Review Exam 2

A small business owner earns $60,000 in revenue annually. The explicit annual costs equal $40,000. The owner could work for someone else and earn $25,000 annually. The owner's accounting profit is ________ and owner's economic profit is ________. a. $20,000, $5,000 c. $25,000, -$5,000 b. $20,000, -$5,000 d. $45,000, -$5,000

$20,000, -$5,000

If a firm produces 10 units of output and incurs $35 in average total cost and $5 in average fixed cost, average variable cost is a. $30 b. $35 c. $50 d. $300

$30

If a firm produces 10 units of output and incurs $30 in average variable cost and $5 in average fixed cost, average total cost is a. $30 b. $35 c. $50 d. $300

$35

If a firm produces 10 units of output and incurs $30 in average variable cost and $5 in average fixed cost, total cost is a. $35 b. $50 c. $300 d. $350

$350

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 a. $3 b. $35 c. $50 d. $300

$50

Which of the following will cause the marginal cost curve of making cigarettes to shift? a. A $5 million penalty charged to each cigarette maker. b. A $1 per pack tax on cigarettes. c. A $1 million advertising campaign by the American Cancer Society. d. All of the above.

A $1 per pack tax on cigarettes.

Suppose the short-run production function is q = 10 * L. If the wage rate is $10 per unit of labor, then MC equals a. q. b. q / 10. c. 10 / q d. 1.

1

Suppose the market supply curve is p = 5Q. At a price of 10, producer surplus equals a. 50. c. 12.50. b. 25. d. 10.

10

A farm can produce 1,000 bushels of wheat per year with 2 workers and 1,300 bushels of wheat per year with 3 workers. The marginal product of the third worker is: a. 100 bushels b. 300 bushels c. 1,300 bushels d. 2,300 bushels.

300 bushels

Which of the following is least likely to be considered a capital input? a. A sewing machine. c. A telephone b. A tractor. d. A ten dollar bill.

A tractor.

In perfect competition: a. A firm's total revenue is found by multiplying market price by the firm's quantity of output. b. The firm's total revenue curve is linear, upward sloping line. c. At any price, the greater the quantity sold, the greater is a firm's total revenue. d. All of the above are true.

All of the above are true.

When government imposes an excise tax in a market: a. Consumer surplus falls. b. Producer surplus falls. c. A deadweight loss is created. d. All of the above occur.

All of the above occur.

Total surplus (W) is a. The sum of consumer and producer surplus b. Measure as the area between the supply and demand curves up to the traded quantity. c. The total net gain to consumer and producers from trading in the market. d. All of the above.

All of the above.

Jennifer is the only employee of her sole proprietorship. She is entertaining the idea of hiring an additional employee. She knows that on her own she can produce 100 units per day. Jennifer figures that Applicant A will help her produce 175 units per day whereas Applicant B will help her produce 155 units per day. Which of the following statements is most accurate? a. Applicant B has a marginal product of 75 units. b. Applicant B has an average product of 77.5 units. c. Applicant A has a marginal product of 75 units. d. Applicant A has an average product of 87.5 units.

Applicant A has a marginal product of 75 units.

The long-run average cost curve is tangent to an infinite number of : a. Total cost curves. b. Marginal cost curves c. Average variable cost curves d. Average total cost curves.

Average total cost curves.

The slope of the total revenue curve is a. Marginal cost b. Net revenue c. Constant under perfect competition d. Varying under perfect competition.

Constant under perfect competition

If the government imposes an excise tax in a market in which the demand curve is perfectly inelastic, the burden of the tax will fall completely on the ____ and the deadweight loss will equal _____. a. Consumers; zero b. Producers; zero c. Consumers; the government's tax revenue d. Producers; the government's tax revenue.

Consumers; zero

A decrease in production costs for firms in a perfectly competitive market will cause a(n): a. Permanent increase in price. b. Economic profit for firms in the short run. c. Increase in demand d. Increase in firms marginal revenue.

Economic profit for firms in the short run.

When an increase in the firms' output reduces its long-run average cost, it experiences a. Economics of scale c. Constant returns to scale b. Diseconomies of scale d. Variable returns to scale.

Economics of scale

Economic profit in a perfectly competitive industry induce _____, and losses induce _____. a. Exit; entry b. Entry; entry c. Entry; exit d. Exit; exit

Entry; exit

Marginal revenue: a. Is the slope of the average revenue curve. b. Equals the market price in perfect competition c. Is the change in quantity divided by the change in total revenue d. Is the price divided by the changes in quantity.

