Econ exam 2

When the wage rate is $10 per hour and the MPP of a worker is 15 units per hour, the unit labor cost is: A. $0.67 per unit. B. $10.00 per hour. C. $15.00 per unit. D. $150.00 per hour

A. $0.67 per unit.

Technological improvements cause: A. ATC to shift down. B. The supply curve to shift to the left. C. MC to shift up. D. P to increase.

A. ATC to shift down When the market is at long-run equilibrium, the quest for profits encourages producers to discover cheaper ways to manufacture their product. This results in lower costs thus shifting the ATC down.

Which of the following does not affect marginal costs? A. An increase in property taxes B. A decrease in Social Security taxes C. An increase in payroll taxes D. An increase in state unemployment taxes

A. An increase in property taxes Fixed costs such as the cost of the basic plant and equipment and property taxes do not vary with the rate of output therefore do not affect marginal costs.

The demand curve confronting a competitive firm: A. Equals the marginal revenue curve. B. Is horizontal, as is the market demand curve. C. Slopes downward, while the market demand curve is horizontal. D. Slopes downward and the marginal revenue curve is below it.

A. Equals the marginal revenue curve. Because a competitive firm can sell all its output at the prevailing price, the marginal revenue will always be equal to price and the MR curve will be equal to the demand curve.

When the production function shifts upward: A. MC shifts downward. B. ATC shifts upward. C. Unit labor costs must increase. D. There are constant returns to scale.

A. MC shifts downward. Advances that shift the production function upward - more can be produced with any given quantity of inputs - must also shift the cost functions downward.

The slope of the budget constraint, when a consumer has reached optimal consumption of two goods, is equal to the: A. Marginal rate of substitution. B. Cross-price elasticity of the two goods. C. Total utility for the two goods. D. Marginal rate of indifference.

A. Marginal rate of substitution.

A consumer maximizes total utility from a given amount of income when the: A. Marginal utility obtained from the last dollar spent on each good is the same. B. Marginal utility of the last unit of each good is the same. C. Total utility obtained from each product is the same. D. Amount spent for each product is the same.

A. Marginal utility obtained from the last dollar spent on each good is the same.

Assume that Anna buys peanut butter and bread. If the price of peanut butter falls, then: A. One end of her budget constraint will move away from the origin. B. Her entire budget constraint will shift toward the origin. C. Her entire budget constraint will shift away from the origin. D. Her indifference curves will shift away from the origin.

A. One end of her budget constraint will move away from the origin. Whenever the price of a good changes, the budget constraint shifts. If only one price is changed, then only one end of the budget constraint is shifted.

Which of the following characterizes a firm that is in long-run perfectly competitive equilibrium where profits are maximized? A. Price equals minimum ATC B. Positive economic profit C. Price equals marginal cost D. Price exceeds marginal cost

A. Price equals minimum ATC

Short-run supply determinants include: A. Technology. B. Number of buyers. C. Income. D. Consumer preferences.

A. Technology. The determinants of a firm's supply include the price of factor inputs, technology, expectations (for costs, sales, technology, and taxes and subsidies).

If a new sushi restaurant opens then: A. The market supply curve for sushi will shift to the right. B. The market supply curve for sushi will shift to the left. C. There will be a movement up along the market supply curve for sushi. D. There will be a movement down along the market supply curve for sushi.

A. The market supply curve for sushi will shift to the right. If the number of producers increases, the supply of sushi will increase

The short-run production function shows how output changes when: A. The quantity of labor changes. B. The quantity of land changes. C. Technology changes. D. The fixed inputs change.

A. The quantity of labor changes. In the short run some inputs (e.g. land and capital) are fixed in quantity.

Marginal revenue is the change in: A. Total revenue when output is changed. B. Total revenue when price is changed. C. Average revenue when output is changed. D. Average revenue when price is changed.

A. Total revenue when output is changed. In general, the contribution to total revenue of an additional unit of output is called marginal revenue.

Which of the following is the best explanation of why the law of diminishing returns does not apply in the long run? A.In the long run, firms can increase the availability of space and equipment to keep up with the increase in variable inputs. B. The MPP does not change in the long run. C. In the long run, firms have enough time to find the most qualified workers. D. All factors of production are fixed in the long run.

A.In the long run, firms can increase the availability of space and equipment to keep up with the increase in variable inputs.

If an additional unit of labor costs $20 and has a MPP of 15 units of output, the marginal cost is: A. $0.75. B. $1.33. C. $30.00. D. $300.00.

B. 1.33 Marginal cost is the increase in total cost associated with a one-unit increase in production and can be found by dividing the change in total cost by the MPP. If an additional unit of labor costs $20 and has a MPP of 15 units of output, the marginal cost is 20/15 or $1.33

q70 Average fixed cost at 20 units of output in Table 6.2 is: A. $1.00. B. $2.00. C. $2.50. D. $4.00.

B. 2 Average fixed cost is equal to fixed cost divided by q

The marginal cost curve intersects the minimum of the curve representing: A. TC. B. ATC. C. AFC. D. MPP.

