ECON MODULE 9
A characteristic of the long run is all inputs can be varied. plant capacity cannot be increased or decreased. there are fixed inputs. there are both fixed and variable inputs
all inputs can be varied.
To maintain a monopoly, a firm must have few competitors. a perfectly inelastic demand. marginal revenue equal to demand. an insurmountable barrier to entry.
an insurmountable barrier to entry.
The perfectly competitive market structure benefits consumers because firms do not produce goods at the lowest possible price in the long run. firms are forced by competitive pressure to be as efficient as possible. firms produce high-quality goods at low prices. firms add a much smaller markup over average cost than firms in any other type of market structure
firms are forced by competitive pressure to be as efficient as possible.
A perfectly competitive firm's marginal revenue is equal to its price. is greater than its price. is less than price because a firm must lower its price to sell more. may be either greater or less than its price, depending on the quantity sold.
is equal to its price.
Average total cost is equal to total cost divided by the level of output. average fixed cost minus average variable cost. total cost divided by the number of workers. marginal cost plus variable cost.
total cost divided by the level of output.
Which one of the following about a monopoly is false? A monopoly could make profits in the long run. A monopoly status could be temporary. A monopoly could break even in the long run. A monopoly must have some kind of government privilege or government imposed barrier to maintain its monopoly.
A monopoly must have some kind of government privilege or government imposed barrier to maintain its monopoly.
Which of the following statements is true? As output increases, average fixed cost becomes smaller and smaller. Average fixed cost does not change as output increases. The marginal cost curve intersects the average fixed cost curve at its minimum point. When marginal cost is greater than average fixed cost, average fixed cost increases.
As output increases, average fixed cost becomes smaller and smaller.
Which of the following is not true for a firm in perfect competition? Average revenue is greater than marginal revenue. Price equals average revenue. Profit equals total revenue minus total cost. Marginal revenue equals the change in total revenue from selling one more unit
Average revenue is greater than marginal revenue.
Which of the following is a characteristic shared by a perfectly competitive firm and a monopoly? Each sets a price for its product that will maximize its revenue. Each must lower its price to sell more output. Each maximizes profits by producing a quantity for which price equals marginal cost. Each maximizes profits by producing a quantity for which marginal revenue equals marginal cost.
Each maximizes profits by producing a quantity for which marginal revenue equals marginal cost.
Which of the following statements is false? Economists consider all costs to be implicit costs. Economic costs include both accounting costs and implicit costs. An implicit cost is a nonmonetary opportunity cost. An explicit cost is a cost that involves spending money.
Economists consider all costs to be implicit costs.
In long-run perfectly competitive equilibrium, which of the following is false? Firms earn economic profit. There is efficient, low-cost production at the minimum efficient scale. Economies of scale are exhausted. Economic surplus is maximized.
Firms earn economic profit.
Which of the following statements best describes the economic short run? It is a period during which at least one of the firm's inputs is fixed. It is a period during which firms are free to vary all of their inputs. It is a period of one year or less. It is a period during which fixed inputs become variable inputs because of depreciation.
It is a period during which at least one of the firm's inputs is fixed.
A firm could continue to operate for years without ever earning a profit as long as it is producing an output where MR > AVC. AFC < AVC. ATC > AVC. MR < ATC.
MR > AVC.
Which of the following statements applies to a monopolist but not to a perfectly competitive firm at their profit-maximizing outputs? Marginal revenue equals marginal cost. Price equals marginal cost. Average revenue equals average cost. Marginal revenue is less than price.
Marginal revenue is less than price.
Peet's Coffee and Teas produces some flavorful varieties of Peet's brand coffee. Is Peet's a monopoly? No, Peet's is not a monopoly because there are many branches of Peet's. Yes, there are no substitutes to Peet's coffee. Yes, Peet's is the only supplier of Peet's coffee in a No, although Peet's coffee is a unique product, there are many different brands of coffee that are very close substitutes.
No, although Peet's coffee is a unique product, there are many different brands of coffee that are very close substitutes.
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? The firm will not sell any output. The firm's revenue will increase. The firm's profits will increase. The firm will sell more output than its competitors.
The firm will not sell any output.
Which of the following is not a characteristic of a perfectly competitive market structure? There are restrictions on exit of firms. There are a very large number of firms that are small compared to the market. There are no restrictions to entry by new firms. All firms sell identical products.
There are restrictions on exit of firms.
T or F An increase in a firm's fixed cost will not change the firm's profit-maximizing output in the short run.
