econ Practice Test #3

Refer to the graph shown. What level of output should the perfectly competitive firm produce to maximize profits?

8; Marginal revenue equals marginal cost at this output level.

The long-run average cost of producing 12 units of output is $54; the long-run average cost of producing 13 units is $56. These numbers imply that:

diseconomies of scale are present. When long-run average cost increases as output rises, diseconomies of scale are present.

Refer to the graph shown. Suppose the market price is $3. At this price, a perfectly competitive firm should:

shut down immediately.

A business owner makes 50 items by hand in six hours. She could have earned $10 an hour working for someone else. If each item sells for $5 and the explicit costs total $14, economic profit equals:

$236. Economic profit equals explicit and implicit revenues ($5 × 50) minus explicit costs ($14) and implicit costs ($10/hour × 6 hours), or $176.

Refer to the graph shown. Currently, if this perfectly competitive firm is maximizing profit, the market price is:

$5.00 and marginal revenue for the firm is $5.00. The perfectly elastic demand curve at $5.00 tells you that both market price and marginal revenue equal $5.00.

The following graph shows average fixed costs, average variable costs, average total costs, and marginal costs of production. Refer to the graph shown. Marginal cost is minimized when output equals:

12 units. The marginal cost curve is curve IV in the diagram, which reaches its lowest point at 12 units of output.

Refer to the table shown. A firm would be most likely to hire between:

5 and 8 workers.

Refer to the table shown. Marginal cost is minimized when how many units of output are produced?

6; The marginal cost of the sixth unit is $1, which is less than the marginal cost of all other units.

Refer to the graph shown. Within which section(s) of the production function is marginal product increasing?

A. Marginal product is increasing in this range because the slope of the production function is increasing.

Refer to the graph shown. Within which section(s) of the production function is marginal product decreasing?

B and C. The slope of the production function is decreasing in ranges B and C, and so marginal product is falling.

The following graph shows average fixed costs, average variable costs, average total costs, and marginal costs of production.

average fixed cost. The vertical distance between the average total cost curve and the average variable cost curve is average fixed cost at a given quantity.

Refer to the graph shown. Suppose that the market price is $5. At this price, a perfectly competitive firm should:

continue to produce in both the short run and the long run. Since price exceeds average total cost at the profit-maximizing output level, the firm earns positive profits in both the short run and the long run and should continue to produce.

Suppose that the firms in the perfectly competitive oat industry currently are receiving a price of $2 per bushel for their product. The minimum possible average total cost of producing oats in the long run is $1 per bushel. It follows that:

new firms will enter the oat industry.

The supply curve of a perfectly competitive firm is:

the marginal cost curve only if price exceeds average variable cost.

Accounting profit is equal to:

total revenue minus explicit measurable costs.

Refer to the graph shown, which depicts a perfectly competitive firm. When it is maximizing profit, the total profit earned by this firm is roughly:

$250. Since per unit profit is roughly $2.30 (more than $2.00 and less than $2.50) at the profit maximizing quantity of 110 units the best answer is $2.30 x 110 = $253 ~ $250.

At one time, sea lions were depleting the stock of steelhead trout. One idea to scare sea lions away from the Washington coast was to launch fake killer whales, which are 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, and so additional whales cost $5,000 each. Based on these numbers, the average total cost of making five fake killer whales would be:

$7,200. The cost of the first whale is $16,000 because this includes the cost of making the mold, but each additional whale adds only $5,000 to costs. The total cost of making five whales is $36,000, and the average total cost is $36,000/5 = $7,200.

To manufacture 1,000 pairs of shoes in a week, a firm must use at least 1,500 workers and 5 machines or 100 machines and 150 workers. Which method can be technically efficient?

1,500 workers and 5 machines; Both can be technically efficient as neither one requires more units of both labor and machinery.

To manufacture 1,000 pairs of shoes in a week, a firm can use 1,500 workers and 50 machines or 100 machines and 2,000 workers. Which method is more technically efficient?

1,500 workers and 50 machines

The following graph shows average fixed costs, average variable costs, average total costs, and marginal costs of production. Refer to the graph shown. Average variable cost is minimized when output equals:

21 units. Curve II is the average variable cost curve, which reaches its minimum point at 21 units of output, where the MC curve intersects it.

A firm can use 50 workers and 10 machines, 70 workers and 9 machines, or 75 workers and 9 machines to produce 40 chairs. If each worker costs $20 and each machine is rented for $500, the economically efficient input combination is:

70 workers and 9 machines. This combination costs $5,900, and both of the other combinations cost more.

The following graph shows average fixed costs, average variable costs, average total costs, and marginal costs of production. Refer to the graph shown. Why does the distance between curves II and III get smaller as quantity increases?

Average fixed cost is declining.

Refer to the graph shown. Within which section(s) of the production function is the marginal product of labor decreasing?

B and C. The marginal product of labor falls when hiring another worker produces a change in output that is less than that produced by the previous worker. This is true whenever the slope of the production function decreases as employment increases.

Refer to the graph shown. The output range in region c is associated with:

diseconomies of scale.

Refer to the graph shown. The output range in region a is associated with:

economies of scale.

When car makers began to cut the costs of producing cars by designing the chassis, engine, and transmissions so that different models could be produced on the same assembly line, production costs fell $240 per car. This idea best illustrates:

economies of scale. Ford was taking advantage of economies of scale by increasing the production of different car models on one assembly line to lower average cost per unit.

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. Since the products are unrelated, they won't be taking advantage of economies of scale or indivisible setup costs.

Refer to the table shown. Diminishing marginal productivity begins when the:

fifth worker is hired; The marginal product of the fifth worker is 7, which is 3 less than the marginal product of the fourth worker.

Refer to the graph shown depicting a perfectly competitive firm. If average variable cost is $3 at quantity 450, points A through E represent the:

firm's supply curve. For a perfectly competitive firm, the marginal cost curve above average variable cost is the firm's supply curve.

Generally, as the size of a firm increases:

monitoring costs increase. Monitoring costs increase because it becomes more difficult for a firm to supervise its operations as the scale of the firm increases.

Refer to the graph shown. Assuming that the industry operates under conditions of perfect competition:

new firms will soon enter the industry. At a price of $60, price exceeds average total cost, and so firms are making positive economic profits. This will induce entry in the long run.

Rachel left her job as a graphic artist, where she earned $42,000 per year, to open her own graphic arts firm. Her explicit costs for her new business include:

only the expenses incurred for office space, equipment, and supplies. Forgone salary is an example of an implicit cost.