U3 MCQ

Answer A The firm is profit-maximizing, therefore it is producing the quantity at which MR equals MC. However, when price is less than average total cost, the firm is better off shutting down to minimize its costs to fixed costs only in the short run and exit the market in the long run. By continuing to produce in the short run, the firm is unable to cover its variable costs and part of its fixed costs because price is less than average variable cost.

A profit-maximizing firm is currently producing a quantity at which price is less than average variable cost. To maximize profit, the firm will do which of the following in the short run and the long run? A. Shut down in the short run and exit the market in the long run B. Produce less quantity in the short run and increase its scale of production in the long run C. Produce more quantity in the short run and increase its scale of production in the long run D. Continue producing the same quantity in the short run and in the long run E. Continue producing the same quantity in the short run and exit the market in the long run

Answer D Marginal product is above average variable cost and average total cost, causing both to increase. Average fixed cost always decreases.

At a firm's current output level, average fixed cost is $10, average variable cost is $30, average total cost is $40, and marginal cost is $55. Which of the following must be true? A. Average fixed cost, average variable cost, and average total cost are all decreasing B. Average fixed cost, average variable cost, and average total cost are all increasing C. Average fixed cost and average total cost are both decreasing, while average variable cost is increasing D. Average fixed cost is decreasing, and both average variable cost and average total cost are increasing E. Average fixed cost and average variable cost are both decreasing, while average total cost is increasing

Answer C The $4,000 equals the total revenues minus the total explicit and implicit costs. The total opportunity cost is the sum of the $50,000 salary offer plus the $6,000 interest forgone. Subtracting $56,000 from the accounting profit of $60,000 gives an economic profit of $4,000.

Kieran owns and operates his own bike shop. In the past week, he received two offers: one to work for a competitor for $50,000 per year and one to sell his bike shop for $100,000. Assume the annual interest rate is 6 percent, and Kieran is indifferent between owning his bike shop or working for the competitor. Kieran currently receives enough annual revenue to cover all explicit costs and has $60,000 left over. There are no additional implicit costs (excluding the items listed above). Under these circumstances, Kieran's economic profit is equal to which of the following? A. -$96,000 B. -$90,000 C. $4,000 D. $10,000 E. $60,000

Answer B When marginal product equals zero, total product is maximized because the change in total product is zero. Because marginal product is diminishing, adding additional units of variable input beyond this point will result in negative marginal product and a decline in total product.

Which of the following is true when total product is at its maximum A. Marginal product is at its maximum B. Marginal product is equal to zero C. Marginal product is equal to average product D. Average product is increasing E. Average product is equal to zero

Answer E Marginal product is the rate of change in total product, so if marginal product is positive and decreasing, each worker adds to total output, but smaller and smaller amounts. Therefore, the total product will be increasing at a decreasing rate.

Given a short-run production function, which of the following is true when the total product is increasing at a decreasing rate? A. Average product must be positive and increasing B. Average product must be negative and decreasing C. Marginal product must be negative and decreasing D. Marginal product must be positive and increasing E. Marginal product must be positive and decreasing

Answer E When the price is equal to the average total cost, the firm is earning zero economic profit and there is no motivation for the firm to exit the market or for new firms to enter the market.

The graph shows a firm in a perfectly competitive industry. Assume all the firms in the industry have identical costs. Firms will have no incentive to exit or enter this market if the price in this market is A. Above P4 B. Below P2 C. Between P2 and P3 D. Equal to marginal cost E. Equal to average total cost

Answer B Diminishing returns begin at the point where marginal cost is minimized because the next unit of output will be at a higher cost, which results from diminishing returns.

The graph shows per unit cost information for firm X. At what quantity of output do diminishing returns begin for firm X? A. Q1 B. Q2 C. Q3 D. Q4 E. Q5

Answer C Implicit costs are part of opportunity costs, reflecting the values of the resources - such as time, financial capital, and property - contributed by the owners of the firm. Implicit costs do not constitute out-of-pocket payments. They are not included in calculating accounting profit.

Which of the following is ignored when calculating accounting profit? A. Total revenue B. Variable costs C. Implicit costs D. Fixed costs E. Total costs

Answer C An increase in fixed costs will increase the firm's total cost but not marginal cost. Marginal cost only changes with changes in variable cost. Therefore, marginal revenue will continue to be equal to marginal cost and the firm will not change its quantity to maximize its profit.

A competitive profit-maximizing firm is currently producing at an output level at which the marginal revenue is equal to marginal cost. Which of the following changes will NOT affect the profit-maximizing quantity? A. An increase in the price B. An increase in variable costs C. An increase in fixed costs D. An increase in labor productivity E. An increase in the firm's revenues

Answer C The minimum efficient scale occurs on SRATC3, which contains the lowest point of all five short-run cost curves, and it occurs at the minimum point on the LRATC curve.

A firm has only five possible factory (plant) sizes to choose from, represented by the short-run average total cost (SRATC) curves on the long-run average total cost (LRATC) curve shown on the graph below. The firm's minimum efficient scale occurs on A. SRATC1 B. SRATC2 C. SRATC3 D. SRATC4 E. SRATC5

Answer E From Q3 to Q5 the LRATC is increasing as output increases, so this range of output illustrates diseconomies of scale.

