ECON 202 Module 9.1-9.10

short run

in the ________ firms cant change fixed costs or technology

economies of scale

when long run average costs fall as quantity/output increases

economic profits

usually less than accounting profits. important to figure out the value of the firm

average variable cost

variable cost/quantity

economic costs

= implicit costs + explicit costs

d. all inputs can be varied

A characteristic of the long run is a. there are fixed inputs. b. there are both fixed and variable inputs c. plant capacity cannot be increased or decreased. d. all inputs can be varied

Oligopoly

A market structure in which there are a few firms, some barriers to entry, and identical or differentiated products

a. true

An increase in a firm's fixed cost will not change the firm's profit-maximizing output in the short run. a. true b. false

b. competition from substitute goods or services

As word processing on personal computers expanded, sales of typewriters began to disappear. Which competitive force does this event demonstrate? a. the threat of competition from new entrants b. competition from substitute goods or services c. bargaining power of suppliers d. bargaining power of buyers

a. total cost divided by the level of output.

Average total cost is equal to a. total cost divided by the level of output. b. average fixed cost minus average variable cost. c. marginal cost plus variable cost. d. total cost divided by the number of workers.

b. each buyer and seller is too small relative to others to independently affect the market price.

Both buyers and sellers are price takers in a perfectly competitive market because a. both buyers and sellers in a perfectly competitive market are concerned for the welfare of others. b. each buyer and seller is too small relative to others to independently affect the market price. c. each buyer and seller knows it is illegal to conspire to affect price. d. the price is determined by government intervention and dictated to buyers and sellers.

c. is not; it has many substitutes

Diet Coke ________ considered a product in a monopoly market, because ________. a. is; the CocaCola company has market power b. is; it has only one producer: CocaCola company c. is not; it has many substitutes d. is not; because it is produced in factories around the world

c. economic costs add the opportunity costs of a firm using its own resources while accounting costs do not.

Economic costs of production differ from accounting costs in that a. economic costs include expenditures for hired resources while accounting costs do not. b. accounting costs are always larger than economic cost. c. economic costs add the opportunity costs of a firm using its own resources while accounting costs do not. d. accounting costs include expenditures for hired resources while economic costs do not.

b. its loss equals its fixed cost.

If a firm shuts down in the short run, a. its loss equals zero. b. its loss equals its fixed cost. c. its total revenue is not large enough to cover its fixed cost. d. is makes zero economic profit.

b. is earning a profit.

If a perfectly competitive firm's price is above its average total cost, the firm a. should shut down. b. is earning a profit. c. is incurring a loss. d. is breaking even.

b. false

If price is equal to average variable cost, then a perfectly competitive firm breaks even. a. true b. false

long run

In the _________ a company can change their production technology or physical space (everything is variable)

b. There are no fixed costs

In the long run which of the following is true? a. The size of a firm's physical plant can be changed but the firm cannot adopt new technology. b. There are no fixed costs. c. Total cost = fixed cost + variable cost. d. The firm can vary its explicit costs but not its implicit costs.

a. (P × Q) - TC

Letters are used to represent the terms used to answer this question: price (P), quantity of output (Q), total cost (TC) and average total cost (ATC). Which of the following equations is equal to a firm's profit? a. (P × Q) - TC b. P - ATC c. P - TC d. (P × Q) - (P × ATC)

a. dividing the change in total cost by the change in output.

Marginal cost is calculated for a particular increase in output by a. dividing the change in total cost by the change in output. b. multiplying the total cost by the change in output. c. multiplying the change in total cost by the change in output. d. dividing the total cost by the change in output.

d. because previously owned diamonds would be a close substitute to newly mined diamonds and would therefore reduce De Beers' market power

The De Beers Company, one of the longest-lived monopolies, is facing increasing competition. One source of competition comes from people who might resell their previously owned diamonds. Why is De Beers worried that people might resell their previously owned diamonds? a. because the availability of previously owned diamonds would make the market demand curve for diamonds more inelastic and force De Beers to lower its price b. because De Beers will not be able to guarantee the quality of previously owned diamonds and fears that its reputation might be harmed c. because the availability of previously owned diamonds would increase the market demand for diamonds and dilute De Beers' monopoly d. because previously owned diamonds would be a close substitute to newly mined diamonds and would therefore reduce De Beers' market power

c. the shutdown point.

