Econ202 Module 9

Define long-run:

- can change production technology - everything is variable in the long-run

What are explicit costs?

- costs in which a firm spends money to buy things ex. wages for workers, lease payment on a store

Define short-run:

- firms can't change fixed costs - firms can't change technology - can make adjustments to variable inputs (workers)

What are the 3 conditions of perfect competition?

1. Many buyers and sellers, all small 2. Sell identical products 3. No barriers to entry or exit

What is a sunk cost?

A cost that has been paid and can not be recovered.

Being a price taker essentially means A. a firm can influence the market price. B. the firm cannot legally set its price above the market price. C. a firm cannot influence the market price. D. the firm cannot legally set its price below the market price.

C. a firm cannot influence the market price.

Are firms in a perfectly competitive market price takers or price makers?

Price takers (they can't not set the market price)

If anyone can do it, you can't make money off if it in the _________.

long-run

Do variable costs remain constant as output changes?

no

In __________ _______________, P=MR (price = marginal revenue).

perfect competition

Output generate ____________.

revenue

Do fixed costs remain constant as output changes?

yes

Do monopolies have the ability to set price?

yes

If you're producing a quantity of zero do you still have to pay fixed costs?

yes

Industry Y is a perfectly competitive industry. Assume that as a result of changes in other markets there is a twenty percent increase in the price of variable inputs used by firms in industry Y. After all adjustments have taken place, we would expect the equilibrium price in industry Y to: A. increase and the number of firms to decrease. B. increase and the number of firms to increase. C. decrease and the number of firms to increase. D. decrease and the number of firms to decrease.

A. increase and the number of firms to decrease.

An increase in a firm's fixed cost will not change the firm's profit-maximizing output in the short run. A. True B. False

A. True

When firms exit a perfectly competitive industry, the market supply curve shifts to the left. A. True B. False

A. True

All else constant, as the amount of a firm's implicit costs increases, the difference between economic profit and accounting profit will: A. increase. B. decrease. C. stay the same. D. cannot be determined without more information.

A. increase.

A public franchise A. is a government designation that a private firm is the only legal producer of a good or service. B. results from ownership of a key raw material. C. is a corporation that is owned by stockholders. D. is an unregulated monopoly necessary for the public good.

A. is a government designation that a private firm is the only legal producer of a good or service.

What are implicit costs?

non-monetary opportunity costs ex. $50,000 you gave up to run a business

What causes a monopoly?

1. government action: - copyrights or patents - public franchise 2. control of a key resource 3. network externalities: the value of a product increases the more people use it 4. natural monopoly: - economies of scale - one firm can supply more cheaply than multiple firms

What are the conditions of a monopoly?

1. one seller 2. unique product, with no close substitute 3. barriers to entry

What happens when a monopoly increases its price?

1. sells fewer units 2. receives more revenue per unit

A perfectly competitive industry achieves allocative efficiency in the long run. What does allocative efficiency mean? A. Each firm produces up to the point where the price of the good equals the marginal cost of producing the last unit. B. Each firm produces up to the point where all scale economies are exhausted. C. Firms use an input combination that minimizes cost and maximizes output. D. Production occurs at the lowest average total cost.

A. Each firm produces up to the point where the price of the good equals the marginal cost of producing the last unit.

Assume a perfectly competitive firm is in long-run equilibrium and there is a decrease in market demand for the firm's output. Which of the following will occur? A. Existing firms will reduce output in the short run. B. Market price will be above its original level. C. Existing firms will maintain the original level of output, but they will shift their cost functions down in the short run. D. Existing firms will raise price to cover the reduction in quantity demanded and maintain total revenue in the short run.

A. Existing firms will reduce output in the short run.

In long-run perfectly competitive equilibrium, which of the following is false? A. Firms earn economic profit. B. Economies of scale are exhausted. C. Economic surplus is maximized. D. There is efficient, low-cost production at the minimum efficient scale.