B. ATC The MC curve will always intersect both the ATC and AVC curves at their lowest points

If a perfectly competitive firm wanted to maximize its total revenues, it would produce: A. The output where MC equals price. B. As much as it is capable of producing. C. The output where the ATC curve is at a minimum. D. The output where the marginal cost curve is at a minimum

B. As much as it is capable of producing.

When the size of a factory (and all its associated inputs) doubles and, as a result, output more than doubles: A. The law of diminishing returns must not apply in the smaller factory. B. Economies of scale must exist. C. The short-run ATC curve must be declining. D. Marginal costs must be declining.

B. Economies of scale must exist. Economies of scale (or increasing returns to scale) exist when all inputs double but output more than doubles which implies that the average costs have decreased.

The demand curve for each perfectly competitive firm is: A. Downward sloping. B. Horizontal C. Vertical D. Upward sloping

B. Horizontal

Market structure is determined by the: A. Annual revenue, costs and profits for an industry. B. Number and relative size of the firms in an industry. C. Amount of compensation given to the CEOs. D. Price charged for the good or service produced.

B. Number and relative size of the firms in an industry.

A catfish farmer will shut down production when: A. He is losing money. B. Price falls below AVC. C. Total revenue falls below total costs. D. The best he can do is breakeven.

B. Price falls below AVC.

When price exceeds average variable cost but not average total cost, the firm should, in the short run: A. Shut down. B. Produce at the rate of output where MR = MC. C. Minimize per-unit losses by producing at the rate of output where ATC is minimized in the short run. D. Minimize total losses by producing at the rate of output where ATC is minimized.

B. Produce at the rate of output where MR = MC. A competitive firm maximizes total profit (minimizes losses) at the output rate where MC is equal to MR. If at that output level the price (or MR) is less than ATC but greater than AVC, then a perfectly competitive firm is losing less than its fixed costs and should continue producing in the short run in order to minimize its losses.

When a firm produces at a technically efficient output level, it is: A. Producing the output at the minimum MC curve. B. Using the fewest resources to produce a good or service. C. Producing the output where the AVC curve is at a minimum. D. Producing the best combination of goods and services.

B. Using the fewest resources to produce a good or service. Technical efficiency is getting the most output attainable from any given level of factor inputs. In other words, no resources are being wasted.

"Unit labor cost" is equal to the: A. Wage rate. B. Wage rate divided by MPP. C. The change in labor cost divided by the change in output. D. Marginal cost.

B. Wage rate divided by MPP. The wage rate divided by the marginal physical product is equal to the unit labor cost which indicates the labor cost to produce one unit.

Which of the following is a production decision? A. How much output the firm should produce in the long run B. Whether the firm should shutdown or produce C. Whether the firm should exit or enter the market D. Whether or not the firm should merge with one of its rivals

B. Whether the firm should shutdown or produce A production decision is the selection of the short-run rate of output (with existing plant and equipment) including shut down (producing zero) or production.

A production decision involves choosing: A. The amount of plant and equipment and is a short-run decision. B. The amount of plant and equipment and is a long-run decision. C. A rate of output and is a short-run decision. D. A rate of output and is a long-run decision.

C. A rate of output and is a short-run decision.

The competitive market model is important because: A. It characterizes all the markets in the U.S. economy. B. It shows how laissez faire can overcome market failures. C. All industries function much like the competitive model. D. It shows that firms can earn economic profits in the long run.

C. All industries function much like the competitive model. Few, if any, product markets are perfectly competitive. However, many industries function much like the competitive model therefore understanding how the market works is important.

An indifference curve shows the: A. Maximum utility that can be achieved for a given consumer budget. B. Maximum utility that can be achieved for different amounts of a good. C. Combinations of goods giving equal utility to a consumer. D. Optimal consumption combinations between two goods.

C. Combinations of goods giving equal utility to a consumer.

Assume a given amount of output can be produced by several small plants or one large plant with identical minimum per-unit costs. This long-run situation reflects the existence of: A. Economies of scale. B. Diseconomies of scale. C. Constant returns to scale. D. Diminishing returns.

C. Constant returns to scale. When there is no economic advantage to a large plant, because a large plant is no more efficient than a small plants, constant returns to scale exist.

When the short-run marginal cost curve is upward-sloping: A. The average total cost curve is upward-sloping. B. The average total cost curve is above the marginal cost curve. C. Diminishing returns occurs with greater output. D. There are diseconomies of scale.

C. Diminishing returns occurs with greater output.

Technological improvements cause: A. New firms to enter but existing firms to continue producing their old output levels. B. Some firms to exit but the remaining firms to produce more output. C. Existing firms to produce more output. D. Existing firms to continue producing their old output levels but to lower the price of the product.

C. Existing firms to produce more output.

The long-run average total cost curve is constructed from the: A. Minimum points of the short-run marginal cost curves. B. Minimum points of the short-run average variable cost curves. C. Lowest average total cost for producing each level of output. D. Minimum points of the long-run marginal cost curves.