The minimum point on the average variable cost curve is called a. the break-even point. b. the point of diminishing returns. c. the shutdown point. d. the loss-minimizing point.

a. firms are forced by competitive pressure to be as efficient as possible.

The perfectly competitive market structure benefits consumers because a. firms are forced by competitive pressure to be as efficient as possible. b. firms produce high-quality goods at low prices. c. firms add a much smaller markup over average cost than firms in any other type of market structure. d. firms do not produce goods at the lowest possible price in the long run.

d. market demand and market supply.

The price of a seller's product in perfect competition is determined by a. a few of the sellers. b. the individual seller. c. the individual demander. d. market demand and market supply.

a. an insurmountable barrier to entry.

To maintain a monopoly, a firm must have a. an insurmountable barrier to entry. b. a perfectly inelastic demand. c. few competitors. d. marginal revenue equal to demand.

c. a corn farmer in Illinois

Which of the following is the best example of a perfectly competitive firm? a. the Ford Motor Company b. a Taco Bell restaurant c. a corn farmer in Illinois d. United Parcel Service (UPS)

a. The firm breaks even.

What is always true at the quantity where a firm's average total cost equals average revenue? a. The firm breaks even. b. The firm's profit is maximized. c. The firm's revenue is maximized. d. Marginal cost equals marginal revenue.

d. nothing at all; the firm shuts down.

When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell a. the output where average total cost equals price. b. the output where marginal revenue equals marginal cost. c. any positive output the entrepreneur decides upon because all of it can be sold. d. nothing at all; the firm shuts down.

monopolistic competition

a market structure in which many firms sell products that are similar but not identical. low barriers to entry

technological change

a positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs

network externalities

a situation in which the usefulness of a product increases with the number of consumers who use it

market power

ability to set P>MC

marginal cost

change in total cost / change in quantity

production technology

firms use __________ to turn inputs into outputs. The processes that firms use

average fixed cost

fixed cost/quantity

long-run supply curve

shows the relationship in the long run between market price and the quantity supplied

production function

the relationship between the inputs employed by a firm and the maximum output it can produce with those inputs

long-run competitive equilibrium

the situation in which the entry and exit of firms has resulted in the typical firm breaking even

d. MR > AVC.

A firm could continue to operate for years without ever earning a profit as long as it is producing an output where a. AFC < AVC. b. ATC > AVC. c. MR < ATC. d. MR > AVC.

b. where marginal revenue equals marginal cost and charging the price on the market demand curve for that output.

A monopolist's profit-maximizing price and output correspond to the point on a graph a. where price is as high as possible. b. where marginal revenue equals marginal cost and charging the price on the market demand curve for that output. c. where total costs are the smallest relative to price. d. where average total cost is minimized.

d. is the same as the market demand curve.

A monopoly firm's demand curve a. is more inelastic than the demand curve for the product. b. is perfectly inelastic. c. is inelastic at high prices and elastic at lower prices. d. is the same as the market demand curve.

a. there are only a few sellers, each selling a unique product.

A monopoly is characterized by all of the following except a. there are only a few sellers, each selling a unique product. b. the firm has market power. c. entry barriers are high. d. there are no close substitutes to the firm's product.

d. without a close substitute.

A monopoly is the only seller of a product a. without a well-defined demand curve. b. with a perfectly inelastic demand. c. with many substitutes. d. without a close substitute.

c. many firms can supply the input.

A supplier of an input is unlikely to have bargaining power if a. it is the sole supplier of the input. b. the input supplied is specialized. c. many firms can supply the input. d. it has a patent on the input.

a. new firms are attracted to the industry.

