TSU ECON 201 Exam 3 Chapters 6-8

Average total cost

Total cost divided by output, or ATC=TC/q; the sum of average fixed cost and average variable cost, or ATC = AFC + AVC

Average revenue (AR)

Total revenue divided by quantity, or AR = TR/q; in all market structures, average revenue equals the market price

Chapter 7 Review

1, Explicit costs are opportunity costs of resources employed by a firm that take the form of cash payments. Implicit costs are the opportunity costs of using resources owned by the firm. A firm earns a normal profit when total revenue covers all implicit and explicit costs. Economic profit equals total revenue minus both explicit and implicit costs. 2. Variable resources can be varied quickly to increase or decrease output. In the short run, at least one resource is fixed. In the long run, all resources under the firm's control are variable. 3. A firm may initially experience increasing marginal returns as it takes advantage of greater specialization of the variable resource. But the law of diminishing marginal returns indicates that the firm eventually reaches a point where adding more units of the variable resource yields a decreasing marginal product. 4. The law of diminishing marginal returns from the variable resource is the most important feature of production in the short run and explains why marginal cost and average cost eventually increase as output expands. 5. In the long run, all inputs under the firm's control are variable, so there is no fixed cost. The firm's long-run average cost curve, also called its planning curve, is an envelope formed by a series of short-run average total cost curves. The long run is best thought of as a planning horizon. 6. A firm's long-run average cost curve, like its short-run average cost curves, is U-shaped. As output expands in the long run, average cost at first declines because of economies of scale—a larger size allows for bigger and more specialized machinery and a more extensive division of labor. Eventually, average cost stops falling. Average cost may then be constant over some range. If output expands still further, the firm may experience diseconomies of scale as the cost of coordinating resources grows. Economies and diseconomies of scale can occur at the plant level—that is, at a particular location—and at the firm level with many plants and locations. 7. In the long run, a firm selects the most efficient size for the desired rate of output. Once that size is constructed, some resources become fixed, so the firm is operating in the short run. Thus, the firm plans for the long run but produces in the short run.

Chapter 8 Review

1. Market structure describes important features of the economic environment in which market participants operate. These features include the number of buyers and sellers in the market, the ease or difficulty of entering and leaving the market, the information available about prices and production processes, differences in the product across firms in the market, and the forms of competition among firms. 2. A perfectly competitive market is characterized by (a) a large number of buyers and sellers, each too small to influence the market price; (b) firms in the market supply a commodity, which is a product undifferentiated across producers; (c) buyers and sellers possess full information about the availability and prices of all resources, goods, and technologies; and (d) firms and resources are freely mobile in the long run. 3. The market price in perfect competition is determined by the intersection of the market demand and market supply curves. Each firm then faces a demand curve that is a horizontal line at the market price. The firm's demand curve also indicates the average revenue and marginal revenue received at each rate of output. Firms in perfect competition are said to be price takers because no firm can influence the market price. Each firm can vary only the amount it supplies at that price. 4. For a firm to produce in the short run, rather than shut down, the market price must at least cover the firm's average variable cost. If price is below average variable cost, the firm shuts down. That portion of the marginal cost curve at and rising above the average variable cost curve becomes the perfectly competitive firm's short-run supply curve. The horizontal sum of each firm's supply curve forms the market supply curve. As long as price covers average variable cost, each perfectly competitive firm maximizes profit or minimizes loss by producing where marginal revenue equals marginal cost. 5. Because firms are not free to enter or leave the market in the short run, economic profit or loss is possible. In the long run, however, firms enter or leave the market and otherwise adjust their scale of operation until any economic profit or loss is eliminated. 6. Competition drives each firm in the long run to produce at the lowest point on its long-run average cost curve. At this rate of output, marginal revenue equals marginal cost and each also equals the price and average cost. Firms that fail to produce at this least-cost combination do not survive in the long run. 7. In the short run, a firm changes quantity supplied by moving up or down its marginal cost, or supply, curve. In the long run, firms enter or leave the market and existing firms may change their scale of operation until firms still in the industry earn just a normal profit. As the industry expands or contracts in the long run, the long-run industry supply curve has a shape that reflects either constant costs or increasing costs. 8. Perfectly competitive markets exhibit both productive efficiency (because output is produced using the most efficient combination of resources available) and allocative efficiency (because the goods produced are those most valued by consumers). In equilibrium, a perfectly competitive market allocates goods so that the marginal cost of the final unit produced equals the marginal value that consumers attach to that final unit. In the long run, market forces minimize the average cost of production. Voluntary exchange in competitive markets maximizes the sum of consumer surplus and producer surplus, thus maximizing social welfare.

