Econ Test 3

Marginal Product

-measure of productivity MPL=changeQ/changeL (labor or input) (MP -or- MPL)

3-step Profit Max. Process

1. Choose a Q where MR=MC 2. Charge Price that is along the Demand Curve 3. Calc. Profit

You have rented your first apartment, signing a lease that commits you to paying $500 each month for twelve months. You have an opportunity to take a trip to Europe during the entire month of June and you will spend $2,000 traveling. Your apartment will be vacant, but because of your lease, you must still pay the rent. The cost of taking the trip to Europe is: A) $2,000 because the $500 for your June rent is a sunk cost. B) $2,500 because this is your total spending during the month of June. C) $1,500 because the June rent is an opportunity cost of traveling that must be deducted from the explicit cost of the trip. D) $2,500 because the June rent is an opportunity cost of traveling and must be added to the explicit cost of the trip

A) $2,000 because the $500 for your June rent is a sunk cost.

The present value of a future payment: A) decreases when the interest rate rises. B) decreases when the interest rate falls. C) decreases when the interest rate stays the same. D) never changes regardless of the interest rates.

A) decreases when the interest rate rises

Paying a tax of $10 on an income of $100, a tax of $25 on an income of $200, and a tax of $60 on an income of $300 is an example of a: A) progressive tax. B) proportional tax. C) regressive tax. D) flat tax.

A) progressive tax.

An excise tax collected from the producers of a good: A) shifts the supply curve upward. B) creates a loss of revenue for the government. C) has a similar effect as a tax subsidy. D) shifts the supply curve downward.

A) shifts the supply curve upward.

Avg. Fixed Cost formula

AFC=FC/Q

Avg. Total Cost formula

ATC=TC/Q Note: ATC=AFC+AVC

Avg. Var. Cost formula

AVC=VC/Q

Given an interest rate of 2%, the present value of a future payment of $1,500 to be paid in one year is: A) $1,250.55 B) $1,470.59 C) $1,530 D) $1,500

B) $1,470.59

Joan loves to eat sushi. Her first piece of sushi normally yields a marginal benefit of $5. Each additional piece creates a declining marginal benefit by $0.25 per piece. If her favorite sushi bar charges $2.75 per piece of sushi, how many pieces should she eat? A) 8 B) 10 C) 5 D) 11

B) 10

According to the marginal decision rule, if marginal benefit: A) exceeds marginal cost, an activity should be reduced. B) is less than marginal cost, an activity should be reduced. C) is equal to marginal cost, an activity should be reduced. D) exceeds marginal cost, net benefit is maximized.

B) is less than marginal cost, an activity should be reduced.

Paying a tax of $10 on an income of $100, a tax of $20 on an income of $200, and a tax of $30 on an income of $300 is an example of a: A) regressive tax. B) proportional tax. C) progressive tax. D) benefits tax.

B) proportional tax.

By law, FICA (the Federal Insurance Contributions Act), a payroll tax, is collected equally from the employers and the employees. In reality: A) the law works—both the employers and the employees bear half the burden of the tax. B) the employees bear almost all the burden of the tax. C) the employers bear almost all the burden of the tax. D) it's impossible to determine who bears the burden of the tax.

B) the employees bear almost all the burden of the tax.

William installs custom sound systems in cars. If he installs seven systems per day, his total costs are $300. If he installs eight systems per day, his total costs are $400. William will install only eight sound systems per day if the eighth customer is willing to pay at least: A) $300. B) $400. C) $100. D) $50.

C) $100.

If the government imposes a $5 excise tax on the sale of leather shoes and collects the tax from the suppliers, the price of leather shoes will: A) increase by $5. B) increase by more than $5. C) increase by less than $5. D) increase, but we cannot determine by how much.

C) increase by less than $5.

If Marie Marionettes is operating under conditions of diminishing marginal product, the marginal costs will be: A) equal to ATC. B) decreasing. C) increasing. D) constant.

C) increasing.

The short run is defined as a: A) period of time less than 1 year. B) period of time less than 6 months. C) period in which some inputs are considered to be fixed in quantity. D) time period in which some inputs are fixed, but it cannot exceed 1 year.

C) period in which some inputs are considered to be fixed in quantity.

Accounting profit differs from economic profit because: A) of differences in the manner in which revenue is calculated. B) economic costs include depreciation, while accounting costs do not. C) accounting costs are generally higher than economic costs because accounting costs include explicit and implicit costs, while economic costs include only explicit costs. D) economic costs are generally higher than accounting costs because economic costs include all opportunity costs, while accounting costs include explicit costs only.

D) economic costs are generally higher than accounting costs because economic costs include all opportunity costs, while accounting costs include explicit costs only.

The amount by which an additional unit of an activity increases total cost is: A) net benefit. B) marginal benefit. C) negative benefit. D) marginal cost.

D) marginal cost.

Paying a tax of $20 on an income of $100, a tax of $15 on an income of $200, and a tax of $12 on an income of $300 is an example of a: A) flat tax. B) proportional tax. C) progressive tax. D) regressive tax.

D) regressive tax.