True
T or F For a natural monopoly, the marginal cost of producing an additional unit of its product is relatively small.
True
T or F If a firm shuts down in the short run, it avoids its variable cost but not its fixed cost.
True
T or F When firms exit a perfectly competitive industry, the market supply curve shifts to the left
True
The rules of accounting generally require that ________ costs be used for purposes of keeping a company's financial records and for paying taxes. These costs are sometimes called ________ costs. real; explicit economic; legal total; economic explicit; accounting
explicit; accounting
A supplier of an input is unlikely to have bargaining power if the input supplied is specialized. many firms can supply the input. it is the sole supplier of the input. it has a patent on the input.
many firms can supply the input.
A monopoly is the only seller of a product without a well-defined demand curve. with a perfectly inelastic demand. with many substitutes. without a close substitute.
without a close substitute.
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 $1,000. $700. $300. impossible to determine without additional information.
$700.
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? (P × Q) - TC P - TC P - ATC (P × Q) - (P × ATC)
(P × Q) - TC
If the total cost of producing 20 units of output is $1,000 and the average variable cost is $35, what is the firm's average fixed cost at that level of output? $65 $50 $15 It is impossible to determine without additional information.
$15
For a perfectly competitive firm, which of the following is not true at profit maximization? Marginal revenue equals marginal cost. Market price is greater than marginal cost. Total revenue minus total cost is maximized. Price equals marginal cost.
Market price is greater than marginal cost.
Suppose that a firm in a competitive market succeeds in producing a superior product and selling it at a price that generates a large demand. As a result, the firm's market share is almost 100 percent. Meanwhile, other firms are trying to regain their market shares through research and development. Is this firm a monopolist? Yes, because it is virtually the only firm in the market. Yes, because it has a power to dictate the price consumers must pay. No, because it faces potential competition from other companies. No, because it does not have a power to dictate the price consumers must pay.
No, because it faces potential competition from other companies.
Marginal cost is calculated for a particular increase in output by dividing the change in total cost by the change in output. dividing the total cost by the change in output. multiplying the change in total cost by the change in output. multiplying the total cost by the change in output.
dividing the change in total cost by the change in output.
Both buyers and sellers are price takers in a perfectly competitive market because each buyer and seller is too small relative to others to independently affect the market price. both buyers and sellers in a perfectly competitive market are concerned for the welfare of others. the price is determined by government intervention and dictated to buyers and sellers. each buyer and seller knows it is illegal to conspire to affect price.
each buyer and seller is too small relative to others to independently affect the market price.
Economic costs of production differ from accounting costs in that economic costs add the opportunity costs of a firm using its own resources while accounting costs do not economic costs include expenditures for hired resources while accounting costs do not. accounting costs are always larger than economic cost. accounting costs include expenditures for hired resources while economic costs do not.
economic costs add the opportunity costs of a firm using its own resources while accounting costs do not.
If fixed costs do not change, then marginal cost equals the change in average fixed cost divided by the change in output. equals the change in average variable cost divided by the change in output. equals the change in variable cost divided by the change in output. also remains constant.
equals the change in variable cost divided by the change in output.
A perfectly competitive industry achieves allocative efficiency when it produces where market price equals marginal production cost. goods and services are produced at the lowest possible cost. firms carry production surpluses. 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.
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 patent or copyright is a barrier to entry based on large economies of scale as output increases. government action to protect a producer. ownership of a key necessary raw material. widespread network externalities.
government action to protect a producer.
A profit-maximizing monopoly's price is not consistently related to price that would prevail if the market was perfectly competitive. greater than the price that would prevail if the industry was perfectly competitive. less than the price that would prevail if the industry was perfectly competitive. the same as the price that would prevail if the industry was perfectly competitive.
greater than the price that would prevail if the industry was perfectly competitive.
A public franchise is a corporation that is owned by stockholders. is a government designation that a private firm is the only legal producer of a good or service. results from ownership of a key raw material. is an unregulated monopoly necessary for the public good.
is a government designation that a private firm is the only legal producer of a good or service.
If a perfectly competitive firm's price is less than its average total cost but greater than its average variable cost, the firm should shut down. is incurring a loss. is breaking even. is earning a profit.
is incurring a loss.
Compared to perfect competition, the consumer surplus in a monopoly is eliminated. is higher because price is higher and output is the same. is unchanged because price and output are the same. is lower because price is higher and output is lower.
is lower because price is higher and output is lower.