Chapter 6 Review

1. Utility is the sense of pleasure or satisfaction that comes from consumption; it is the want-satisfying power of goods, services, and activities. The utility you get from consuming a particular good depends on your tastes. The law of diminishing marginal utility says that the more of a particular good you consume per period, other things constant, the smaller the gain in total utility from each additional unit consumed. The total utility derived from a good is the sum of the marginal utilities from each additional unit of the good consumed. At some point, additional consumption could reduce total utility, meaning negative marginal utility. 2. Utility is subjective. Each consumer makes a personal assessment of the want-satisfying power of consumption. By translating an individual's subjective measure of satisfaction into units of utility, we can predict the quantity demanded at a given price as well as the effect of a change in price on quantity demanded. 3. The consumer's objective is to maximize utility within the limits imposed by income and prices. In a world without scarcity, utility is maximized by consuming each good until its marginal utility reaches zero. In the real world—a world shaped by scarcity as reflected by prices—utility is maximized when the budget is exhausted and the marginal utility of the final unit consumed divided by that good's price is identical for each different good. 4. Utility analysis can be used to construct an individual consumer's demand curve. By observing the effects of a change in price on consumption, we can generate points that trace a demand curve. 5. Consumers typically receive a surplus, or a bonus, from consumption. Consumer surplus is the difference between the maximum amount consumers would pay for a given quantity of the good rather than go without it and the amount they actually pay. Consumer surplus increases as the price declines. 6. Consumption involves a money price and a time price. People are willing to pay a higher money price for products that save time.

Producer surplus

A bonus for producers in the short run; the amount by which total revenue from production exceeds variable cost

Constant long-run average cost

A condition that occurs if, over some range of output, long-run average cost neither increases nor decreases with changes in firm size

Long-run average cost curve

A curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve

Short-run industry supply curve

A curve that indicates the quantity supplied by the industry at each price in the short run; in perfect competition, the horizontal sum of each firm's short-run supply curve

Short-run firm supply curve

A curve that shows how much a firm supplies at each price in the short run; in perfect competition, that portion of a firm's marginal cost curve that intersects and rises above the low point on its average variable cost curve

Long-run industry supply curve

A curve that shows the relationship between price and quantity supplied by the industry once firms adjust in the long run to any change in market demand

Price taker

A firm that faces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive firm that decides to produce must accept, or "take," the market price

Normal profit

A firm's accounting profit when all resources earn their opportunity cost; when normal profit is earned, accounting profit equals implicit costs

Implicit cost

A firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment

Total Product

A firm's total output per period

Economic profit

A firm's total revenue minus its explicit and implicit costs

Accounting profit

A firm's total revenue minus its explicit costs

Perfect competition

A market structure with many fully informed buyers and sellers of a standardized product and with no obstacles to entry or exit of firms in the long run

Long run

A period during which all resources under the firm's control are variable

Short run

A period during which at least one of a firm's resources is fixed

Commodity

A standardized product; a product that does not differ across producers, such as a bushel of wheat or an ounce of gold

Constant-cost industry

An industry that can expand or contract without affecting the long-run per-unit cost of production; the long-run industry supply curve is horizontal

Increasing-cost industry

An industry that faces higher per-unit production costs as industry output expands in the long run; the long-run industry supply curve slopes upward

Variable cost

Any production cost that changes as the rate of output changes

Fixed cost

Any production cost that is independent of the firm's rate of output

Variable resource

Any resource that can be varied in the short run to increase or decrease production

Fixed resource

Any resource that cannot be varied in the short run

Law of diminishing marginal returns

As more of a variable resource is added to a given amount of other resources, marginal product eventually declines and could become negative

Golden rule of profit maximization

To maximize profit or minimize loss, a firm produces the quantity at which marginal revenue equals marginal cost; this rule holds for all market structures

Productive efficiency

Each firm employs the least-cost combination of inputs; minimum average cost in the long run

Allocative efficiency

Each firm produces the output most preferred by consumers; marginal benefit equals marginal cost

Diseconomies of scale

Forces that may eventually increase a firm's average cost as the scale of operation expands in the long run

Economies of scale

Forces that reduce a firm's average cost as the scale of operation expands in the long run

Market structure

Important features of a market, such as the number of firms, product uniformity across firms, firm's ease of entry and exit, and forms of competition

Explicit cost

Opportunity cost of resources employed by a firm that takes the form of cash payments

Marginal cost

The change in total cost resulting from a one-unit change in output; the change in total cost divided by the change in output, or MC = ΔTC/Δq

Marginal product

The change in total product when a particular resource increases by one unit, all other resources constant

Marginal Utility

The change in your total utility from a one-unit change in your consumption of a good

Consumer equilibrium

The condition in which an individual consumer's budget is exhausted and the last dollar spent on each good yields the same marginal utility; therefore, utility is maximized

consumer surplus

The difference between the most a consumer would pay for a given quantity of a good and what the consumer actually pays

marginal valuation

The dollar value of the marginal utility derived from consuming each additional unit of a good

Marginal revenue (MR)

The firm's change in total revenue from selling an additional unit; a perfectly competitive firm's marginal revenue is also the market price

Minimum efficient scale

The lowest rate of output at which a firm takes full advantage of economies of scale

Increasing marginal returns

The marginal product of a variable resource increases as each additional unit of that resource is employed

Law of Diminishing Marginal Utility

The more of a good a person consumes per period, the smaller the increase in total utility from consuming one more unit, other things constant

Social welfare

The overall well-being of people in the economy; maximized when the marginal cost of production equals the marginal benefit to consumers

Production function

The relationship between resources employed and a firm's total product

Total cost

The sum of fixed cost and variable cost, or TC = FC + VC

Total Utility

The toaltal satisfaction you derive from consumption; this could refer to either your total utility of consuming a paticular good or your total utility from all consumption