How to decide to shut-down or not:

If Profit is greater than AVC, continue, if it's less than, temporary shut-down

Average Cost Formula:

TC/Q=FC/Q+VC/Q Fixed Cost Variable Cost

Long Run v. Short Run

Long run has no fixed inputs, short run has at least one fixed input

Perfect Competition Assumptions (3)

Many buyer/sellers Free entry/exit (no barriers to entry) Standardized Product

One of the defining characteristics of a perfectly competitive market is a. a standardized product b. significant nonprice competition among firms c. a large number of buyers and a small number of sellers d. a small number of sellers e. an inefficient information system

a. a standardized product

If a firm is experiencing constant returns to scale a. average total cost neither rises nor falls as production increases b. the decrease in average variable cost is exactly offset by an increase in average fixed cost c. the increase in average variable cost is exactly offset by a decrease in average fixed cost d. average fixed cost is zero e. average total cost is zero.

a. average total cost neither rises nor falls as production increases

A perfectly competitive firm a. cannot increase sales or total revenue by changing its price b. can sell more goods by lowering its price c. typically tries to offer lower prices than rival firms d. can sell more goods by raising its price e. can increase total revenue by raising its price

a. cannot increase sales or total revenue by changing its price

Economies of scale act as a barrier to entry because a. one large firm can produce the market output at a lower average cost than many small firms b. large firms can hire inputs at a higher price than smaller firms could c. firms are not allowed by law to sell output below average cost d. one large firm can supply the market at a higher average cost than many small firms could e. firms will not compete with a larger firm when there are differences in marginal cost

a. one large firm can produce the market output at a lower average cost than many small firms

Suppose that a firm chose an output level where the total cost and total revenue curves intersect. At this level of output, a. profit is zero b. the firm is maximizing profits c. total revenue is maximized d. the firm is minimizing losses e. total cost is minimized

a. profit is zero

Variable Input:

an input whose Q can be varied at any time. Ex.: Farm Workers (book)

Fixed Input:

an input whose Q is fixed for a period of time and cannot be varied. Ex. Farm land (book)

Law of diminishing returns:

as labor/input (L) increases, holding capital (K) constant, Q increases at smaller increments

Which of the following is always true for a perfectly competitive firm? a. The market demand curve is a horizontal line. b. Price equals marginal revenue. c. Marginal revenue is below price. d. The market supply curve is a horizontal line. e. Marginal revenue exceeds price.

b. Price equals marginal revenue.

The demand curve facing a firm acts as a constraint by a. limiting sales to those who are first in line when the product is distributed b. showing the maximum price that could be charged to sell a specific output level c. showing the minimum quantity of output that a firm needs to produce at a specific price d. shifting to the left and right as suppliers vary their quantities e. relating the actions and decisions of buyers and sellers in the market

b. showing the maximum price that could be charged to sell a specific output level

If a firm is experiencing diminishing marginal returns to labor, then a. the firm is in the short run b. total output rises more slowly as additional workers are added c. total output per worker must be rising d. the firm must decrease the amount of labor it hires e. total output must be decreasing

b. total output rises more slowly as additional workers are added

Suppose that a non-discriminating monopolist lowers its price from $75 to $70 in order to sell more output. Marginal revenue will a. equal $75 b. equal $70 c. be less than $70 d. be between $75 and $70 e. be greater than $75

c. be less than $70

In long-run equilibrium, every perfectly competitive firm a. suffers an economic loss b. earns an economic profit c. chooses its plant size and output level to operate at minimum long-run average total cost d. maximizes its output e. chooses its plant size and output level to operate at minimum long-run marginal cost

c. chooses its plant size and output level to operate at minimum long-run average total cost

The demand curve faced by a monopolist is a. undefined b. perfectly inelastic c. the market demand curve d. perfectly elastic e. the sum of the demand curves for perfectly competitive firms in a similar industry

c. the market demand curve

Marginal Cost Formula

changeTC/changeQ

Marginal Revenue Formula

changeTR/changeQ (TR=(P)(Q))

If a firm has an accounting profit of $2,350,000 and implicit costs totaling $150,000, then its economic profit equals a. $2,350,000 b. $2,500,000 c. $150,000 d. $2,200,000 e. $2,000,000

d. $2,200,000

Under the total revenue and total cost approach to profit maximization, a. the profit-maximizing output level is equivalent to the total revenue-maximizing output level b. when total costs are minimized, profits are maximized c. total cost must always exceed total revenue in the long run d. firms choose the output level where TR - TC is greatest e. firms equate total cost and total revenue in order to maximize profit

d. firms choose the output level where TR - TC is greatest

Which of the following is an implicit cost? a. salaries paid to owners who work for their own firm b. cash payments for raw materials c. wages paid to hourly employees d. foregone rent on office space owned and used by the firm e. interest on money borrowed to finance equipment purchases

d. foregone rent on office space owned and used by the firm

Variable costs are a. irrelevant to decision making, because they are sunk b. the costs of inputs that do not vary with the level of production c. the additional total cost associated with producing an additional unit of output d. the costs of inputs that vary with the level of production e. the same as sunk costs

d. the costs of inputs that vary with the level of production

If the physical plant for a corporation is considered to be a fixed input, then a. technology must be changing b. labor must be a variable input c. the firm will lose money in the short run, except under perfect competition d. it is held constant in the long run e. it can be changed in the long run

e. it can be changed in the long run

Optimal Consumption Rule:

when a consumer maximizes utility in the face of budget constraint, the marginal utility per dollar spent on each good or service in the consumption bundle is the same "MU/P"

Profit formula(s)

P=TR-TC (P-ATC)(Q)