Exam 2 Review
Which of the following is not an assumption that economists make when using the model of perfect competition?
Each firm sets its price equal to its average total cost.
If the following demand elasticities, 0.05 and 0.6, are given for a particular good or service, then:
0.05 is probably the short-run demand elasticity and 0.6 is the long-run demand elasticity.
The price of gasoline rises 5% and the quantity of gasoline purchased falls 1%. The price elasticity of demand is equal to ________ and demand is described as ________.
0.2; inelastic
If the price increases by 100% and the quantity decreases by 50%, then the elasticity of demand is ___.
0.5
Suppose the cross-price elasticity between demand for Burger King burgers and the price of McDonald's burgers is 0.8. If McDonald's increases the price of its burgers by 10%, then:
Burger King will sell 8% more burgers.
The absolute value of the price elasticity of demand for gasoline in the short run has been estimated to be 0.1. If a war in the Middle East causes the price of oil (from which gasoline is made) to increase, how will that affect total expenditures on gasoline in the short run, all other things equal? (Hint: Consider the change in gasoline prices.)
Demand will not change much, but total expenditures will rise.
Which of the following is a necessary condition for perfect competition?
Firms produce a standardized product.
There is one gas station in a small rural town. The owner of the station claims that he will sell the same quantity of gas, no matter how high or low the price. If he is correct in this assertion, what must be true about the demand curve for gas at his station?
It must be vertical with a price elasticity of zero.
Assume that in the short run a perfectly competitive firm does not produce output and has economic losses. This would occur if:
P < AVC and FC > 0.
Which of the following will lead to a decrease in total revenue?
The price increases and demand is price-elastic.
Which of the following is likely to make supply more inelastic?
The time period under consideration is very short and the inputs necessary for production cannot readily be increased.
Which of the following is not a characteristic of a perfectly competitive industry?
There are differentiated products.
Which of the following occurs in the short run?
Wal-Mart hires five new workers.
In perfectly competitive long-run equilibrium:
all firms produce at the minimum point of their average total cost curves.
Which commodity would have the most inelastic demand curve?
beer
When marginal cost is rising:
both average variable cost and average total cost may be rising or falling.
The average total cost curve in the short run slopes upward due to:
diminishing returns.
Hank operates a perfectly competitive firm in the long run. For several periods the market price has been $20, and he knows his break-even price is $22. Hank should:
exit the industry, since he is making losses.
If firms are experiencing economic losses in the short run, firms will leave the industry, industry output will ________, and economic losses will ________ in the long run.
fall; fall
When economic profits in an industry are zero:
firms are doing as well as they could do in other markets.
Suppose that the market for candy canes operates under conditions of perfect competition, that it is initially in long-run equilibrium, and that the price of each candy cane is $0.10. Now suppose that the price of sugar rises, increasing the marginal and average total cost of producing candy canes by $0.05; there are no other changes in production costs. Based on the information given, we can conclude that in the long run we will observe:
firms leaving the industry.
For which of the following is the cross-price elasticity of demand most likely a large positive number?
french fries and onion rings
The long-run price elasticity of supply of crude oil is ______ the short-run price elasticity of supply of crude oil.
greater than
A perfectly competitive firm will earn a profit in the short run when it produces the profit-maximizing quantity of output and the price is:
greater than average total cost.
If there are no obstacles to new firms entering the pet-sitting industry, then we can say that this industry:
has free entry.
Price-takers are individuals in a market who:
have no ability to affect the price of a good in a market.
Which of the following is most likely to have a perfectly inelastic demand curve?
heart transplant surgery
An assumption of the model of perfect competition is:
identical goods.
As defined in the text, the long run is a planning period:
in which a firm can adjust all resources.
Based on sales history, a retailer calculates that Ei for Gummycrumbs is -0.8. Now, due to a recession, incomes in the market area are down 10%. Based on this it can be estimated that Gummycrumb sales will:
increase by 8%.
After a price decrease, the quantity effect tends to:
increase total revenue.
If a firm experiences lower costs per unit as it increases production in the long run, this is an example of:
increasing returns to scale.
Heath's company is currently producing 30 units of output. The price of the good is $8 per unit. Total fixed costs are $50 and the average variable cost is $5 at 30 units. This company:
is experiencing an economic profit of $40.
When a firm produces at an output level at which MR = MC, it is operating at the:
optimal output level.
A perfectly competitive industry with constant costs initially operates in long-run equilibrium. When demand increases, one will observe that in the long and short runs:
output will increase.