Average variable cost

Variable cost divided by output, or AVC=VC/q

A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job, which pays $20,000 a year, and take over a building that he owns and currently rents to his brother for $6,000 a year. His expenses at the sushi bar would be $50,000 for food and $2,000 for gas and electricity. The chef's explicit costs are equal to_____. a. ​$52,000 b. ​$72,000 c. ​$26,000 d. ​$66,000 e. ​$78,000

a. ​$52,000

The following table shows John's total utility derived from billiards and bowling games. Assume John has $30 to spend on a game of billiards and/or a game of bowling. A game of billiards costs him $4, and a game of bowling costs him $2. Which of the following is John's utility-maximizing combination of the games of billiards and the games of bowling? Table 6.5 Quantity 0 1 2 3 4 5 6 Games of billiards 0 100 180 240 272 288 292 Games of bowling0 70 130 180 210 218 222 a. ​Five games of billiards and five games of bowling b. ​Three games of billiards and eight games of bowling c. ​Four games of billiards and four games of bowling d. ​Five games of billiards and two games of bowling e. ​Twelve games of bowling

a. ​Five games of billiards and five games of bowling

​If a firm is producing at an output level where the total revenue curve intersects the total cost curve, which of the following is true of the firm? a. ​Its profit is zero. b. ​Its cost is maximized. c. ​Its profit is maximized. d. ​Its revenue is maximized. e. ​Its cost is minimized.

a. ​Its profit is zero.

​Which of the following is not necessarily a characteristic of a perfectly competitive market structure? a. ​Low prices b. ​Easy entry and exit in the long run c. ​Perfect information d. ​A homogeneous product e. ​A large number of buyers and sellers

a. ​Low prices

"The second glass of Evian water was very good. May I have another?" Which of the following is necessarily true regarding this statement? a. ​The marginal utility of the second glass of water was positive. b. ​The water is available free of cost. c. ​The marginal utility of the third glass of water will be negative. d. ​The marginal utility of the first glass of water was zero. e. ​The marginal utility of the second glass of water was negative.

a. ​The marginal utility of the second glass of water was positive.

A variable cost is one that changes _____. a. ​as output changes b. ​year to year c. ​only in the long run d. ​only in the short run e. ​month to month

a. ​as output changes

The law of diminishing marginal returns states that: a. ​as units of a variable input are added to a given amount of fixed inputs, the marginal product of the variable input eventually diminishes. b. ​if the marginal product is above the average product, the average will rise. c. ​as a person consumes more of a good, the marginal satisfaction from that good eventually diminishes. d. ​if marginal product is positive, total product rises. e. ​long-run average cost declines as output increases.

a. ​as units of a variable input are added to a given amount of fixed inputs, the marginal product of the variable input eventually diminishes.

The following diagram shows the market demand schedule for a good. When the price of the good is P, the shaded area represents: a. ​consumer surplus. b. ​marginal valuation of the good. c. ​marginal utility of the good. d. ​price floor. e. ​shortage.

a. ​consumer surplus.

A perfectly competitive firm is currently producing at a point where price is $10 and both marginal cost and average variable cost are $7. To maximize profit or minimize loss in the short run, this firm should: a. ​increase its output. b. ​reduce its output. c. ​shut down. d. ​raise its price. e. ​lower its price.

a. ​increase its output. As the market price exceeds the average variable cost of production, the firm should expand output to the point where price equals marginal cost. See 8-3: Short-Run Loss Minimization

In the short run, if a firm shuts down, its loss is equal to: a. ​its fixed cost. b. ​its fixed cost minus its variable cost. c. ​its variable cost. d. ​its fixed cost minus total revenue. e. ​zero.

a. ​its fixed cost.

Suppose Ripco owns the building from which it operates. If: a. ​its usage of the building precludes it from renting to anyone else, there is an opportunity cost. b. ​the firm does not rent the building to anyone else, there is no opportunity cost. c. ​the firm pays no rent, there is no opportunity cost. d. ​the firm pays rent, there is an opportunity cost. e. ​the firm can use the building for other things, there is no opportunity cost.

a. ​its usage of the building precludes it from renting to anyone else, there is an opportunity cost.

The length of time that represents the long run: a. ​varies from industry to industry. b. ​is greater than six months. c. ​is greater than one year. d. ​is the same for all industries. e. ​is longer in service industries than in manufacturing.

a. ​varies from industry to industry.

A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job, which pays $20,000 a year, and take over a storage building that he owns and currently rents to his brother for $6,000 a year. His expenses at the sushi bar would be $50,000 for food and $2,000 for gas and electricity. The chef's implicit costs are equal to _____. a. ​$78,000 b. ​$26,000 c. ​$72,000 d. ​$66,000 e. ​$52,000

b. ​$26,000

If total cost at Quantity = 0 is $100 and total cost at Quantity = 10 is $500, then average variable cost at Quantity = 10 is _____. a. ​$500 b. ​$40 c. ​$10 d. ​$400 e. ​$50

b. ​$40

Maryann and Don want to open their own deli. To do so, Maryann must give up her job, where she earns $20,000 per year, and Don must give up his part-time job, where he earns $10,000 per year. They must liquidate their money market fund, which earns $1,000 interest annually. The rent on the building is $10,000 per year, and the expenses of such necessities as utilities, corned beef, and pickles are $35,000 annually. The minimum amount of revenue per year that would make it worthwhile, financially, for Maryann and Don to run the deli is _____. a. ​$35,000 b. ​$76,000 c. ​$31,000 d. ​$10,000 e. ​$45,000