A. Firms earn economic profit.

Describe allocative efficiency: A. It refers to a situation in which resources are allocated such that the last unit of output produced provides a marginal benefit to consumers equal to the marginal cost of producing it. B. It refers to a situation in which resources are allocated fairly to all consumers in a society. C. It refers to a situation in which resources are allocated such that goods can be produced at their lowest possible average cost. D. It refers to a situation in which resources are allocated to their highest profit use.

A. It refers to a situation in which resources are allocated such that the last unit of output produced provides a marginal benefit to consumers equal to the marginal cost of producing it.

The rutabaga market is perfectly competitive. Research is published claiming that eating rutabagas leads to gaining weight and so the demand for rutabagas permanently decreases. The permanent decrease in demand results in a A. lower price, economic losses by rutabaga farmers, and exit from the market. B. higher price, economic profits for rutabaga farmers, and entry into the market. C. lower price, economic losses by rutabaga farmers, and entry into the market. D. higher price, economic losses by rutabaga farmers, and exit from the market. E. lower price, economic profits for rutabaga farmers, and entry into the market.

A. lower price, economic losses by rutabaga farmers, and exit from the market.

If a typical firm in a perfectly competitive industry is earning profits, then A. new firms will enter in the long run causing market supply to increase, market price to fall, and profits to decrease. B. new firms will enter in the long run causing market supply to C. decrease, market price to rise, and profits to increase. D. all firms will continue to earn profits. E. the number of firms in the industry will remain constant in the long run.

A. new firms will enter in the long run causing market supply to increase, market price to fall, and profits to decrease.

The demand curve faced by the individual perfectly competitive firm is: A. perfectly elastic. B. perfectly inelastic. C. elastic or inelastic depending on price. D. unit elastic.

A. perfectly elastic.

In a perfectly competitive market, which of the following is the main factor that affects consumers' decisions on which firm to purchase a good from? A. price B. reputation C. customer service D. quality

A. price

A teenaged babysitter is similar to a firm in a perfectly competitive industry in that, for both A. there are many other suppliers of similar goods or services. B. fixed costs are lower than variable costs. C. average costs of production do not change when their industry expands. D. the implicit costs of production exceed the explicit costs of production.

A. there are many other suppliers of similar goods or services.

Marginal cost is defined as the change in ________ cost when output changes by one unit. In the short run, marginal cost can also be measured by the change in ________ cost when output changes by one unit. A. total; variable B. fixed; variable C. total; fixed D. variable; fixed

A. total; variable

If average total cost is $50 and average fixed cost is $15 when output is 20 units, then the firm's total variable cost at that level of output is A. $1,000. B. $700. C. $300. D. impossible to determine without additional information.

B. $700.

Which one of the following about a monopoly is false? A. A monopoly could break even in the long run. B. A monopoly must have some kind of government privilege or government-imposed barrier to maintain its monopoly. C. A monopoly could make profits in the long run. D. A monopoly status could be temporary.

B. A monopoly must have some kind of government privilege or government-imposed barrier to maintain its monopoly.

Which of the following statements is true? A. When marginal cost is greater than average fixed cost, average fixed cost increases. B. As output increases, average fixed cost becomes smaller and smaller. C. Average fixed cost does not change as output increases. D. The marginal cost curve intersects the average fixed cost curve at its minimum point.

B. As output increases, average fixed cost becomes smaller and smaller.

If price is equal to average variable cost, then a perfectly competitive firm breaks even. A. True B. False

B. False (it is at the shutdown point)

In the long run, A. the firm is more profitable than it is in the short run. B. all of the firm's costs are variable costs. C. the firm's fixed costs are greater than its fixed costs in the short run. D. all of the firm's costs are explicit costs; there are no implicit costs of production.

