Exam 2: Assignments & Test Questions

I'MaPizzaCo. produces and sells specialty pizzas. Last year, it produced 8,000 mushroom, sausage and spinach pizzas and sold each one for $8. To produce these 8,000 specialty pizzas, the company incurred variable costs of $24,000 and a total cost of $40,000. I'MaPizzaCo's average fixed cost to produce 8,000 specialty pizzas was a. $3.00 b. $2.00 c. $1.80 d. $1.60

b. $2.00

____________ include all of the costs of production that increase with the quantity produced. a. Fixed costs b. Variable costs c. Average total costs d. Average fixed costs

b. Variable costs

For a perfectly competitive firm, the marginal cost curve above the minimum of its average variable cost curve is identical to the firm's ____________. a. demand curve b. supply curve c. average total cost curve d. average variable cost curve

b. supply curve

In microeconomic terms, the ability of a good or a service to satisfy wants is called: a. opportunity cost. b. utility. c. utility maximization. d. profit potential.

b. utility.

A perfectly competitive industry is a a. realistic extreme. b. hypothetical assumption. c. hypothetical extreme. d. realistic assumption.

c. hypothetical extreme.

Which of the following occurs simultaneously with an income effect? a. backward-bending supply curve b. Giffen good effect c. preferences effect d. substitution effect

d. substitution effect

Economists are able to determine total utility by: a. multiplying the marginal utility of the first unit consumed by the number of units consumed. b. multiplying the marginal utility of the last unit consumed by the number of units consumed. c. multiplying the marginal utility of the last unit consumed by the unit price. d. summing up the marginal utilities of each unit consumed.

d. summing up the marginal utilities of each unit consumed.

In May and June, Tammy spent all her clothing budget on bathing suits and beach bags. Each bathing suit cost $75. At Tammy's optimal choice, her marginal utility from the last bathing suit purchased is 300 and her marginal utility from the last beach bag purchased is 200. This means that each handbag must cost: a. $50 b. $25 c. $100 d. $150

a. $50

The term ____________ describes a situation where a ____________ causes a reduction in the buying power of income, even though actual income has not changed. a. substitution effect; lower price b. intertemporal budget; higher price c. income effect; higher price d. intertemporal budget; lower price

c. income effect; higher price

The key assumption that accompanies the use of numbers for measuring utility is that: a. utility cannot be measured by an outside party. b. utility can be perfectly measured. c. individuals choose based on their subjective preferences. d. people make consumption decisions.

c. individuals choose based on their subjective preferences.

If a competitive firm experiences a shift in costs of production that decreases marginal costs at all levels of output, a. expanding output levels at any given price will be profitable. b. producing less at any market price will off-set marginal cost . c. the firm's marginal cost curve will shift to the left. d. the firm's demand curve will also shift to the left.

a. expanding output levels at any given price will be profitable.

If marginal cost is rising in a competitive firm's short-run production process and its average variable cost is falling as output is increased, then a. marginal cost is above average variable cost. b. marginal cost is below average fixed cost. c. marginal cost is below average variable cost. d. average fixed cost is constant.

c. marginal cost is below average variable cost.

(Table 1 - H6) Given the data provided in the table below, what will the marginal cost equal for production at quantity (Q) level 4? a. $5.00 b. $4.00 c. $1.00 d. $3.00

b. $4.00

Which of the following characteristics relate to utility? a. The common pattern that each marginal unit of a good consumed provides more of an addition to utility than the previous unit. b. The level of satisfaction or pleasure that people receive from their choices. c. The situation when high-wage people can earn so much that they respond to a still-higher wage by working fewer hours. d. The theoretical but unrealistic possibility that a higher price for a good could lead to a higher quantity demanded (or a lower price leads to a lesser quantity demanded).

b. The level of satisfaction or pleasure that people receive from their choices.

