Ch.6 Producer's theory

the production function.

The relationship between the quantity of inputs used and the quantity of outputs produced

The Law of Diminishing Returns

successive increases in inputs eventually lead to less additional output.

Suppose there is a product that is being sold in a perfectly competitive market. If the demand for the product increases​, producer surplus will decrease/ increase since this change results in a higher ​price, which means there is less/more area between the supply curve and the market price for the good.

increase- more

Consider indifference curves for goods X and Y. Suppose we plot the quantity of good Y on the​ y-axis and the quantity of good X on the​ x-axis. These indifference curves are​ downward-sloping because any other slope would imply that consumption of the two goods reached the point where​ __________. A. one or both goods have zero marginal benefit. B. the positive marginal benefit of one good is exactly offset by the negative marginal benefit of the other. C. the consumer has become irrational. D. all of the above. E. A and B are both correct. 2.What is the economic interpretation of the slope of an indifference​ curve? The slope indicates the amount of the​ __________ measured good that the consumer is willing to exchange for one unit of the​ __________ measured good while keeping her total​ __________ constant. A. ​vertically; horizontally; utility. Your answer is correct. B. ​vertically; horizontally; income. C. ​vertically; horizontally; expenditure. D. ​horizontally; vertically; utility. 3. An indifference curve would flatten out as someone consumes more of good X and less of good Y because of the assumption of increasing/ diminishing/ constant marginal benefits.

1. E. A and B are both correct. 2. D. ​horizontally; vertically; utility. 3. diminishing

According to the graph, which level of output represents the minimum efficient scale in bookselling?

20,000 books

In a perfectly competitive​ market, all of the following are true​ except: A. The market supply cannot affect the retail price. B. The products sold are basically homogeneous. C. Entry into the market is unrestricted. D. Sellers are​ price-takers.

A. The market supply cannot affect the retail price. While individual sellers are​ price-takers in a perfectly competitive​ market, the combined effect of many​ sellers' decisions can affect the market price.

All of the following could cause an increase in producer surplus​ except: A. an upward shift in the marginal cost curve. B. a shift in the market demand curve. C. a higher equilibrium price. D. a downward shift in the marginal cost curve.

A. an upward shift in the marginal cost curve.

All of the following are factors in a​ firm's elasticity of supply​ except: A. market price.. B. time. C. labor. D. inventories.

A. market price.. Key factors include 1. whether the firm has excess​ inventories, 2. how long the firm has to respond to price​ changes, 3. whether workers are readily available.

The goal of a business in a perfectly competitive market is to​ maximize: A. profits. B. margins. C. units sold. D. revenues.

A. profits.

In a competitive​ market, if economic profits​ exist, then: A. the market supply curve will shift rightward and the price will decrease. B. the market supply curve will shift leftward and the price will increase. C. the market supply curve will shift rightward and the price will increase. D. the market supply curve will shift leftward and the price will decrease.

A. the market supply curve will shift rightward and the price will decrease.

You are planning to build an apartment building. Your market research department estimates that your revenues will be ​$800,000. Your engineering department estimates the cost will be ​$500,000. You started construction and spent ​$200,000 to build the foundation when the recession begins. This causes the market research department to revise its revenue estimates downward to ​$299,950. Should you complete the apartment​ building? A. ​No, the remaining cost to build is ​$300,000 and you only expect to earn ​$299,950​; you will ignore the ​$200,000 spent since it is a sunk cost. B. ​No, the cost to build is still ​$500,000 ​(which includes the ​$200,000 you spent already and the ​$300,000 ​remaining) and you only expect to earn ​$299,950. C. ​Yes, the ​$200,000 is a fixed cost of production so you must complete the building to cover these fixed costs. D. ​Yes, since you have already spent ​$200,000​, you cannot stop construction since that money would be wasted.

A. ​No, the remaining cost to build is ​$300,000 and you only expect to earn ​$299,950​; you will ignore the ​$200,000 spent since it is a sunk cost.

A firm with positive economic / accounting profits might still choose to exit an​ industry, while a firm with positive economic/ accounting profits would not.

Accounting - Economic

Under which of the following examples is it likely that the accounting profit is positive and the economic profit is​ negative? A. Using a store in the mall to sell clothes instead of shoes. B. If you open an amusement park in the middle of New York City. C. Opening a McDonald's franchise in a college town. D. Such a​ scenario, where accounting cost is positive and economic profit is​ negative, is not possible.

B. If you open an amusement park in the middle of New York City.

Is producer surplus always equal to​ profit? A. Producer surplus is equal to profit when marginal cost is equal to fixed costs. B. Producer surplus equals profit when marginal cost and average total cost can be represented with the same curve. C. Producer surplus will always equal​ profit, since both profit and producer surplus measure the same concept. D. Producer surplus can never equal​ profit, since profit and producer surplus are based off of different curves.

B. Producer surplus equals profit when marginal cost and average total cost can be represented with the same curve.

By producing to where marginal revenue equals marginal​ cost, the seller​ is: A. ensuring a profit. B. minimizing an existing loss. C. minimizing costs. D. reducing total profits.

B. minimizing an existing loss. By producing to where MR=MC​, the seller is maximizing any existing profit or minimizing any existing loss. To determine profit or​ loss, (P−ATC)Q must be used.

