Micro chapter 10
What is the average fixed cost if total fixed cost is $100, total variable cost is $50, and output is 20?
$5
The law of ______ returns states that as successive units of a variable resource are added to a fixed resource, beyond some point, the marginal product will decline.
diminishing
The lowest level of output at which a firm can minimize long-run average costs is called ______.
minimum efficient scale
Suppose the total fixed cost of a firm is $500, the total variable cost is $200, and the output produced is 5 units. The average fixed cost of the firm is ______.
$100
What is the marginal cost when output changes from 300 to 301 units and total cost rises from $400 to $500?
$100
What is the total revenue if the economic profit is $24,000 and the economic costs are $96,000?
$120,000
When output is 10, what is the total cost if total fixed cost is $50 and total variable cost is $75?
$125
If economic cost is $96,000 and total revenue is $120,000, what is the economic profit?
$24,000
Which of the following best describes the average variable cost curve?
It is U-shaped.
In the _________ run, firms are able to adjust all resources.
long
Farley's Frozen Yogurt is a purely competitive firm that makes frozen yogurt cakes. The market price is currently $7 per cake. Assume that AVC is $6 per cake, AFC is $4 per cake, and Farley's sells 200 frozen yogurt cakes.
a. Farley's Frozen Yogurt - should produce in the short run; will incur a short-run loss b. Suppose the marginal cost of a frozen yogurt cake is $7. Farley's Frozen Yogurt should - produce the same quantity
Which of the following resources can a firm easily and quickly adjust?
hourly labor, fuel, raw materials
Which costs do not vary with changes in output?
fixed
Variable costs change with the level of
output
If total variable cost is $100, total fixed cost is $100, and output is 10, what is average variable cost?
$10
What is average variable cost if total variable cost is $500, total fixed cost is $100, and output is 50?
$10
What is the average fixed cost if the average total cost is $100 and the average variable cost is $75?
$25
If at 10 units of output, total fixed cost is $10 and total variable cost is $16, what is total cost?
$26
Your company's total sales revenue for the month is $150,000; the costs to produce your products are $12,000 for rent, $6,000 for utilities, and $42,000 for employee wages. What is your accounting profit?
$90,000
What are the components of plant capacity?
Amount of machinery and equipment Size of the factory building
What is meant by the phrase "spreading the overhead"?
As production increases, average fixed cost declines.
The table below shows cost and revenue information for Choco Lovers, a purely competitive firm producing different quantities of chocolate gift boxes. Fill in the blanks in the table.
Assume the profit-maximizing price is $4 per gift box, and then answer the following questions: a. Profit-maximizing quantity = 25 gift boxes b. Total revenue = $100 c. Profit = $7.50 d. Profit per unit = $0.30 per gift box
Which group of costs is the most accurate example of variable cost?
Payments for materials, fuel, power, and transportation services
Which best describes economic costs?
Payments that must be made to obtain a resource
How is average fixed cost determined?
Total fixed cost divided by output
Consider a firm that has no fixed costs and that is currently losing money. a. Are there any situations in which it would want to stay open for business in the short run? b. A firm with no fixed costs
a. No, the firm will want to shut down. b. is really in the long run
Briefly state the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Into which of these market classifications does each of the following most accurately fit? In each case, justify your classification.
a. a supermarket in your hometown - Oligopoly b. the steel industry - Oligopoly c. a kansas wheat farm - Pure competition d. the commercial bank in which you have an account - Monopolistic competition e. the automobile industry - Oligopoly
Average fixed cost equals total fixed cost divided by the ______.
amount of input
The figure illustrates that in an industry with an extended range of ______ returns to scale, firms of varying sizes can coexist and be equally profitable.
constant
Which best characterizes variable costs?
costs that change with the level of output
Accounting profit is what remains after a firm has paid its _______ costs.
explicit
________ costs are the monetary payments a firm makes to purchase resources from others.
explicit
Economies of scale explain the downward-sloping part of the ______ curve.
long-run average-total-cost
A firm's decision about what output level to produce is typically a ______ decision.
marginal
The marginal-product curve is a mirror image of the ______ curve.
marginal-cost
A ______ is a relatively rare market situation in which average total cost is minimized when only one firm produces the good.
natural monopoly
Average variable cost equals total variable cost divided by total ______.