Diet Coke ________ considered a product in a monopoly market, because ________. is not; because it is produced in factories around the world is; it has only one producer: CocaCola company is; the CocaCola company has market power is not; it has many substitutes
is not; it has many substitutes
A monopoly firm's demand curve is perfectly inelastic. is the same as the market demand curve. is inelastic at high prices and elastic at lower prices. is more inelastic than the demand curve for the product.
is the same as the market demand curve.
If a firm shuts down in the short run, its total revenue is not large enough to cover its fixed cost. its loss equals zero. its loss equals its fixed cost. is makes zero economic profit.
its loss equals its fixed cost.
T or F If marginal cost is above the average variable cost, then average variable cost is decreasing.
False
T or F If price is equal to average variable cost, then a perfectly competitive firm breaks even.
False
Which of the following offers the best reason why restaurants are not considered to be perfectly competitive firms? Restaurants do not sell identical products. 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. Restaurants have significant liability costs that perfectly competitive firms do not have; for example, customers may sue if they suffer from food poisoning. Restaurants usually have entry barriers in the form of zoning restrictions and health regulations.
Restaurants do not sell identical products.
What is always true at the quantity where a firm's average total cost equals average revenue? The firm's profit is maximized. Marginal cost equals marginal revenue. The firm breaks even. The firm's revenue is maximized.
The firm breaks even.
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? 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. This firm will be able to earn above normal profits indefinitely if it obtains a patent for its innovation. 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. 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.
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.
Which of the following statements is false? The difference between average total cost and average fixed cost is average variable cost. Firms often refer to the process of lowering average fixed cost as "spreading the overhead." The marginal cost curve intersects the average variable cost curve and the average total cost curve at their minimum points. When marginal cost equals average total cost, average total cost is at its highest value.
When marginal cost equals average total cost, average total cost is at its highest value.
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? Yes, it should continue to produce because its price exceeds its average fixed cost. Yes, it should continue to produce because the firm's revenues cover the total variable cost of $16,000. No, it should shut down because it is making a loss. There is insufficient information to answer the question.
Yes, it should continue to produce because the firm's revenues cover the total variable cost of $16,000.
Which of the following is the best example of a short-run adjustment? A local bakery purchases another commercial oven as part of its capacity expansion. Smith University completed negotiations to acquire a large piece of land to build its new library. Toyota builds a new assembly plant in Texas. Your local Walmart hires two more associates.
Your local Walmart hires two more associates.
Which of the following is the best example of a perfectly competitive firm? a corn farmer in Illinois United Parcel Service (UPS) a Taco Bell restaurant the Ford Motor Company
a corn farmer in Illinois
A price maker is a person who actively seeks out the best price for a product that he or she wishes to buy. a consumer who participates in an auction where she announces her willingness to pay for a product. a firm that has some control over the price of the product it sells. a firm that is able to sell any quantity at the highest possible price.
a firm that has some control over the price of the product it sells.
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 only a and c only b and c only all of the above
a only
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? marginal efficiency allocative efficiency profit maximization productive efficiency
allocative efficiency
A natural monopoly is most likely to occur in which of the following industries? the diamond mining and marketing industry because one firm can control a key resource an industry where fixed costs are very large relative to variable costs the software industry because of the importance of network externalities the pharmaceutical industry because the development and approval of new drugs through the Food and Drug Administration can take more than 10 years
an industry where fixed costs are very large relative to variable costs
If the marginal cost curve is below the average variable cost curve, then average variable cost could either be increasing or decreasing. average variable cost is increasing. marginal cost must be decreasing. average variable cost is decreasing
average variable cost is decreasing
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? 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 because unlike Microsoft, the wealthy corn farmer is probably a monopolist because Microsoft could potentially lose sales if it sets prices indiscriminately because Microsoft is large enough to hire the best people in the field
because Microsoft could potentially lose sales if it sets prices indiscriminately
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 marginal revenue of the sixth performance is $38,000. cost of staging the sixth performance is probably higher than the cost of staging the previous five. marginal revenue of the sixth performance is $288,000. company will be making a loss on the sixth performance because its ticket sales will be les s than the average revenue received from the previous five.
marginal revenue of the sixth performance is $38,000.
If a typical firm in a perfectly competitive industry is earning profits, then the number of firms in the industry will remain constant in the long run. new firms will enter in the long run causing market supply to increase, market price to fall, and profits to decrease. all firms will continue to earn profits. new firms will enter in the long run causing market supply to decrease, market price to rise, and profits to increase.
new firms will enter in the long run causing market supply to increase, market price to fall, and profits to decrease.