Suppose one firm accounts for 55 percent of the global market share for a​ product, while 147 other firms account for the remaining 45 percent of the market. With such a large number of buyers and​ sellers, is this market likely to be​ competitive? A. ​Yes, a competitive market is characterized by having many​ firms, regardless of size. B. ​No, even though there are many firms in the​ market, there is one firm large enough to influence the market price. C. ​Yes, markets are only competitive if there is at least one firm large enough to act as a price setter for all other firms. D. ​No, even with such a large number of buyers and​ sellers, there must be barriers to entry for this market to stay competitive.

B. ​No, even though there are many firms in the​ market, there is one firm large enough to influence the market price.

How would the introduction of legal or technical barriers to entry affect the​ long-run equilibrium in a perfectly competitive​ market? A. It would create downward pressure on​ prices, causing firms to exit the market. B. It would make all firms in the market less​ competitive, since any artificial barrier hurts the market overall. C. It would reduce any downward pressure on prices from entry and allow economic profits in the long run. D. There would be no effect on the​ market, since there are no barriers to entry in perfectly competitive markets.

C. It would reduce any downward pressure on prices from entry and allow economic profits in the long run.

Can two indifference curves​ intersect? Explain your answer. A. ​Yes, intersecting indifference curves simply imply that a consumer has difficulty choosing between some bundles. B. ​Yes, intersecting indifference curves simply imply that a consumer changes her mind from time to time. C. ​No, intersecting indifference curves would imply that a consumer is indifferent between bundles that yield different total benefits. D. ​No, intersecting indifference curves violate the Law of Demand.

C. ​No, intersecting indifference curves would imply that a consumer is indifferent between bundles that yield different total benefits.

In a perfectly competitive​ market, all of the following statements are true​ except: A. The marginal revenue curve is the same as the demand curve facing sellers. B. Marginal revenue is the change in total revenue associated with producing one more unit of output. C. Marginal revenue is the same as price. D. Marginal revenue is equal to price times quantity.

D. Marginal revenue is equal to price times quantity. Because a perfectly competitive firm is a price taker and faces a horizontal demand curve, its marginal revenue curve is also horizontal and coincides with its average revenue (and demand) curve.

An indifference curve is the set of bundles that​ ___________. A. a consumer can purchase with his income. B. a consumer can purchase using all of his income. C. a consumer most prefers. D. provide an equal level of satisfaction for the consumer.

D. provide an equal level of satisfaction for the consumer. the budget constraint summarizes what you can afford and the difference curve summarizes what you like

The aggregate difference between the average total cost ​(ATC​) and average variable cost ​(AVC​) for all units of production is​ the: A. marginal cost. B. total cost. C. total variable cost. D. total fixed cost

D. total fixed cost

Is it possible for accounting profit to be positive and economic profit to be​ negative? A. ​Yes, this could occur if implicit costs were modest and explicit costs were high. B. ​No, economic profit must always be larger than accounting profit. C. ​No, economic profit and accounting profit will always end up being the same. D. ​Yes, this could occur if explicit costs were modest and implicit costs were high.

D. ​Yes, this could occur if explicit costs were modest and implicit costs were high.

Every candle maker in Town A must have a license. The cost of a license is the same regardless of the number of candles a business produces. Assume that the candle market is perfectly competitive. i. Does this license shift a candle​ maker's short-run average fixed cost​ curve? ii. Does this license shift a candle​ maker's short-run average variable cost​ curve? iii. Does this license shift a candle​ maker's short-run​ profit-maximizing choice of the number of candles to​ produce? - With the​ license, the​ short-run average fixed cost curve ----- and the​ short-run average variable cost curve---------------. - The license change/ does not change the​ short-run profit-maximizing quantity of candles to produce.

Shifts up - remains unchanged Marginal cost is the change in total cost associated with producing one more unit of output. The license is a fixed​ cost, so it does not change the marginal cost of production.​ Subsequently, the​ profit-maximizing quantity of candles to produce remains unchanged.

When the ATC curve is​ decreasing, we know that the MC curve is --------, and when the ATC curve is​ increasing, we know that MC is --------.

below the ATC curve/ above the ATC curve

For this​ exercise, assume there are only two goods. The substitution effect of an increase in the price of one good always decreases/ increases the amount of that good in the​ individual's new consumption choice​ (bundle) and increases/decreases the amount of the other good. The associated income effect of an increase in the price of one good always increases/always decreases/ may increase or decrease the quantity of that good and always increases/always decreases/ may increase or decrease the quantity of the other​ good, but the quantities of the two goods in the new consumption choice cannot simultaneously decrease/ increase as a result of the income effect.

decreases- increases may increase or decrease- may increase or decrease- increase (bc both cannot be inferior goods)

You read a story in the newspaper about a car company that has recently been fined five billion dollars by government regulators. The fine is for past infractions that are no longer relevant to how the firm will produce cars going forward. The story contains the statement​ "clearly, the company will now need to raise prices in order to recover this​ loss." If it is impossible for the company to pay its​ obligations, the company should--------------- continue production increase price to cover fixed costs file for bankruptcy

file for bankruptcy

The marginal cost of producing the third unit is ----- the average total cost of the third unit. This means that producing the third unit causes the average total cost to ------- .

less than/decrease

If marginal cost​ (MC) is greater than average total cost​ (ATC), then ATC is falling/ remaining unchanged/ rising. At this point of production the average fixed cost​ (AFC) would be falling/ remaining unchanged/ rising .

rising- falling

Marginal product

the change in total output associated with using one more unit of input.

Martha runs a business that makes designer jeans. Each of the seamstresses she employs uses one of the sewing machines on the factory floor. In the short​ run, the seamstresses are a variable/fixed factor of production and the sewing machines are a fixed/variable factor of production. The output of each seamstress is considered the ------

variable- fixed- marginal product