output
A firm cannot avoid paying fixed costs in the _______ run.
short
Increased labor ______ becomes more achievable as a plant increases in size.
specialization
One explanation for the U-shaped average variable cost curve is that greater ______ yields more efficiency and variable cost per unit of output declines
specialization
When total product is at its maximum, marginal product is ______.
zero
A purely competitive wheat farmer can sell any wheat he grows for $10 per bushel. His five acres of land show diminishing returns because some are better suited for wheat production than others. The first acre can produce 1,000 bushels of wheat, the second acre 900, the third 800, and so on. a. Use the table below to help you answer the following questions. How many bushels will each of the farmer's five acres produce? How much revenue will each acre generate? What are the TR and MR for each acre? b. If the marginal cost of planting and harvesting an acre is $7,000 per acre for each of the five acres, how many acres should the farmer plant and harvest?
Acre - bushel - rev - tr - mr 1 - 1,000 - 10,000 - 10,000 - 10,000 2 - 900 - 9,000 - 19,000 - 9,000 3 - 800 - 8,000 - 27,000 - 8,000 4 - 700 - 7,000 - 34,000 - 7,000 5 - 600 - 6,000 - 40,000 - 6,000 b. 4 acres
Which industry requires the most time for its firms to alter plant capacity?
Aircraft manufacturing
Which of the following statements explain why the average variable cost curve is U-shaped?
At low levels of output, production is relatively inefficient and costly. As output rises from the initial very low levels, greater specialization occurs, and average variable cost declines.
Which of the following is true of average fixed cost when output increases?
Average fixed cost declines as output increases.
What happens to average product when marginal product exceeds it?
Average product continues to rise.
Total fixed cost divided by output plus total variable cost divided by the output yields which of the following?
Average total cost
How is marginal cost (MC) calculated?
By dividing the change in total cost by the change in output
By using economies of scale, successful start-up firms are able to shift their short-run cost curves in which directions?
Downward and to the right
Which of the following is an example of labor specialization?
Hiring more workers in order to subdivide tasks Assigning each worker one task instead of five or six
Why does the law of diminishing returns not account for the U-shape of the long-run average-total-cost curve?
In the long run all resources and inputs are variable.
Which of the following are examples of fixed costs?
Interest on a firm's debts Rental payments
How does labor specialization allow a worker to become more proficient?
It allows a worker to focus on fewer tasks and become more skilled in performing those tasks.
Greater labor specialization has which of the following effects?
It eliminates the loss of time that occurs whenever a worker shifts from one task to another.
What happens to average product as additional units of labor are added to a fixed plant?
It increases, reaches a maximum, and then decreases.
Strictly speaking, pure competition is relatively rare. Then why do we study it?
It produces ideal results in terms of low-cost production and allocative efficiency, which can be used as a basis of comparison.
A firm grows from one to three plants. As a result, the firm's sales increase, leading to greater marketing expertise. This is an example of which of the following?
Learning by doing
A planning curve is another term for which of the following?
Long run average-total-cost curve
By expanding the size of its operations, a growing firm is able to experience economies of scale to do which of the following?
Lower its average total costs
What type of cost can be saved by not producing the last unit?
Marginal
What is the term for the extra cost of producing one more unit of output?
Marginal cost
A firm's decision whether to produce a few more or a few less units of output is a decision based on which of the following?
Marginal data
What happens to marginal product when total product is increasing at an increasing rate?
Marginal product is rising.
A purely competitive firm whose goal is to maximize profit will choose to produce the amount of output at which:
TR exceeds TC by as much as possible.
What is the effect of an increase in the price of labor on the ATC, AVC, and MC curves?
The average-variable-cost, average-total-cost, and marginal-cost curves shift upward. The average-fixed-cost curve remains the same.
Marginal cost includes which of the following?
The cost savings resulting from not producing the last unit of output All the cost associated with producing the last unit of output
What is the primary cause of diseconomies of scale?
The difficulty of efficiently controlling and coordinating a firm's operations as it becomes a large-scale producer
Which of the following best illustrates diseconomies of scale?
The increase in average total costs as a firm expands the size of its plant in the long run
Over what period of time can an industry and firms in that industry adjust all resource inputs used?
The long run
What does the long-run average-total-cost curve show?