If, in a perfectly competitive industry, the market price facing a firm is above its average total cost at the output where marginal revenue equals marginal cost, then a. new firms are attracted to the industry. b. firms are breaking even. c. existing firms will exit the industry. d. market supply will remain constant.

a. the non-monetary opportunity cost of using the firm's own resources.

Implicit costs can be defined as a. the non-monetary opportunity cost of using the firm's own resources. b. accounting profit minus explicit cost. c. total cost minus fixed costs. d. the deferred cost of production.

b. sunk costs.

In analyzing the decision to shut down in the short run we assume that the firm's fixed costs are a. capital costs. b. sunk costs. c. nonmonetary opportunity costs. d. implicit costs.

b. Amazon took these actions to compete more effectively with existing online booksellers.

In recent years, Amazon has lowered its profits by offering some of its customers free shipping on books and building more warehouses to hold its book inventories. Which of the following explains Amazons actions? a. Amazon was forced to take these actions because of the bargaining power of its suppliers. b. Amazon took these actions to compete more effectively with existing online booksellers. c. Amazon feared government regulation if its profits were too high. d. Amazon took these actions to deter entry into its market by new online booksellers.

b. all of the firm's costs are variable costs.

In the long run, a. all of the firm's costs are explicit costs; there are no implicit costs of production. b. all of the firm's costs are variable costs. c. the firm's fixed costs are greater than its fixed costs in the short run. d. the firm is more profitable than it is in the short run.

a. supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve.

In the long run, a perfectly competitive market will a. supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve. b. produce only the quantity of output that yields a long-run profit for the typical firm. c. supply whatever amount consumers will buy at a price which earns the market an economic profit. d. generate a long-run equilibrium where the typical firm operates at a loss.

a. benefits consumers by forcing prices down to the level of average cost.

In the long run, the entry of new firms in an industry a. benefits consumers by forcing prices down to the level of average cost. b. harms consumers by forcing prices up above the level of total cost c. harms consumers by forcing prices up above the level of average cost d. benefits consumers by forcing prices down to the level of total cost.

c. No, although Peet's coffee is a unique product, there are many different brands of coffee that are very close substitutes.

Peet's Coffee and Teas produces some flavorful varieties of Peet's brand coffee. Is Peet's a monopoly? a. Yes, there are no substitutes to Peet's coffee. b. No, Peet's is not a monopoly because there are many branches of Peet's. c. No, although Peet's coffee is a unique product, there are many different brands of coffee that are very close substitutes. d. Yes, Peet's is the only supplier of Peet's coffee in a market where there are high barriers to entry.

b. The firm will not sell any output.

Suppose the equilibrium price in a perfectly competitive industry is $15 and a firm in the industry charges $21. Which of the following will happen? a. The firm's revenue will increase. b. The firm will not sell any output. c. The firm will sell more output than its competitors. d. The firm's profits will increase.

b. Economic profit takes into account all costs involved in producing a product.

Which of the following statements is correct? a. Accounting profit is not relevant in preparing the firm's financial statement. b. Economic profit takes into account all costs involved in producing a product. c. Accounting profit is the same as economic profit. d. Economic profit always exceeds accounting profit.

explicit costs

costs in which the firm spends money on buying things (wages for workers)

sunk costs

costs that are paid and cannot be recovered

natural monopoly

when one firm can supply more cheaply than multiple firms

c. because Microsoft could potentially lose sales if it sets prices indiscriminately

Microsoft hires marketing and sales specialists to decide what prices it should set for its products, whereas a wealthy corn farmer in Iowa, who sells his output in the world commodity market, does not. Why is this so? a. because the wealthy corn farmer is a price maker who sets his price independently of the market price, but Microsoft's optimal output depends on the price it selects b. because unlike Microsoft, the wealthy corn farmer is probably a monopolist c. because Microsoft could potentially lose sales if it sets prices indiscriminately d. because Microsoft is large enough to hire the best people in the field

a. the differentiation of its products and the production of products at a lower average cost than competing firms.

