Econ Exam Ch. 11-15

Average fixed cost:

decreases as output increases.

Variable cost:

are the only costs that exist in the long run.

Refer to the graph shown. The short-run equilibrium price for the monopolistically competitive firm represented is:

$0.60.

Refer to the graph shown. If this monopolist sets the price to maximize profit, it will charge:

$16 for its product. At a price of $16, the quantity produced will be such that marginal revenue equals marginal cost.

If a monopolist increases output from 14 to 15 by lowering its price from $32 to $31, marginal revenue is:

$17. Total revenue increases from $32 × 14 = $448 to $31 × 15 = $465, and so marginal revenue is 17. $1 is the change in average revenue.

If a monopolist increases sales from 10 to 11 by lowering its price from $40 to $38, its marginal revenue is:

$18 Total revenue increases from $40 × 10 = $400 to $38 × 11 = $418, and so marginal revenue is $18. $2 is the change in average revenue.

If a firm's average fixed cost is $4 and its average total cost is $6, its average variable cost is:

$2 Average variable cost equals the difference between average total cost and average fixed cost, or $6 − $4 = $2.

A firm's total variable cost increases from $4,000 to $4,020 as the firm increases its output from 400 to 401 units. What is the marginal cost of producing the 401st unit?

$20 The marginal cost of output is the cost of producing an additional unit of output. In this case, the last unit of output increased total cost by $20, and so this is the marginal cost of producing the 401st unit.

Refer to the graph shown. Assuming that the monopoly maximizes profit, it will earn profits of:

$40,000 per day. Total profits equal per-unit profits ($200) times output (200), or $40,000.

An entrepreneur most likely would develop a product if expected average total cost is:

$50 and expected price is $75.

An entrepreneur would be least likely to develop a product if expected average total cost is:

$65 and expected price is $40.

Refer to the graph shown. If the firm's total cost is $375, labor must cost:

$75 per unit. The position of the isocost indicates that if the firm spends the entire $375 on labor, it can afford 5 units of labor. Divide 375 by 5 to find the per-unit cost of labor: $375/5 = $75. Recall that all combinations on the isocost line have the same total cost.

Refer to the graph shown. The marginal rate of substitution at point C is:

2/3. The absolute value of the slope of the isoquant at point C is the same as the absolute value of the slope of the isocost line. Slope can be calculated by dividing the y-axis intercept by the x-axis intercept.

The top four firms in the industry have 10 percent, 8 percent, 8 percent, and 6 percent of the market. The four-firm concentration ratio of this market is:

32. The concentration ratio is calculated by summing the market shares of the top four firms.

Peggy-Sue's cookies are the best in the world, or so I hear. She has been offered a job by Cookie Monster, Inc., to come to work at $130,000 per year. Currently, she is producing her own cookies, and she has revenues of $260,000 per year. Her costs are $40,000 for labor, $15,000 for rent, $35,000 for ingredients, and $5,000 for utilities. She has $100,000 of her own money invested in the operation, which, if she leaves, can be sold for $400,000 that she can invest at 1 percent per year.a. Calculate her accounting and economic profits.

Accounting profit: $ 165,000 Economic profit: $ 31,000 Accounting profit = Explicit revenue - Explicit cost = $260,000 - $95,000 = $165,000 Economic profit = Explicit and implicit revenue - Explicit and implicit cost = Total revenue - Total cost = $260,000 - $229,000 = $31,000

Economan has been infected by the free enterprise bug. He sets up a firm on extraterrestrial affairs. The rent of the building is $4,000, the cost of the two secretaries is $50,000, and the cost of electricity and gas comes to $5,000. There's a great demand for his information, and his total revenue amounts to $100,000. By working in the firm, though, Economan forfeits the $55,000 he could earn by working for the Friendly Space Agency and the $4,000 he could have earned as interest had he saved his funds instead of putting them in this business.a. What is his profit or loss by an accountant's definitions?

Accounting profit: $41,000 Economic profit: $-18,000 a. By the accounting definition of cost and profit, Economan is making a profit equal to $100,000 - ($4,000 + $50,000 + $5,000) = $41,000. b. From an economist's point of view, where explicit and implicit costs are considered, Economan now has a loss of $100,000 - ($4,000 + $50,000 + $5,000 + $55,000 + $4,000) = −$18,000.

A profit-maximizing firm is producing where MR = MC and has an average total cost of $25, but it gets a price of $10 for each good it sells.a. What would you advise the firm to do?

As long as average variable costs are less than $10, in the short run, the firm should produce. In the long run, it should exit the market.