The lowest average total cost at which any chosen output level can be produced after the firm has had time to make adjustments in plant size
What is the definition of total product (TP)?
The total quantity, or total output, of a particular good or service produced
What methods can be used to calculate average total cost?
Total cost divided by output (Q) Average fixed cost plus average variable cost
What is the definition of average variable cost?
Total variable cost divided by output (Q)
The table below shows the total cost (TC) and marginal cost (MC) for Choco Lovers, a purely competitive firm producing different quantities of chocolate gift boxes. The market price for a box of chocolates is $5 per box.
a. Fill in the marginal revenue (MR) and average revenue (AR) columns. - MR & AR= 5 for all b. Given a price of $5 per gift box, how many boxes of chocolate should Choco Lovers produce? - 25 gift boxes What will profit or loss be per gift box? - $-.08 per gift box c. Suppose that Choco Lovers raises the price to $7 per gift box. Now how many boxes should Choco Lovers produce? - 30 gift boxes What will the new profit or loss be per gift box? - $1.60 per gift box
Assume that the cost data in the following table are for a purely competitive producer:
a. Yes, Profit-maximizing at output of 8 units per firm, Profit $7.87 per unit b. Yes, Loss-minimizing at output of 6 units per firm, Loss of $6.50 per unit c. No, N/A at output 0 units per firm, Total loss = $60 d. (from top to bottom) (2) Quantity Supplied, Single Firm - 0, 0, 5, 6, 7, 8, 9(3) Profit (+) or Loss (-) - -60, -60, -55, -39, -8, 63, 144 e. (4) Quantity Supplied, 1500 Firms - 0, 0, 7500, 9000, 10500, 12000, 13500 f. Equilibrium price = $46 Equilibrium output = 10500 for industry 7 per firm Loss per unit = $1.14 for industry $7.98 per firm The industry will contract
a. The equality of marginal revenue and marginal cost is essential for profit maximization in all market structures because when this is true b. When an industry is purely competitive, price can be substituted for marginal revenue in the MR = MC rule because
a. the last unit produced adds more to revenue than costs, and its production must necessarily increase profits or reduce losses. b. the demand curve is perfectly elastic and the price is constant regardless of the quantity demanded, so MR is constant and equal to price.
Assuming technology and production techniques are fixed and cannot change, if beyond some point of production a firm experiences declining units of additional output with each additional unit of labor input, then the firm is experiencing the effects of the law of ______.
diminishing returns
The ______ cost of any resource used to produce a good is the value or worth the resource would have in its best alternative use.
economic
Start-up firms achieve ________ of scale from learning by doing and through increased specialization of labor, management, and equipment.
economies
What is another term for economies of scale?
economies of mass production
Learning by doing contributes to a firm's ______.
economies of scale
True or false: Important determinants of an industry's structure are economies of scale and revenue.
false
A firm's insurance premiums are generally considered ______ costs
fixed
_______ costs are part of the simple existence of a firm's plant and must be paid even when output is zero.
fixed
When total product declines, marginal product ______.
is negative
A perfectly competitive firm that makes car batteries has total fixed costs of $10,000 per month. The market price at which it can sell its output is $100 per battery. The firm's minimum AVC is $105 per battery. The firm is currently producing 500 batteries a month (the output level at which MR = MC). This firm is making a __________ and should __________ production.
loss; shut down
A marketing supervisor works in a small plant where she performs a range of duties. As the company grows and hires additional supervisors, she is able to spend the bulk of her time in her area of expertise. In this example, the company has increased its ______.
managerial specialization
If all workers are hired at the same price, the marginal cost of producing each extra unit of output falls provided the ______ of each additional worker is rising.
marginal product
In heavy industries, small firms are unlikely to realize ______ and will be unable to compete with large-scale producers.
minimum efficient scale
What is the term for the total quantity of a specific good produced?
total product
True or false: Hourly labor, raw materials, and fuel are examples of resources a firm can easily adjust.
true
True or false: In an industry with an extended range of constant returns to scale, firms of varying sizes can coexist and be equally profitable.
true
Which of the following illustrates constant returns to scale?
A firm's 10% increase in given inputs, causing a proportionate 10% increase in output
Which of the following explain the concept of explicit costs?
