Econ Ch 7 and Ch 8

Does the market exhibit allocative efficiency in the short run? yes no

yes

5. In a perfectly competitive market, each firm's demand curve is: horizontal. vertical. downward-sloping. upward-sloping.

Horizontal Correct! While in perfect competition the market demand curve slopes downward and to the right, the demand curve for individual firms is horizontal, meaning each of the small firms in the industry can sell as much as it wants without reducing price because each firm is too small to influence the market's price.

10. The firms in a perfectly competitive market produce _____ products. different cooperative identical complementary

Identical Right answer! One of the distinguishing characteristics of a perfectly competitive market is the nearly identical products the market's competitors produce. Other important distinguishing characteristics are the presence of many small firms in the market and the absence of entry/exit barriers.

6. The price charged by a firm in a perfectly competitive market always equals its: total revenue. marginal cost. marginal revenue. average cost.

Marginal Revenue Since the price of a firm's product in a perfectly competitive market doesn't change as it sells additional units (shown by a horizontal demand curve), its marginal revenue (the additional revenue from selling additional units) is equal to the unit price the firm charges for its product.

6. The additional cost of producing one more unit of a good is: average variable cost. total cost. variable cost marginal cost.

Marginal cost Good job! All marginal concepts in economics involve a change in an amount caused by changing a related variable. In this case, cost is increased by increasing the level of output by one unit.

Which of the following best describes the economic reasoning behind the fact that the marginal physical product of labor declines as more labor is employed, with other inputs held constant? The tattoo shop is experiencing increasing returns because its total tattoo output increases each time a new worker is hired. Monster's Ink is experiencing diminishing returns, possibly caused by three workers getting in each other's way and needing to share tools (after sanitization, of course). There is no rational reason for tattoo output to change as it does. Monster's Ink is experiencing negative returns because hiring the third worker increases tattoo output less than hiring the fourth worker.

Monster's Ink is experiencing diminishing returns, possibly caused by three workers getting in each other's way and needing to share tools (after sanitization, of course).

Which business organization has unlimited liability and more than one owner? sole proprietorship corporation partnership

Partnership A partnership has unlimited liability and more than one owner.

Which business organization typically has a single owner that has unlimited liability? partnership corporation sole proprietorship

Sole prop A sole proprietorship has a single owner with unlimited liability. Unlimited liability means that your personal assets are not protected should something happen to the business such as a lawsuit or a bankruptcy.

5. _____ costs increase as the level of production increases. Implicit Fixed Variable Sunk

Variable Correct! Variable costs change with the level of production. They include items such as labor and raw materials. As production increases, the level of total variable costs increases, and as production declines, the level of total variable costs declines.

4. Firms in perfectively competitive industries earn _____ economic profits. positive negative zero excessive

Zero Outstanding! Since a firm earning zero economic profit is covering its opportunity cost (and as a result is earning an accounting profit), such an outcome is not as bad as it sounds.

Bruno's Gelato Café has a fixed cost of $100. The variable cost of producing 10 gelatos is $20, and the variable cost of producing 11 gelatos is $22. What is the total cost and marginal cost of producing 11 gelatos? a) $122; $2 b) $122; $22 c) $42; $2 d) $42; $22

a) $122; $2 The total cost is equal to fixed cost ($100) + variable cost ($22) = $122. The marginal cost is the change in total cost from producing 10 gelatos ($120) and 11 gelatos ($122).

The average total cost of manufacturing smartphones tends to decrease as more sellers enter the industry. Therefore, the long run supply curve for this industry will be: a) downward sloping b) horizontal c) relatively steep d) upward slopping

a) downward sloping

a. ΔTC/ΔQ: (TC is total cost; VC is variable cost; Q is quantity.) average variable cost marginal cost average (total) cost

marginal cost

Candice is a jewelry shop owner, specializing in beaded necklaces. For each of the following inputs, indicate which items are variable inputs as opposed to fixed inputs in the long run. Variable inputs include shipping computers beads chairs two-year lease on office and retail space hourly labor upper management salaries

all options are variable inputs

This is total output divided by the number of workers. Diminishing returns marginal product average product