If a firm's revenues do not cover its average variable costs, then that firm has reached its ____________. a. price taking point b. shutdown point c. marginal point d. opportunity margin

b. shutdown point

The ____________ arises when a price changes because consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price. a. income effect b. substitution effect c. backward-bending supply curve d. preferences effect

b. substitution effect

A consumer will maximize utility when a. the marginal utility of each good is equal, regardless of price. b. the marginal utility each good relative to its price is equal to that of all other goods being purchased. c. the total utility of each good relative to price is equal. d. the marginal utility of each good is equal to its marginal cost. e. marginal utility minus the opportunity costs are equal for all goods.

b. the marginal utility each good relative to its price is equal to that of all other goods being purchased.

What is meant by marginal cost? a. Variable cost divided by the quantity of output. b. When expanding all inputs does not change the average cost of production. c. The additional cost of producing one more unit. d. When the average cost of producing each individual unit declines as total output increases.

c. The additional cost of producing one more unit.

____________ include all spending on labor, machinery, tools, and supplies purchased from other firms. a. Total profits b. Total revenues c. Total costs d. Total profit margins

c. Total costs

In terms of microeconomic analysis, what is the function of "utils"? a. a form of budget constraint b. applies to changes in income c. a measurement of utility d. relates to a consumers original choice

c. a measurement of utility

A business operating in a perfectly competitive market qualifies as which of the following a. a public company b. a private company c. a price taker

c. a price taker

I'MABigCorp. produces and sells kitchen wares. Last year, it produced 7,000 can openers and sold each one for $6. To produce the 7,000 can openers, the company incurred variable costs of $28,000 and a total cost of $45,000. I'MABIGCorp.'s average fixed cost to produce the 7,000 can openers was a. $1.50 b. $1.23 c. $2.25 d. $2.43

d. $2.43

(Table 1 - H6) Given the data provided in the table below, what will the fixed costs equal for production at quantity (Q) level 4? a. $35.00 b. $4.00 c. $36.00 d. $9.00

d. $9.00

What term is used to describe when the marginal gain in output diminishes as each additional unit of input is added? a. Diminishing marginal costs b. Fixed costs c. Average cost recovery d. Diminishing marginal returns

d. Diminishing marginal returns

What name is given to expenditures that must be made before production starts and that do not change regardless of the level of production? a. Marginal costs b. Diseconomies of scale c. Variable costs d. Fixed costs

d. Fixed costs

If a solar panel manufacturer wants to look at its total costs of production in the short run, which of the following would provide a useful starting point? a. divide total costs into two categories: variable costs that can't be changed in the short run and fixed costs that can be b. divide the total costs of production by the quantity of output c. divide the variable costs of production by the quantity of output d. divide total costs into two categories: fixed costs that can?7 ft be changed in the short run and variable costs that can be

d. divide total costs into two categories: fixed costs that can?7 ft be changed in the short run and variable costs that can be

Why would labor be treated as a variable cost? a. they are costs incurred in the act of producing that will decrease with quantity produced b. they are made before production starts and vary according to the specific line of business c. labor costs are an input cost that firms are unable to change in the short run d. producing larger quantities of a good or service generally requires more workers

d. producing larger quantities of a good or service generally requires more workers

The most common pattern for marginal utility is ____________. a. diminishing marginal utility b. a budget constraint model c. a long-term perspective theoretical model d. substitute consumption

a. diminishing marginal utility

Which of the following characteristics relate to variable costs? a. Costs of production that increase with the quantity produced. b. The additional cost of producing one more unit. c. When a larger-scale firm can produce at a lower cost than a smaller-scale firm. d. Expenditures that must be made before production starts and that do not change regardless of the level of production.

a. Costs of production that increase with the quantity produced.

