AP Mirco Unit 3 Progress Check
The graph above shows per unit cost information for firm X. At what quantity of output do diminishing returns begin for firm X? A) Q1 B) Q2 C) Q3 D) Q4 E) Q5
Answer B, Q2 Diminishing returns begin at the point where marginal cost is minimized because the next unit of output will be produced at a higher cost, which results from diminishing returns.
In a comparison of a profit-maximizing perfectly competitive firm's short-run equilibrium to its long-run equilibrium, which of the following is true? A) Price must equal marginal cost in the long run, but not necessarily in the short run. B) Economic profit must be positive in the long run, but not necessarily in the short run. C) The firm can set price in the short run, but not necessarily in the long run. D) The firm must produce at minimum average total cost in the short run, but not necessarily in the long run. E) Price equals average total cost in the long run, but not necessarily in the short run.
Answer E, Price equals average total cost in the long run, but not necessarily in the short run. Perfectly competitive firms must earn zero profit in the long run, meaning price must equal marginal cost and average total cost. Profit can be positive, negative, or zero in the short run.
Given the price P4P4, what is a firm's profit-maximizing quantity of output? A) Q1 B) Q2 C) Q3 D) Q4 E) 0
Answer C, Q3 At Q3 profit is maximized because price (marginal revenue) is equal to marginal cost. Producing more output beyond that will reduce total profit.
If a typical firm in a perfectly competitive market earns positive economic profit in the short run, what will most likely happen in the long run? A) Firms will enter the market and cause the price to fall. B) Firms will enter the market and cause the price to rise. C) Firms will exit the market and cause the price to fall. D) Firms will exit the market and the cause price to rise. E) There will be no change in the market because profit is maximized.
Answer A, Firms will enter the market and cause the price to fall. The positive economic profit attracts new firms to enter the market, increasing supply and putting a downward pressure on price. This will eliminate economic profits in the long run.
Which of the following is ignored when calculating accounting profit? A) Total revenue B) Variable costs C) Implicit costs D) Fixed costs E) Total costs
Answer C, Implicit costs Implicit costs are part of opportunity costs, reflecting the values of the resources — such as time, financial capital, and property — contributed by the owners of the firm. Implicit costs do not constitute out-of-pocket payments. They are not included in calculating accounting profit.
A profit-maximizing firm is currently producing a quantity at which price is less than average variable cost. To maximize profit, the firm will do which of the following in the short run and the long run? A) Shut down in the short run and exit the market in the long run. B) Produce less quantity in the short run and increase its scale of production in the long run. C) Produce more quantity in the short run and increase its scale of production in the long run. D) Continue producing the same quantity in the short run and in the long run. E) Continue producing the same quantity in the short and exit the market in the long run.
Answer A, Shut down in the short run and exit the market in the long run. The firm is profit-maximizing, therefore it is producing the quantity at which MRMR equals MCMC. However, when price is less than average variable cost, the firm is better off shutting down to minimize its costs to fixed costs only in the short run and exit the market in the long run. By continuing to produce in the short run, the firm is unable to cover its variable costs and part of its fixed costs because price is less than average variable cost.
Habib withdrew $100,000 from his bank account paying 5% interest to purchase equipment for his construction company. If Habib earns an accounting profit of $10,000 and he has no other opportunity costs, his economic profit will be equal to A) $0 B) $5,000 C) $15,000 D) $105,000 E) $115,000
Answer B, $5,000 Habib earns an accounting profit of $10,000. Subtracting the $5,000 implicit cost associated with the forgone interest income, Habib earns a positive economic profit of $5,000.
The marginal revenue of the third unit of output is A) $3 B) $8 C) $10 D) $17 E) $24
Answer B, $8 Marginal revenue is the change in total revenue divided by the change in total output. The change in total revenue is $8, and the change in output is 1 unit of output. Therefore, the marginal revenue is $8 divided by 1 unit of output, which is equal to $8.
Number of Workers: 0, 1, 2, 3, 4, 5, 6 Total Product (units): 0, 11, 20, 27, 32, 35, 36 The table above shows a firm's short-run production function using labor as the only variable input. The marginal product of the third worker is A) 5 units B) 7 units C) 9 units D) 20 units E) 27 units
Answer B, 7 units Marginal product is the change in total product that occurs as a result of an additional unit of labor. As the table indicates, output increases from 20 to 27 as a result of adding the third worker. Therefore, the marginal product for the third worker is 7 units.
A graph shows quantity of output produced on the horizontal axis and shows total variable cost and total cost on the vertical axis. Which of the following is true about the vertical distance between total variable cost and total cost as output increases? A) It decreases. B) It remains constant. C) It increases. D) It decreases and then increases. E) It increases and then decreases.
Answer B, It remains constant. The vertical distance between total variable cost and total cost at each output level is total fixed cost, which is constant.
Which of the following is true when total product is at its maximum? A) Marginal product is at its maximum. B) Marginal product is equal to zero. C) Marginal product is equal to average product. D) Average product is increasing. E) Average product is equal to zero.
Answer B, Marginal product is equal to zero. When marginal product equals zero, total product is maximized because the change in total product is zero. Because marginal product is diminishing, adding additional units of variable input beyond this point will result in negative marginal product and a decline in total product.