average

When eight weavers are employed, and output is 80 baskets, ___________ is equal to 10 baskets. Diminishing returns marginal product average product

average

(TC is total cost; VC is variable cost; Q is quantity.) c. TC/Q: average variable cost marginal cost average (total) cost

average (total) cost

d. The total cost divided by the quantity of output: average variable cost marginal cost average (total) cost

average (total) cost

(TC is total cost; VC is variable cost; Q is quantity.) f. VC/Q: average variable cost marginal cost average (total) cost

average variable cost

g. The sum of all costs that change as output changes divided by the number of units produced: average variable cost marginal cost average (total) cost

average variable cost

b. The amount by which total cost increases when an additional unit is produced: average variable cost marginal cost average (total) cost

marginal cost

Suppose that the average score in a class before the final exam was 80%. The average score on the final exam was 85%. How does the marginal score (final exam average) affect overall grades? a) The marginal score lies below the average and overall grades fall. b) The marginal score lies above the average and overall grades rise. c) The marginal score lies below the average and overall grades rise. d) The marginal score lies above the average and overall grades fall.

b) The marginal score lies above the average and overall grades rise. Great Job! If the marginal score (85%) is greater than the average score (80%), the overall grade will rise.

e. The change in total cost divided by the change in output: average variable cost marginal cost average (total) cost

marginal cost

b. Many buyers and sellers perfectly competitive markets monopolistically competitive markets both perfectly competitive and monopolistically competitive markets

both perfectly competitive and monopolistically competitive markets

c. Few, if any, barriers to entry perfectly competitive markets monopolistically competitive markets both perfectly competitive and monopolistically competitive markets

both perfectly competitive and monopolistically competitive markets

It is argued that this form of business contributes the most to increases in the nation's output (GDP). partnership sole proprietorship corporation

corporation

Limited liability encourages investors to invest large amounts of money in this form of business. partnership sole proprietorship corporation

corporation

Shareholders are the owners of this form of business. partnership sole proprietorship corporation

corporation

Which business organization can raise capital by issuing stock? partnership sole proprietorship corporation

corporation A corporation has limited liability and the ability to issue stock to raise capital.

The following would be an example of a variable input in the production of pizza: a) the rent on the locale b) the oven c) the cash register d) cheese

d) cheese The amount of cheese used depends on the quantity of pizza produced.

Suppose a car manufacturer discovers that the marginal cost of the last car produced was $15,000, while the marginal revenue was $14,000. In order to increase profits, the car manufacturer should __________ the quantity of cars produced. a) increase b) stay the same c) increase or decrease d) decrease

d) decrease Right answer! When marginal cost exceeds marginal revenue, one should decrease the quantity produced in order to maximize profits.

Suppose that producers in the market for pizza around Campustown are earning economic profits. In the long run then, we can expect the price of pizza to: a) increase. b) stay the same. c) increase or decrease. d) decrease.

d) decrease. Right answer! As more pizza stores enter the profitable market, supply will increase which pushes prices down.

Assume the following table described the production function for haircuts. From 2 to 3 workers the marginal product of workers: # of workers ,output 0, 0 1, 10 2, 25 3, 35 4, 40 a) increases. b) does not change. c) can not be calculated. d) decreases.

d) decreases. The marginal product of the 2nd worker is 15, the 3rd worker is 10, and the 4th worker is 5.

Suppose a Mexican restaurant maximizes profits when it sells each meal at a price of $10. For the restaurant to remain open in the short run, its average variable costs should be _______ $10. a) higher or equal to b) equal to c) either higher or lower than d) lower or equal to

d) lower or equal to Great Job! Average variable costs must be less than the price in order for a business to stay open in the short run.

An additional worker adds less to total output than the previous worker hired. Diminishing returns marginal product average product

diminishing

4. A fixed cost: doesn't change with the level of output in the short run. includes only sunk costs. grows as the level of output grows. refers only to costs for assets that don't move.

doesn't change with the level of output in the short run. Good job! While in the short run fixed costs don't change as the level of output changes, this is not the case in the long run.