A profit-maximizing firm is producing where MR = MC and has an average total cost of $4, but it gets a price of $3 for each good it sells.a. What would you advise the firm to do?

As long as average variable costs are less than $3, in the short run, the firm should produce. In the long run, it should exit the market

A perfectly competitive firm sells its good for $20. If marginal cost is four times the quantity produced, how much does the firm produce? Why?

Assuming perfect competition, the firm is producing where MR = MC = P. Since price is $20, MR is $20. If MC is 4 times the quantity, it is producing 5 units

A perfectly competitive firm sells its good for $9. If marginal cost is three times the quantity produced, how much does the firm produce? Why?

Assuming perfect competition, the firm is producing where MR = MC = P. Since price is $9, MR is $9. If MC is three times the quantity, it is producing 3 units.

Why must buyers and sellers be price takers for a market to be perfectly competitive?

Buyers and sellers must be price takers because if sellers set prices, they would be able to raise them to make a profit and the demand curve that they face would not be horizontal.

Sea lions have been depleting the stock of steelhead trout. One idea to scare sea lions off the Washington State coast was to launch fake killer whales, predators of sea lions. The cost of making the first whale is $16,000—$5,000 for materials and $11,000 for the mold. The mold can be reused to make additional whales, so additional whales would cost $5,000 apiece.a. Calculate the total cost and average total cost of producing 1 to 10 fake killer whales by filling in the table below.

Economies of scale c. The fixed cost of producing fake whales is the cost of the mold, or $11,000. d. The variable cost of producing fake whales is the materials used to make a new whale, or $5,000 per whale.

Sea lions have been depleting the stock of steelhead trout. One idea to scare sea lions off the Washington state coast was to launch fake killer whales, predators of sea lions. The cost of making the first whale is $24,000—$8,000 for materials and $16,000 for the mold. The mold can be reused to make additional whales, so additional whales would cost $8,000 apiece.a. Calculate the total cost and average total cost of producing 1 to 10 fake killer whales by filling in the table below.

Economies of scale c. The fixed cost of producing fake whales is the cost of the mold, or $16,000. d. The variable cost of producing fake whales is the materials used to make a new whale, or $8,000 per whale.

The following graph shows marginal cost, average total cost, and average variable cost curves for a typical perfectly competitive firm.Draw the marginal revenue curve to indicate this firm is in a long-run equilibrium. Then label the profit-maximizing level of output.

In the long run, firms enter and exit the market and neither economic profits nor economic losses are possible. In the long run, firms make zero economic profit.

A farmer is producing where MC = MR. Assume that half of the cost of producing wheat is the rental cost of land (a fixed cost) and half is the cost of labor and machines (a variable cost). If the average total cost of producing wheat is $8 and the price of wheat is $6, what would you advise the farmer to do?

In the short run, the farmer should still grow wheat because by producing he will lose $2 per unit, but if he did not produce he would lose $4 per unit. In the long run, the farmer will go out of business.

A farmer is producing where MC = MR. Assume that half of the cost of producing wheat is the rental cost of land (a fixed cost) and half is the cost of labor and machines (a variable cost). If the average total cost of producing wheat is $26 and the price of wheat is $10, what would you advise the farmer to do?

In the short run, the farmer should stll grow wheat because by producing he will lose $16 per unit, but if he did not produce he would lose $13 per unit. In the long run, the farmer will go out of business.

Strategic decision making is most likely to occur in which market structure?

Oligopoly

Which of the following market structures does not have predictable price and output decisions at which the firms will arrive rationally?

Oligopoly

Refer to the table shown. If the output of bicycles is 4 per week, the marginal cost of producing another bicycle per week is:

Since total cost rises from $440 to $580 when the fifth bicycle is produced, the marginal cost of this bicycle is $140.

b. What would you advise the firm to do if you knew average variable costs were $12?

The firm should shut down in the short run and exit the market in the long run.

b. What would you advise the firm to do if you knew average variable costs were $3.50?

The firm should shut down in the short run and exit the market in the long run.

What will be the effect of a technological development that reduces marginal costs in a perfectly competitive market on short-run price and quantity?

The market supply curve will shift to the right, causing market price to fall and output to rise.

How is a firm's marginal cost curve related to the market supply curve?

The sum of all the individual firms' marginal cost curves (above the minimum AVC curve) is the market supply curve.

An entrepreneur is an individual who sees an opportunity to sell an item at a price higher than the average total cost of producing it.