b. ​$76,000

The following table indicates Sharona's marginal utilities from the additional consumption of goods A and B. The first and third columns of the table show the quantities of goods A and B consumed. The second and the fourth columns show Sharona's marginal utilities from each additional unit of goods A and B consumed. The price of A is $2 per unit and the price of B is $4 per unit. If Sharona's budget is $12, then which of the following combinations would maximize her total utility? Table 6.6 QA 1 2 3 4 MUZ 24 22 18 12 QB 1 2 3 4 MUB 48 44 36 24 a. ​0 units of A; 3 units of B b. ​2 units of each good c. ​1 unit of A; 4 units of B d. ​4 units of each good e. ​4 units of A; 1 unit of B

b. ​2 units of each good

The table given below shows the output supplied by a firm and its total cost of production. If the market price is $8.50, the profit-maximizing output and profit are _____. Table 8.2 Q TC 0 50 10 85 20 150 30 220 40 305 50 455 a. 0 units and −$50, respectively b. ​40 units and $35, respectively c. ​40 units and $0, respectively d. ​50 units and $30, respectively e. ​30 units and $25, respectively

b. ​40 units and $35, respectively

The following table shows the total utility and marginal utility derived from the consumption of scones. The first column of the table represents the number of scones a consumer consumes in a day. The second column of the table presents the total utility derived from that consumption, and the third column shows the marginal utility of each additional scones. The marginal utility of the second scone is _____ units. Table 6.3 Scones 1 2 3 4 5 Total utility 10 18 24 28 30 Marginal utility - - 6 - 2 a. ​12 b. ​8 c. ​19 d. ​6 e. ​9

b. ​8

The following graph shows the marginal utility derived by a consumer from watching an additional baseball game every month. Which of the following is true of the total and marginal utilities derived from watching the baseball games? Figure 6.2 a. ​For the last four games, both total and marginal utility increases. b. ​For the first six games, total utility increases as marginal utility decreases. c. ​For all the ten games, total utility increases as marginal utility increases. d. ​For the first six games, total utility decreases as marginal utility increases. e. ​For all the ten games, total utility decreases as marginal utility decreases.

b. ​For the first six games, total utility increases as marginal utility decreases.

​Which of the following would not appear on a firm's accounting statement? a. ​Explicit costs b. ​Implicit costs c. ​Fixed costs d. ​Insurance costs e. ​Sunk costs

b. ​Implicit costs

​Suppose the marginal utility of a unit of good x = MUx, the marginal utility of a unit of good y = MUy, Px= price of a unit of good x, and Py= price of a unit of a good y. A utility-maximizing consumer who purchases two goods, x and y, allocates her budget in such a way that _____. a. ​MUx/Py = MUy/Px b. ​MUx/Px = MUy/Py c. ​MUx = MUy d. ​TUx = TUy e. ​TUx/Py = TUy/Px

b. ​MUx/Px = MUy/Py

Annie reallocates her budget until the ratios of marginal utilities of goods equal the ratios of their prices. Which of the following is true of Annie's behavior? a. ​She ensures that her marginal utility from each good is less than that good's marginal cost. b. ​She maximizes her total utility derived from the consumption of goods. c. ​She adjusts her baskets of goods until marginal utilities of all goods become negative. d. ​She ensures that her expected marginal utilities from goods are equal to zero. e. ​She maximizes her marginal utilities from goods and minimizes her disutility from consumption.

b. ​She maximizes her total utility derived from the consumption of goods.

Which of the following is true of the total revenue curve of a perfectly competitive firm? a. ​It is vertical. b. ​The slope of the curve remains constant slope as output increases. c. ​The slope of the curve decreases as output increases. d. ​The slope of the curve increases as output increases. e. ​It is horizontal.

b. ​The slope of the curve remains constant slope as output increases

The demand curve facing a perfectly competitive firm is: a. ​vertical at the equilibrium quantity. b. ​a horizontal straight line at the market price. c. ​upward sloping. d. ​downward sloping. e. ​a straight line through the origin.

b. ​a horizontal straight line at the market price.

Marginal utility is the: a. ​average satisfaction obtained from consuming a good. b. ​additional satisfaction obtained from consuming one more unit of a good. c. ​increase in satisfaction that results from consuming 1 percent less of a good. d. ​additional cost of purchasing one more unit of a good. e. ​overall satisfaction obtained from consuming a good.

b. ​additional satisfaction obtained from consuming one more unit of a good.

If a shoe store earns more than a normal profit, its: a. ​economic profit must be greater than its accounting profit. b. ​economic profit is positive. c. ​accounting profit is less than its economic profit. d. ​economic profit is, therefore, equal to its accounting profit. e. ​accounting profit is zero.

b. ​economic profit is positive.

If a firm shuts down in the short run and produces no output, its total cost will be: a. ​equal to the variable cost. b. ​equal to the fixed cost. c. ​equal to only explicit costs. d. ​equal to zero. e. ​equal to the sum of implicit and explicit costs.

b. ​equal to the fixed cost.

A firm in a perfectly competitive market: a. ​can raise the price of its product and sell more output. b. ​has to accept the market price for its product. c. ​can decrease its supply to increase the market price. d. ​has to lower the price of its product to sell more output. e. ​can increase its supply to lower the market price.

b. ​has to accept the market price for its product.