Equals the market price in perfect competition

In the long run, the line connecting the all the points of tangency between an isoquant and the lowest cost of production is called a. Income-consumption curve. c. Expansion path b. Engel curve d. None of the above.

Expansion path

Marginal cost ______ over the range of increasing marginal returns and ______ over the range of diminishing marginal returns. a. Increases; falls b. Falls; increases c. Is constant; rises d. Increases; is constant

Falls; increases

True or False: If a firm doesn't make an economic profit it will shut down.

False

True or False: If a firm sets marginal revenue equal to marginal cost it will make an economic profit.

False

True or False: If increasing returns to scale are present, the long-run average cost increases as more output is produced.

False

True or False: The marginal cost curve intersects the average fixed cost curve at its minimum.

False

True or False: The welfare loss of a tariff equals that of an import quota that leads to the same level of imports.

False

Perfect competition is a model of the market that assumes all of the following except a. A large number of firms. b. Firms facing downward-sloping demand curves. c. Firms produce identical goods. d. Many buyers.

Firms facing downward-sloping demand curves.

In a perfectly competitive market, which of the following statements is true? a. In the long run, price will change to reflect whatever change we observe in production cost. b. The existence of profits leads firms to exit the industry and that of losses leads firms to enter. c. In the long-run, economic profits are positive. d. Perfect competition generate prices greater than marginal costs.

In the long run, price will change to reflect whatever change we observe in production cost.

Which of the following statements best explains why long-run average cost is never greater than short-run average cost? a. In the long run, tangency of the isocost and isoquant is attainable. This is not necessarily true in the short run. b. In the long run, diseconomies of scale might not occur, but in the short run diminishing marginal returns do. c. In the long run, the cost of capital declines because the firm is able to pay down some of its debts. d. In the long run, the average cost curve need not be U-shaped, but in the short run it is.

In the long run, tangency of the isocost and isoquant is attainable. This is not necessarily true in the short run.

Firms in the model of perfect competition will: a. Maximize total revenue by using the marginal decision rule. b. Increase output up to the point that the marginal benefit of an additional unit of output is greater than the marginal cost. c. Increase output up to the point that the marginal benefit of an additional unit of output is equal to the marginal cost. d. Always attempt to minimize average variable cost.

Increase output up to the point that the marginal benefit of an additional unit of output is equal to the marginal cost

The assumption of perfect competition imply that: a. Individuals in the market accept the market price as given. b. Individuals can influence the market price. c. The price will be a fair price. d. The price will be low

Individuals in the market accept the market price as given.

The marginal cost curve intersects the average variable cost curve at: a. Its lowest point. b. Its maximum. c. Its endpoint. d. No point, the curves do not cross.

Its lowest point.

At quantities less than the long-run least per-unit cost quantity of output, the long-run average cost curve is tangent to the ____ of the corresponding short-run average cost curve. a. Minimum b. Maximum c. Right of the minimum d. Left of the minimum.

Left of the minimum.

If the marginal cost of producing a good is increasing as a firm produces more of the good, then which of the following must be TRUE? a. AFC is rising. c. MC > AVC b. AVC is rising. d. MPL is falling.

MPL is falling.

The slope of the total cost curve is a. Marginal cost b. Marginal revenue c. Constant under perfect competition d. Always negative.

Marginal cost

In the long run, the expansion path is a. horizontal. c. diagonal b. vertical. d. Not enough information.

Not enough information.

In the short-run, a perfectly competitive firm produces output and earns zero economic profit if: a. P > ATC b. P = ATC c. P < AVC d. AVC> P > ATC

P = ATC

If price is greater than average total cost at the profit-maximizing quantity of output in the short run, a perfectly competitive firm will: a. Produce at a loss. b. Produce at a profit c. Shut down production d. Produce more than the profit-maximizing quantity.

Produce at a profit

When a perfectly competitive firm is in long-run equilibrium, the firm is: a. Producing at maximum average total cost. b. Producing at maximum average variable cost. c. Producing at minimum marginal cost. d. Producing at minimum long-run average total cost.

Producing at minimum long-run average total cost.

A perfectly competitive firm's supply curve is the : a. Entire MC curve b. Rising part of the MC curve beginning at the shutdown point. c. Rising part of the MC curve beginning at the point at which the firms starts earning economic profit. d. MC curve below the shutdown point.

Rising part of the MC curve beginning at the shutdown point.

