Economics Test 2
One strategy for long-term profit maximization is
Innovation
In a simple grass-mowing business, the lawn mower and labor would be
Inputs
What word describes the goods and services that are used to produce outputs for a business?
Inputs
The goods or services purchased by a business for immediate use in the production process are known as
Intermediate inputs
Theodore can make 6 pizzas in one hour. If Theodore's labor has a diminishing marginal product, what must be true about the number of pizzas that Theodore can make in three hours?
It must be less than 18.
Inputs used by a business in the production process include
Labor
The hours of work supplied by various types of workers are referred to by economists as
Labor
The price of labor per unit times the amount of labor used is called
Labor cost
The total cost of production is determined by adding which of the following costs
Labor, capital and land, intermediate inputs, and accumulating business know-how
Fixed costs are also known as __________ costs because they are much harder for a business to change.
Long-term
A market where there is only one seller, and buyers have no good alternative, is called a(n)
Monoploy
What happens to the marginal product of labor if more capital is added to a production process?
More capital generally causes the marginal product of labor to rise.
A _______ monopoly is an industry in which it makes economic sense to have only one provider.
Natural
In a simple lawn-mowing business where you have a push mower and labor as input, by adding an additional input in the form of a gas self-propelled mower (capital), what would be the impact on output?
Output would increase
Average product is not as reliable an indicator of how a business is doing as it used to be because of
Outsourcing labor
In perfect competition, P = MC means
Price equals marginal cost
What is the economic process of turning inputs into outputs that a business will sell to customers?
Production
Economists think of a business as a machine, where you put inputs in one end and get outputs from the other end. This metaphor is called the
Production function
The __________ summarizes the output of the business, given the level of inputs.
Production function
What is the difference between revenue and cost?
Profit
The main objective of a business in a market economy is
Profit maximization
Companies will often spend considerable amounts of money to create a ____________ in regards to their brand name.
Reputation effect
What word describes the money that customers pay for the output of a business?
Revenue
___________ is the amount of money a company receives for selling its product or service.
Revenue
When a business expands production and increases sales, what generally happens to revenue?
Revenue rises because the business is selling more output.
In a market where businesses are earning high profits, new entrants will cause the supply curve to shift to the _________ and the market price to _________.
Right; fall
Marginal cost generally ________ quantity produced.
Rises with
In short-run profit maximization, businesses focus on the ______, holding fixed costs constant.
Short-term cost function
Variable costs are also known as
Short-term costs
Variable costs are relevant for
Short-term everyday decision making
______ shows the potential cost for each level of output.
The cost function
In the process of long-term profit maximization, the business makes decisions under the assumption that it can
Vary all the inputs
Which of the following is most likely to be sold in a perfectly competitive market?
Wheat
Does the stock market resemble a perfectly competitive market?
Yes, the stock market does resemble a perfectly competitive market.
Monopolistic competition is characterized by
a large number of sellers with a similar product.
Microsoft's two main products, Windows and Office, could be examples of
a natural monopoly
Marshall Field's and Sterns Department Stores are examples of low-cost producers in a perfect competition market. (T/F)
False
Outputs are always good. (T/F)
False
Perfect competition requires a nonstandard product. (T/F)
False
The average product is calculated by dividing input by the number of hours worked. (T/F)
False
The short-term cost function assumes that
Fixed costs can't be changed
An example of variable costs is
Hourly labor
An oligopoly occurs when there
are a few sellers in a market.
Monopolies generally _____________ technology and globalization
are reduced in number by
A __________ is anything that might make it more difficult for a competitor to enter a market.
barrier to entry
A ___________ makes it more difficult for a competitor to enter a market.
barrier to entry
Government regulations, such as zoning laws, can act as
barriers to entry
When businesses have market power, they are able to charge a price higher than the price charged by a business in perfect competition. Thus the market power equilibrium on a diagram will be
higher and to the left of the perfect competition equilibrium.
AT&T is an example of a business that used market power to
invest in important research benefiting society
An example of a barrier to entry is
lack of a key resource
Which of the following is NOT an example of a barrier to entry?
lower costs
Marginal revenue is generally __________ for businesses that do not operate under conditions of perfect competition.
lower than the price
Compared to businesses with market power, businesses in perfect competition will charge __________ prices and sell __________ output.
lower; more
From World War II to the early 1970s, GM, Ford, and Chrysler enjoyed
market power
A profit-maximizing monopolist will always charge _______ a perfect competitor would.
more than
A good example of monopolistic competition is
neighborhood restaurants
A profitable business will attract
new competitors
In the long run, monopolistic competition starts to look like
perfect competition
The four main types of market structure are
perfect competition, monopolistic competition, oligopoly, and monopoly.
If music was perfectly competitive, then all performers would
play the same music and charge the same price for concerts
If all of the restaurants in a small town colluded and agreed to raise dinner prices, this would lead to a loss to society because
some dinners that could be served are not.
A business with market power may
sometimes use high profits to research new technologies.
Natural monopolies have been slowly eroded by
technological change
In perfect competition, higher-cost businesses
tend toward oligopolies.
Market power is
the ability to raise prices above the prices that would exist under perfect competition.