As a consumer allocates income between good A and good B, total utility is maximized when: a. ​marginal utility of A = marginal utility of B = 0 b. ​marginal utility of A/price of A = marginal utility of B/price of B c. ​marginal utility of A/price of A = marginal utility of B/price of B = 0 d. ​price of A = price of B e. ​marginal utility of A = marginal utility of B

b. ​marginal utility of A/price of A = marginal utility of B/price of B

​When total utility falls, marginal utility is _____. a. ​infinite b. ​negative c. ​at its maximum d. ​zero e. ​positive

b. ​negative

A perfectly competitive firm sells 200 units at a market price of $40 per unit. Its marginal cost is $50, and it incurs a variable cost of $10,000. To improve its profit or loss situation, this firm should _____. a. ​continue to produce the present level of output b. ​shut down c. ​reduce output but not to zero d. ​increase output sold to 300 units e. ​raise the price to $45 per unit

b. ​shut down

Negative marginal utility implies that: a. ​total utility is negative. b. ​total utility decreases as additional units of a good are consumed. c. ​the price of a good increases as additional units are consumed. d. ​the total revenue spent by a consumer on a good decreases as more of the good is purchased. e. ​marginal utility increases as additional units of a good are consumed.

b. ​total utility decreases as additional units of a good are consumed.

Figure 7.1 shows the U-shaped cost curves for a producer. In the table figure, A is the marginal cost curve, B is the average variable cost curve, and C is the average total cost curve. At an output of 10, the: Figure 7.1 a. ​total cost equals $10. b. ​variable cost equals $10. c. ​fixed cost equals $1. d. ​marginal cost equals $10. e. ​fixed cost equals $10.

b. ​variable cost equals $10.

If a manufacturer shuts down in the short run, it must be true that before the shutdown, at all positive output levels, _____. a. ​profit was zero b. ​variable cost was greater than total revenue c. ​total cost plus total revenue was less than profit d. ​average total cost was less than average variable cost e. ​fixed cost was greater than total revenue

b. ​variable cost was greater than total revenue

Suppose John goes to a wedding reception where free drinks are served. He will drink until the marginal utility of an additional drink is _____. a. ​less than zero b. ​zero c. ​infinite d. ​greater than one e. ​one

b. ​zero

​If Joel buys ten floppy disks, which are worth a total of $30 to him, and he pays $1 per disk, his consumer surplus is: a. ​$10. b. ​$30. c. ​$20. d. ​$24. e. ​$15.

c. ​$20.

Table 7.2 shows labor and the quantity of shoes produced by a firm. Given the information in the table below, _____ is the average product of the third unit of labor. Table 7.2 ​ Labor 0 1 2 3 4 5 Total product (pairs of shoes) 0 20 50 75 80 75 ​ a. ​75 pairs of shoes b. ​15 pairs of shoes c. ​25 pairs of shoes d. ​45 pairs of shoes e. ​10 pairs of shoes

c. ​25 pairs of shoes

Table 7.2 shows labor and the quantity of shoes produced by a firm. Given the information in the table below, _____ is the marginal product of the third unit of labor. Table 7.2 ​ Labor 0 1 2 3 4 5 Total product (pairs of shoes) 0 20 50 75 80 75 ​ a. ​45 pairs of shoes b. ​15 pairs of shoes c. ​25 pairs of shoes d. ​50 pairs of shoes e. ​75 pairs of shoes

c. ​25 pairs of shoes

​The following image shows the market equilibrium for opera tickets. The graph shows that a demand curve for opera tickets, labeled D and a supply curve of opera tickets, labeled S. Area _____ represents the maximum amount that consumers are willing to pay for 10 opera tickets?. Figure 6.7 a. ​b b. ​a + b c. ​a + b + c d. ​a e. ​c

c. ​a + b + c

Diminishing marginal utility means that: a. ​as one hires more labor, other things constant, the total amount of output produced begins to fall. b. ​as one hires more units of labor, other things constant, the marginal product of labor begins to fall. c. ​as one consumes more of a good, other things constant, the additional satisfaction obtained from each additional unit of the good tends to fall. d. ​as one consumes more of a good, other things constant, the total satisfaction obtained from consuming the good tends to fall. e. ​as one consumes more of a good, other things constant, the extra satisfaction obtained from each extra good becomes negative.

c. ​as one consumes more of a good, other things constant, the additional satisfaction obtained from each additional unit of the good tends to fall.

Figure 7.1 shows the U-shaped cost curves for a producer. In the figure below, A is the marginal cost curve, B is the average variable cost curve, and C is the average total cost curve. The vertical distance between lines B and C at any level of output represents _____. Figure 7.1 a. ​marginal cost b. ​average marginal cost c. ​average fixed cost d. ​average variable cost e. ​average total cost

c. ​average fixed cost

If marginal cost is less than average total cost, then: a. ​average total cost must be increasing. b. ​average variable cost must equal average total cost. c. ​average variable cost may be increasing or decreasing. d. ​average variable cost must be decreasing. e. ​marginal cost must be falling.

c. ​average variable cost may be increasing or decreasing.