We can measure total consumer surplus for good X as: a. The area above the price of X and below the demand curve of X. b. The area above the demand curve for X and below the price of X. c. The area bounded by the demand curve for X and the two axes. d. All of the above.

The area above the price of X and below the demand curve of X.

When hiring units of labor between zero and L1 units of labor, which of the following statements is true? a. The marginal product of labor is increasing b. The marginal product of labor is decreasing c. Total product is increasing at a diminishing rate d. None of the above statements is true.

The marginal product of labor is increasing

After hiring L2 units of labor and producing at point B on the total product curve, hiring more units of labor would result in which of the following statements being true? a. The marginal product of labor is rising. b. The marginal product of labor is negative. c. Total product is negative d. Average product is negative.

The marginal product of labor is negative.

The shutdown price is: a. The price at which economic profit is zero. b. The minimum level of AVC c. The intersection of the MC and ATC curves. d. The minimum level of AFC.

The minimum level of AVC

Why might a police officer not pull over someone speeding two miles over the speed limit? a. The explicit costs of stopping the driver over are too high. b. The opportunity costs of stopping the driver are too high. c. The opportunity costs of stopping the driver are too low. d. The explicit costs of stopping the driver are too low.

The opportunity costs of stopping the driver are too high.

The services of real estate brokers are provided in a competitive market. If the state Board of Realtors enacts several requirements that limit the number of real estate brokers, which of the following is most likely to occur? a. The supply curve of real estate brokers will shift to the left. b. The supply curve of real estate brokers will shift to the right. c. Social welfare will remain unchanged. d. The supply curve will remain unchanged.

The supply curve of real estate brokers will shift to the left.

Which of the following is true if there is a decrease in the supply of ice cream? a. There is an increase in consumer surplus. b. There is a decrease in consumer surplus. c. There is no change in consumer surplus. d. It's impossible to tell what will happen to consumer surplus.

There is a decrease in consumer surplus.

Which of the following is true if there is a decrease in the demand of ice cream? a. There is an increase in producer surplus. b. There is a decrease in producer surplus. c. There is no change to producer surplus. d. It's impossible to tell what will happen to producer surplus.

There is a decrease in producer surplus.

Average total cost is: a. The change in cost divided by the change in output. b. Total cost divided by output. c. The change in output divided by the change in costs. d. Total cost times output.

Total cost divided by output.

True of False: If a city decides to lift restrictions of how many taxi cabs can operate social welfare will increase.

True

True or False: The productive skills and knowledge that workers and managers gain from experience, referred to as learning by doing, can shift the Average costs curve down.

True

Joey cuts grass during the summer. He rents a lawn mower from his dad. Which of the following statements best illustrates the difference between the short run and the long run for Joey? a. Joey's friends say they will help him, but when he calls them, they say they have other things to do. b. When Joey acquires more customers, he responds by working more hours. Next year, he will buy a lawn mower and split the work with his brother. c. Some customers pay Joey immediately; others wait till the following week. d. Joey has had to turn away some customers because he is already too busy.

When Joey acquires more customers, he responds by working more hours. Next year, he will buy a lawn mower and split the work with his brother.

Let the production function be a b q AL K = . The function exhibits decreasing returns to scale if a. a + b = 1. b. a + b > 1. c. a + b < 1. d. cannot be determined with the information given.

a + b < 1.

Isoquants that are downward-sloping straight lines exhibit a. an increasing marginal rate of technical substitution. b. a decreasing marginal rate of technical substitution. c. a constant marginal rate of technical substitution. d. a marginal rate of technical substitution that cannot be determined.

a constant marginal rate of technical substitution.

Which situation is most likely to exhibit diminishing marginal returns to labor? a. a factory that obtains a new machine for every new worker hired b. a factory that hires more workers and never increases the amount of machinery c. a factory that increases the amount of machinery and holds the number of worker constant d. none of these situations will result in diminishing marginal returns to labor.

a factory that hires more workers and never increases the amount of machinery

Fixed costs are a. a production expense that does not vary with output. b. a production expense that changes with the quantity of output produced. c. equal to total cost divided by the units of output produced. d. the amount by which a firm's cost changes if the firm produces one more unit of output.

a production expense that does not vary with output.

24. A change in relative factor prices will always result in a. a change in the slope of the isoquants. b. a tangency between the new isocost line and a new isoquant. c. a rotation of the isocost lines. d. all of the above.

a rotation of the isocost lines.