____________ is calculated by taking the quantity of everything that is sold and multiplying it by the sale price. a. Total revenue b. Total profits c. Average profit margin d. Total cost

a. Total revenue

An ____________ is calculated by subtracting the firm's costs from its total revenues, ____________. a. accounting profit; excluding opportunity cost b. accounting profit; including opportunity cost c. economic profit; excluding opportunity cost d. opportunity cost; including economic profit

a. accounting profit; excluding opportunity cost

A perfection competition market structure features how many barriers to entry? a. no barriers b. limited barriers c. many barriers

a. no barriers

I'MaGadgetCo. produces and sells widgets. Last year, it produced 9,000 widgets and sold each one for $8. To produce the 9,000 widgets, the company incurred variable costs of $27,000 and a total cost of $36,000. I'MaGadgetCo's average fixed cost to produce 9,000 widgets was a. $1.00 b. $3.00 c. $4.00 d. $7.00

a. $1.00

The term ____________ is used to describe the common pattern whereby each marginal unit of a consumed good provides less of an addition to utility than the previous unit. a. diminishing marginal utility b. marginal utility pattern c. marginal income utility d. increasing marginal utility

a. diminishing marginal utility

A firm's ____________ consist of expenditures that must be made before production starts that typically, over the short run, ____________ regardless of the level of production. a. fixed costs; do not change, b. variable costs; are constantly changing, c. fixed costs; are consistently changing, d. variable costs; do not change,

a. fixed costs; do not change,

The economies-of-scale curve is a long-run average cost curve, because a. it allows all factors of production to change. b. fixed costs cannot be changed. c. only variable costs are allowed to change. d. only marginal costs are allowed to change

a. it allows all factors of production to change.

Marcella operates a small, but very successful art gallery. All but one of the following can be classified as a variable cost arising from the physical inputs Marcella requires to operate her business. Which is it? a. physical space for the gallery b. costs of purchasing art work to sell in the gallery c. wages paid to three part-time employees d. accountant's fees for preparing tax returns

a. physical space for the gallery

If a perfectly competitive firm is a price taker, then a. pressure from competing firms will force acceptance of the prevailing market price. b. it must be a relatively small player compared to its competitors in the overall market. c. it can increase or decrease its output without affecting overall quantity supplied in the market. d. quality differences will be very perceptible and will play a major role in purchasers' decisions.

a. pressure from competing firms will force acceptance of the prevailing market price.

The typical pattern revealed in a budget constraint model shows that as the quantity consumed rises, a. total utility rises, but marginal utility falls. b. marginal utility increases. c. total utility decreases, but marginal utility rises. d. total utility decreases.

a. total utility rises, but marginal utility falls.

If a paper mill shuts down its operations for three months so that it produces nothing, its ____________ will be reduced to zero? a. variable costs b. fixed costs c. opportunity costs d. total cost

a. variable costs

The marginal utility of two goods changes ____________. a. with the quantities consumed b. for the better, if taxes are imposed c. if they are intertemporal choices d. if the mother controls the household budget

a. with the quantities consumed

(Table 1 - H4) Janie works for an accounting firm. Her wage increased from $30 per hour to $40 per hour. She can work up to 50 hours each week. The table below shows her utility from different levels of leisure and income. Before her raise, if Janie decreases her hours of work from 30 to 20 hours per week, the marginal utility gain from having more leisure is: a. 29 b. 21 c. 13 d. 7

b. 21

What is meant by average cost? a. When the marginal gain in output diminishes as each additional unit of input is added. b. Total cost divided by the quantity of output. c. The additional cost of producing one more unit. d. When expanding all inputs does not change the average cost of production.

b. Total cost divided by the quantity of output.

Economic theory offers ____________ about the full range of possible events and responses, which can prevent ____________ about how households will respond to changes in prices or incomes. a. one budget constraint theory; unrealistic possibilities b. a systematic way of thinking; misguided conclusions c. two budget constraint theories; misguided possibilities d. systematic consumption choices; unrealistic conclusions

b. a systematic way of thinking; misguided conclusions

Economic profit can be derived from calculating total revenues minus all of the firm's costs, a. excluding its opportunity costs. b. including its opportunity costs. c. including its marginal revenue. d. excluding its marginal revenue.

b. including its opportunity costs.