C. Lowest average total cost for producing each level of output. Long-run cost possibilities are determined by all possible short-run options. In the long run, we'd choose the plant that yielded the lowest average cost for any desired rate of output. The LATC represents these choices.

The point where the budget constraint and an indifference curve are tangent: A. Represents maximum total revenue. B. Indicates the optimal level of production. C. Represents the optimal consumption point. D. Indicates profit maximization.

C. Represents the optimal consumption point. The objective is to reach the highest indifference curve that is compatible with our budget constraint. We can afford only those consumption combinations that are on or inside the budget line. Therefore, the optimal consumption combination—the one that maximizes the utility of spendable income—lies at the point where the budget line is tangent to (just touches) an indifference curve.

Normal profit implies that: A. Economic profit must be positive. B. Economic profit must be negative. C. The factors employed are earning as much as they could in the best alternative employment. D. Firms will expand their scale of production.

C. The factors employed are earning as much as they could in the best alternative employment. Normal profit is the profit one makes if they cover all of their explicit costs and implicit costs but do not make any profit above and beyond what they could have made using those resources elsewhere.

Which of the following is a determinant of market supply but not the supply curve of an individual firm? A. The price of factor inputs B. Expectations C. The number of firms in the market D. Technology

C. number of firms in market The market supply of a competitive industry is determined by the price of factor inputs, technology, expectations, taxes and subsidies and the number of firms in the industry. The number of firms in the industry does not impact the supply curve of the individual firm.

Which of the following is used to depict all combinations of goods that are affordable with a given income and given prices? A. An indifference curve B. An indifference map C. A demand curve D. A budget constraint

D. A budget constraint

Which of the following characterizes a competitive market? A. A downward-sloping demand curve for the firm B. A vertical demand curve facing each firm in the market C. Some of the firms sell at a price above the market equilibrium price D. A downward-sloping demand curve for the market

D. A downward-sloping demand curve for the market

Implicit costs: A. Include only payments to labor. B. Are the sum of actual monetary payments made for resources used to produce a good. C. Include the value of all resources used to produce a good. D. Are the value of resources used to produce a good but for which no monetary payment is made

D. Are the value of resources used to produce a good but for which no monetary payment is made

A firm that makes zero economic profits: A. Must eventually go bankrupt, and exit the industry. B. Does not cover its variable costs and should shut down in the short-run. C. Incurs an accounting loss if fixed costs are greater than variable costs. D. Covers all its costs, including a provision for normal profit.

D. Covers all its costs, including a provision for normal profit. A firm that is making zero economic profits is covering all of its costs including its opportunity costs, in other words it is earning a normal profit. normal profit = implicit cost

The marginal cost curve: A. Is not be affected by changes in the price of variable inputs. B. Slopes downward to the right as output increases. C. Is the long run supply curve for a competitive firm at prices below the AVC curve. D. Is the short run supply curve for a competitive firm at prices above the AVC curve.

D. Is the short run supply curve for a competitive firm at prices above the AVC curve. For competitive firms, marginal cost defines the lowest price a firm will accept for a given quantity of output. In this sense, the marginal cost curve is the supply curve; it tells us how quantity supplied will respond to price. However, a firm will shut down if price falls below minimum average variable cost. The supply curve does not exist below minimum AVC.

If the marginal cost curve is rising, then which of the following must be true? A. The average total cost curve must be rising B. The average total cost curve must be below the marginal cost curve C. The average total cost curve must be above the marginal cost curve D. Total costs must be rising

D. Total costs must be rising

A budget constraint line represents combinations of two goods that provide an individual the same total utility.

FALSE An indifference curve is a graphical representation of the combinations of two goods that yield equal total utility. A budget constraint depicts the limited consumption possibilities.

The production decision is a long-run supply decision.

FALSE A firm's production decision is the selection of the short-run rate of output that maximizes profits.

If a business owner uses a warehouse he owns to store his inventory, then his total costs will be less than if he rented warehouse space from someone else.

FALSE Total costs include explicit as well as implicit costs. If a business owner uses his own warehouse the market value of the warehouse is an implicit cost. If he rents the warehouse, the value will be an explicit cost. Either way, the cost of the warehouse will be included in total costs.

q71ch7 The marginal cost between 20 and 30 units of output in Table 6.2 is: A. $1.60. B. $4.00. C. $1.80. D. $18.00.

Marginal cost is equal to the change in total cost (80 - 62) divided by the change in quantity (30 - 20) which is $1.80.

If MPP declines with greater output, then MC must increase.

TRUE

The long-run ATC curve is simply a composite of the best short-run ATC possibilities.

TRUE

When a firm is able to achieve the output indicated by a production function, it is producing with technical efficiency.

TRUE

The farther an indifference curve is from the origin, the more total utility it yields.

TRUE An indifference map depicts all the combinations of goods that would yield various levels of satisfaction. As the indifference curve move farther from the origin, the greater the level of total utility.