The graph above shows the short-run cost curves for a perfectly competitive firm. Assume that the market price is P0P0 and the firm is producing at quantity Q0Q0. To maximize profit, the firm should A) increase production to quantity Q3Q3, where average total cost is at its minimum B) increase production to quantity Q2Q2, where price is equal to marginal cost C) increase production to quantity Q1Q1, where average variable cost is at its minimum D) shut down and incur losses equal to fixed costs E) shut down and incur zero losses
Answer B, increase production to quantity Q2Q2, where price is equal to marginal cost The profit-maximizing perfectly competitive firm should produce where P (or MR)= MCP (or MR)= MC, at Q2Q2. The firm will have a loss, since PP is less than ATCATC. The firm should continue to produce, since P >AVCP >AVC and the loss will be less than fixed costs.
Kieran owns and operates his own bike shop. In the past week, a competitor offered to buy Kieran's bike shop for $100,000 and hire Kieran for $50,000 per year. Assume the annual interest rate is 6 percent, and Kieran's accounting profit from his bike shop is $60,000. Kieran's economic profit is A) −$96,000 B) −$90,000 C) $4,000 D) $10,000 E) $60,000
Answer C, $4,000 The correct answer is $4,000. The $4,000 equals the total revenues minus the total explicit and implicit costs. The total opportunity cost is the sum of the $50,000 salary offer plus the $6,000 interest forgone. Subtracting $56,000 from the accounting profit of $60,000 gives an economic profit of $4,000.
A competitive profit-maximizing firm is currently producing at an output level at which the marginal revenue is equal to marginal cost. Which of the following changes will NOT affect the profit-maximizing quantity? A) An increase in the price B) An increase in variable costs C) An increase in fixed costs D) An increase in labor productivity E) An increase in the firm's revenues
Answer C, An increase in fixed costs An increase fixed costs will increase the firm's total cost but not marginal cost. Marginal cost only changes with changes in variable cost. Therefore, marginal revenue will continue to be equal to marginal cost and the firm will not change its quantity to maximize its profit.
Which of the following is true about economies of scale and increasing returns to scale? A) Economies of scale and increasing returns to scale are the same thing. B) Economies of scale refers to the relationship between inputs and output. Increasing returns to scale refers to the relationship between long-run average total cost and the size of the firm. C) Economies of scale refers to the relationship between long-run average total cost and the size of the firm. Increasing returns to scale refers to the relationship between inputs and output. D) Economies of scale is a long-run concept, while increasing returns to scale is a short-run concept. E) Increasing returns to scale is a long-run concept, while economies of scale is a short-run concept.
Answer C, Economies of scale refers to the relationship between long-run average total cost and the size of the firm. Increasing returns to scale refers to the relationship between inputs and output. Economies of scale exist in the long run when increasing firm size results in lower average total cost. Increasing returns to scale refers to the relationship between inputs and output, meaning that output changes by more than a proportional increase in inputs.
The firm's minimum efficient scale occurs on A) SRATC1 B) SRATC2 C) SRATC3 D) SRATC4 E) SRATC5
Answer C, SRATC3 The minimum efficient scale occurs on SRATC3SRATC3, which contains the lowest point of all five short-run cost curves, and it occurs at the minimum point on the LRATCLRATC curve.
The firm's profit maximizing quantity is A) 2 B) 3 C) 4 D) 5 E) 6
Answer D, 5 Marginal revenue is $8 for each unit of output. Marginal cost of producing the fifth unit is $7. Since marginal revenue ($8) is greater than marginal cost ($7), then increasing output increases profit as long as the marginal cost of producing the next unit is less than its marginal revenue, but the marginal cost of the sixth unit is $9 (which is greater than $8), and so producing six units will not maximize the firm's economic profit. Therefore, total profit is maximized at 5 units of output, where the difference between total revenue and total cost is $11.
At a firm's current output level, average fixed cost is $10, average variable cost is $30, average total cost is $40, and marginal cost is $55. Which of the following must be true? A) Average fixed cost, average variable cost, and average total cost are all decreasing. B) Average fixed cost, average variable cost, and average total cost are all increasing. C) Average fixed cost and average total cost are both decreasing, while average variable cost is increasing. D) Average fixed cost is decreasing, and both average variable cost and average total cost are increasing. E) Average fixed cost and average variable cost are both decreasing, while average total cost is increasing.
Answer D, Average fixed cost is decreasing, and both average variable cost and average total cost are increasing. Marginal cost is above average variable cost and average total cost, causing both to increase. Average fixed cost always decreases.
Given a short-run production function, which of the following is true when total product is increasing at a decreasing rate? A) Average product must be positive and increasing. B) Average product must be negative and decreasing. C) Marginal product must be negative and decreasing. D) Marginal product must be positive and increasing. E) Marginal product must be positive and decreasing.
Answer E, Marginal product must be positive and decreasing. Marginal product is the rate of change in total product, so if marginal product is positive and decreasing, each additional worker adds fewer output than the worker before and total product will increase but by smaller and smaller amounts. Therefore, total product will be increasing at a decreasing rate.
Which of the following ranges of output illustrates diseconomies of scale? A) Q1 to Q2 B) Q1 to Q3 C) Q2 to Q3 D) Q2 to Q4 E) Q3 to Q5
Answer E, Q3 to Q5 From Q3 to Q5 the LRATC is increasing as output increases, so this range of output illustrates diseconomies of scale.
Firms will have no incentive to exit or enter this market if the price in this market is A) above P4 B) below P2 C) between P2 and P3 D) equal to marginal cost E) equal to average total cost
Answer E, equal to average total cost When the price is equal to the average total cost, the firm is earning zero economic profit and there is no motivation for the firm to exit the market or for new firms to enter the market.