Microeconomics Chapter 9
Two college students share an apartment and split the cost of heating, electricity, and rent. They decide to include one more roommate and divide heat, electricity, and rent costs three ways instead of two ways. If adding the third roommate reduces the amount of money they each pay for utilities and rent each month, this can be described as:
increasing returns to scale.
A firm suffering losses in the short run will continue to operate as long as total revenue at least covers fixed cost.
Disagree: It should continue to operate as long as total revenue total revenue is greater than variable costs variable costs.
In a perfectly competitive market in the long run, profits are driven to zero due to which of the following relationships?
P* = SRMC = SRAC = LRAC.
When an industry enjoys external economies, its long-run supply curve slopes ________ and the industry is called a(n) ________ industry.
down; decreasing-cost
If this farmer is maximizing his profits, his TVC is
$108
If this farmer is maximizing profits, his profit will be
$48
This farmer's shutdown point is at a price of
$7
Total revenue (TR) is $___
1500
The following table shows the costs related to a hypothetical firm. Fill in the missing values and assume that this particular firm produces 800 units of output and that the market price in this perfectly competitive industry is $7.00
2,400 1,600 4,000 5,600 1,600
This firm is currently earning a profit of $___
225
The total revenue is $56
56
In the short run, a firm in a perfectly competitive industry will minimize its losses by shutting down if:
A and B only
Constant returns to scale refers to a situation where an increase in a firm's scale of production has no effect on costs per unit produced.
The above statement is correct.
A firm in a perfectly competitive industry in long-run equilibrium will earn normal returns and zero economic profit.
True
Furthermore, with external economies, the long-run industry supply curve --- with output.
decreases
In the short run,
firms act to minimize losses or maximize profits.
The total cost is $70
70
A firm that is breaking even is:
All of the above.
If a firm's economic profit is $0, then it must be true that
TR equals TC.
Firms that are "breaking even" are
earning zero economic profits.
Assume demand is decreasing in a contracting industry. Also assume that the industry is a decreasing-cost industry.
graph lol
This farmer would earn a zero economic profit if price was
$10.
If this farmer is maximizing profits, his total costs will be
$132.
The firm's shut down point is at a price of
$6
Explain why it is possible that a firm with a production function that exhibits increasing returns to scale can run into diminishing returns at the same time. Increasing returns is a reduction in _______ costs in the ______, while diminishing returns is an increase in _______ costs in the _____
average; long run; marginal; short run
A perfectly competitive market is in long-run equilibrium and demand in this market suddenly increases. In this situation, firms will eventually ________ the industry and will ultimately earn ________ economic profits.
enter; zero
A perfectly competitive market is in long-run equilibrium. If demand in this market suddenly increases, price will ________ and firms will ________.
increase; earn a profit
Refer to the information provided in the figure at right to answer the question that follows. This farmer's fixed costs are
$24
A firm earning positive profits in the short run always has an incentive to increase its scale of operation in the long run.
Disagree. It has an incentive to expand its scale of operation only if it expects to continue to earn profits.
Observe the firm's long-run average cost curve shown to the right. Between points C and D, there are:
diseconomies of scale
The short-run supply curve of a perfectly competitive firm is:
the portion of the marginal cost curve that lies above minimum average variable cost.
The firm will operate in the short run
will operate
Refer to the scenario below to answer the following question. Tom borrowed $40,000 from his parents to open a donut stand. He agrees to pay his parents a 5% yearly return on the money they lent him. His other yearly fixed costs equal $10,000. His variable costs equal $25,000. He sold 40,000 dozen donuts during the year at a price of $2.00 per dozen. Tom's total revenue was
$80,000.
Suppose demand for wheat is initially D2. If consumer incomes increase, then demand for wheat will shift to _____. This will _____ the equilibrium price of wheat and individual profit maximizing firms will produce _____ bushels of wheat.
.D3; increase; 15
Suppose a competitive industry experiences external economies. If so, then:
a firm's long-run average cost curve shifts down when industry output expands
When an increase in a firm's scale of production leads to lower average costs, we say that there are:
economies of scale.
In the long run, the firm should -----
shut down, because short-run profits are negative
The firm will produce ___ units of output.
300
When P = SRMC = SRAC = LRAC, an industry is considered to be:
A and D only.
Refer to the scenario below to answer the following question. Tom borrowed $40,000 from his parents to open a donut stand. He agrees to pay his parents a 5% yearly return on the money they lent him. His other yearly fixed costs equal $10,000. His variable costs equal $25,000. He sold 40,000 dozen donuts during the year at a price of $2.00 per dozen. Tom's total fixed costs equal.
$12,000.
Refer to the information provided in the figure at right to answer the question that follows. If this farmer is maximizing profits, his total revenue will be
$180.
Refer to the scenario below to answer the following question. Tom borrowed $40,000 from his parents to open a donut stand. He agrees to pay his parents a 5% yearly return on the money they lent him. His other yearly fixed costs equal $10,000. His variable costs equal $25,000. He sold 40,000 dozen donuts during the year at a price of $2.00 per dozen. Tom's total costs equal
$37,000.
Refer to the scenario below to answer the following question. Tom borrowed $40,000 from his parents to open a donut stand. He agrees to pay his parents a 5% yearly return on the money they lent him. His other yearly fixed costs equal $10,000. His variable costs equal $25,000. He sold 40,000 dozen donuts during the year at a price of $2.00 per dozen. Tom's profit is
$43,000.
A perfectly competitive firm sells pineapples for $4 each. MR = MC at a quantity of 600 units. Average total cost at the profit-maximizing quantity is $2.75. This firm is earning a profit of
$750.
For this farmer to maximize profits he should produce _____ bushels of wheat.
12
If the price of output is $14, this firm will produce 4 units of output.
4
Decreasing returns to scale refers to a situation where an increase in a firm's scale of production leads to lower costs per unit produced.
The above statement is incorrect . Decreasing returns to scale refers to a situation where a firm's long-run average cost curve slopes upward . Therefore, an increase in the firm's scale of production leads to higher average costs.
Increasing returns to scale refers to a situation where an increase in a firm's scale of production leads to higher costs per unit produced.
The above statement is incorrect . Increasing returns to scale refers to a situation where a firm's long-run average cost curve slopes downward . Therefore, an increase in the firm's scale of production leads to lower average costs.
A firm that is earning a positive profit in the short run and expects to continue doing so has an incentive to expand its scale of operation in the long run.
True
If total revenue is less than total variable cost in a perfectly competitive industry in the short run, firms will tend to exit that industry in the long run.
True
Constant-cost industries are industries in which there are no external economies or diseconomies of scale.
True
