Econ 201 Chapter 13- HOYT

Industrial Organization

The study of how firm's decisions about prices and quantities depend on the market conditions they face.

A firm is producing 20 units with an average total cost of $25 and a marginal cost of $15. If it increases production to 21 units, which of the following must occur? a. Average total cost will decrease. b. Marginal cost will increase. c. Marginal cost will decrease. d. Average total cost will increase.

a. Average total cost will decrease.

When marginal costs are below average total costs, a. average total costs are falling. b. average fixed costs are rising. c. average total costs are minimized. d. average total costs are rising.

a. average total costs are falling.

Economic profit is equal to total revenue minus a. the sum of implicit and explicit costs. b. implicit costs. c. variable costs. d. explicit costs. e. marginal costs.

a. the sum of implicit and explicit costs.

In the long run all inputs are fixed. all inputs are variable. some inputs are fixed and some inputs are variable.

all inputs are variable.

The slope of the average fixed cost curve is always upward sloping. initially downward sloping and then upward sloping. always downward sloping. always zero.

always downward sloping.

The efficient scale of production is the quantity of output that minimizes a. average fixed cost. b. average variable cost. c. marginal cost. d. average total cost.

d. average total cost.

Accounting profit is equal to total revenue minus a. marginal costs. b. the sum of implicit and explicit costs. c. variable costs. d. implicit costs. e. explicit costs.

e. explicit costs.

average total cost

total cost divided by the quantity of output

For Local Taco, total cost is $1,800 when output equals 100 tacos, and total cost is $1,000 when output is zero tacos. What are average variable costs when output equals 100 tacos? $80 $18 $800 $8

$8

The Toyota plant in Georgetown is considering adjusting their production inputs to produce more Camry's. Which of the following is a long run adjustment? Hiring another shift of workers Purchasing more steel to have at-hand Adding an assembly line dedicated to the Camry Hiring more people to work with the detail crew

Adding an assembly line dedicated to the Camry

Typical Cost Curves

At low levels of output, the firm experiences increasing marginal product, and marginal cost curve falls.

U-Shaped Average Total Cost

Average total cost is the sum of average fixed cost and average variable cost. AFC always declines as output rises because the fixed cost is getting spread over a larger number of units.

Marginal Cost

Change in total cost divided by change in Quantity Marginal cost tells us the increase in total cost that arises from producing an additional unit of output.

If Goodfella's installs more pizza ovens and in the long run, average total costs rise, this implies that Goodfella's faces Economies of scale Diminishing marginal product Constant returns to scale Diseconomies of scale

Diseconomies of scale

Fixed Costs

Do not vary with the quantity of output produced. They are incurred even if the firms produce nothing at all. Caleb's fixed costs include any rent he pays because this cost is the same regardless of how much coffee he produces

Which of the following is NOT a reason that a firm may experience economies of scale? Quantity discounts High variable costs Learning by doing High fixed costs

High variable costs

Which of the following statements is true about the short run and the long run? The long run refers to a production planning period of longer than one year. Economists typically refer to the short run as a period of time in which the firm does not have sufficient time to change the amounts of any of its inputs. In the long run all inputs are variable; in the short run at least one input is fixed. The short run is a period of time less than 6 months. In the long run all costs are fixed; in the short urn some costs are fixed.

In the long run all inputs are variable; in the short run at least one input is fixed.

Don Franklin recently bought the Hyundai dealership in Lexington. Which of the following is NOT a variable cost he will face when running his business? Hiring salespeople Purchasing inventory Purchasing complementary beverages for service customers Making payments on the facility

Making payments on the facility

Rising marginal cost

Marginal cost rises as the quantity rises

Profit

Profit= Total Revenue- total cost

Efficient Scale

Quantity of output that minimizes average total cost

production function

Relationship between the quantity of inputs (workers) and quantity of output (cookies

Samim runs an Infiniti car dealership. A car dealership offers a classic principal agent relationship. The dealership (the principle) hires salespeople (the agents) to sell cars for them based on commission. Which of the following is not an example of shirking, and thus should not worry Samim? Salespeople looking at Youtube instead of following up with customers Salespeople joyriding cars Salespeople taking advantage of their employee discount for customers Salespeople cleaning up their workspace when not busy

Salespeople cleaning up their workspace when not busy

Which of the following decisions is a LONG RUN decision involving our class taco truck business? How many workers should we schedule during the lunch hour rush on weekdays at UK? Should we adjust the amount of ground beef we order from our input suppliers relative to the amount of chicken we order from our input suppliers? Should we expand our operation and open a food truck in Louisville that targets the University of Louisville campus?

Should we expand our operation and open a food truck in Louisville that targets the University of Louisville campus?

Total Cost

The amount that the firm pays to buy inputs (flour, sugar, workers, ovens)

Total Revenue.