Marginal cost eventually increases as output increases due to the effect of _____. a. ​increasing total cost b. ​increasing average cost c. ​diminishing marginal product of inputs d. ​constant fixed cost e. ​economies of scale

c. ​diminishing marginal product of inputs

​Jerry consumes three hamburgers at McDonald's. He figures out that the last hamburger he ate was just worth the price he paid for it. If the price of a hamburger is $1, _____. a. ​he would have a consumer surplus if he eats one more hamburger b. ​he has no consumer surplus c. ​he has a consumer surplus on the first two hamburgers d. ​he has a consumer surplus on the third hamburger alone e. ​he has a consumer surplus on the first hamburger

c. ​he has a consumer surplus on the first two hamburgers

A firm's opportunity costs of using resources provided by the firm's owners are called _____. a. ​sunk costs b. ​fixed costs c. ​implicit costs d. ​entrepreneurial costs e. ​explicit costs

c. ​implicit costs

​The price charged by a perfectly competitive firm is determined by: a. ​each individual firm. b. ​the firm's average variable cost. c. ​market demand and market supply. d. ​a group of firms acting together as a cartel. e. ​the firm's total costs.

c. ​market demand and market supply.

Suppose Sally allocates her budget between two goods, A and B. She spends her entire income on a combination of A and B, for which the ratio of marginal utility of good A to its price exceeds the ratio of marginal utility of good B to its price. She can increase her total utility by buying: a. ​more B and more A. b. ​more A without changing her consumption of B. c. ​more A and less B. d. ​less B without changing her consumption of A. e. ​more B and less A.

c. ​more A and less B.

The Hound Dog Bus Company contemplates expanding its New Mexico operations by offering services from Raton to Santa Fe. It has estimated that the total cost of the trip will be $400, of which $150 is the fixed cost, which it has already paid. The company expects an increase in revenue by $275 from the trip. The Hound Dog Bus Co. should: a. ​offer this service because it will earn a positive economic profit. b. ​offer this service because total revenue exceeds fixed cost. c. ​offer this service because the additional revenue exceeds the additional cost of this service. d. ​not offer this service because total cost exceeds total revenue. e. ​not offer this service because marginal revenue is less than marginal cost.

c. ​offer this service because the additional revenue exceeds the additional cost of this service.

Resources are efficiently allocated when production occurs at that point at which: a. ​the marginal cost curve intersects the average variable cost curve. b. ​price is equal to average variable cost. c. ​price is equal to marginal cost. d. ​the marginal revenue curve intersects the average variable cost curve. e. ​price is equal to average revenue.

c. ​price is equal to marginal cost. Allocative efficiency occurs when the equilibrium price in a market equals marginal cost

If Jennie spends her income on ice cream and biscuits and the price of ice cream is three times the price of biscuits, then: a. ​she maximizes her utility by buying three times as many biscuits as ice cream. b. ​she maximizes her utility by buying three times as much ice cream as biscuits. c. ​she buys biscuits and ice cream until the marginal utility of ice cream is three times the marginal utility of biscuits. d. ​she buys biscuits and ice cream until the marginal utility of biscuits is three times the marginal utility of ice cream. e. ​she maximizes her utility by buying equal quantities of ice cream and biscuits.

c. ​she buys biscuits and ice cream until the marginal utility of ice cream is three times the marginal utility of biscuits.

The additional output obtained by adding another unit of labor to the production process is called _____. a. ​a variable cost b. ​the marginal utility of labor c. ​the marginal product of labor d. ​the marginal cost of labor e. ​the average output of labor

c. ​the marginal product of labor

​Increasing marginal returns are generally the result of _____. a. ​labor unions b. ​increasing costs c. ​the specialization and division of labor d. ​change in technology e. ​diseconomies of scale

c. ​the specialization and division of labor

Economic profit is defined as _____.​ a. ​total revenue plus explicit costs b. ​total revenue minus implicit costs c. ​total revenue minus implicit and explicit costs d. ​total revenue plus implicit costs e. ​wages plus interest minus rent

c. ​total revenue minus implicit and explicit costs

The following image shows the demand curve for neckties. At point a, consumer surplus is _____. Price at a is 5 and neckties at 4 Price at b is 4 and neckties at 5 Figure 6.3 a. ​$5 b. ​$0 c. ​$20 d. $8​ e. ​$26

d. $8​

​Which of the following is not an explicit cost? a. ​Sales taxes b. ​The cost of utilities, such as gas and electricity c. ​Salaries d. ​The value of a firm owner's time e. ​Insurance premiums

d. ​The value of a firm owner's time

The short run is a period of time: a. ​during which all resources may be varied. b. ​equal to or less than six months. c. ​during which at least one resource may be varied. d. during which at least one resource is fixed. e. ​during which all resources are fixed.

d. during which at least one resource is fixed.

Suppose Debbie is willing to pay $50 for a pair of shoes but has to pay $20 because the shoes are on sale. Her consumer surplus is: a. ​$70. b. ​$20. c. ​$50. d. ​$30. e. ​$25.

d. ​$30.