Which of the following industries is likely to be an increasing cost industry?
steel
If a 20% price increase generates a 20% decrease in quantity demanded, then there is a(n) _______ response.
unit-elastic
When the Keep On Calling Cell Phone Company is at full capacity, it incurs costs of $230,000. During the December shutdown period, when no cell phones are produced, it incurs costs of $76,000. One can conclude that
at full capacity, variable costs are $154,000.
A factor of production whose quantity cannot be changed during a particular period is a(n):
fixed factor of production.
An input whose quantity cannot be changed during a particular period is a(n):
fixed input.
The price elasticity of demand for skiing lessons in New Hampshire is over 1.00. This means that the demand is ________ in New Hampshire.
price elastic
Suppose the price elasticity of demand for cheeseburgers equals 0.37. This means the overall demand for cheeseburgers is:
price inelastic.
A firm will be profitable if it produces at a point at which:
price is above average total cost.
Under which condition would the firm be incurring a loss?
price is below average total cost.
If a university decreases the price of tickets to football games to collect more revenue, it is assuming that the demand for tickets is:
price-elastic.
If the absolute value of the price elasticity of demand is found to be 6, then demand is:
price-elastic.
If the price of a good is increased by 15% and the quantity demanded falls by 20%, the price elasticity of demand is:
price-elastic.
If the quantity supplied responds substantially to a relatively small change in price, supply would be:
price-elastic.
The optimal output rule for a price-taking firm is to:
produce at the point at which price is equal to marginal cost of the last unit produced.
The equilibrium price of a guidebook is $35 in the perfectly competitive guidebook industry. Our firm produces 10,000 guidebooks for an average total cost of $38, marginal cost of $30, and average variable cost of $30. Our firm should:
produce more guidebooks, because the next guidebook produced increases profit by $5.
In the short run, if P > ATC, a perfectly competitive firm:
produces output and earns an economic profit.
The supply curve for a good will be more elastic if:
production inputs are readily available at a relatively low cost.
Economists explicitly assume that the primary objective of firms is to maximize:
profits.
If 2 goods have a positive cross-price elasticity of demand between them, we would say that these 2 goods are:
substitutes.
If the cross elasticity of demand between chicken and fish is 0.8, then chicken and fish are:
substitutes.
If you know the cross-price elasticity between two goods is positive, then you know the two goods are:
substitutes.
Costs that cannot be recovered are:
sunk costs.
If the price elasticity of supply is greater than 1, then:
supply is price-elastic.
The production function provides information about:
the transformation of inputs into outputs.
The diminishing returns of a variable input will account for:
the upward slope of marginal cost.
Demand for McDonald's hamburgers is more elastic than demand for hamburgers because:
there are more close substitutes for McDonald's hamburgers than for hamburgers.
If a perfectly competitive firm sells 300 units of output at a market price of $1 per unit, its marginal revenue is:
$1.
If Jakob knows the marginal cost of the first sports jersey is $21, the marginal cost of the second sports jersey is $40, and the marginal cost of the third jersey is $17, what is the total variable cost of producing three jerseys?
$78
What is the price elasticity of demand if price increases by 100% and quantity demanded decreases by 50%?
0.5
If a 20 percent decrease in the price of sapphires causes a 15 percent decrease in the quantity of diamonds demanded, then the cross-price elasticity of demand between sapphires and diamonds is:
0.75
A farm can produce 1,000 bushels of wheat per year with two workers and 1,300 bushels of wheat per year with three workers. The marginal product of the third worker is:
300 bushels. ((1300-1000)/(3-2))
Quantity Price Total Cost 1 $6.50 $6 2 $6.50 $11 3 $6.50 $13 4 $6.50 $16 5 $6.50 $20 6 $6.50 $28 7 $6.50 $38 The table above gives the total cost information for a perfectly competitive firm. What is the profit-maximizing quantity of output?
5
John uses funds from a savings account to pay off his equipment loan. The interest rate John pays on the equipment loan is the same as interest rate he can earn on the savings account. John's accounting profit ____ and his economic profit ____.
Rises, stays the same.
Marginal revenue:
equals the market price in perfect competition.
Which of the following will continually decrease as output increases?
average fixed cost
At 20 units of output, a firm finds that its average variable cost is $5 per unit and its average total cost is $8 per unit. Therefore, its:
average fixed cost is $3 per unit.
Maria has a business printing t-shirts selling 200 t-shirts per month. Her monthly total fixed costs are $400, and her monthly total variable costs are $1,000. If for some reason Maria's fixed cost increased to $1,000, then her:
average fixed costs would increase.
Suppose the marginal product of the 23rd worker is eight boxes of output. Average product when 23 workers are employed if five boxes per worker. We can conclude that:
average product is rising
If marginal cost is greater than average total cost, then:
average total cost is increasing.