True

Refer to the table shown. If the average product is 8, the number of workers is:

When the number of workers is six, total output (which equals the sum of the marginal products of the first six workers) is 48, and so the average product is 48/6 = 8.

A cartel is:

a group of firms that collude to maximize group profits.

Each of 10 firms in a given perfectly competitive industry has the identical costs given in the first table. The market demand schedule is given in the second table. Complete the calculation for marginal cost in the first table below.

a. In perfect competition, the market equilibrium price and the price each firm gets for its product is equal to the marginal revenue, or $8. b. The market equilibrium quantity is 40 units, where MR = MC ($8 = $8). (Remember that in perfect competition, MR = Market Price.) Since there are 10 firms, each firm produces 1/10 of the quantity, or 4 units. c. Each firm is making a total profit of −$7 (a negative profit is a loss)= Profit per unit × Quantity= (Market Price − Average Total Cost) × Q= [$8 − ($39/4)] × 4= −$7.00 d. Firms will begin to exit the market when the price falls below the minimum average total costs, or $9.75 (= $39/4).

Use the accompanying graph, which shows the marginal cost and average total cost curves for the shoe store Zapateria, a perfectly competitive firm.

a. Zapateria will produce 500 pairs of shoes if the market price is $70. At 500 pairs, the market price equals the marginal cost of $70. b. At a quantity of 500 pairs of shoes the average total cost is $50, while the price is $70. So Zapateria earns $20 of economic profit on each pair of shoes. The total profit Zapateria will earn is $20 times 500 pairs of shoes, or $10,000. c. Since Zapateria is making an economic profit, it should expect other shoe stores to enter the market. d. The long-run equilibrium price is $40 a pair because at $40 a pair price equals average total cost and all firms earn zero profit.

If MR > MC, a monopolist should:

increase production.

The Herfindahl index is calculated by:

adding the squared value of the market shares of all the firms in the industry.

In the long run:

all inputs can be varied and no inputs are fixed.

Total output per worker is also called:

average product.

In long-run equilibrium, monopolistically competitive firms produce where:

average total cost is equal to price.

A factory producing calculators employs four workers. At current levels of operation each worker produces 40 calculators per week. Assuming labor is the only variable input and the weekly wage is $400 per worker:

average variable cost is $10. Average variable cost equals $400/40, or $10.

Suppose you operate a factory that produces gadgets. Your current output is 1,000 gadgets. If your fixed cost is $10,000 and your total cost is $50,000, the:

average variable cost of production is $40. Total variable cost equals total cost minus total fixed cost, in this case $50,000 − $10,000 = $40,000. Since average variable cost equals total variable cost divided by output, average variable cost equals $40,000/1,000, or $40.

Refer to the graph shown. If this monopolist produces 45 units of output per day, it will:

be able to increase profit by producing less per day. At this output level, marginal revenue is less than marginal cost, so profits can be increased by reducing output.

Refer to the graph shown. If this monopolistically competitive firm maximizes profit, it will:

charge $85 per dress. At this price, the output level is such that marginal revenue equals marginal cost.

b. Advise her as to what she should do.As an economist, I would advise Peggy-Sue to:

decline the job at Cookie Monster, Inc., because she is currently earning an economic profit with her current business

A purpose of advertising is to make the:

demand for one's product more inelastic.

The difference between a perfectly competitive firm and a monopolistically competitive firm is that a monopolistically competitive firm faces a:

downward-sloping demand curve and price exceeds marginal cost in equilibrium.

If a firm is able to lower total costs by specializing in marketing and distribution while outsourcing production, it is taking advantage of:

economies of scope.

The reason for the merger of two businesses that sell unrelated goods but can share business practices and sales forces might best be explained by:

economies of scope.

Positive expected profits:

encourage people to supply goods.

The DeBeers Company is a profit-maximizing monopolist that exercises monopoly power in the distribution of diamonds. If the company earns positive economic profits this year, the price of diamonds will:

exceed both the marginal cost and the average total cost of diamonds.

An isoquant is a curve that represents combinations of:

factors of production that produce equal amounts of output.

List three conditions for perfect competition.

firms products are identical there are no barriers to entry

Costs that are spent and cannot be changed in the period of time under consideration are called:

fixed cost

A four-firm concentration ratio of 75 tells you that the top:

four firms in the industry produce 75 percent of the industry's output.

One advantage of the Herfindahl index over the concentration ratio is that it:

gives extra weight to firms that are especially large.

In the absence of economies of scale, advertising and product differentiation:

have an uncertain effect on welfare because they increase both average total cost and product variety.