A firm has only five possible factory (plant) sizes to choose from, represented by the short-run average total cost (SRATC) curves on the long-run average total cost (LRATC) curve shown on the graph below. Which of the following ranges of output illustrates diseconomies of scale? A. Q1 to Q2 B. Q1 to Q3 C. Q2 to Q3 D. Q2 to Q4 E. Q3 to Q5

Answer C At Q3 profit is maximized because price (marginal revenue) is equal to marginal cost. Producing more output beyond that will reduce total profit.

The graph shows a firm in a perfectly competitive industry. Assume all the firms in the industry have identical costs. Given the price P4, what is a firm's profit-maximizing quantity of output? A. Q1 B. Q2 C. Q3 D. Q4 E. Q5

Answer B Marginal revenue is the change in total revenue divided by the change in total output. Between each of the rows in the table, the change in revenue is $8, and the change in output is 1 unit of output. Therefore, the marginal revenue is $8 divided by 1 unit of output, which is equal to $8.

The marginal revenue associated with selling the third unit of output is A. $3 B. $8 C. $10 D. $17 E. $24

Answer B Marginal product is the change in total product that occurs as a result of an additional unit of labor. As the table indicates, output increases from 20 to 27 as a result of adding the third worker. Therore, the marginal product for the third worker is 7 units.

The table above shows a firm's short-run production function using labor as the only variable input. The marginal product of the third worker is A. 5 units B. 7 units C. 9 units D. 20 units E. 27 units

Answer D Total profit is maximized at 5 units of output, where the difference between total revenue and total cost is $11. Even though marginal revenue ($8) is greater than marginal cost ($7), increasing output but one unit decreases profit because the marginal cost of the sixth unit is $9.

The firm's profit maximizing quantity is A. 2 B. 3 C. 4 D. 5 E. 6

Answer B The profit-maximizing competitive firm should produce where P (or MR)=MC, at Q2. The firm will have a loss, since P is less than ATC. The firm should continue to produce, since P>AVC and the loss will be less than fixed costs.

The graph above shows the short-run cost curves for a perfectly competitive firm. Assume that the market price is P0 and the firm is producing at quantity Q0. To maximize profit, the firm should A. Increase production to quantity Q3, where average total cost is at its minimum B. Increase production to quantity Q2, where price is equal to marginal cost C. Increase production to quantity Q1, where average variable cost is at its minimum D. Shut down and incur losses equal to fixed costs E. Shut down and incur zero losses

Answer B The vertical distance between total variable costs and total cost at each output level is total fixed cost, which is constant.

A graph shows the quantity of output produced on the horizontal axis and shows total variable cost and total cost on the vertical axis. Which of the following is true about the vertical distance between total variable cost and total cost as output increases? A. It decreases B. It remains constant C. It increases D. It decreases and then increases E. It increases and then decreases

Answer A The positive economic profit attracts new firms to enter the market, increasing supply and putting a downward pressure on price. This will eliminate economic profits in the long run.

If a typical firm in a perfectly competitive market earns economic profit in the short run, what will most likely happen in the long run? A. Firms will enter the market and cause the price to fall B. Firms will enter the market and cause the price to rise C. Firms will exit the market and cause the price to fall D. Firms will exit the market and cause the price to rise E. There will be no change in the market because profit is maximized

Answer E Perfectly competitive firms must earn zero profit in the long run, meaning price must equal marginal cost and average total cost. Profit can be positive, negative, or zero in the short run.

In a comparison of a perfectly competitive firm's short-run equilibrium to its long-run equilibrium, which of the following is true? A. Price must equal marginal cost in the long run, but not necessarily in the short run B. Economic profit must be positive in the long run, but not necessarily in the short run C. The firm can set price in the short run, but not necessarily in the long run D. The firm must produce at minimum average total cost in the short run, but not necessarily in the long run E. Price equals average total cost in the long run, but not necessarily in the short run

Answer C Economies of scale exist in the long run when increasing firm size results in lower average total cost. Increasing returns to scale refers to the relationship between inputs and outputs, meaning that output changes by more than a proportional increase in inputs.

Which of the following is true about economies of scale and increasing returns? A. Economies of scale and increasing returns to scale to scale are the same thing B. Economies of scale refers to the relationship between inputs and outputs. Increasing returns to scale refers to the relationship between long-run average total cost and the size of the firm C. Economies of scale refers to the relationship between long-run average total cost and the size of the firm. Increasing returns to scale refers to the relationship between inputs and output D. Economies of scale is a long-run concept, while increasing returns to scale is a short-run concept E. Increasing returns to scale is a long-run concept, while economies of scale is a short-run concept

Answer B Habib earns an accounting profit of $10,000. Subtracting the $5,000 implicit cost associated with the forgone interest income, Habib earns a positive economic profit of $5,000.

Habib withdrew $100,000 from his bank account paying 5% interest to purchase equipment for his construction company. If Habib earns an accounting profit of $10,000 and he has no other opportunity costs, his economic profit will be equal to A. $0 B. $5,000 C. $15,000 D. $105,000 E. $115,000