Total cost divided by the quantity of output produced is:
average total cost.
In a perfectly competitive market:
both producers and consumers are price-takers.
If there is free entry and exit in a perfectly competitive industry, the long-run equilibrium will:
be at the level of zero economic profit for each firm.
If a perfectly competitive firm can sell a bushel of soybeans for $25 and it has an average variable cost of $26 per bushel and the marginal cost is $26 per bushel, the firm should:
cut output to zero.
If the price elasticity of demand for Rip's Punch is 1.5 and he increases the price for each bottle, then total revenue will:
decrease because the percent change in quantity demanded will be greater than the percent change in price.
In general, we would predict the price elasticity of demand for Gala apples would be:
elastic.
If your purchases of shoes decrease from 11 pairs per year to 9 pairs per year when your income increases from $19,000 to $21,000 a year, other things equal, then, for you, shoes are considered a(n):
inferior good.
When perfectly competitive firm X sells three units of product Z, its marginal revenue is $4.67. When it sells 100 units, marginal revenue is $4.67. We can conclude that the price:
is $4.67.
The marginal revenue received by a firm in a perfectly competitive market:
is equal to its average revenue.
If supply is perfectly inelastic, then a 5 percent increase in the price of the good would cause _________ in the quantity supplied.
no change.
The price elasticity of demand measures the responsiveness of the change in:
quantity demanded to a change in price.
Marginal revenue is a firm's:
ratio of the change in total revenue to the change in output.
Total revenue is a firm's:
total output times the price at which it sells that output.
Suppose coffee is considered inelastic. If the price of coffee increases:
total revenue increases.
A firm's total output times the price at which it sells that output is:
total revenue.
When a firm cannot affect the market price of the good that it sells, it is said to be a:
price-taker.
The sum of fixed and variable costs is:
total cost.
A gas station owner in a large city learned in his microeconomics class that buyers are relatively unresponsive to changes in the price of gasoline. If, based on that assumption, he increases the price of gas at his station:
total revenue will increase.
If the cross elasticity of demand for good A with respect to good B is -4.4, then good A could be ______ and good B ______.
camera; camera film
If a perfectly competitive firm is producing a quantity where P < MC, then profit:
can be increased by decreasing production.
If a perfectly competitive firm is producing a quantity where MC < MR, then profit:
can be increased by increasing production.
A linear demand curve:
can have both elastic and inelastic price elasticities of demand.
A price-taking consumer is one who:
cannot affect the market price of the product.
A decrease in production costs for firms in a perfectly competitive market will cause a(n):
economic profit for firms in the short run.
If the firm produces a quantity at which total cost exceeds total revenue, then:
economic profit is negative.
Profits that are in excess of both implicit and explicit costs are called ____.
economic profits
A firm that is able to more efficiently utilize by-products as it increases production in the long run is an example of:
economies of scale.
For large beer breweries, it is common for long-run average total cost to decline as output increases. This indicates that many breweries achieve:
economies of scale.
Assume that Bethany optimized today's production with today's sale of 100 bushels of corn. If her total variable cost is $200, and her total fixed cost is $100, and her marginal revenue is $3, then Jean:
is earning a normal profit
Suppose Sarah's pottery studio is charging the market price, which is just higher than her minimum average total cost. This means that Sarah:
is earning a small economic profit.
For a perfectly competitive firm, marginal revenue:
is equal to price.
At 30 units of output, a firm's marginal cost and average variable cost each equal $10. Therefore, assuming normally shaped cost curves, at 29 units of output its marginal cost:
is less than $10 and its average variable cost is more than $10.
If the price is greater than average total cost at the profit-maximizing quantity of output in the short run, a perfectly competitive firm will:
produce at a profit.
If a competitive firm can sell a bushel of soybeans for $25 and it has an average variable cost of $24 per bushel and the marginal cost is $26 per bushel, the firm should:
reduce output.
If a competitive firm can sell a ton of steel for $500 a ton and it has an average variable cost of $400 a ton, and the marginal cost is $600 a ton, the firm should:
reduce output.
Price elasticity of demand is a measure of:
responsiveness.
Which factor is the most important in determining the price elasticity of supply?
the time period the produce has to adjust inputs and outputs
Which factor is the most important in determining the price elasticity of supply?
the time period the producer has to adjust inputs and outputs
A vertical demand curve is:
perfectly inelastic.
If 2 goods are substitutes, then the cross-price elasticity of demand between them is:
positive.
The slope of a long-run average total cost curve exhibiting diseconomies of scale is:
positive.
Vitamin Water and Gatorade are substitutes. Thus, their cross elasticity of demand is:
positive.