Efficient production occurs if a firm a. cannot produce its current level of output with fewer inputs. b. given the quantity of inputs, cannot produce more output. c. maximizes profit. d. all of the above

all of the above

A market's structure is described by a. the number of firms in the market. b. the ease with which firms can enter and exit the market. c. the ability of firms to differentiate their product. d. all of the above.

all of the above.

Assuming a horizontal long-run market supply curve, which of the following statements is (are) TRUE about competitive firms in the long run? a. p = MC b. p = AC c. profit = 0 d. all of the above.

all of the above.

If a city government enacts a maximum price on rent a. quantity supplied will decrease. b. quantity demanded will increase. c. allocational problems develop. d. all of the above.

all of the above.

A specific tax of $1 per unit of output will affect a firm's a. average total cost, average variable cost, average fixed cost, and marginal cost. b. average total cost, average variable cost, and average fixed cost. c. average total cost, average variable cost, and marginal cost. d. marginal cost only.

average total cost, average variable cost, and marginal cost.

The slope of the isoquant tells the firm how much a. output increases when labor increases by one unit. b. output increases when capital and labor are doubled. c. capital must decrease to keep output constant when labor increases by one unit. d. a unit of capital costs relative to the cost of labor.

capital must decrease to keep output constant when labor increases by one unit.

Limited liability is a benefit to a. sole proprietorships. c. corporations. b. partnerships. d. all of the above

corporations.

Joey's Lawncutting Service rents office space from Joey's dad for $300 per month. Joey's dad is thinking of increasing the rent to $400 per month. As a result Joey's marginal cost of cutting grass will a. increase by $100 divided by the amount of grass cut. b. increase by $100. c. decrease by $100. d. not change.

decrease by $100.

Survivability in a perfectly competitive world requires that a. firms minimize average total cost. b. firms produce new and different products. c. firms maximize profit. d. firms maximize revenue.

firms maximize profit.

When an additional unit of a variable input adds less to total product than the previous unit, the firm must be experiencing a. increasing returns. b. diminishing returns c. diminishing average returns d. diminishing marginal returns.

diminishing marginal returns.

At 47 units of labor, a firm finds that average product of labor equals 39.6 and marginal product of labor equals 32.9. We can conclude that the average product curve at 47 units of labor is a. upward sloping b. horizontal c. vertical d. downward sloping

downward sloping

If all conditions for a perfectly competitive market are met a. firms face sunk cost when entering the market. b. firms demand curves are horizontal. c. the market demand curve is horizontal. d. the firms' demand curves are downward-sloping.

firms demand curves are horizontal.

The difference between producer surplus and profit is always the associated a. opportunity costs. b. total costs. c. variable costs. d. fixed costs.

fixed costs.

Which is an important aspect of the perfectly competitive market that leads to long run equilibrium? a. perfect information b. freedom of entry and exit c. price taking behavior d. homogeneous products

freedom of entry and exit

Firms that exhibit price-taking behavior a. wait for other firms to set price, take it as given, and charge a higher price. b. have outputs that are too small to influence market price and thus take it as given. c. take pricing behavior in their own hands. d. are independently capable of setting price.

have outputs that are too small to influence market price and thus take it as given.

Long-run market supply curves are downward sloping if a. firms are identical. b. the number of firms is restricted in the long run. c. input prices fall as the industry expands. d. all of the above.

input prices fall as the industry expands.

If average cost is decreasing a. marginal cost equals average cost. b. marginal cost exceeds average cost. c. marginal cost is less than average cost. d. not enough information

marginal cost is less than average cost.

The change in total output resulting from a 1 - unit increase in the quantity of an input used, holding the quantities of all other inputs constant is: a. average cost b. average product c. marginal cost d. marginal product.

marginal product.

Hiring L2 units of labor results in total product attaining a ____ and the marginal product of labor ______. a. minimum; being equal to 0. b. maximum; being equal to 0. c. maximum; being positive. d. minimum; falling, but still being positive.

maximum; being equal to 0.

Decreasing returns to scale may occur as increasing the amount of inputs used a. increases specialization. b. always increases the amount of output produced. c. may cause coordination difficulties. d. increases efficiency.

may cause coordination difficulties.

Travel websites such as Travelocity tend to offer reservation services for multiple travel modes. This is because a. the firms have contractual obligations to offer reservations for airlines and railroads, for example. b. the firms have statutory obligations to offer reservations for airlines and railroads, for example. c. once the firm has the reservation technology for airlines, there are economies of scale in offering the same service for railroads. d. once the firm has the reservation technology for airlines, there are economies of scope in offering the same service for railroads.

once the firm has the reservation technology for airlines, there are economies of scope in offering the same service for railroads.