The amount that the firm receives for the sale of its output (cookies)

You take some of your savings to buy a local food truck and sell sushi at local breweries. You cut your hours back working at CD Central to operate your food truck. Which of the following is a cost your accountant will NOT consider when doing your taxes (aka, what is solely an economic cost) The fuel for the food truck The cost of rice for the sushi The interest you would have earned from savings The cost of hiring additional labor

The interest you would have earned from savings

Total-Cost Curve:

Total cost curve gets steeper as amount rises whereas the production function gets flatter as production rises

Total Revenue

Total revenue= quantity of output X price per output.

Diseconomies of Scale:

When long- run average total, costs rise as output increases Can arise because of coordination problems that often occur in large organizations

Constant returns to scale:

When long-run average total cost does not vary with the level of output

Relationship between Marginal Cost and Average Total Cost

Whenever marginal cost is less than average total cost, average total cost is falling. Whenever marginal cost is greater than ATC, ATC is rising Marginal-cost curve crosses the Average total cost curve at its minimum.

In an agency relationship between a bank manager and a bank teller, the manager is an agent and the teller is a principal. an agent, as is the teller. a principal, as is the teller. a principal and the teller is an agent.

a principal and the teller is an agent.

Which of the following statements is true? a. All costs are variable in the long run. b. All costs are fixed in the long run. c. All costs are fixed in the short run. d. All costs are variable in the short run.

a. All costs are variable in the long run.

Farmer McDonald gives banjo lessons for $20 per hour. One day, he spends 10 hours planting $100 worth of seeds on his farm. What total cost has he incurred? a. $100 b. $300 c. $200 d. $400

b. $300

Which of the following is a variable cost in the short run? a. Interest payments on borrowed financial capital b. Wages paid to factory labor c. Payment on the lease for factory equipment d. Rent on the factory e. Salaries paid to upper management

b. Wages paid to factory labor

If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal-cost curve will a. be flat (horizontal). b. be U-shaped. c. slope upward. d. slope downward.

b. be U-shaped.

If Boeing produces 9 jets per month, its long-run total cost is $9 million per month. If it produces 10 jets per month, its long-run total cost is $11 million per month. Boeing exhibits a. falling marginal cost. b. diseconomies of scale. c. rising marginal cost. d. economies of scale.

b. diseconomies of scale.

In the long run, if a very small factory were to expand its scale of operations, it is likely that it would initially experience a. an increase in average total costs. b. economies of scale. c. diseconomies of scale. d. constant returns to scale.

b. economies of scale.

Use the following information to answer question. Madelyn owns a small pottery factory. She can make 1,000 pieces of pottery per year and sell them for $100 each. It costs Madelyn $20,000 for the raw materials to produce the 1,000 pieces of pottery. She has invested $100,000 in her factory and equipment: $50,000 from her savings and $50,000 borrowed at 10 percent (assume that she could have loaned her money out at 10 percent, too). Madelyn can work at a competing pottery factory for $40,000 per year. The economic profit at Madelyn's pottery factory is a. $35,000. b. $70,000. c. $30,000. d. $75,000. e. $80,000.

c. $30,000.

Xavier opens up a lemonade stand for two hours. He spends $10 for ingredients and sells $60 worth of lemonade. In the same two hours, he could have mowed his neighbor's lawn for $40. Xavier earns an accounting profit of _____ and an economic profit of ____. a. $50, $90 b. $90, $50 c. $50, $10 d. $10, $50

c. $50, $10

If a production function exhibits diminishing marginal product, its slope a. is linear (a straight line). b. could be any of the above. c. becomes flatter as the quantity of the input increases. d. becomes steeper as the quantity of the input increases.

c. becomes flatter as the quantity of the input increases.

If a higher level of production allows workers to specialize in particular tasks, a firm will likely exhibit ________ of scale and ________ average total cost. a. economies, rising b. diseconomies, falling c. economies, falling d. diseconomies, rising

c. economies, falling

A firm is producing 1,000 units at a total cost of $5,000. When it increases production to 1,001 units, its total cost rises to $5,008. For this firm, a. marginal cost is $5, and average total cost is $8. b. marginal cost is $8, and average variable cost is $5. c. marginal cost is $8, and average total cost is $5. d. marginal cost is $5, and average variable cost is $8.

c. marginal cost is $8, and average total cost is $5.

Variable Costs

change as the firm alters the quantity of output produced. Include coffee beans, milk, sugar, and paper cups.

fixed costs

costs that do not vary with the quantity of output produced

variable costs

costs that vary with the quantity of output produced

Use the following information to answer question. Madelyn owns a small pottery factory. She can make 1,000 pieces of pottery per year and sell them for $100 each. It costs Madelyn $20,000 for the raw materials to produce the 1,000 pieces of pottery. She has invested $100,000 in her factory and equipment: $50,000 from her savings and $50,000 borrowed at 10 percent (assume that she could have loaned her money out at 10 percent, too). Madelyn can work at a competing pottery factory for $40,000 per year. The accounting profit at Madelyn's pottery factory is a. $30,000. b. $80,000. c. $70,000. d. $75,000. e. $35,000.

d. $75,000

Use the following information to answer question 0 workers=0 output 1 worker= 23 output 2 worker= 40 output 3 worker= 50 output The marginal product of labor as production moves from employing one worker to employing two workers is a. 10. b. 23. c. 40. d. 17. e. 0.

d. 17.