Supply curves tend to be more ________ the greater the time period facing the producer.
price-elastic
When the percentage change in quantity demanded is larger than the percentage change in price, demand is said to be:
price-elastic.
Along the lower end of a linear demand curve, the price elasticity of demand will be:
price-inelastic.
If the University of Michigan increases the price of football tickets, this will result in increasing revenues if the price elasticity of demand is:
price-inelastic.
If the price elasticity of supply is less than 1, then supply is:
price-inelastic.
If total revenue goes down when price falls, the price elasticity of demand is said to be:
price-inelastic.
When a public transit system (such as a subway or bus line) raises its fares, it may experience an increase in total revenue. This suggests that demand is:
price-inelastic.
For a perfectly competitive firm, marginal revenue is equal to:
price.
In the short run, an example of a fixed cost is:
a property tax.
Suppose that Bob leaves a job that pays $50,000 per year in order to open a new sponge business. His insurance cost is $5,000, his material cost is $25,000, his lease payments are $10,000 and his sales revenue is $90,000. Bob's economic profit is:
$0.
Suppose that the market for candy canes operates under conditions of perfect competition, that it is initially in long-run equilibrium, and that the price of each candy cane is $0.10. Now suppose that the price of sugar rises, increasing the marginal and average total cost of producing candy canes by $0.05; there are no other changes in production costs. Based on the information given, we can conclude that once all of the adjustments to long-run equilibrium have been made, the price of candy canes will equal:
$0.15.
Quantity of cherries (in pounds) Price per pound of cherries Total cost 1 $6 $6 2 $6 $11 3 $6 $13 4 $6 $16 5 $6 $20 6 $6 $28 7 $6 $38 The table above gives the total cost information for Hank and Helen's cherry farm. They sell their cherries in a perfectly competitive market, where the price is $6.00 per pound. If Hank and Helen produce and sell 5 pounds of cherries, what is their profit?
$10
A perfectly competitive firm is producing 100 units (profit maximizing). If the price is $12 marginal cost is $12, and average total cost is $11, this firm's profits are:
$100.
Oscar has negotiated a lease for his sporting goods store in which he is required to pay $2,500 per month in rent. Oscar pays his staff $9 per hour to sell sporting goods and his monthly electricity bill averages $700, depending on his total hours of operation. Oscar's fixed costs of production equal:
$2,500 per month.
If a perfectly competitive firm increases production from 10 units to 11 units and the market price is $20 per unit, total revenue for 11 units is:
$220.
Quantity of output Fixed cost Variable cost Total cost 0 $70 $18 1 70 32 2 70 42 3 70 57 4 70 75 5 70 95 6 70 120 The table shows the cost information for Bonita's pet-sitting service, where quantity of output is the number of clients served per day. Think about the number you would put in the total cost column, and then answer this question. What is the marginal cost of increasing output from 5 clients to 6 clients?
$25
The market for beef is in long-run equilibrium at a price of $3.25 per pound. The announcement that mad cow disease has been discovered in the United States reduces the demand for beef sharply, and the price falls to $2.00 per pound. If the long-run supply curve is horizontal, then when the long-run equilibrium is reestablished, the price will be:
$3.25 per pound.
Quantity of cherries (in pounds) Price per pound of cherries Total cost 1 $6 $6 2 $6 $11 3 $6 $13 4 $6 $16 5 $6 $20 6 $6 $28 7 $6 $38 The table above gives the total cost information for Hank and Helen's cherry farm. They sell their cherries in a perfectly competitive market, where the price is $6.00 per pound. If Hank and Helen produce and sell 5 pounds of cherries, what is their total revenue?
$30
When the Frame Factory is producing 1,500 frames, total cost is $225,000 and total variable cost is $180,000. What does average fixed costs equal at 1,500 units?
$30
Quantity of output Fixed cost Variable cost Total cost 0 $70 $18 1 70 32 2 70 42 3 70 57 4 70 75 5 70 95 6 70 120 The table shows the cost information for Bonita's pet-sitting service, where quantity of output is the number of clients served per day. Think about the number you would put in the total cost column, and then answer this question. What is the average total cost of serving 5 clients?
$33
A firm in a perfectly competitive industry is maximizing its profits at 400 units. If the marginal revenue and marginal cost are both $35 and the firm's average total cost is $25, this firm's profit is
$4,000
If a perfectly competitive firm has total revenue equal to $400 when it produces 100 units, and if its total revenue rises to $404 when it produces 101 units, the marginal revenue of the 101st unit is:
$4.
A perfectly competitive firm is selling a product at the market price of $11. It produces and sells the profit-maximizing quantity of 50 units, and at this level of output, its average total cost is $10 and its average variable cost is $8. What is the firm's level of profit?
