Econ 2305 Exam 2 Rashid

A price-taker faces a demand curve that is:

horizontal at the market price.

A rational seller will sell another unit of output:

if the cost of making another unit is less than the revenue gained from selling another unit.

If a firm shuts down in the short run, then its:

economic loss will equal its fixed costs.

Last year, Casey grew fresh vegetables, which she sold at her local farmers market, but this year, Casey did not plant any vegetables and went to work at a bank instead. If Casey's decision to change careers did not affect the price of vegetables at the farmers market, then this suggests that:

the market for vegetables is perfectly competitive.

A firm should shut down if its total revenue is less than its _____ even when the firm produces the level of output at which price equals marginal cost.

variable cost. Explanation The firm must pay fixed costs whether it operates or not. As long as the firm is covering its variable cost, it should produce a positive level of output. Otherwise, it should shut down.

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the table below: What is the lowest price per window that John would be willing to accept to spend 4 hours per day cleaning windows?

$3.50 He must make at least $7 per hour cleaning windows since he can earn that amount at the grocery store. If he spends a 4th hour cleaning windows, he can clean 2 additional windows. Thus, in order to earn at least $7, he has to be paid a minimum of $3.50 per window.

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the table below: How many hours a day should John spend cleaning windows?

2

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the table below: What is John's opportunity cost of cleaning windows for an hour?

7$ Each hour John spends cleaning windows is one fewer hour he can work at the store. His wage at the store is $7 per hour, so that is what he sacrifices per hour spent cleaning windows.

Which of the following is a defining characteristic of all perfectly competitive markets?

All firms sell the same standardized product.

Which of the following statements is true for both Microsoft and a locally owned restaurant?

Both seek to maximize profits

Which of the following is NOT a characteristic of a perfectly competitive market?

Each firm in the market sells a somewhat different variant of the good.

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the table below: Should John spend a third-hour cleaning windows?

No, because the additional amount he would earn is $6, which is less than his opportunity cost of $7.

If we plot John's opportunity cost per window on the vertical axis and the number of windows cleaned each day on the horizontal axis, we will have John's ______ curve for window-cleaning services.

Supply

Suppose a firm produces the level of output at which the marginal cost of the last unit produced equals the price of the good. Which of the following statements is always true?

The firm should shutdown if its total revenue is less than its variable cost. Explanation In general, a firm maximizes its profit by choosing the level of output at which price equals marginal cost. However, if a firm???s total revenue isn't ???t large enough to cover its variable cost, then the firm should shut down. Note that even when a firm produces where price equals marginal cost, there is no guarantee that the firm will earn a positive economic profit.

An increase in the price a firm receives for its output will lead the firm to:

expand output. Explanation As price increases, a profit-maximizing firm will expand output up to the point where marginal cost is again equal to price.

Which of the following is the most likely to be a fixed factor of production at a pizza restaurant?

The size of the seating area.

If a perfectly competitive firm produces an output level at which price is greater than marginal cost, then the firm should:

expand output to earn greater profits or smaller losses. Explanation If the price is greater than marginal cost, the firm should increase output because the revenue generated from selling an additional unit is greater than the cost of producing an additional unit.

One implication of the shape of the demand curve facing a perfectly competitive firm is that:

if the firm increases its price above the market price, it will earn zero revenue. Explanation A perfectly competitive firm cannot raise its price without losing all of its customers to the many rival firms that produce the same product.

Jenny sells lemonade in front of her house in the summer. Several other kids in Jenny's neighborhood also run lemonade stands in the summer. If the lemonade market is perfectly competitive and Jenny is charging the equilibrium price, then Jenny can increase her revenue if she:

keeps the price of her lemonade the same and increases the output. Explanation If the market for lemonade is perfectly competitive, then no one will buy Jenny???s lemonade if she increases the price. Thus, if she wants to increase her revenue, she has to keep the price of her lemonade the same and increase output.

Suppose a perfectly competitive firm is producing 1,000 units of output and the marginal cost of the 1,000th unit is $7. If the firm can sell each unit of output for $7 and the firm's revenue is sufficient to cover its variable cost, the firm should:

leave production unchanged.

In general, perfectly competitive firms maximize their profit by producing the level of output at which:

marginal cost equals price. Explanation The rule for profit maximization follows from the Cost-Benefit Principle: a firm should continue to produce output as long as price is at least as great as marginal cost.

The primary objective of most private firms is to:

maximize profit.

If a perfectly competitive firm produces an output level at which price is less than marginal costs, then the firm should:

reduce output to earn greater profits or smaller losses.

When the price of a perfectly competitive firm's output rises:

the firm will produce more. Explanation Since the marginal cost curve is upward sloping (due to diminishing returns), the firm will produce more and the price of its output rises.