Natural monopolies include
the local water company
The easiest way to have a monopoly today is
to have the government protect you
The profit-maximizing rule says that a seller will expand output up to the point
where marginal revenue equals marginal cost
Refer to Table 5.1, which gives Farmer McColl's marginal cost function for barley. If Farmer McColl is currently producing 20 bushels of barley, which of the following is the market price for a bushel of barley?
$0.60
Refer to Table 5.1, which gives Farmer McColl's marginal cost function for barley. If Farmer McColl is currently producing 25 bushels of barley, which of the following could be the market price for a bushel of barley?
$0.75
If a local car dealership can sell 8 cars per day at a price of $25,000 each, but must reduce the price to $24,000 to sell one more car, what is the marginal revenue of the 9th car?
$16,000
If a local diner can sell 50 burgers per day at a price of $5 each, but must reduce the menu price to $4.95 to sell one more burger, what is the marginal revenue of the 51st burger?
$2.45
If Sara can produce 25 muffins for a total cost of $15, but her production process is subject to increasing marginal costs, which of the following could be the total cost of producing 100 muffins?
$80
Refer to Table 5.1, which gives Farmer McColl's marginal cost function for barley. Suppose Farmer McColl is one of 20 farmers in the barley market, and all of the farmers have identical marginal cost functions. If the market price of barley is $1.00 per bushel, which of the following could be the total amount of barley produced in the market?
700
What word describes the money that a business pays for its inputs?
Costs
The local department store used to be ___________ before technological change.
A monopoly
__________ is paid communication with potential customers in a public medium, such as newspapers and television.
Advertising
Which of the following is an example of a profit-maximizing business?
An accountant who makes her living preparing tax returns for other people.
Inputs to production do NOT include
Average product
Output divided by the number of hours worked or by the number of workers is called
Average product
Refer to Table 5.1, which gives Farmer McColl's marginal cost function for barley. If the current market price for barley is $1.00 per bushel, how much barley should Farmer McColl produce?
Between 30 and 40 bushels
The technology or knowledge necessary for the production process is called
Business know-how
The difference between long-term and short-term profit maximization is that in the short term,
Businesses focus on achieving as much profit as they can, given that fixed costs cannot be changed.
The long-lived physical equipment and structures that a business uses in its production process are called
Capital
If two or more oligopolistic companies work together to keep their prices high and split the market between them, this is called
Collusion
Profit is the difference between revenue and
Cost
If you add too many inputs, your business may experience
Diminishing marginal product
Many times, technology is _____ in the equipment a company buys.
Embodied
If June can earn $1,500 in revenue from painting two houses, how much can she earn in revenue from painting three houses? (Assume she is just one housepainter in a large market of housepainters, and that she can easily find a third customer.)
Exactly $2,250
Businesses will generally shut down if they lose money for one or two years. (T/F)
False
Cost is what a business receives after subtracting expenses from revenue. (T/F)
False
Inputs for a business are the goods and services that it sells to its customers. (T/F)
False
In perfect competition, a profit-maximizing business will expand until its _________ equals the market price.
Marginal cost
The added expense of producing one more unit of output is called the
Marginal cost
_________ is the added cost to produce one more unit of output.
Marginal cost
The extra amount of output a business can generate by adding one more hour of labor is called
Marginal product
The additional money a business gets from producing and selling one more unit of output is
Marginal revenue
_____________ is the added revenue from producing and selling one more unit of output.
Marginal revenue
A profit-maximizing business will increase production as long as
Marginal revenue exceeds marginal cost
As the market price of a good rises, businesses will respond by producing more of that good because
Marginal revenue exceeds marginal cost after the price increase.
___________ is the ability to raise prices above the level perfect competition would produce by restricting the quantity supplied.
Market power
In perfect competition, all businesses in a market produce at the point where ________ equals __________.
Market price; marginal cost
Economists generally assume that the main goal of most businesses in the economy is to
Maximize profits
A business can escape perfect competition by building a better, more innovative product. (T/F)
True
A production function tells you, given the inputs, what the output will be. (T/F)
True
Advertising a brand can help create a reputation effect. (T/F)
True
Businesses have two types of cost: fixed and variable. (T/F)
True
In a market with perfect competition, given enough time and no barriers to entry, profits will tend toward zero in the long run. (T/F)
True
In perfect competition, a profit-maximizing business will expand until its marginal cost equals the market price. (T/F)
True
In perfect competition, all buyers and sellers are price takers. (T/F)
True
In perfect competition, if there are no barriers to entry, only the lowest-cost businesses survive over the long run. (T/F)
True
Marginal cost is the added expense of producing one more unit of output. (T/F)
True
Marginal revenue is the additional revenue a business gets from producing or selling one more unit of input. (T/F)
True
Revenue is the money that customers pay for the output of a business. (T/F)
True
The marginal product is the extra amount of output a firm can generate by adding one more hour of labor (or one more worker. (T/F)
True
Under the right circumstances, competition could be a win-win proposition for companies and consumers. (T/F)
True
An example of an oligopoly is the
airline industry
If two drugstores in a market agree that they will both sell Fritos at a higher price, and neither will undercut the other, this is called
collusion