Of the factors that are within the control of the firm's owners, the most important factors that make a firm successful are a. the differentiation of its products and the production of products at a lower average cost than competing firms. b. the establishment of trademarks for its products and the aggressive defense of those trademarks. c. lobbying government to erect or enforce entry barriers in its markets and the marketing of its products as widely as possible. d. the selection of the prices of its products and the selection of the most productive and loyal employees.

a. an industry where fixed costs are very large relative to variable costs

A natural monopoly is most likely to occur in which of the following industries? a. an industry where fixed costs are very large relative to variable costs b. the software industry because of the importance of network externalities c. the diamond mining and marketing industry because one firm can control a key resource d. the pharmaceutical industry because the development and approval of new drugs through the Food and Drug Administration can take more than 10 years

b. government action to protect a producer.

A patent or copyright is a barrier to entry based on a. large economies of scale as output increases. b. government action to protect a producer. c. ownership of a key necessary raw material. d.widespread network externalities.

b. Yes, it should continue to produce because the firm's revenues cover the total variable cost of $16,000.

A perfectly competitive firm produces 3,000 units of a good at a total cost of $36,000. The fixed cost of production is $20,000. The price of each good is $10. Should the firm continue to produce in the short run? a. Yes, it should continue to produce because its price exceeds its average fixed cost. b. Yes, it should continue to produce because the firm's revenues cover the total variable cost of $16,000. c. No, it should shut down because it is making a loss. d. There is insufficient information to answer the question.

c. is equal to its price.

A perfectly competitive firm's marginal revenue a. is greater than its price. b. may be either greater or less than its price, depending on the quantity sold. c. is equal to its price. d. is less than price because a firm must lower its price to sell more.

b. goods and services are produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.

A perfectly competitive industry achieves allocative efficiency when a. goods and services are produced at the lowest possible cost. b. goods and services are produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it. c. firms carry production surpluses. d. it produces where market price equals marginal production cost.

b. a firm that has some control over the price of the product it sells.

A price maker is a. a consumer who participates in an auction where she announces her willingness to pay for a product. b. a firm that has some control over the price of the product it sells. c. a person who actively seeks out the best price for a product that he or she wishes to buy. d. a firm that is able to sell any quantity at the highest possible price.

d. greater than the price that would prevail if the industry was perfectly competitive.

A profit-maximizing monopoly's price is a. not consistently related to price that would prevail if the market was perfectly competitive. b. the same as the price that would prevail if the industry was perfectly competitive. c. less than the price that would prevail if the industry was perfectly competitive. d. greater than the price that would prevail if the industry was perfectly competitive.

c. is a government designation that a private firm is the only legal producer of a good or service.

A public franchise a. is an unregulated monopoly necessary for the public good. b. is a corporation that is owned by stockholders. c. is a government designation that a private firm is the only legal producer of a good or service. d. results from ownership of a key raw material.

d. The firm will be able to increase its economic profits temporarily, but in the long run its economic profits will be eliminated as other firms copy the innovation.

Assume that the 4K and OLED television sets industry is perfectly competitive. Suppose a producer develops a successful innovation that enables it to lower its cost of production. What happens in the short run and in the long run? a. Initially, the firm will be able to increase its profit significantly, but in the long run its profits will still be greater than zero but lower than its short-run profits because other firms would also innovate. b. The firm will probably incur losses temporarily because of the high cost of the innovation, but in the long run it will start earning positive profits. c. This firm will be able to earn above normal profits indefinitely if it obtains a patent for its innovation. d. The firm will be able to increase its economic profits temporarily, but in the long run its economic profits will be eliminated as other firms copy the innovation.

b. increase its output.

If, for a perfectly competitive firm, price exceeds the marginal cost of production, the firm should a. keep output constant and enjoy the above normal profit. b. increase its output. c. lower the price. d. reduce its output.

c. to maximize profit the firm should increase output.