$50
If a firm produces 10 units of output and incurs $30 in average variable cost and $35 in average total cost, total fixed cost is:
$50.
Zoe's Bakery operates in a perfectly competitive industry. When the market price of iced cupcakes is $5, the profit-maximizing output level is 150 cupcakes. Her average total cost is $4, and her average variable cost is $3. Zoe's marginal cost is ________, and her short-run profits are:
$5; $150
Mikail's perfectly competitive camera memory card-producing factory is making positive economic profits. If the price of memory cards is $9, Mikail's output is 3,000 cards a month, and his monthly average total cost is $7, what are his monthly profits?
$6,000. profit=(P-ATC)*Q
Darren runs a barbershop with fixed costs equal to $100 per day and a total output of 50 haircuts per day. What is his weekly total fixed cost if he is open 6 days per week?
$600
Suppose Cyd knows the average cost of producing 9 scones is $5, while the average cost of producing 10 scones is $5.20. What is the marginal cost of the 10th unit?
$7
Wendy leaves her job as a dancer to start her own dance studio. As a dancer, she made $34,000 per year. During the first year she paid $4,300 per year for insurance, $1846 for music and licensing fees, $150 for a boom box, and $11,300 for rent and utilities. She received $60,480 in tuition payments. Wendy's economic profit was
$8,884
Suppose that the first four units of a variable input generate corresponding total outputs per period of 200, 350, 450, and 500, respectively. The marginal product of the second unit of input is:
150.
Each month Jacquelyn spends exactly $50 on ice cream regardless of the price of each container. Jacquelyn's price elasticity of demand for ice cream is:
1.
If a firm has $9,000 of fixed costs and $21,500 of variable costs, then the time period referred to is:
the short run.
To pursue a goal of being a business owner, Mary left a job that paid $40,000 per year. At the end of her first year in business, her cash revenues summed up to $90,000 and her explicit costs were $50,000. Also, in order to fund her business startup, Mary cashed in a $20,000 certificate of deposit that was providing a yield of 5%. Ceteris paribus, Mary's economic profit is:
-$1,000.
If a 12 percent increase in the price of lodging at a ski resort causes a 10 percent decrease in the quantity of skis rented, then the cross-price elasticity of demand between lodging and ski rentals is:
-0.83
If a 10 percent increase in the price of lodging at a ski resort causes a 12 percent decrease in the quantity of skis rented, then the cross-price elasticity of demand between lodging and ski rentals is:
-1.20
Quantity Price Total Cost 1 $1 $6 2 $1 $11 3 $1 $13 4 $1 $16 5 $1 $20 6 $1 $28 7 $1 $38 The table above gives the total cost information for a perfectly competitive firm. What is the profit-maximizing quantity of output?
1
If quantity demanded rises by 60% and price falls by 20%, the price elasticity of demand is:
3.
Suppose that the units of variable input in a coal-production process are 1, 2, 3, 4, and 5, and the corresponding total outputs per period are 10, 15, 19, 22, and 24 tons, respectively. The marginal product of the third unit of input is ________ tons per period.
4
Egg producers know that the elasticity of demand for eggs is 0.1. If they want to increase sales by 5%, they will have to lower price by ________%.
50
Wal-Mart is thinking about offering a 25% discount on a brand of shoes. If the elasticity of demand is two, then the discount would increase sales by:
50%.
Quantity of labor (workers) Total numbers of cars serviced 0 0 1 12 2 22 3 30 4 36 5 40 6 42 The table above gives the production function for Andrew's Garage. If labor is the variable input and number of cars serviced is the output, what is the marginal product of labor when the number of workers rises from 2 to 3?
8
Price is $1 and total revenue is $200. If price increases to $2 and total revenue increases to $400, you know that the demand for the product is:
?
A firm produces at the output level at which its average total costs are minimized. At this output level, its average total costs are equal to all of the following except:
AVC. (MC, MR, price)
If the total variable cost for five shoes is $50 and the total variable cost of six shoes is $80, which of the following is true?
Average variable cost for the fifth shoe is $10.
Which of the following is true?
If the price elasticity of supply is greater than 1, then supply is price-elastic.
In a perfectly competitive market, which of the following statements is true?
In the long run, the price will change to reflect whatever change we observe in production cost.
Suppose that the quantity demanded for a product falls by 9 percent as people's incomes rise by 3 percent. What type of good is this product?
Inferior good
Assume that Bethany optimized today's production with today's sale of 100 bushels of corn. If her total variable cost is $200, and her total fixed cost is $100, and her marginal revenue is $3, then:
Jean is earning a normal profit.
