Econ 2nd Test

"The fixed...expenses which attach to the operation of railroads...are in the nature of a tax upon the business of the road; the smaller the amount of business, the larger the tax." In what sense is the tax smaller when the amount of business is larger?

As production increases, fixed costs can be allocated over a greater amount of output, decreasing the average cost of the tax

What is the relationship between a perfectly competitive​ firm's marginal cost curve and its supply​ curve?

A​ firm's marginal cost curve is equal to its supply curve for prices above average variable cost.

In deciding between consuming more goods now or saving money, consumers should do what?

Choose an amount of current spending on goods and savings so that the marginal utility per dollar of both are equal

Her marginal utility from consuming ginger ale

Does not change

As Maya adjusts to the change in the price of ginger ale, her marginal utility per dollar spent on tuna will

Increase because she will buy less tuna

The marginal utility per dollar she spends on ginger ale

Increases

Jill: "I would like to have a restaurant in the suburbs, but I pay no rent for my restaurant now, and I don't want to see my costs rise by $3,000 per month." What do you think of Jill's reasoning?

Jill is incorrectly ignoring the opportunity cost of using the building she owns

Which of the following statements is true when the difference between TR and TC is at its maximum positive​ value?

MR​ = MC Slope of TR​ = Slope of TC

For a market to be perfectly competitive, there must be

Many buyers and sellers, with all firms selling identical products, and no barriers to new firms entering the market

PROFIT Total revenue minus total cost

No

Because of the substitution effect, Maya will buy more ginger ale. Can we conclude that ginger ale is a normal good?

No, because normal and inferior good designations are related to the income effect, not the substitution effect.

The financial writer Andrew Tobias has described an incident when he was a student at Harvard Business​ School: Each student in the class was given large amounts of information about a particular firm and asked to determine a pricing strategy for the firm. Most of the students spent hours preparing their answers and came to class carrying many sheets of paper with their calculations. When his professor called on him in class for an​ answer, Tobias​ stated, ​"The case said the XYZ Company was in a very competitive industry . . . and the case said that the company had all the business it could​ handle." Given this​ information, what price do you think Tobias argued the company should​ charge? (Tobias says the class greeted his answer with​ "thunderous applause.")

The market price.

A student in a principles of economics course makes the following remark: "The economic model of perfectly competitive markets is fine in theory but not very realistic. It predicts that in the long run, a firm in a perfectly competitive market will earn no points. No firm in the real world would stay in business if it earned zero profits." Is this remark correct or incorrect?

The remark is incorrect because the student has confused accounting profit and economic profit. Firms in a perfectly competitive market earn accounting profit, but no economic profit

A student makes the following argument: "When a market is in equilibrium, there is no consumer surplus. We know this because in equilibrium, the market price is equal to the price consumers are willing to pay for the good." Briefly explain whether you agree with the student's argument.

The student is incorrect because the price consumers are willing to pay and the market price are only equal for the last unit consumed

Why are firms willing to accept losses in the short run but not in the long​ run?

There are fixed costs in the short run but not in the long run.

"Firms will supply all those goods that provide consumers with a marginal benefit at least as great as the marginal cost of producing them. A student objects to this statement saying, "I doubt that firms will really do this. After all, firms are in business to make a profit; they don't care about what is best for consumers." After reminding the class that we are assuming a competitive market, your professor would most likely give the following reply

While it's true that firms don't care about consumer welfare, they do maximize profits by producing the efficient level of output

A price taker is

a firm that is unable to affect the market price.

In the short​ run, a​ firm's shutdown point is the minimum point on the

average variable cost​ curve, while in the long​ run, a​ firm's exit point is the minimum point on the average total cost curve.

Suppose Farmer Lane grows and sells cotton in a perfectly competitive industry. The market price of cotton is ​$1.42 per​ kilogram, and his marginal cost of production is ​$1.79 per​ kilogram, which increases with output. Assume Farmer Lane is currently earning a profit. Can Farmer Lane do anything to increase his profit in the short​ run?

can increase his profit by raising his price.

The interest payments these firms make are a

fixed cost since they do not vary with output.

The late Nobel​ Prize-winning economist George Stigler once​ wrote, "the most common and most important criticism of perfect competition...​ [is] that it is​ unrealistic." ​ Despite the fact that few firms sell identical products in markets where there are no barriers to​ entry, economists believe that the model of perfect competition is important because

it is a benchmarklong-market with the maximum possible competition-that economists use to evaluate actual markets that are not perfectly competitive.

A firm is likely to be a price taker when

it represents a small fraction of the total market

"Rent controls, government farm programs, and other price ceilings and price floors are bad." This is an example of a

normative statement. The statement is concerned with what should be

The quote describes logical behavior of solar panel firms in the

short run.

For a demand curve to be upward sloping, the good would have to be an inferior good, and

the income effect would have to be larger than the substitution effect

Minimum effect scale is

the level of output at which the long-run average cost of production no longer decreases with output

A firm that does not reach its minimum efficient scale

will lose money if it remains in business