000 he takes it, even though it is less than he was hoping to get. -Mary Beth grows cotton. She finds that she can always sell her entire crop at the market price. However, if she asks a price that is even slightly higher she cannot sell any of her cotton.

Mary Beth grows cotton. She finds that she can always sell her entire crop at the market price. However, if she asks a price that is even slightly higher she cannot sell any of her cotton.

Suppose that the price of corn, a crop produced in a perfectly (or purely) competitive industry, increased 208% last year as demand for corn‑based ethanol fuel increased. What do you expect to happen in the long run for the corn industry given this recent success? -The price per bushel of corn will continue to increase, yielding higher profits. Thus, more firms will enter the market indefinitely. -Profits will become negative due to overfarming, which will result in the corn farming industry going under. -Profits will be equal to zero. -None of the above.

Profits will be equal to zero.

Suppose you are thinking of starting your own small business. Consider how your accounting profit is different than your economic profit. Accounting profit is different than economic profit because: -accounting profit ignores the opportunity cost of launching a new business. -economic profit is what is reported on your tax return. -economic profit is only important to economists and does not apply to the actual decision to launch a new business. -accounting profit includes all financial and opportunity costs of starting a business.

accounting profit ignores the opportunity cost of launching a new business.

The decision to start a business and the decision to attend college -are the same in that each decision involves the same costs -and benefits and the same opportunity costs are different in that in starting a business, you should mainly consider the opportunity cost principle, whereas in attending college, you should mainly consider the cost-benefit principle -are similar in that in both cases, you will want to consider the cost-benefit principle and the opportunity cost principle -are different in that in starting a business, you should mainly consider the cost-benefit principle, whereas in attending college, you should mainly consider the opportunity cost principle

are similar in that in both cases, you will want to consider the cost-benefit principle and the opportunity cost principle

Economic costs and accounting costs differ because economists include -only explicit costs. -only implicit costs. -both explicit and implicit costs. -neither explicit nor implicit costs.

both explicit and implicit costs.

Price takers -charge the prevailing prices and do not have any effect on the market price. -set their market prices. -can control the market prices of the products they sell. -produce only agricultural items in the market.

charge the prevailing prices and do not have any effect on the market price.

In the long run, each firm in an industry will: -earn only enough to cover the opportunity costs of all resources used in production. -produce where MR is less than MC. -offer more than one variation of the same good. -set price in coordination with other producers in the market.

earn only enough to cover the opportunity costs of all resources used in production.

Classify each cost below as an implicit cost or an explicit cost. The expense of buying textbooks

explicit cost

Classify each cost below as an implicit cost or an explicit cost. purchases of office supplies

explicit cost

An individual firm in a perfectly competitive market can obtain a higher price for its product by reducing output. True False

false

An individual firm in a perfectly competitive market must lower its price to sell more of its product. True False

false

Erika is the owner of a cherry orchard. The price of cherries is high enough that Erika is earning positive economic profits. In the long run, Erika should expect _____ cherry prices due to the _____ firms. -lower; entry of new -higher; exit of existing -lower; exit of existing -higher; entry of new

lower; entry of new

A perfectly competitive industry is characterized by -many firms with control over the market price producing differentiated products. -many firms with no control over the market price producing identical products. -a single firm with limited control over the market price producing a product with many close substitutes. -a single firm with control over the market price producing a product with no close substitutes.

many firms with no control over the market price producing identical products.

Classify each statement or equation according to whether it describes average variable cost, marginal cost, or average (total) cost. (TC is total cost; VC is variable cost; Q is quantity.) The amount buy which total cost increases when an additional unit is produced

marginal cost

Suppose you are thinking of starting your own small business. Consider how your accounting profit is different than your economic profit. After doing your research, you are confident that you will make an accounting profit if you launch the business but feel it is very unlikely that you will make an economic profit. In this case, you (should/should not) start the business.

should not

Sort the descriptions below into whether they are characteristics of productive or allocative efficiency. PRODUCTIVE EFFICIENCY: can have multiple answers -the maximum output is obtained with given resources -goods and services are produced at their lowest opportunity -the price consumers pay is equal to the marginal cost of producing the good -production represents consumer preferences

the maximum output is obtained with given resources; goods and services are produced at their lowest opportunity cost

The marginal cost curve intersects -the minimum of the average fixed cost, average variable cost and the average total cost curves. -the minimum of the average variable cost and average total cost curves. -the average fixed cost curve at its minimum. -the average total cost curve at its maximum.

the minimum of the average variable cost and average total cost curves.