In perfect competition, the profit-maximizing level of output occurs where the:
MR = MC above minimum AVC.
Kellogg, General Mills, Post and Quaker Oats dominate the ready-to-eat cereal market. This industry has consistently showed profits in the long run, and is difficult to enter due to brand proliferation. The ready-to-eat cereal industry is an example of what type of market structure?
Oligopoly
In the short run, a perfectly competitive firm produces output and earns zero economic profit if:
P = ATC.
Provided that there are no external benefits or costs, resources are efficiently allocated when:
P = MC.
Which of the following is true?
Price and marginal revenue are the same in perfect competition.
Farmer Ted sells winter wheat in a perfectly competitive market. The market price for a bushel of winter wheat is $9. Ted has 270 bushels of wheat to sell. If his total variable cost is $2000 and his total fixed cost is $500, then
Ted is minimizing his losses.
Lauren has 11 people working in her tangerine grove. The marginal product of the eleventh worker equals 13 bushels of tangerines. If she hires a twelfth worker, the marginal product of that worker will equal:
The answer cannot be determined with the information available.
What would happen in the market for canned pinto beans if individuals' incomes increase?
The income elasticity of demand would be positive if beans are a normal good.
Which of the following is true?
The long-run industry supply curve relates the price of a good or service to the quantity produced after all adjustments to a price change have been made.
Quantity of labor (workers) Total numbers of cars serviced 0 0 1 12 2 22 3 30 4 36 5 40 6 42 The table above gives the production function for Andrew's Garage. If labor is the variable input and number of cars serviced is the output, which of the following statements is true?
There are diminishing returns to labor.
When perfect competition prevails, which of the following characteristics of firms are we likely to observe?
They are all price-takers.
Which of the following equations is true?
Total Cost = Fixed Cost + Variable Cost
Which of the following is true?
Total economic profit is per-unit profit times quantity.
If the estimated price elasticity of demand for foreign travel is 4, then:
a 20% decrease in the price of foreign travel will increase quantity demanded by 80%.
In perfect competition:
a firm's total revenue is found by multiplying the market price by the firm's quantity of output.
A restaurant offering free children's meals in an effort to attract parents' business is an example of:
a loss leader.
The short run is the period of time in which:
at least one input is fixed.
The average total cost of producing cell phones in a factory is $20 at the current output level of 100 units per week. If fixed cost is $1,200 per week:
average variable cost is $8.
Variable cost divided by the quantity of output produced is:
average variable cost.
If the long-run market supply curve for a perfectly competitive market is horizontal, then this industry is one that exhibits:
constant costs.
The long-run average total cost of producing 100 units of output is $4, while the long-run average cost of producing 110 units of output is $4. These numbers suggest that the firm producing this output is experiencing:
constant returns to scale.
A competitive firm facing a price of $15 decides to produce 100 units. If the marginal cost of producing the last unit is $20, the firm should:
decrease production.
A firm finds that as it produces more, its long-run average total costs increase. This firm is experiencing:
diseconomies of scale.
Zoe's Bakery operates in a perfectly competitive industry. The variable costs at Zoe's Bakery increase, so all of the cost curves (with the exception of fixed cost) shift leftward. The demand for Zoe's pastries does not change, nor does the firm shut down. To maximize profits after the variable cost increase, Zoe's Bakery will ________ its price and ________ its level of production.
do nothing to; decrease
In the short run, if P < AVC, a perfectly competitive firm:
does not produce output and incurs an economic loss.
With one input fixed, a firm will find that as it attempts to produce more, the total product curve will increase at a decreasing rate and its marginal product curve will be:
downward-sloping.
In the long run, each firm in a perfectly competitive industry will:
earn only enough to cover the opportunity costs of the resources used in production.
Suppose that the market for haircuts in a community is perfectly competitive and that the market is initially in long-run equilibrium. Subsequently, an increase in population increases the demand for haircuts. In the short run, we expect that the typical firm is likely to begin:
earning an economic profit.
The demand curve for a vacation in Europe is probably:
elastic.
Products with many close substitutes tend to have ____ demand, and products considered to be luxury goods tend to have ____ demand.
elastic; elastic
You own a small deli that produces sandwiches, soups, and other items for customers in your town. Which of the following is a variable input in the production function at your deli?
employees hired to help make the food
Economic profits in a perfectly competitive industry encourage firms to ________ the industry, and losses encourage firms to ________the industry.
enter; exit
Demand is unit elastic when the absolute value of the price elasticity of demand is:
equal to 1.
If firms are making positive economic profits in the short run, then in the long run:
firms will enter the industry.
A cost that does not depend on the quantity of output produced is called a:
fixed input.