B. all of the firm's costs are variable costs.

Which of the following describes a situation in which every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it? A. productive efficiency B. allocative efficiency C. marginal efficiency D. profit maximization

B. allocative efficiency

In the long run, the entry of new firms in an industry A. benefits consumers by forcing prices down to the level of total cost. B. benefits consumers by forcing prices down to the level of average cost. C. harms consumers by forcing prices up above the level of total cost D. harms consumers by forcing prices up above the level of average cost

B. benefits consumers by forcing prices down to the level of average cost.

In a perfectly competitive market, a(n) ________ occurs because ________. A. efficient outcome; the fair rules condition is met B. efficient outcome; total surplus is maximized C. deadweight loss; firms minimize average minimum cost D. deadweight loss; total surplus is minimized E. deadweight loss; firms must be price takers

B. efficient outcome; total surplus is maximized

A perfectly competitive industry achieves allocative efficiency when A. firms carry production surpluses. B. goods and services are produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it. C. it produces where market price equals marginal production cost. D. goods and services are produced at the lowest possible cost.

B. goods and services are produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.

If a firm shuts down in the short run, A. its loss equals zero. B. its loss equals its fixed cost. C. its total revenue is not large enough to cover its fixed cost. D. it makes zero economic profit.

B. its loss equals its fixed cost.

If total costs are $50,000 when 1000 units are produced, and total costs are $50,100 when 1001 units are produced, we can conclude that A. average fixed costs are $100. B. marginal costs are $100. C. average total costs are $100. D. average variable costs are $100.

B. marginal costs are $100.

Jennifer's Bakery Shop produces baked goods in a perfectly competitive market. If Jennifer decides to produce her 100th batch of cookies, the marginal cost is $120. She can sell this batch of cookies at a market price of $110. To maximize her profit, Jennifer should A. produce this batch of cookies because their MR exceeds their MC. B. not produce this additional batch. C. shut down. D. charge $120 for this batch. E. produce this batch of cookies because they will help lower her average fixed cost.

B. not produce this additional batch.

Alice, Bud, and Celia can produce rubber bands in a perfectly competitive market. If they enter the market, the minimum average total cost for a bundle of rubber bands, for the three of them is $2, $3, and $4, respectively. If the market price is $2.10 per bundle, then A. Alice and Bud will enter the market. B. only Alice will enter the market. C. all three of them will enter the market. D. Bud and Celia will enter the market. E. Alice and Celia will enter the market.

B. only Alice will enter the market.

McDonald's is a fast-food restaurant chain. Which of the following would be a long-run decision for McDonald's? A. supply more hamburgers in one restaurant B. open a new restaurant in a city C. hire one more worker in a restaurant location D. replace the manager of a restaurant

B. open a new restaurant in a city

In the long run, a perfectly competitive market will A. generate a long-run equilibrium where the typical firm operates at a loss. B. supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve. C. produce only the quantity of output that yields a long-run profit for the typical firm. D. supply whatever amount consumers will buy at a price which earns the market an economic profit.

B. supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve.

Implicit costs can be defined as A. accounting profit minus explicit cost. B. the non-monetary opportunity cost of using the firm's own resources. C. the deferred cost of production. D. total cost minus fixed costs.

B. the non-monetary opportunity cost of using the firm's own resources.

Which of the following is TRUE about the long run? A. All resources are fixed. B. At least one resource is fixed. C. All resources are variable. D. none of the above

C. All resources are variable.

A firm could continue to operate for years without ever earning a profit as long as it is producing an output where A. MR < ATC. B. AFC < AVC. C. MR > AVC. D. ATC > AVC.

C. MR > AVC.

Assume that the 4K and OLED television sets industry is perfectly competitive. Suppose a producer develops a successful innovation that enables it to lower its cost of production. What happens in the short run and in the long run? A. Initially, the firm will be able to increase its profit significantly, but in the long run its profits will still be greater than zero but lower than its short-run profits because other firms would also innovate. B. The firm will probably incur losses temporarily because of the high cost of the innovation, but in the long run it will start earning positive profits. C. The firm will be able to increase its economic profits temporarily, but in the long run its economic profits will be eliminated as other firms copy the innovation. D. This firm will be able to earn above normal profits indefinitely if it obtains a patent for its innovation.