Which of the following is an implicit cost of production? interest paid on a loan to a bank wages paid to labor plus the cost of carrying benefits for workers the utility bill paid to water, electricity, and natural gas companies rent that could have been earned on a building owned and used by the firm
rent that could have been earned on a building owned and used by the firm
If, for a given output level, a perfectly competitive firm's price is less than its average variable cost, then the firm should increase price. should shut down. is earning a profit. should increase output.
should shut down.
If a typical firm in a perfectly competitive industry is incurring losses, then all firms will continue to lose money. some firms will exit in the long run, causing market supply to decrease and market price to fall, increasing losses for the remaining firms. some firms will enter in the long run, causing market supply to increase and market price to rise, increasing profit for all firms. some firms will exit in the long run, causing market supply to decrease and market price to rise, increasing profits for the remaining firms.
some firms will exit in the long run, causing market supply to decrease and market price to rise, increasing profits for the remaining firms.
n analyzing the decision to shut down in the short run we assume that the firm's fixed costs are nonmonetary opportunity costs. implicit costs. sunk costs. capital costs.
sunk costs.
In 2017, the Educational Testing Service (ETS) charged $54.50 to take the Scholastic Aptitude Test (SAT) but $205 to take the Graduate Record Exam (GRE). One reason for this difference in price is the GRE is a longer test with more questions. the ETS faces competition in the market for the SAT but no competition for the GRE. more people took the SAT than the GRE in 2015. an average, those who take the GRE have higher incomes than those who take the SAT.
the ETS faces competition in the market for the SAT but no competition for the GRE
Which of the following is an example of a factor that a firm's owners and managers can control in making the firm successful? the ability to produce the product at a lower cost a rise in the price of a key input, for example, a rise in the price of oil leads to higher energy costs changing consumer tastes the number of competitors in the market
the ability to produce the product at a lower cost
Of the factors that are within the control of the firm's owners, the most important factors that make a firm successful are the establishment of trademarks for its products and the aggressive defense of those trademarks. the differentiation of its products and the production of products at a lower average cost than competing firms. lobbying government to erect or enforce entry barriers in its markets and the marketing of its products as widely as possible. the selection of the prices of its products and the selection of the most productive and loyal employees.
the differentiation of its products and the production of products at a lower average cost than competing firms.
in perfect competition, the market demand curve is downward sloping while demand for an individual seller's product is perfectly elastic. the market demand curve is perfectly elastic while demand for an individual seller's product is perfectly inelastic. the market demand curve is perfectly inelastic while demand for an individual seller's product is perfectly elastic. the market demand curve and the individual's demand curve are identical.
the market demand curve is downward sloping while demand for an individual seller's product is perfectly elastic.
Implicit costs can be defined as accounting profit minus explicit cost. the non-monetary opportunity cost of using the firm's own resources. the deferred cost of production. total cost minus fixed costs.
the non-monetary opportunity cost of using the firm's own resources.
The minimum point on the average variable cost curve is called the shutdown point. the point of diminishing returns. the break-even point. the loss-minimizing point.
the shutdown point.
A teenaged babysitter is similar to a firm in a perfectly competitive industry in that, for both the implicit costs of production exceed the explicit costs of production. fixed costs are lower than variable costs. there are many other suppliers of similar goods or services. average costs of production do not change when their industry expands.
there are many other suppliers of similar goods or services.
A monopoly is characterized by all of the following except there are no close substitutes to the firm's product. the firm has market power. there are only a few sellers, each selling a unique product. entry barriers are high.
there are only a few sellers, each selling a unique product.
If a monopolist's marginal revenue is $35 per unit and its marginal cost is $25, then to maximize profit the firm should decrease output. to maximize profit the firm should continue to produce the output it is producing. to maximize profit the firm should increase output. Not enough information is given to say what the firm should do to maximize profit.
to maximize profit the firm should increase output.
The basic activity of a firm is to provide jobs for its employees. to compete with other firms that produce similar products. to set the prices of its products as high as possible. to use inputs to produce outputs of goods and services
to use inputs to produce outputs of goods and services
Which of the following costs will not change as output changes? marginal cost total variable cost average variable cost average fixed cost total fixed cost
total fixed cost
A monopolist's profit-maximizing price and output correspond to the point on a graph where total costs are the smallest relative to price. where average total cost is minimized. where price is as high as possible. where marginal revenue equals marginal cost and charging the price on the market demand curve for that output.
where marginal revenue equals marginal cost and charging the price on the market demand curve for that output.