If a monopolist's marginal revenue is $35 per unit and its marginal cost is $25, then a. to maximize profit the firm should decrease output. b. to maximize profit the firm should continue to produce the output it is producing. c. to maximize profit the firm should increase output. d.Not enough information is given to say what the firm should do to maximize profit.

d. is incurring a loss.

If a perfectly competitive firm's price is less than its average total cost but greater than its average variable cost, the firm a. is breaking even. b. is earning a profit. c. should shut down. d. is incurring a loss.

b. marginal revenue of the sixth performance is $38,000.

If a theatre company expects $250,000 in ticket revenue from five performances and $288,000 in ticket revenue if it adds a sixth performance, the a. marginal revenue of the sixth performance is $288,000. b. marginal revenue of the sixth performance is $38,000. c. company will be making a loss on the sixth performance because its ticket sales will be less than the average revenue received from the previous five. d. cost of staging the sixth performance is probably higher than the cost of staging the previous five.

a. new firms will enter in the long run causing market supply to increase, market price to fall, and profits to decrease.

If a typical firm in a perfectly competitive industry is earning profits, then a. new firms will enter in the long run causing market supply to increase, market price to fall, and profits to decrease. b. the number of firms in the industry will remain constant in the long run. c. new firms will enter in the long run causing market supply to decrease, market price to rise, and profits to increase. d. all firms will continue to earn profits.

b. $700

If average total cost is $50 and average fixed cost is $15 when output is 20 units, then the firm's total variable cost at that level of output is a. $1,000. b. $700 c. $300 d. impossible to determine without additional information.

D. equals the change in variable cost divided by the change in output.

If fixed costs do not change, then marginal cost a. also remains constant. b. equals the change in average fixed cost divided by the change in output. c. equals the change in average variable cost divided by the change in output. d. equals the change in variable cost divided by the change in output.

c. average variable cost is decreasing.

If the marginal cost curve is below the average variable cost curve, then a. average variable cost is increasing. b. average variable cost could either be increasing or decreasing. c. average variable cost is decreasing. d. marginal cost must be decreasing.

c. $25

If the market price is $25 in a perfectly competitive market, the marginal revenue from selling the fifth unit is a. $5 b. $12.50 c. $25 d. $125

a. a gain in producer surplus less than the loss in consumer surplus.

Relative to a perfectly competitive market, a monopoly results in a. a gain in producer surplus less than the loss in consumer surplus. b. a gain in producer surplus equal to the loss in consumer surplus. c. a gain in producer surplus equal to the gain in consumer surplus. d. greater economic efficiency.

c. total fixed cost

Which of the following costs will not change as output changes? A. total variable cost B. average variable cost c. total fixed cost d. average fixed cost e. marginal cost

a. allocative efficiency

Which of the following describes a situation in which every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it? a. allocative efficiency b. productive efficiency c. marginal efficiency d. profit maximization

c. Each maximizes profits by producing a quantity for which marginal revenue equals marginal cost.

Which of the following is a characteristic shared by a perfectly competitive firm and a monopoly? a. Each must lower its price to sell more output. b. Each sets a price for its product that will maximize its revenue. c. Each maximizes profits by producing a quantity for which marginal revenue equals marginal cost. d. Each maximizes profits by producing a quantity for which price equals marginal cost.

a. the ability to produce the product at a lower cost

Which of the following is an example of a factor that a firm's owners and managers can control in making the firm successful? a. the ability to produce the product at a lower cost b. the number of competitors in the market c. a rise in the price of a key input, for example, a rise in the price of oil leads to higher energy costs d. changing consumer tastes

c. Walmart builds another Supercenter.

Which of the following is an example of a long-run adjustment? a. Ford Motor Company lays off 2,000 assembly line workers. b. Your university offers Saturday morning classes next fall. c. Walmart builds another Supercenter. d. A soybean farmer turns on the irrigation system after a month long dry spell.

a. rent that could have been earned on a building owned and used by the firm

Which of the following is an implicit cost of production? a. rent that could have been earned on a building owned and used by the firm b. interest paid on a loan to a bank c. wages paid to labor plus the cost of carrying benefits for workers d. the utility bill paid to water, electricity, and natural gas companies

a. Average revenue is greater than marginal revenue.