We predict the long-run price elasticity of demand of gasoline would be ________ the short-run price elasticity of demand of gasoline.
greater than
Firms will make a profit in the long run or short run if the price is:
greater than ATC.
When marginal cost is above average variable cost, average variable cost must be:
greater than average fixed cost.
A perfectly competitive firm will earn a profit and will continue producing the profit-maximizing quantity of output in the short run if the price is:
greater than average total cost.
Following a price increase, total revenue will:
increase if demand is price-inelastic.
Marginal cost is the:
increase in total cost when one more unit of output is produced.
Mingma hired another cashier to work in her clothing store, and her sales more than doubled. Hiring the second worker resulted in
increasing marginal returns
If each of your first seven employees add more to output than the previous worker hired, you are experiencing:
increasing marginal returns.
The assumptions of perfect competition imply that:
individuals in the market accept the market price as given.
If some firms in a perfectly competitive industry are earning positive economic profits, then in the long run, the:
industry supply curve will shift to the right.
Assume the supply curve shifts to the right by a given amount at each price. Price in the market will decline the most if demand is more price:
inelastic and supply is more price-inelastic.
If the price elasticity of demand for oranges is 0.90, then the demand is _____ and total revenue will ______ if the price of oranges increases.
inelastic; increase
A firm's decision about whether or not to stay in business should be based on:
its economic profit.
For a restaurant:
labor and food would be variable resources and a building would be a fixed resource in the short run.
Suppose the price elasticity of demand for fishing lures equals 1 in South Carolina and 0.63 in Alabama. To increase revenue, fishing lure manufacturers should:
leave prices unchanged in South Carolina and raise prices in Alabama.
If hot dogs and relish are complements, their cross elasticity of demand is:
less than 0.
The cross-price elasticity of demand of complementary goods is:
less than 0.
Economies and diseconomies of scale are associated with the:
long-run average total cost curve and the long run.
The curve that illustrates the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output is the:
long-run average total cost curve.
If the current price is $36 and this is a perfectly competitive industry,
losses in the short run would induce some firms to leave the industry.
Many furniture stores run "going out of business" sales but never go out of business. In order for the shut-down decision to be the appropriate one, the price of furniture must be ________ than the ________ average variable cost.
lower; minimum
One characteristic of a perfectly competitive market is that there are ________ sellers of the good or service.
many
The short-run supply curve for a perfectly competitive firm has its:
marginal cost curve above its average variable cost curve.
A perfectly competitive firm's short-run supply curve is its:
marginal cost curve above the average variable cost curve.
Consider a perfectly competitive firm in the short run. Assume that it is sustaining economic losses but continues to produce. At the profit-maximizing (loss-minimizing) output, all of the following statements are correct except:
marginal cost is less than average variable cost.
The change in total cost arising from producing one more unit of output is known as:
marginal cost.
The change in total cost resulting from a one-unit change in quantity is:
marginal cost.
The slope of the total cost curve is:
marginal cost.
Cindy operates Birds-R-Us, a small store manufacturing and selling 100 bird feeders per month. Cindy's monthly total fixed costs are $500, and her monthly total variable costs are $1,000. If for some reason Cindy's variable cost increased to $4,000, then her:
marginal costs would increase.
The additional quantity of output obtained from using one more unit of labor is known as the:
marginal product of labor.
For a firm in a perfectly competitive market:
marginal revenue equals market price.
When a perfectly competitive firm is in long-run equilibrium, the firm is producing at:
minimum long-run average total cost.
If a good is a necessity with few substitutes, then the price elasticity of demand will tend to be:
more (less?) price-inelastic.
If someone did not regard health care as very important, often using home remedies and other substitutes, his or her demand curve for health care would most likely be ________ over the relevant range of prices for health care.
more price-elastic
If a good is a luxury item that looms large in the household budget, then the price elasticity of demand will tend to be:
more price-elastic.
If a good is a necessity with few substitutes. then the price elasticity of demand will tend to be:
more price-inelastic.
Suppose that the market for candy canes operates under conditions of perfect competition, that it is initially in long-run equilibrium, and that the price of each candy cane is $0.10. Now suppose that the price of sugar rises, increasing the marginal and average total costs of producing candy canes by $0.05. Based on the information given, we can conclude that in the short run a typical producer of candy canes will be making:
negative economic profits.
In the model of perfect competition:
no individual or firm has enough power to have any impact on price.
For the Colorado beef industry to be classified as perfectly competitive, ranchers in Colorado must have ________ on prices and beef must be a ________ product.
no noticeable effect; standardized
In a perfectly competitive market:
no one market participant will be able to influence price.