C. The firm will be able to increase its economic profits temporarily, but in the long run its economic profits will be eliminated as other firms copy the innovation.

Which of the following statements regarding the relationship between average and marginal costs is INCORRECT? A. When marginal costs are greater than average costs, the latter must rise. B. When marginal costs are less than average costs, the latter must fall. C. There is no way for average variable costs to fall when marginal costs are falling. D. There is always a definite relationship between average and marginal cost.

C. There is no way for average variable costs to fall when marginal costs are falling.

In comparing accounting profit with economic profit, we generally find that A. economic profit and accounting profit are the same in the short run. B. accounting profit is less than economic profit. C. accounting profit is greater than economic profit. D. economic profit exceeds accounting profit by the amount of opportunity costs.

C. accounting profit is greater than economic profit.

Assume goods X and Y are complements and are produced in perfectly competitive markets. All else constant, an increase in demand for good X would cause: A. a decrease in the number of firms that produce good X. B. a decrease in the number of firms that produce good Y. C. an increase in the number of firms that produce good Y. D. no effect on the number of firms that produce either good.

C. an increase in the number of firms that produce good Y.

A natural monopoly is most likely to occur in which of the following industries? A. the diamond mining and marketing industry because one firm can control a key resource B. the software industry because of the importance of network externalities C. an industry where fixed costs are very large relative to variable costs D. the pharmaceutical industry because the development and approval of new drugs through the Food and Drug Administration can take more than 10 years

C. an industry where fixed costs are very large relative to variable costs

Economic profit is A. an opportunity cost of operating the firm. B. equal to the firm's total revenue minus its normal profit. C. equal to the firm's total revenue minus its opportunity costs. D. the average return for supplying entrepreneurial ability.

C. equal to the firm's total revenue minus its opportunity costs.

The rules of accounting generally require that ________ costs be used for purposes of keeping a company's financial records and for paying taxes. These costs are sometimes called ________ costs. A. economic; legal B. total; economic C. explicit; accounting D. real; explicit

C. explicit; accounting

The perfectly competitive market structure benefits consumers because A. firms add a much smaller markup over average cost than firms in any other type of market structure. B. firms do not produce goods at the lowest possible price in the long run. C. firms are forced by competitive pressure to be as efficient as possible. D. firms produce high-quality goods at low prices.

C. firms are forced by competitive pressure to be as efficient as possible.

The change in total variable cost which accompanies one extra unit of output is A. the average total cost. B. the average fixed cost. C. marginal cost. D. the average variable cost.

C. marginal cost.

If, in a perfectly competitive industry, the market price facing a firm is above its average total cost at the output where marginal revenue equals marginal cost, then A. market supply will remain constant. B. existing firms will exit the industry. C. new firms are attracted to the industry. D. firms are breaking even.

C. new firms are attracted to the industry.

When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell A. any positive output the entrepreneur decides upon because all of it can be sold. B. the output where average total cost equals price. C. nothing at all; the firm shuts down. D. the output where marginal revenue equals marginal cost

C. nothing at all; the firm shuts down.

In analyzing the decision to shut down in the short run we assume that the firm's fixed costs are A. implicit costs. B. capital costs. C. sunk costs. D. nonmonetary opportunity costs.

C. sunk costs.

If your business earns $20,000 in revenues, has explicit costs of $7,000, and implicit costs of $5,000, your accounting profit is A. $32,000 B. -$8,000 C. $8,000 D. $13,000

D. $13,000

Marginal cost is equal to A. change in total cost divided by change in output. B. change in total variable cost divided by change in output. C. total variable cost divided by the quantity of output. D. Both A and B are correct.