Which of the following is not true for a firm in perfect competition? a. Average revenue is greater than marginal revenue. b. Price equals average revenue. c. Marginal revenue equals the change in total revenue from selling one more unit. d. Profit equals total revenue minus total cost.

a. Your local Walmart hires two more associates.

Which of the following is the best example of a short-run adjustment? a. Your local Walmart hires two more associates. b. Smith University completed negotiations to acquire a large piece of land to build its new library. c. A local bakery purchases another commercial oven as part of its capacity expansion. d. Toyota builds a new assembly plant in Texas.

c. Restaurants do not sell identical products.

Which of the following offers the best reason why restaurants are not considered to be perfectly competitive firms? a. Restaurants compete in small market areas—neighborhoods and cities—rather than in regional or national markets. Therefore, restaurants are not small relative to their market size. b. Restaurants usually have entry barriers in the form of zoning restrictions and health regulations. c. Restaurants do not sell identical products. d. Restaurants have significant liability costs that perfectly competitive firms do not have; for example, customers may sue if they suffer from food poisoning.

a. It is a period during which at least one of the firm's inputs is fixed.

Which of the following statements best describes the economic short run? a. It is a period during which at least one of the firm's inputs is fixed. b. It is a period of one year or less. c. It is a period during which firms are free to vary all of their inputs. d. It is a period during which fixed inputs become variable inputs because of depreciation.

c. When marginal cost equals average total cost, average total cost is at its highest value.

Which of the following statements is false? A. The marginal cost curve intersects the average variable cost curve and the average total cost curve at their minimum points. B. Firms often refer to the process of lowering average fixed cost as "spreading the overhead." c. When marginal cost equals average total cost, average total cost is at its highest value. d. The difference between average total cost and average fixed cost is average variable cost.

c. Economists consider all costs to be implicit costs.

Which of the following statements is false? a. An explicit cost is a cost that involves spending money. b. An implicit cost is a nonmonetary opportunity cost. c. Economists consider all costs to be implicit costs. d. Economic costs include both accounting costs and implicit costs.

d. Marginal cost will equal average total cost when marginal cost is at its lowest point.

Which of the following statements is false? a. Marginal cost will equal average total cost when average total cost is at its lowest point. b. When marginal cost is less than average total cost, average total cost will fall. c. When marginal cost is greater than average total cost, average total cost will rise. d. Marginal cost will equal average total cost when marginal cost is at its lowest point.

d. As output increases, average fixed cost becomes smaller and smaller.

Which of the following statements is true? a. When marginal cost is greater than average fixed cost, average fixed cost increases. b. Average fixed cost does not change as output increases. c. The marginal cost curve intersects the average fixed cost curve at its minimum point. d. As output increases, average fixed cost becomes smaller and smaller.

a. a only

Which of the following would be categorized as an opportunity cost? a. not being able to spend your $10,000 savings if you sink the money in your business b. the cost of purchasing supplies for your house-cleaning business c. the cost of purchasing auto insurance for your dry-cleaning delivery business a. a only b. a and c only c. b and c only d. all of the above

d. A monopoly must have some kind of government privilege or government imposed barrier to maintain its monopoly.

Which one of the following about a monopoly is false? a. A monopoly could break even in the long run. b. A monopoly could make profits in the long run. c. A monopoly status could be temporary. d. A monopoly must have some kind of government privilege or government imposed barrier to maintain its monopoly.

b. because it stops producing output at a point where price is above marginal cost

Why does a monopoly cause a deadweight loss? a. because it appropriates a portion of consumer surplus for itself b. because it stops producing output at a point where price is above marginal cost c. because it increases producer surplus at the expense of consumer surplus d. because it does not produce some output for which demand exceeds supply

implicit costs

nonmonetary opportunity costs

average total cost

total cost divided by the quantity of output