Kate's 24-Hour Breakfast Diner menu offers one item, a $5.00 breakfast special. Kate's costs for servers, cooks, electricity, food, etc. average out to $3.95 per meal. Her costs for rent, insurance cleaning supplies and business license average out to $1.25 per meal. Since the market is highly competitive, Kate should a. raise her prices above the perfectly competitive level set by the market. b. keep the business open in the short-run, but plan to exit the industry in the long-run. c. keep the business open in the short-run, and plan to expand the business in the long-run. d. lay-off her staff, break her lease, and close the business down immediately.

b. keep the business open in the short-run, but plan to exit the industry in the long-run.

Firms operating in a market situation that creates ____________, sell their product in a market with other firms who produce identical products. a. a perfect monopoly b. perfect competition c. an oligopoly d. a free-market

b. perfect competition

Idaho farmers can sell as large a quantity of their potato crop as they wish, a. if they set their own price in the short run, but in the long run, the market sets the price. b. provided each is willing to accept the prevailing market price. c. if they set their own price in the long run, but in the short run, the market sets the price. d. provided quality is perceptible and determines the market price.

b. provided each is willing to accept the prevailing market price.

Fixed costs are important because, at least in the ____________, the firm ____________. a. long run; cannot alter them b. short run; cannot alter them c. long run; can alter them d. short run; can alter them

b. short run; cannot alter them

As a general rule, utility-maximizing choices between consumption goods occur where the: a. rise in income has created the greatest utility. b. the marginal utility to price ratio of two goods is equal. c. higher-income households have the greatest satisfaction. d. constraints on budget expenditures has fallen substantially.

b. the marginal utility to price ratio of two goods is equal.

The marginal cost curve is generally ____________, because diminishing marginal productivity implies that additional units are ____________. a. downward-sloping; more costly to produce b. upward-sloping; more costly to produce c. downward-sloping; less costly to produce d. upward-sloping; less costly to produce

b. upward-sloping; more costly to produce

The marginal cost curve is generally ____________, because diminishing marginal returns implies that additional units are ____________. a. downward-sloping; more costly to produce b. upward-sloping; more costly to produce c. downward-sloping; less costly to produce d. upward-sloping; less costly to produce

b. upward-sloping; more costly to produce

When dealing with the costs and operation of a typical business firm, the short run is a planning period in which the firm would usually: a. set marginal cost equal to price. b. vary output but not factory size. c. vary output and factory size. d. have overtime work but not hire extra workers.

b. vary output but not factory size.

What is meant by income effect? a. The common pattern that many people save little or borrow heavily early in life, save more in the middle of life, and then draw upon their accumulated savings later in life. b. The additional utility provided by one additional unit of consumption. c. A change in price affects the buying power of income, with a higher price meaning that the buying power of income has been reduced, so that there is usually an incentive to buy less, and a lower price meaning that the buying power of income has been increased, so that there is usually an incentive to buy more. d. The common pattern that each marginal unit of a good consumed provides less of an addition to utility than the previous unit.

c. A change in price affects the buying power of income, with a higher price meaning that the buying power of income has been reduced, so that there is usually an incentive to buy less, and a lower price meaning that the buying power of income has been increased, so that there is usually an incentive to buy more.

Which of the following characteristics relate to decreasing returns to scale? a. The additional cost of producing one more unit. b. When the marginal gain in output diminishes as each additional unit of input is added. c. A situation in which as the quantity of output rises, the average cost of production rises. d. Costs of production that increase with the quantity produced.

c. A situation in which as the quantity of output rises, the average cost of production rises.

What term is used to describe the construct of utility maximization which describes all of the combinations of goods and services that the consumer can afford? a. Marginal utility b. Income effect c. Budget constraint framework d. Diminishing marginal utility

c. Budget constraint framework

____________ occur when the marginal gain in output diminishes as each additional unit of input is added. a. Diminishing variable returns b. Diminishing average returns c. Diminishing marginal productivity d. Diminishing marginal costs

c. Diminishing marginal productivity

If the price that a firm charges is higher than its ____________ cost of production for that quantity produced, then the firm will earn profits. a. marginal b. variable c. average total d. fixed

c. average total

Marginal utility can: a. be positive or negative, but not zero b. decrease, but not become negative c. be positive, negative, or zero d. increase positively, but not negatively

