ch 6 practice problems

Suppose a firm produces the level of output at which the marginal cost of the last unit produced equals the price of the good. Which of the following statements is always true? a. The firm should shut down if its total revenue is less than its variable cost. b. The firm will earn a positive economic profit. c. The firm is maximizing its profit. d. The firm should produce more if its economic profit is positive.

a. The firm should shut down if its total revenue is less than its variable cost.

Suppose that when a perfectly competitive firm produces 1,000 units of output, its total variable cost is $1,900. If the marginal cost of producing the 1,000th unit is $1.70, and if the market price of each unit of output is $1.70, then the firm should a. shut down. b. raise its price. c. increase output. d. continue to produce 1000 units.

a. shut down.

If a firm spends $400 to produce 20 units of output and spends $880 to produce 40 units, then between 20 and 40 units of output, the marginal cost of production is: a. $20. b. $24. c. $22. d. $480.

b. $24.

To produce 150 units of output per day, a firm must use 3 employees. To produce 300 units of output per day, the firm must use 8 employees. Apparently, the firm is a. producing in the long run. b. experiencing diminishing returns. c. not using any fixed factors of production. d. experiencing negative returns.

b. experiencing diminishing returns.

When plotting marginal and average cost curves, the ______ cost curve always crosses the ______ cost curve at its ______. a. average fixed; marginal; minimum b. marginal; average total; minimum c. marginal; average variable; maximum d. average variable; marginal; maximum

b. marginal; average total; minimum

If a perfectly competitive firm produces an output level at which price is less than marginal costs, then the firm should a. raise its price. b. reduce output to earn greater profits or smaller losses. c. expand output to earn greater profits or smaller losses. d. leave its output level unchanged provided it is covering its variable cost.

b. reduce output earn greater profits or smaller losses.

Suppose that when a perfectly competitive firm produces 500 units of output a day, it earns an economic loss. If the price of each unit of output is $1.50, then, in the short run, it is clear that this firm a. should shut down. b. should not shut down if its total variable cost is less than $750. c. is not maximizing its profit. d. should produce more than 500 units a day.

b. should not shut down if its total variable cost is less than $750.

Suppose that when a firm produces the level of output at which price equals marginal cost, the firm's total revenue is less than its variable cost. In this case, the firm should a. not change its level of output even if it's earning an economic loss in the short run. b. shut down. c. produce more so that its total revenue increases. d. purchase more fixed factors of production.

b. shut down.

One reason that variable factors of production tend to show diminishing returns in the short run is that a. capital equipment is often idle in the short run. b. there is only so much that can be produced using additional variable inputs when some factors of production are fixed. c. large firms cannot effectively manage their resources. d. the cost of employing additional resources increases as firms employ more of those resources.

b. there is only so much that can be produced using additional variable inputs when some factors of production are fixed.

If a firm shuts down in the short run, then its a. total revenue and total cost will fall to zero. b. profit will equal zero. c. economic loss will equal its fixed costs. d. economic loss will equal its variable costs.

c. economic loss will equal its fixed costs.

Suppose a perfectly competitive firm is producing 37 units output, and the marginal cost of the 37th unit is $3. If the firm can sell each unit of output for $5 and the firm's revenue is sufficient to cover its variable cost, the firm should a. lower its price. b. decrease production. c. increase production. d. raise its price.

c. increase production.

Assume that each day a firm uses 13 employee-hours per day and an office to produce 100 units of output. The price of each unit output is $5, the hourly wage rate is $10, and rent on the office is $200 per day. Each day the firm earns a ______ of ______. a. profit; $370 b. loss; $370 c. profit; $170 d. loss; $170

c. profit; $170

When Acme Dynamite produces 250 units of output, its variable cost is $2,000, and its fixed cost is $500. It sells each unit of output for $25. When Acme Dynamite produces 250 units of output, its profit is a. $6,250. b. $5,750. c. $4,250. d. $3,750

d. $3,750.

When Acme Dynamite produces 250 units of output, its variable cost is $2,000, and its fixed cost is $500. It sells each unit of output for $25.When Acme Dynamite produces 250 units of output, its average variable cost is ______ and its average total cost is ______. a. $8; $2 b. $10; $10 c. $10; $2 d. $8; $10

d. $8; $10

When Acme Dynamite produces 250 units of output, its variable cost is $2,000, and its fixed cost is $500. It sells each unit of output for $25. If the price of dynamite drops to $10, should Acme Dynamite continue to operate in the short run? a. No, because price is less than average total cost. b. Yes, because price is less than average variable cost. c. No, because price is not greater than average total cost. d. Yes, because price is greater than average variable cost.

d. Yes, because price is greater than average variable cost.

Suppose 30 employees can produce 50 units of output per day. Assuming the presence of diminishing marginal returns, producing exactly 25 units of output per day would require a. a total of more than 15 employees. b. more than 15 additional employees. c. fewer than 15 additional employees. d. a total of fewer 15 employees.

d. a total of fewer than 15 employees.

Suppose a profit-maximizing firm in a perfectly competitive market is earning an economic profit of $1,345. If the firm's fixed cost increases from $200 to $300, the firm will a. reduce its output. b. raise its price. c. earn a greater profit. d. earn a smaller profit.

d. earn a smaller profit.

Suppose that at a firm's profit-maximizing level of output, its total revenue is $1,250, the total cost of its variable factors of production is $1,000, and its total fixed cost is $500. This firm will ______ in the short run, and it will ______ in the long run. a. shut down; reopen for business b. earn a profit; earn a loss c. earn a loss; earn a profit d. not shut down; exit the industry

d. not shut down; exit the industry

A decrease in the price a firm receives for its output will lead the firm to a. expand output. b. cut its payments to its factors of production. c. leave output unchanged. d. reduce output.

d. reduce output.