The long run is best defined as a time period that is longer than one year. during which at least one input cannot be changed. during which all inputs can be varied. during which consumer income change.

during which all inputs can be varied.

Suppose that a car manufacturer discovers that it can lower its average costs if it diversifies its operation by also producing pickup trucks and SUVs. What concept does this illustrate? economies of scale economies of scope opportunity cost the law of diminishing returns comparative advantage

economies of scope

3. A firm in a perfectly competitive market maximizes its profits when its marginal cost equals its total revenue. True False

false Correct. The profit-maximizing output level for a firm in perfect competition is where the firm's marginal cost equals its marginal revenue. If the firm were to select another output level (higher or lower) it would earn less profit.

1. If a business has revenue of $100,000, explicit costs of $50,000, and implicit costs of $60,000, it is earning an economic profit. True False

false Good job! Because economic profit includes both explicit costs (paid to another economic entity) and implicit costs (the opportunity cost, not otherwise captured, of resources supporting the business), this example would produce a loss ($100,000 − $50,000 − $60,000 = −$10,000).

2. A perfectively competitive industry's market demand curve is a horizontal line. True False

false Right answer! Although a firm in perfect competition faces a horizontal demand curve because each firm takes the equilibrium price as given, the market itself (representing the demand faced by all the producers in the market) has a downward-sloping to the right of the demand curve.

2. When a business sells an excess factory, it is incurring a sunk cost. True False

false Right! Because this business is recovering at least a portion of its fixed costs by selling the factory, the fixed costs associated with the factory are not a sunk cost. Sunk costs are not recoverable.

2. A perfectly competitive industry is characterized by: many small firms each producing different products and low barriers to entry. a few large firms each taking into account the behavior of competitors and high barriers to entry. many small firms each producing identical products and no barriers to entry. a single firm that satisfies virtually all of the market's needs for a product with effective barriers to entry.

many small firms each producing identical products and no barriers to entry. Right answer! These characteristics yield the most competitive market structure. Because each firm is but a small part of the overall market, no firm can influence the market price.

If hiring Kristen causes average product to increase, Kristen's ___________ must be above current average product. Diminishing returns marginal product average product

marginal

Joe notices that when he hires another worker, the number of cars his company can wash increases. Diminishing returns marginal product average product

marginal

This is the change in total output divided by the change in the number of workers. Diminishing returns marginal product average product

marginal

7. A firm's profit is maximized at the output level where: marginal cost equals marginal revenue. average fixed cost is minimized. variable cost is maximized. sunk cost is eliminated.

marginal cost equals marginal revenue. Right answer! When marginal revenue equals marginal cost, no other output level yields a higher profit; that is, profit is maximized.

. The profit-maximizing level of output for a firm in a perfectly competitive market occurs where: total revenue exceeds total cost. marginal revenue equals marginal cost. marginal revenue exceeds marginal cost. marginal revenue equals total cost.

marginal revenue equals marginal cost. At the output level where a firm's marginal revenue (the additional revenue from selling additional units) equals its marginal cost (the additional cost generated by producing additional units), the firm's total profits cannot be improved by producing a different number of units.

9. A firm earning a zero economic profit is _____ the financial expectations of its investors. exceeding meeting not meeting gaining

meeting Good job! Because a firm's opportunity costs include the returns investors forgo in order to invest in the firm, the firm's zero economic profit produces an acceptable return for investors.

3. A firm earning zero economic profit is: failing and will shortly close. meeting its investors' minimum expectations and covering its opportunity costs. earning a positive accounting profit but not covering the opportunity costs of all of the resources employed in the business. not operating.

meeting its investors' minimum expectations and covering its opportunity costs. Correct! A firm earning zero economic profit has sufficient revenue to cover its costs, both explicit (paid to another economic entity) and implicit (opportunity cost of all of the resources in the business not otherwise captured). Because implicit costs include the return investors give up to invest in this business rather than in other opportunities, investors' expectations are met with a zero economic profit.

e. Differentiated goods perfectly competitive markets monopolistically competitive markets both perfectly competitive and monopolistically competitive markets

monopolistically competitive markets

8. If firms in a perfectly competitive market are earning positive economic profits in the short run, one would expect that in the long run: existing firms would leave the market and market prices would decrease. existing firms would leave the market and market prices would increase. new firms would enter the market and market prices would increase. new firms would enter the market and market prices would decrease.

new firms would enter the market and market prices would decrease. Because there are no barriers to entry, the positive short-run economic profits of existing firms in perfect competition will attract new competition. This increase in supply will cause market prices to decrease to the point where all the firms earn zero economic profits.

