Exam 2
Diseconomies of scale arise primarily because
of the difficulties involved in managing and coordinating a large business enterprise
An explicit cost is
a money payment made for resources not owned by the firm itself.
In the short run, a purely competitive firm will always make an economic profit if
P > ATC
Refer to the diagram, which pertains to a purely competitive firm. Curve A represents
total revenue only.
As the firm in the diagram expands from plant size #3 to plant size #5, it experiences
diseconomies of scale.
If marginal cost is below average variable cost,
both average total cost and average variable cost are decreasing.
Average fixed cost
declines continually as output increases.
Refer to the diagram for a purely competitive producer. The firm's short-run supply curve is
the bcd segment and above on the MC curve.
Firms seek to maximize
total profit.
Which of the following is characteristic of a purely competitive seller's demand curve?
Price and marginal revenue are equal at all levels of output.
Frank buys 10 magazines and 25 newspapers. The magazines cost $5 each and the newspapers cost $2.50 each. Suppose that his MU from the final magazine is 10 utils while his MU from the final newspaper is also 10 utils. According to the utility-maximizing rule, Frank should:
Reallocate spending from magazines to newspapers. (The MU per dollar from the last magazine is 10/$5 = 2 utils per dollar. The MU per dollar from the last newspaper is 10/$2.50 = 4 utils per dollar. Thus, Frank could gain more total utils if he spent less on magazines and more on newspapers.)
To the economist, total cost includes
explicit and implicit costs.
The minimum efficient scale of a firm
is the smallest level of output at which long-run average total cost is minimized
If a purely competitive firm shuts down in the short run,
it will realize a loss equal to its total fixed costs.
If a firm decides to produce no output in the short run, its costs will be
its fixed costs
When a firm is experiencing economies of scale,
long-run average (per-unit) total cost is decreasing.
In answering the question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis. For a purely competitive firm, marginal revenue graphs as a
straight line, parallel to the horizontal axis.
A competitive firm in the short run can determine the profit-maximizing (or loss-minimizing) output by equating
marginal revenue and marginal cost.
When a consumer has maximized total utility, he or she cannot increase total utility by reallocating expenditures among different products. (True or False)
True
A purely competitive seller is
a "price taker"
Which of the following is correct as it relates to cost curves?
Marginal cost intersects average total cost at the latter's minimum point.
In the long run,
all costs are variable costs
Refer to the diagram, which pertains to a purely competitive firm. Curve C represents
average revenue and marginal revenue.
The MR = MC rule can be restated for a purely competitive seller as P = MC because
each additional unit of output adds exactly its price to total revenue.
Price is constant to the individual firm selling in a purely competitive market because
each seller supplies a negligible fraction of total supply.
The diagram shows the short-run average total cost curves for five different plant sizes of a firm. The position of these five curves in relation to one another reflects
economies and diseconomies of scale.
The long-run average total cost curve
indicates the lowest unit costs achievable when a firm has had sufficient time to alter plant size
The marginal revenue curve of a purely competitive firm
is horizontal at the market price.
If you operated a small bakery, which of the following would be a variable cost in the short run?
baking supplies (flour, salt, etc.)
A consumer's demand curve for a product is downsloping because
marginal utility diminishes as more of a product is consumed.
To maximize utility, a consumer should allocate money income so that the
marginal utility obtained from the last dollar spent on each product is the same.
Suppose that MUx/Px exceeds MUy/Py. To maximize utility, the consumer who is spending all her money income should buy
more of X and/or less of Y.
The demand schedule or curve confronted by the individual, purely competitive firm is
perfectly elastic
If a firm is confronted with economic losses in the short run, it will decide whether or not to produce by comparing
price and average variable cost.
Which of the following is not a characteristic of pure competition?
pricing strategies by firms
Suppose that Ms. Thomson is currently exhausting her money income by purchasing 10 units of A and 8 units of B at prices of $2 and $4, respectively. The marginal utility of the last units of A and B are 16 and 24, respectively. These data suggest that Ms. Thomson
should buy less B and more A.
In answering the question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis.For a purely competitive firm, marginal revenue graphs as a
straight line, parallel to the horizontal axis.
In answering the question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis.For a purely competitive firm, total revenue graphs as a
straight, upsloping line.
Implicit and explicit costs are different in that
the former refer to nonexpenditure costs and the latter to monetary payments
When diseconomies of scale occur,
the long-run average total cost curve rises.
Which of the following constitutes an implicit cost to the Johnston Manufacturing Company?
use of savings to pay operating expenses instead of generating interest income
Accounting profits equal total revenue minus
total explicit costs.
Marginal revenue is the
change in total revenue associated with the sale of one more unit of output.
Marginal utility is the
change in total utility obtained by consuming one more unit of a good.
Suppose that a business incurred implicit costs of $200,000 and explicit costs of $1 million in a specific year. If the firm sold 4,000 units of its output at $300 per unit, its accounting profits were
$200,000 and its economic profits were $0.
Assume that in the short run a firm is producing 100 units of output, has average total costs of $200, and has average variable costs of $150. The firm's total fixed costs are
$5,000
The first Pepsi yields Craig 18 units of utility and the second yields him an additional 12 units of utility. His total utility from three cans of Pepsi is 38 units of utility. The marginal utility of the third Pepsi is
8 units of utility.
With fixed costs of $400, a firm has average total costs of $3 and average variable costs of $2.50. Its output quantity must be
800 units.
Refer to the diagram for a purely competitive producer. The lowest price at which the firm should produce (as opposed to shutting down) is
P2
A perfectly elastic demand curve implies that the firm
can sell as much output as it chooses at the existing price.
The fact that a purely competitive firm's total revenue curve is linear and upsloping to the right implies that
product price is constant at all levels of output.
An industry comprising a very large number of sellers producing a standardized product is known as
pure competition
In the figure, curves 1, 2, 3, and 4 represent the
MC, ATC, AVC, and AFC curves, respectively.
According to the accompanying diagram, at the profit-maximizing output, the firm will realize
an economic profit of ABGH.
The law of diminishing returns indicates that
as extra units of a variable resource are added to a fixed resource, marginal product will decline beyond some point.
For most producing firms,
average total costs decline as output is carried to a certain level, and then begin to rise.
Suppose you find that the price of your product is less than minimum AVC. You should
close down because, by producing, your losses will exceed your total fixed costs.
Which of the following is most likely to be an implicit cost for Company X?
forgone rent from the building owned and used by Company X
Accounting profits are typically
greater than economic profits because the former do not take implicit costs into account.
Assume the XYZ Corporation is producing 20 units of output. It is selling this output in a purely competitive market at $10 per unit. Its total fixed costs are $100 and its average variable cost is $3 at 20 units of output. This corporation
is realizing an economic profit of $40.
Mrs. Arnold is spending all her money income by buying bottles of soda and bags of pretzels in such amounts that the marginal utility of the last bottle is 60 utils and the marginal utility of the last bag is 30 utils. The prices of soda and pretzels are $0.6 per bottle and $0.4 per bag, respectively. It can be concluded that
Mrs. Arnold should spend more on soda and less on pretzels.
The law of diminishing marginal utility explains why
demand curves slope downward.
Refer to the provided graph. If the firm is producing at Q1, the area BADE represents
total fixed costs
A purely competitive firm's short-run supply curve is
upsloping and equal to the portion of the marginal cost curve that lies above the average variable cost curve.
If a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue
will also be $5.
As the firm in the diagram expands from plant size #1 to plant size #3, it experiences
Economies of scale.