If your purchases of shoes increase from 9 pairs per year to 11 pairs per year when your income increases from $19,000 to $21,000 a year, other things equal, then, for you, shoes are considered a(n):
normal good.
A competitive firm operating in the short run is maximizing profits and just breaking even. Its costs include a monthly license fee of $100 that is imposed by the state and must be paid for as long as the firm is in existence. If the license fee is raised to $150, what should the firm do to maximize profits in the short run?
not change output.
Which of the following would be most likely to have a vertical supply curve?
paintings by Van Gogh
The competitive model assumes all of the following except:
patents and copyrights. (easy entry into and easy exit from the market, large number of buyers, standardized product)
The demand curve for a perfectly competitive firm is:
perfectly elastic.
At quantities greater than the long-run least per-unit cost quantity of output, the long-run average total cost curve is tangent to the ________ of the corresponding short-run average total cost curve.
right of the minimum
Ashley, who makes knitted caps, determines that her marginal cost of producing one more knitted cap is equal to $10. A consumer offers her $12 if she sells one more knitted cap to her. Ashley will:
sell the additional knitted cap, since the marginal revenue is greater than the marginal cost for the unit.
The horizontal sum of individual firms' MC curves at and above the shut-down price is the:
short-run industry supply curve.
The supply curve found by summing up the short-run supply curves of all of the firms in a perfectly competitive industry is called the:
short-run market supply curve.
If the price is consistently below the average variable cost, then in the short run a perfectly competitive firm should:
shut down.
If the absolute value of the price elasticity of demand is greater than 1, this means:
small percentage changes in price will lead to much larger changes in the percentage change in quantity demanded.
In the short run:
some inputs are fixed and some inputs are variable.
If an increase in price for cotton increases total revenue, then the price effect is ________ the quantity effect.
stronger than
If the cross elasticity of demand for good A with respect to good B is 2.3, then good A is a(n):
substitute for good B.
If your purchases of shoes increase from 9 pairs per year to 11 pairs per year when the price of shirts increases from $8 to $12, then, for you, shoes and shirts are considered:
substitute goods.
Suppose the price of real estate increases by 37.11% in Oakland next year. If the quantity of new homes supplied does not change, this means that the price elasticity of ________ will be perfectly ________ in Oakland next year.
supply; inelastic
Free entry and exit in an industry guarantees:
that the number of producers will adjust to changing market conditions.
Which of the following curves is not affected by the existence of diminishing returns?
the average fixed cost curve
In the short run, an example of a variable cost is:
the cost of labor.
If the price of JoBob's Beef Jerky increases in price and JoBob, Inc. makes tens of millions more dollars, then we can safely conclude that:
the demand for JoBob's Beef Jerky is price inelastic.
Sonik, a local wireless phone company, tested the effect of a price reduction for text messaging. It lowered prices from $0.08 to $0.04 per message and found that the number of messages sent tripled. This means:
the demand for text messaging is elastic in this price range.
A good is likely to have an inelastic demand curve if:
the good has few available substitutes.
Suppose that some firms in a perfectly competitive industry earn negative economic profits. In the long run:
the industry supply curve will shift to the left.
If a firm has $10,000 in variable costs and no fixed cost, then the time period referred to is
the long run
The resources needed for growing cucumbers are relatively abundant. Many new firms could enter this industry and not change costs. If that happens,
the long-run industry supply curve will be horizontal.
Diminishing returns is a reason why:
the marginal cost curve is upward-sloping.
The shut-down price is:
the minimum of the AVC curve.
If demand is elastic, then:
the quantity effect dominates the price effect, and a decrease in price causes total revenue to rise.
A firm's marginal cost is:
the ratio of the change in total cost to the change in the quantity of output.
When a perfectly competitive industry is in equilibrium:
the value of marginal cost is the same for all firms.
Assuming that all other factors of production are held constant, marginal product is the change in ________ output resulting from a one-unit change in ________ .
total; a variable input
If the price elasticity of demand for beach towels is 1.00, then the demand is _____ and total revenue will ______ if the price of beach towels increases.
unit-elastic; remain unchanged.
Average variable cost is the ratio of:
variable cost to the quantity of output.
A perfectly competitive firm will continue producing in the short run as long as it can cover its:
variable cost.
The costs associated with variable inputs are ________ costs and the costs associated with ________ inputs are ________costs.
variable; fixed; fixed
A fixed input is one:
whose quantity cannot be changed in a particular time period.
Buford Bus Manufacturing installs a new assembly line. As a result, the output produced per worker increases. The marginal cost of output at Buford:
will decrease (the MC curve will shift right).
A perfectly competitive firm will produce:
with a loss in the short run if its price is greater than AVC but less than ATC.