An entrepreneur probably will start a business if she sees an opportunity to sell an item at a price:

higher than the average total cost of producing it.

Refer to the graph shown. At an output of a, the monopolist should:

increase output to increase profits. Since marginal revenue exceeds marginal cost at a, the monopolist can increase profits by increasing output and decreasing price.

The marginal rate of substitution of an isoquant curve is the rate at which:

inputs must be substituted for one another to keep output constant.

In 1996, Archer Daniels Midland Company was found guilty of fixing the price of lysine. This is an example of:

judgment by performance.

The primary criterion governing U.S. antitrust policy until 1945 was:

judgment by performance.

A monopolistically competitive industry has:

many firms producing differentiated products.

An industry that has many sellers offering slightly differentiated products is called:

monopolistically competitive.

Network externalities create a push toward:

natural monopoly.

Competition in markets defined as platform monopolies is most likely to come from:

new technologies.

If the average total cost of supplying a good exceeds the price at which the good can be sold, then entrepreneurs have:

no incentive to supply the good.

When the FTC investigated whether firms conspired to fix prices of computer memory called dynamic random-access memory (DRAM) chips, Samsung, Micron Technology, Hynix Semiconductor, and Infineon controlled more than 75 percent of the market for DRAM chips. The market for these chips is most likely:

oligopolistic.

If labor costs $10 per unit and machines rent for $20 apiece, the slope of an isocost line might imply a substitution of:

one unit of machinery for two units of labor.

For a monopolist, the point where the marginal revenue curve intersects the horizontal axis is:

one-half the distance between the origin and the point where the demand curve intersects the horizontal axis.

An entrepreneur is willing to bring a supply of goods to the market if expected:

price is greater than expected average total cost.

A firm could be guilty of antitrust violations using the judgment by structure criteria despite:

producing the best product it could at the lowest possible cost.

Suppose a firm finds that an additional dollar spent on labor increases output more than does an additional dollar spent on machines. Under these conditions, the firm:

should substitute labor for machines if it wants to increase economic efficiency.

"For-benefit" corporations are created to pursue multiple goals, such as profitability, social responsibility, and value for the broader society. These firms provide examples of:

social entrepreneurship.

Concluding that a company is in violation of antitrust laws because it controls over 90 percent of the market is an application of judgment by:

structure.

The standard long-run model assumes that:

technology is fixed.

A profit-maximizing firm in a monopolistically competitive industry sells its product at a price:

that exceeds marginal cost.

Judgment by performance means that the competitiveness of a market is determined by:

the actual behavior of firms in the market.

The difference between a monopolist and a monopolistic competitor is that:

the average total cost curve of a monopolistic competitor is tangent to the demand curve in long-run equilibrium, but the average total cost curve of a monopolist can be in a position below the price in long-run equilibrium.

Expected economic profit per unit is equal to:

the difference between expected price and expected average total cost.

Marginal revenue is not equal to price for a monopolist because:

the monopolist must lower the price of all units in order to sell more.

The Sherman Antitrust Act of 1890 was passed primarily because of:

the practices of various trusts in the railroad, steel, tobacco, and oil industries.

The difference between a three-digit North American Industry Classification System (NAICS) industry and a six-digit NAICS industry is that:

the six-digit industry is more specifically defined than the three-digit code.

Under oligopoly:

there are only a few sellers in the industry.

You're thinking of buying one of two firms. One has a profit margin of $15 per unit; the other has a profit margin of $14 per unit. Which should you buy? Why?If both firms are producing where MR = MC and you could buy either for the same amount, then you should buy the firm:

there is not enough information to determine which firm to buy. The one with the highest total profit should be bought

You are thinking of buying one of two perfectly competitive firms. One has a profit margin of $8 per unit; the other has a profit margin of $4 per unit. Which should you buy? Why?If both firms are producing where MR = MC and you could buy either for the same amount, then you should buy the firm:

there is not enough information to determine which firm to buy. The one with the highest total profit should be bought.

A social entrepreneur's central motivation in creating "for-benefit" corporations is to achieve social, not just economic, ends.

true

Fixed costs remain the same regardless of the level of production.

true

If total cost is 100, total fixed cost is 30, and output is 20, average variable cost is 3.5.

true

The North American Industry Classification System (NAICS) categorizes firms by:

type of economic activity, and groups firms with like production processes.

In breaking up the Standard Oil Company, the U.S. Supreme Court established that a company's violation of the Sherman Antitrust Act was determined by:

whether or not the firm engaged in "unfair business practices."