Farmer Greene faces diminishing marginal product. If she plants no seeds on her farm, she gets no harvest. If she plants 1 bag of seeds, she gets 3 bushels of wheat. If she plants 2 bags, she gets 5 bushels. If she plants 3 bags, she gets a. 7 bushels. b. 8 bushels. c. 9 bushels. d. 6 bushels.

d. 6 bushels.

If there are implicit costs of production, a. economic profit will exceed accounting profit. b. economic profit and accounting profit will be equal. c. economic profit will always be zero. d. accounting profit will exceed economic profit. e. accounting profit will always be zero

d. accounting profit will exceed economic profit.

The government imposes a $1,000 per year license fee on all pizza restaurants. As a result, which cost curves shift? a. average total cost and marginal cost b. average variable cost and marginal cost c. average variable cost and average fixed cost d. average total cost and average fixed cost

d. average total cost and average fixed cost

If marginal costs equal average total costs, a. average total costs are rising. b. average total costs are maximized. c. average total costs are falling. d. average total costs are minimized.

d. average total costs are minimized.

If a production function exhibits diminishing marginal product, the slope of the corresponding total-cost curve a. is linear (a straight line). b. becomes flatter as the quantity of output increases. c. could be any of the above. d. becomes steeper as the quantity of output increases.

d. becomes steeper as the quantity of output increases.

0 workers=0 output 1 worker= 23 output 2 worker= 40 output 3 worker= 50 output The production process described above exhibits a. increasing marginal product of labor. b. decreasing returns to scale. c. increasing returns to scale. d. diminishing marginal product of labor. e. constant marginal product of labor.

d. diminishing marginal product of labor.

Diminishing marginal product explains why, as a firm's output increases, a. the production function and total-cost curve both get steeper. b. the production function and total-cost curve both get flatter. c. the production function gets steeper, while the total-cost curve gets flatter. d. the production function gets flatter, while the total-cost curve gets steeper.

d. the production function gets flatter, while the total-cost curve gets steeper.

Average fixed cost

equals the fixed cost divided by the quantity of output

Average variable cost

equals the variable cost divided by the quantity of output.

average fixed cost

fixed cost divided by the quantity of output

implicit costs

input costs that do not require an outlay of money by the firm

explicit costs

input costs that require an outlay of money by the firm

Diminishing Marginal Product

o The property whereby the marginal product of an input declines as the quantity of the input increases.

Marginal Product

of any input in the production process is the change in the quantity of output obtained from

Opportunity cost:

refers to all the things that must be forgone to acquire that item.

Economic costs are also called by all of the following names EXCEPT sunk costs implicit costs imputed costs opportunity costs avoidable costs

sunk costs

If an economist and an accountant both calculate profits for the same firm the economist will calculate a higher value for profit the accountant will calculate a higher value for profit.

the accountant will calculate a higher value for profit.

marginal product

the increase in output that arises from an additional unit of input

Marginal cost is all costs that vary with output. all costs associated with fixed inputs. all costs associated with the production of goods. the increase in total cost resulting from a one-unit increase in output.

the increase in total cost resulting from a one-unit increase in output.

marginal cost

the increase in total cost that arises from an extra unit of production

total cost

the market value of the inputs a firm uses in production

economies of scale

the property whereby long-run average total cost falls as the quantity of output increases

diseconomies of scale

the property whereby long-run average total cost rises as the quantity of output increases

constant returns to scale

the property whereby long-run average total cost stays the same as the quantity of output changes

diminishing marginal product

the property whereby the marginal product of an input declines as the quantity of the input increases

efficient scale

the quantity of output that minimizes average total cost

production function

the relationship between the quantity of inputs used to make a good and the quantity of output of that good

Average total cost

total cost/ quantity of output Average total cost tells us the cost of a typical unit of output if total cost is divided evenly over all the units produced

When marginal product is rising we know that total product is increasing at a decreasing rate. total product is decreasing at an increasing rate. total product is increasing at an increasing rate. total product is decreasing at a decreasing rate.

total product is increasing at an increasing rate.

Accounting profit

total revenue - explicit costs Accounting is usually higher than economic profit.

economic profit

total revenue minus total cost, including both explicit and implicit costs

accounting profit

total revenue minus total explicit cost

Economic profit

total revenue- all its opportunity cost (implicit and explicit) Economic profit is lower than accounting profit Total revenue must exceed all the opportunity costs.

average variable cost

variable cost divided by the quantity of output

Typical unit produced

we divide the firm's costs by the quantity of output it produces.

Economies of Scale:

when long run average total cost declines as output increases.