D. Both A and B are correct.

Economic costs of production differ from accounting costs in that A. accounting costs are always larger than the economic cost. B. economic costs include expenditures for hired resources while accounting costs do not. C. accounting costs include expenditures for hired resources while economic costs do not. D. economic costs add the opportunity costs of a firm using its own resources while accounting costs do not.

D. economic costs add the opportunity costs of a firm using its own resources while accounting costs do not.

In the short run, average total cost is A. sometimes higher and sometimes lower than average variable cost. B. equal to average variable cost. C. less than average variable cost. D. higher than average variable cost.

D. higher than average variable cost.

The demand curve faced by the individual perfectly competitive firm is: A. vertical. B. upward sloping. C. downward sloping. D. horizontal.

D. horizontal.

A perfectly competitive firm's marginal revenue A. may be either greater or less than its price, depending on the quantity sold. B. is greater than its price. C. is less than price because a firm must lower its price to sell more. D. is equal to its price.

D. is equal to its price.

Peter's Pencils is a perfectly competitive company producing pencils. Suppose Peter is producing 1,000 pencils an hour. If the total cost of 1,000 pencils is $500, the market price per pencil is $2, and the marginal cost is $2, then Peter A. is not maximizing his profit but is making zero economic profit anyway. B. should decrease his output to increase his profit. C. should increase his output to increase his profit. D. is maximizing his profit and is making an economic profit. E. makes an economic profit because marginal revenue is equal to marginal cost at this output level.

D. is maximizing his profit and is making an economic profit.

The monopolist's marginal revenue curve A. is identical to the demand curve. B. lies above the demand curve. C. doesn't exist. D. lies below the demand curve.

D. lies below the demand curve.

If productive efficiency characterizes a market A. firms use the best technology available to produce the good. B. firms produce the goods that consumers desire most. C. the marginal cost of production is minimized. D. the output is being produced at the lowest possible cost.

D. the output is being produced at the lowest possible cost.

The demand curve for a monopoly is A. upward sloping. B. horizontal because the demand is perfectly elastic. C. undefined because it is the only supplier in the market. D. vertical because the demand is perfectly inelastic. E. downward sloping.

E. downward sloping.

If perfectly competitive firms are making an economic profit, then A. some firms will exit the market. B. the market might be in a long-run equilibrium but not a short-run equilibrium. C. the market cannot be in either a short-run or a long-run equilibrium. D. the market must be in long-run equilibrium but cannot be in a short-run equilibrium. E. new firms will enter the market.

E. new firms will enter the market.

What tells you the true value of a firm?

Economic profits

How do you find profit maximizing quantity?

MR=MC

Should sunk costs effect your decision of whether you produce or not?

No, because they've already been paid. All that matters is if you can make any money off of what you do sell, ignoring the fixed costs. (variable costs)

What is the goal of all firms?

Profit maximization

How to calculate total revenue:

Q x MR (P=MR)

What is marginal cost?

The cost of producing one more unit of a good

What is productive efficiency?

The idea that goods and services are produced at the lowest possible cost.

True or False: Economic profits are usually less than accounting profits.

True

What is allocative efficiency?

Where production represents consumer preferences.

Explicit costs are also known as ________________ costs.

accounting

When P=ATC this means you're _______________ _______.

breaking even

How do you calculate marginal cost?

change in total cost / change in quantity

How to calculate marginal revenue:

change in total revenue / change in quantity

Marginal revenue is _____________ in perfect competition.

constant

Inputs have _______.

cost

When P<ATC this means you have an ______________ ______.

economic loss

When P>ATC this means you have an ______________ _________.

economic profit

Economic profits lead to firm _______.

entry

Economic losses lead to firm ______.

exit

What is economic cost?

explicit + implicit cost

When P<AVC you should _____________________.

shut down right away

When P=AVC you're at the ______________________.

shutdown point

When P>AVC you should _________________________.

stay in business in the short-run

How do you calculate average total cost?

total cost / quantity

What is profit?

total revenue - total cost

How do you calculate average variable cost?

variable cost / quantity