A firm's monetary payments made for the use of resources owned by others. A firm's monetary payments to those who supply labor services, materials, fuel, and transportation services.
If total cost rises from $300 to $700 when one additional unit of output is produced, what is the marginal cost?
$400
With economies of scale, a 10% increase in all resources that causes a 20% increase in output results in which of the following?
A decline in average total cost (ATC)
Suppose at an output level of 150 units a firm's average fixed cost is $25 and average variable cost is $50. Then the average total cost of the firm is ______.
$75
An increase in the price of labor has no effect on which cost curve?
Average-fixed-cost
How is total cost calculated?
By adding total fixed cost and total variable cost
__________ cost is the sum of fixed cost and variable cost at each level of output.
total
Suppose that the paper clip industry is perfectly competitive. Also assume that the market price for paper clips is 2 cents per paper clip. The demand curve faced by each firm in the industry is:
a horizontal line at 2 cents per paper clip.
The size of the factory, the amount of machinery and equipment, and other capital resources define _______ ________
plant capacity
Which resource requires the most time for a firm to adjust, given a change in demand?
plant capacity
The U-shape of the long-run average-total-cost curve results from which of the following?
Economies of scale Diseconomies of scale
Which of the following are examples of variable costs? (Check all that apply.)
Fuel costs Materials costs Transportation services payments
Which of the following result from managerial specialization?
Greater efficiency Lower unit costs
If it is possible for a perfectly competitive firm to do better financially by producing rather than shutting down, then it should produce the amount of output at which:
MR = MC.
What happens to marginal product when total product is increasing but at a decreasing rate?
Marginal product is positive but falling.
The table below shows the weekly marginal cost (MC) and average total cost (ATC) for Buddies, a purely competitive firm that produces novelty ear buds. Assume the market for novelty ear buds is a competitive market and that the price of ear buds is $6.00 per pair.
a. If Buddies wants to maximize profits, how many pairs of ear buds should it produce each week? - 35 pairs b. At the profit-maximizing quantity, what is the total cost of producing ear buds? - $157.50 c. If the market price for ear buds is $6 per pair, and Buddies produces the profit-maximizing quantity of ear buds, what will Buddies profit or loss be per week? - $52.50 d. Now assume the market price is $5.50 per pair, and Buddies produces the profit-maximizing quantity of ear buds. What Buddies profit or loss be per week? - $37.50 e. Buddies earns a normal profit when - marginal cost equals average cost at the minimum of average cost
The table below shows the daily costs of Corny's Corn Cobs. Corny's sells corn by the dozen in a purely competitive market. The market price is $2.20 for a dozen ears of corn.
a. In the short run, if Corny's wants to maximize profits, how much corn should it produce? - 70 dozen ears of corn per day b. Assuming that Corny's produces in the short run, what will Corny's profit or loss be per day? - $-7 per day c. In the short run, assuming nothing else changes, Corny's should - produce the same quantity of corn per day d. If the short-run price of corn falls to $1.30 per dozen, Corny's should - shut down, because the market price is below the AVC
Which of the following sections of a long-run average total cost curve depicts constant returns to scale?
The flat section
What happens to fixed costs when the level of production output reaches zero?
They remain unchanged.
When is marginal cost at its minimum?
When marginal product is at its maximum
Karen runs a print shop that makes posters for large companies. It is a very competitive business. The market price is currently $1 per poster. She has fixed costs of $250. Her variable costs are $1,000 for the first thousand posters, $800 for the second thousand, and then $750 for each additional thousand posters.
a. What is her AFC per poster (not per thousand!) if she prints 1,000 posters? - $0.25 What if she prints 2,000 posters? - $0.13 What if she prints 10,000 posters? - $0.03 b. What is her ATC per poster if she prints 1,000? - $1.25 What if she prints 2,000? - $1.03 What if she prints 10,000? - $0.81 c. If the market price fell to 70 cents per poster, would there be any output level at which Karen would not shut down production immediately? - NO
Which curve first falls and then rises?
average variable cost curve
a. Consider the statement: "Even if a firm is losing money, it may be better to stay in business in the short run." This statement is b. The firm should produce in the short run as long as the price
a. true, if the loss is less than the fixed cost. b. exceeds the average variable cost.
The marginal cost curve's shape is a consequence of the law of __________ returns.
diminishing