c. be positive, negative, or zero

A situation known as ____________ occurs when all production inputs are allowed to expand, but that expansion does not result in a change in the average cost of production. a. returns to scale b. economies of scale c. constant returns to scale d. diminishing marginal returns

c. constant returns to scale

The term ____________ describes a situation where the quantity of output rises, but the average cost of production falls. a. diminishing marginal returns b. marginal cost output c. economies of scale d. diseconomies of scale

c. economies of scale

In order to calculate marginal cost, the change in ____________ is divided by the amount of change in quantity. a. either total cost or average cost b. increasing marginal returns c. either total cost or variable cost d. decreasing marginal returns

c. either total cost or variable cost

If a graph is used to compare total revenue and total cost of a perfectly competitive firm, then the horizontal axis of the graph will represent the ____________ and the vertical axis will represent ____________. a. price, measured in dollars; quantity of goods produced b. total costs measured in dollars; quantity of goods produced c. quantity produced; both total revenue and total costs, measured in dollars. d. quantity produced; total revenue and total variable costs, measured in dollars.

c. quantity produced; both total revenue and total costs, measured in dollars.

In the ____________, if profits are not possible, the perfectly competitive firm will seek out the quantity of output where ____________. a. long run; increasing production b. short run; fixed costs can be reduced c. short run; losses are smallest d. long run; fixed costs can be eliminated

c. short run; losses are smallest

(Diagram 1 - H5) Refer to the diagram above. Based on the information illustrated in the graph, which of the following is correct? a. producing a marginal unit is reducing average costs overall b. the marginal cost of production for producing an additional unit is below the cost for producing the earlier units c. the transition point between where MC is pulling down and pulling up AC always occurs at the minimum point of the AC curve d. low marginal costs first pull up the overall average costs

c. the transition point between where MC is pulling down and pulling up AC always occurs at the minimum point of the AC curve

Whatever the firm?7 fs quantity of production, ____________ must exceed total costs if it is to earn a profit. a. marginal costs b. average costs c. total revenue d. variable costs

c. total revenue

George, Jerry, Elaine, and Kosmo are seated in a restaurant figuring out what to order. Carrot cakes cost $2 and pickles cost $1 each. George declares he would like to get three carrot cakes and four pickles. Jerry suggests, why not get two carrot cakes and six pickles, since the marginal utility of carrot cakes diminishes more rapidly. Kosmo says George should order no carrot cakes and 10 pickles, or else 5 carrot cakes and no pickles. George responds that with 10 pickles or 5 cakes, the marginal utility of the last one would be very low. "But the total utility would be greater," says Kosmo. Elaine says that George should get the quantities where the marginal utility of the next cake is double the marginal utility of the next pickle. "You're wrong," says Jerry. "The marginal utility of the cake should equal the marginal utility of the pickle." You are seated in the next table and they ask you what they should do. For rational consumer choice, a. George should heed Jerry's advice and get the quantity where the marginal utility of the last pickle equals the marginal utility of the last carrot cake. b. George should heed Kosmo's advice and use total, not marginal, utility. c. George should just forget about utilities and order randomly, since there is really no way to calculate how to get the most utility for the money. d. George should heed Elaine's advice and get that amount for which the marginal utility divided by the price is equal for the carrot cake and the pickle. e. George should ignore all the advice and just go with his feelings.

d. George should heed Elaine's advice and get that amount for which the marginal utility divided by the price is equal for the carrot cake and the pickle.

The term ____________ is used to describe the additional cost of producing one more unit. a. average cost b. fixed cost c. variable cost d. marginal cost

d. marginal cost

If a comparison between average cost and price reveals whether a firm is earning profits, then a comparison between average variable cost and price reveals a. that if the market price exceeds average cost, profits will be positive. b. that if the market price is below average cost, then profits will be negative. c. total revenues are the quantity produced multiplied by the price. d. whether the firm should operate at a loss or shut down in the short run.

d. whether the firm should operate at a loss or shut down in the short run.