Does the market exhibit production efficiency in the short run? yes no

no

1. A market structure describes the nature of an industry based on the: size of the industry and number of firms. number and size of firms in the industry. type of products produced by the industry. size of firms in the industry.

number and size of firms in the industry. Good job! With knowledge of these two characteristics, economists can understand the nature of competition in an industry. We will study four market structures: perfect competition, monopolistic competition, oligopoly, and monopoly.

2. Implicit costs are the: additional costs of producing an additional unit. costs that change with the level of output. opportunity costs of the resources used by the firm. costs that don't change with the level of output in the short run.

opportunity costs of the resources used by the firm. While not recognized in an accountant's profit and loss statement, economists view the opportunity costs of resources (not otherwise captured) deployed in a business as relevant to assessment of the performance of the enterprise. The outside compensation business owners give up to work in their business is an example of an implicit cost.

Ownership is distributed among a small number of people. This type of business is subject to unlimited liability. partnership sole proprietorship corporation

partnership

a. Identical/homogenous goods perfectly competitive markets monopolistically competitive markets both perfectly competitive and monopolistically competitive markets

perfectly competitive markets

d. No one buyer or seller can control price perfectly competitive markets monopolistically competitive markets both perfectly competitive and monopolistically competitive markets

perfectly competitive markets

3. A firm is a _____ if its actions have no impact on the market price of a good. price taker price maker price creator price manipulator

price taker Good job! In the perfect competition market structure, there are many relatively small firms producing identical products and there are no barriers to entry. This means firms in this industry must take the market price as given.

Most American businesses are this form of business. partnership sole proprietorship corporation

sole prop

Which of the following is not a characteristic of a perfectly competitive market? no product differentiation between firms some control over price a large number of firms offering similar products no barriers to entry

some control over price

Which of the following is not a characteristic of a perfectly competitive market? some control over price no barriers to market entry or exit many buyers and sellers homogeneous products

some control over price Perfect competition is characterized by four attributes: many buyers and sellers, each too small to individually influence price; a homogeneous (standardized) product; full information among buyers and sellers regarding product price and quality; and no barriers to entry or exit. Perfect competition contrasts with monopolistic competition in that, under the latter, firms have some control over price (limited market power).

Marginal cost is defined as total cost divided by total output. the change in total costs from producing one more unit of output. total variable cost divided by total output. the change in fixed cost from producing one more unit of output.

the change in total costs from producing one more unit of output.

One thing that distinguishes the short run and the long run is the existence of marginal costs. implicit costs. the number of months considered. the existence of at least one fixed input.

the existence of at least one fixed input.

The marginal cost curve often decreases at first and then starts to increase. This is explained by increasing ATC. economies of scale. the law of diminishing returns.

the law of diminishing returns.

1. Explicit costs are: the same as implicit costs. those paid to some other economic entity. the opportunity costs of the resources used in the business. costs that cannot be documented by a receipt.

those paid to some other economic entity. Explicit costs (also called accounting costs) are typically documented by a receipt or invoice. Examples of explicit costs include labor and raw materials.

1. In a perfectly competitive industry, one would expect that a natural disaster that decreases the production of a significant number of firms in the industry would cause market prices to rise. True False

true Correct! The impact of a natural disaster that reduces production is a shift in the market's supply curve to the left, indicating fewer producers are available to service the market's demand. This results in an increase in prices.

3. If a firm's total cost increases by $25 when it produces an additional unit of output, an economist would say that the marginal cost for that unit is $25. True False

true Right answer! The marginal cost for a unit of output is the additional cost the firm incurs to produce that additional unit.