27. Returns to scale is a concept that operates a. only in the short run. b. only in the long run. c. in both the long run and the short run. d. in either the long run or the short run but never both.

only in the long run.

The short run is defined as a: a. period of time less than 1 year. b. period of time less than 6 months c. planning period in which some inputs are considered to be fixed in quantity. d. time period in which some inputs are fixed, but it cannot exceed 1 year.

planning period in which some inputs are considered to be fixed in quantity.

The demand curve for an individual competitive firm faces is known as its a. excess demand curve. b. market demand curve. c. residual demand curve. d. leftover demand curve.

residual demand curve.

A curve which shows the quantities of output that can be obtained from different quantities of a variable input, assuming other inputs are fixed, is called the _____ curve. a. total input b. marginal input c. total product d. average total quantity.

total product

If a market produces a level of output below the competitive equilibrium, then a. social welfare is not maximized. b. consumer surplus might still be maximized. c. the actual price will be below the equilibrium price. d. social welfare might still be enhanced if a price ceiling keeps price below the competitive price.

social welfare is not maximized.

The deadweight loss associated with output less than the competitive level can be determined by a. subtracting the competitive level producer surplus from the producer surplus associated with less output. b. subtracting the consumer surplus from the producer surplus associated with less output. c. summing the consumer and producer surplus associated with less output. d. summing the change in the total consumer and producer surplus from moving from the competitive level of output to less output.

summing the change in the total consumer and producer surplus from moving from the competitive level of output to less output.

If a firm operates in a perfectly competitive market, then it will most likely a. advertise its product on television. b. take the price of its product as determined by the market. c. have a difficult time obtaining information about the market price. d. have an easy time keeping other firms out of the market.

take the price of its product as determined by the market.

Joey cuts grass during the summer. He owns one lawn mower. For him, the short run is equal to a. the amount of time it takes to acquire more customers. b. the amount of time it takes to hire an additional employee. c. the amount of time it takes to hire an additional employee and buy another lawn mower. d. the amount of time it takes to mow one lawn.

the amount of time it takes to hire an additional employee and buy another lawn mower.

If the average productivity of labor equals the marginal productivity of labor then a. the average productivity of labor is at a maximum. b. the marginal productivity of labor is at a maximum. c. both A and B above. d. neither A nor B above.

the average productivity of labor is at a maximum.

The steeper an isoquant is a. the greater is the marginal productivity of labor relative to that of capital. b. the greater is the substitutability between capital and labor. c. the greater is the need to keep capital and labor in fixed proportions. d. the greater is the level of output.

the greater is the marginal productivity of labor relative to that of capital.

As the price of a good increases, the loss in consumer surplus is larger, a. the more elastic demand is. b. the more money previously spent on the good. c. the less money previously spent on the good. d. the smaller the price increase.

the more money previously spent on the good.

The marginal product of Labor is a. the change in labor divided by the change in total product b. the slope of the total product of labor curve c. the change in average product divided by the change in the quantity of labor. d. none of the above.

the slope of the total product of labor curve

A firm will shut down in the short run if a. total fixed costs are too high. b. total revenue from operating would not cover all costs. c. total revenue from operating would not cover variable costs. d. total revenue from operating would not cover fixed costs.

total revenue from operating would not cover variable costs.

Economists claim that measuring society's welfare as CS + PS a. is inappropriate since ultimately everyone is a consumer. b. is valid only when the same person could be either a consumer or a producer. c. treats the gains to consumers and producers equally. d. is not commonly accepted.

treats the gains to consumers and producers equally.

If an isocost line crosses the isoquant twice, a cost minimizing firm will a. use a different isocost line to select the bundle of inputs. b. use the input bundle associated with the intersection on the higher point of the isoquant. c. use the input bundle associated with the intersection on the lower point of the isoquant. d. Both B and C.

use a different isocost line to select the bundle of inputs.

An input whose quantity can be changed during a particular period is a a. marginal input b. fixed input c. incremental input d. variable input.

variable input.

A fixed input is one: a. that exists in nature and there is only so much of it. b. that can be used for one thing only c. that can never produce more or less in any time period. d. whose quantity cannot be changed in a particular period.

whose quantity cannot be changed in a particular period.