Fernando allocates his lunch money between pizza and Coke. A slice of pizza costs $1.50 and a can of Coke costs $1. The marginal utility of the last slice of pizza Fernando ate that day was 30 units, and the marginal utility of the last can of Coke was 25 units. If Fernando decides to spend all of his lunch money, then identify the correct statement. a. ​Fernando could have increased his total utility by purchasing more Coke and the same quantity of pizza. b. ​Fernando could have increased his total utility by purchasing more pizza and the same quantity of Coke. c. ​Fernando allocates his money so as to maximize his total utility. d. ​Fernando's total utility would have been greater if he had purchased more Coke and less pizza. e. ​Fernando's total utility would have been greater if he had purchased more pizza and less Coke.

d. ​Fernando's total utility would have been greater if he had purchased more Coke and less pizza.

Long-run equilibrium for a perfectly competitive firm occurs when: a. ​Marginal cost (MC) = Marginal revenue (MR) = Average fixed cost (AFC) = Short-run average total cost SRATC. b. ​Marginal cost (MC) = Marginal revenue (MR) = Price (P) > Long-run average cost (LRAC). c. ​Marginal cost (MC) = Marginal revenue (MR) = Average fixed cost (AFC) = Long-run average cost (LRAC). d. ​Price (P) = Marginal cost (MC) = Short-run average total cost (SRATC) = Long-run average cost (LRAC). e. ​Price (P) = Marginal revenue (MR) = Long-run average variable cost (LRAVC) = Long-run average cost (LRATC).

d. ​Price (P) = Marginal cost (MC) = Short-run average total cost (SRATC) = Long-run average cost (LRAC). The long-run adjustment process continues till the market supply curve intersects the market demand curve at a price that corresponds to the lowest point on a firm's long-run average cost curve. Therefore, in long-run equilibrium, the identity P = MC = SRATC = LRAC holds.

Suppose a perfectly competitive constant-cost industry is in long-run equilibrium when market demand increases. What will probably happen to a firm in this industry in the long run? a. ​It will experience higher average total costs and will reduce its output. b. ​The equilibrium price will be lower in the long run. c. ​It will charge the same equilibrium price but will reduce its output. d. ​There will be no change in the equilibrium price and quantity supplied by the firm. e. ​The equilibrium price will be higher in the long run.

d. ​There will be no change in the equilibrium price and quantity supplied by the firm In a constant-cost industry, an increase in market demand will lead to adjustments so that the equilibrium price and quantity supplied by each individual firm in the market remain unchanged

Which of the following is true of marginal product? a. ​When marginal product is negative, total product is increasing. b. ​When marginal product is positive and decreasing, total product is increasing by increasing amounts. c. ​When marginal product is increasing, total product is decreasing. d. ​When marginal product is increasing, total product is increasing by increasing amounts. e. ​When marginal product is positive and decreasing, total product is decreasing.

d. ​When marginal product is increasing, total product is increasing by increasing amounts.

The average total cost curve and the average variable cost curve: a. ​are closer together as output increases, with average total cost reaching its minimum level first. b. ​are farther apart as output increases, with average variable cost reaching its minimum level first. c. ​are parallel to each other and reach their minimum levels at the same rate of output. d. ​are closer together as output increases, with average variable cost reaching its minimum level first. e. ​are farther apart as output increases, with average total cost reaching its minimum level first.

d. ​are closer together as output increases, with average variable cost reaching its minimum level first.

The following diagram shows a market equilibrium. D is the demand curve for a good and S is the supply curve of the good. The consumer surplus at a price of $b is given by the area: Figure 6.6 a. ​below the curve D and above the curve S. b. ​below the curve S. c. ​above the curve D. d. ​below the curve D and above the market price of $b. e. ​below the curve D and above the market price of $d.

d. ​below the curve D and above the market price of $b.

Table 7.3 shows the number of workers and total output produced in a firm. In the table below, diminishing marginal returns set in with the addition of the _____. Table 7.3 Number of workers 0 1 2 3 4 5 6 7 Total output 0 10 40 100 140 160 170 150 ​ a. ​third worker b. ​seventh worker c. ​first worker d. ​fourth worker e. fifth worker

d. ​fourth worker

As output rises, marginal product eventually diminishes and _____. a. ​fixed cost is increasing b. ​total cost falls c. ​average cost falls d. ​marginal cost increases e. ​average product is negative

d. ​marginal cost increases

The long-run supply curve for a constant-cost perfectly competitive industry is _____. a. ​relatively inelastic b. ​a ray from the origin at a 45-degree angle c. ​downward sloping d. ​perfectly elastic e. ​perfectly inelastic

d. ​perfectly elastic The long-run supply curve for a constant-cost perfectly competitive industry is perfectly elasti

For a perfectly competitive firm, ____. a. ​price exceeds marginal revenue at all output levels b. ​price equals marginal revenue only at the profit-maximizing quantity c. ​price is less than marginal revenue only at the profit-maximizing quantity d. ​price equals marginal revenue at all output levels e. ​price is less than marginal revenue at all output levels

d. ​price equals marginal revenue at all output levels

If a good is offered free of charge, one would: a. ​never consume it because it has no market value. b. ​stop consuming it when its marginal utility begins to fall. c. ​stop consuming it when its marginal utility begins to increase. d. ​stop consuming it when its marginal utility has declined to zero. e. ​never stop consuming it.

d. ​stop consuming it when its marginal utility has declined to zero.

