problem sets

11. A firm produces 400 units of output at a total cost of $1,200. If total variable costs are $1,000, a. average fixed cost is 50 cents. b. average variable cost is $2. c. average total cost is $2.50. d. average total cost is 50 cents.

A

18. Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura specializes in making wedding cakes. Laura sells 20 wedding cakes per month. Her monthly total revenue is $5,000. The marginal cost of making a wedding cake is $200. In order to maximize profits, Laura should a. make more than 20 wedding cakes per month. b. make fewer than 20 wedding cakes per month. c. continue to make 20 wedding cakes per month. d. We do not have enough information to answer the question.

A

3. If Kevin's children run a lemonade stand for a day and sell 200 glasses of lemonade at $0.50 each, their total revenues are a. $100. b. $199.50. c. $200. d. $400.

A

5. The laws governing patents and copyrights a. promote monopolies. b. are intended to serve private interests, not the public's interest. c. have costs but not benefits. d. eliminate the need for firms to engage in research and development.

A

1. Economists normally assume that the goal of a firm is to a. maximize its total revenue. b. maximize its profit. c. minimize its explicit costs. d. minimize its total cost.

B

12. The Wacky Widget company has total fixed costs of $100,000 per year. The firm's average variable cost is $5 for 10,000 widgets. At that level of output, the firm's average total costs equal a. $10 b. $15 c. $100 d. $150

B

12. The deadweight loss associated with a monopoly occurs because the monopolist a. maximizes profits. b. produces an output level less than the socially optimal level. c. produces an output level greater than the socially optimal level. d. equates marginal revenue with marginal cost.

B

19. Robin owns a horse stables and riding academy and gives riding lessons for children at "pony camp." Her business operates in a competitive industry. Robin gives riding lessons to 20 children per month. Her monthly total revenue is $4,000. The marginal cost of pony camp is $250 per child. In order to maximize profits, Robin should a. give riding lessons to more than 20 children per month. b. give riding lessons to fewer than 20 children per month. c. continue to give riding lessons to 20 children per month. d. We do not have enough information to answer the question.

B

4. Profit is defined as a. net revenue minus depreciation. b. total revenue minus total cost. c. average revenue minus average total cost. d. marginal revenue minus marginal cost.

B

4. When marginal revenue equals marginal cost, the firm a. should increase the level of production to maximize its profit. b. may be minimizing its losses rather than maximizing its profit. c. must be generating positive economic profits. d. must be generating positive accounting profits.

B

5. Ryan sells 200 plastic ball point pens at $0.50 each. His total costs are $25. His profits are a. $25. b. $75. c. $100. d. $175.

B

6. For a firm, the relationship between the quantity of inputs and quantity of output is called the a. profit function. b. production function. c. total-cost function. d. quantity function.

B

7. As a monopolist increases the quantity of output it sells, the price consumers are willing to pay for the good a. is unaffected. b. decreases. c. increases. d. There is not enough information given in answer the question.

B

1. A monopoly a. can set the price it charges for its output and earn unlimited profits. b. takes the market price as given and earns small but positive profits. c. can set the price it charges for its output but faces a downward-sloping demand curve so it cannot earn unlimited profits. d. can set the price it charges for its output but faces a horizontal demand curve so it can earn unlimited profits.

C

1. Which of the following is not a characteristic of a competitive market? a. Buyers and sellers are price takers. b. Each firm sells a virtually identical product. c. Entry is limited. d. Each firm chooses an output level that maximizes profits.

C

16. For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $7 and a marginal cost of $10. It follows that the a. production of the 100th unit of output increases the firm's profit by $3. b. production of the 100th unit of output increases the firm's average total cost by $7. c. firm's profit-maximizing level of output is less than 100 units. d. production of the101st unit of output must increase the firm's profit by more than $3.

C

17. If a competitive firm is selling 900 units of its product at a price of $10 per unit and earning a positive profit, then a. its total cost is more than $9,000. b. its marginal revenue is less than $10. c. its average total cost is less than $10. d. the firm cannot be a competitive firm because competitive firms cannot earn positive profits.

C

2. In a competitive market, the actions of any single buyer or seller will a. discourage entry by competitors. b. influence the profits of other firms in the market. c. have a negligible impact on the market price. d. None of the above is correct.

C

2. Microsoft faces very little competition from other firms for its Windows software. Why isn't the price of the software $1,000 per copy? a. because the government would not allow such a high price b. because stockholders would not allow such a high price c. because the company would sell so few copies that they would earn higher profits by selling at a lower price d. All of the above are correct.

C

2. Total revenue equals a. marginal revenue - marginal cost. b. price/quantity. c. price x quantity. d. output - input.

C

3. Suppose a firm in a competitive market produces and sells 150 units of output and earns $1,800 in total revenue from the sales. If the firm increases its output to 200 units, the average revenue of the 200th unit will be a. less than $12. b. more than $12. c. $12. d. Any of the above may be correct depending on the price elasticity of demand for the product.

C

3. Which of the following is a characteristic of a monopoly? a. low fixed costs as a portion of total costs b. free entry and exit c. barriers to entry d. declining marginal cost

C

5. Consider a firm operating in a competitive market. The firm is producing 40 units of output, has an average total cost of production equal to $5, and is earning $240 economic profit in the short run. What is the current market price? a. $9 b. $10 c. $11 d. $12

C

9. Some costs do not vary with the quantity of output produced. Those costs are called a. marginal costs. b. average costs. c. fixed costs. d. explicit costs.

C

10. Average total cost is equal to a. output/total cost. b. total cost - total quantity of output. c. average variable cost + total fixed cost. d. total cost/output.

D

16. Suppose a monopolist is able to charge each customer a price equal to that customer's willingness-to pay for the product. Then the monopolist is engaging in a. marginal cost pricing. b. arbitrage pricing. c. voodoo economics. d. perfect price discrimination.

D

17. Antitrust laws allow the government to a. prevent mergers. b. break up companies. c. promote competition. d. All of the above are correct.

D

17. Marginal cost increases as the quantity of output increases. This reflects the property of a. increasing total cost. b. diminishing total cost. c. increasing marginal product. d. diminishing marginal product.

D

18. In the long run, a firm that produces and sells textbooks gets to choose a. how many workers to hire. b. the size of its factories. c. which short-run average-total-cost curve to use. d. All of the above are correct.

D

4. The fundamental cause of monopoly is a. incompetent management in competitive firms. b. the zero-profit feature of long-run equilibrium in competitive markets. c. advertising. d. barriers to entry.

D

6. Drug companies are allowed to be monopolists in the drugs they discover in order to a. increase the availability of expensive but useful medications. b. increase the overall welfare of society through better health because drug companies continually produce better medications. c. encourage research. d. All of the above are correct.

D

8. For a monopolist, marginal revenue is a. equal to price, as it is for a perfectly competitive firm. b. less than price, as it is for a perfectly competitive firm. c. equal to price, whereas marginal revenue is less than price for a perfectly competitive firm. d. less than price, whereas marginal revenue is equal to price for a perfectly competitive firm.

D