A farmer in the Midwest who produces wheat faces a horizontal demand curve because: a. ​he produces a good for which there are no complements. b. ​he produces a good that no other firm in the market produces. c. ​he produces a good for which there are no substitutes. d. ​the quantity supplied by him is so small relative to the market that it has no impact on the market price for wheat. e. ​the quantity supplied by him is so large relative to the market that it has no impact on the market price for wheat.

d. ​the quantity supplied by him is so small relative to the market that it has no impact on the market price for wheat.

Consumer surplus is: a. ​the horizontal sum of the individual demand curves for all consumers in the market. b. ​the change in total utility derived from a one-unit change in the consumption of a good. c. ​the amount by which quantity demanded exceeds quantity supplied at the current market price. d. ​valued by the difference between the maximum price consumers are willing to pay and the amount they actually pay. e. ​the amount by which quantity supplied exceeds quantity demanded at the current market price.

d. ​valued by the difference between the maximum price consumers are willing to pay and the amount they actually pay.

When diminishing marginal returns set in, total product _____. a. ​is negative b. ​decreases at an increasing rate c. ​decreases at a decreasing rate d. ​increases at an increasing rate e. ​increases at a decreasing rate

e. ​increases at a decreasing rate

Elvis values the first gravy sandwich at $5, the second at $4.50, the third at $4. If he buys three for $4 each, his consumer surplus has a value of: a. ​$9.50. b. ​$4. c. ​$5. d. ​$12. e. ​$1.50.

e. ​$1.50.

The following diagram shows the demand curve for neckties. At point a, total expenditure on neckties is: Price at a is 5 and neckties at 4 Price at b is 4 and neckties at 5 Figure 6.3 a. ​$45. b. ​$5. c. ​$9. d. ​$26. e. ​$20.

e. ​$20.

If variable cost rises from $60 to $100 as output increases from 15 to 20 units, the marginal cost of the twentieth unit is _____. a. ​$5 b. ​$58 c. ​$100 d. ​$40 e. ​$8

e. ​$8

The following diagram shows a consumer's demand schedule for a good. At a price of $2, consumer surplus is: At price $2, the quantity is 20 a. ​$200. b. ​$10. c. ​$5. d. ​$4. e. ​$80.

e. ​$80.

​"I don't feel so good; I shouldn't have had that last doughnut." Which of the following supports this statement? a. ​The marginal utility of the last doughnut was positive. b. ​The marginal utility of the next doughnut will be positive. c. ​The total utility from eating doughnuts is negative. d. ​The marginal utility of doughnuts is still increasing. e. ​The marginal utility of the last doughnut was negative.

e. ​The marginal utility of the last doughnut was negative.

Suppose a perfectly competitive firm and industry is in long-run equilibrium and the firm earns an economic profit in the short run. Which of the following is likely to occur in the long run? a. ​There will be an increase in the amount of economic profit earned by the firm. b. ​The firm will continue to earn economic profit. c. ​Industry output will decrease. d. ​The market supply curve will shift to the left, and the market price will increase. e. ​The market supply curve will shift to the right, and the market price will decrease.

e. ​The market supply curve will shift to the right, and the market price will decrease. As new firms that are attracted by the positive profits earned by existing firms enter the market, the market supply curve will shift to the right and this will force the market price to decrease in the long run.

Mark's marginal utility of a third waffle is 10 units and marginal utility of a second slice of ham is 30 units. If Mark eats the third waffle, which of the following statements is true? a. ​The price of a waffle is five times more than the price of a slice of ham. b. ​The price of a waffle is less than one-fourth the price of a slice of ham. c. ​The price of a waffle is three times more than the price of a slice of ham. d. ​The price of a waffle is four times more than the price of a slice of ham. e. ​The price of a waffle is less than one-third the price of a slice of ham.

e. ​The price of a waffle is less than one-third the price of a slice of ham.

Total cost is calculated as _____. a. ​marginal cost plus variable cost b. ​marginal cost plus fixed cost c. ​average fixed cost plus average variable cost d. ​the additional cost of the last unit produced e. ​fixed cost plus variable cost

e. ​fixed cost plus variable cost

A perfectly competitive firm that earns an economic profit in the short run choose the output that: a. ​maximizes its total revenue. b. ​minimizes its total cost. c. ​maximizes the difference between total revenue and implicit cost. d. ​maximizes the difference between total revenue and explicit cost. e. ​maximizes the difference between total revenue and total cost.

e. ​maximizes the difference between total revenue and total cost.

Firms achieve productive efficiency by: a. ​producing at their minimum long-run marginal cost. b. ​striving to minimize their fixed cost. c. ​producing the products that have no substitute. d. ​striving to maximize their total revenue. e. ​producing at their minimum long-run average cost.

e. ​producing at their minimum long-run average cost. Firms achieve productive efficiency by producing at the minimum point of their long-run average cost curve.

In Connecticut, the market for apples is perfectly competitive. Suppose consumers' tastes change so that the market demand for apples increases. In this case, the demand curves faced by individual firms will:​ a. ​shift downward. b. ​become less elastic. c. ​not change. d. ​become upward sloping. e. ​shift upward.

e. ​shift upward.

Claude's Copper Clappers sells clappers for $40 each in a perfectly competitive market. At its present level of output, Claude's marginal cost is $39, average variable cost is $45, and average total cost is $60. To improve his profit or loss situation, Claude should: a. ​increase the price. b. ​continue to produce the present level of output. c. ​increase output. d. ​reduce output but not to zero. e. ​shut down.

e. ​shut down.