Ch 7 Econ Exam 2
The above figure shows the cost curves for a competitive firm. If the firm is to earn economic profit, price must exceed
$10
The above figure shows the cost curves for a competitive firm. The firm will incur economic losses if the price is less than
$10.
The above figure shows the cost curves for a competitive firm. If the profit-maximizing level of output is 40 price is equal to
$15.
The above figure shows the cost curves for a competitive firm. If the market price is $15 per unit, the firm will earn profits of
$160.
A small business owner earns $50,000 in revenue annually. The explicit annual costs equal $30,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.
$20,000, -$5,000
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 ________.
$20,000, -$5,000
The above figure shows the cost curves for a competitive firm. If the firm is to operate in the short run, price must exceed
$5.
According to the survivor principle
only firms that maximize profits survive in highly competitive markets.
If a firm traded on the New York Stock Exchange posts an accounting profit of $10 million, then the firm is making a positive economic profit
only if the firm's opportunity cost is less than $10 million.
If a competitive firm maximizes short-run profits by producing some quantity of output, which of the following must be true at that level of output?
p ≥ AVC
A firm that is vertically integrated
participates in more than one successive stage of production.
A monopoly
produces the market output.
Which of the following generally does NOT seek to maximize profit?
public sector companies
A McDonald's franchise is an example of
quasi-vertical integration.
Toyota's just-in-time system is an example of
quasi-vertical integration.
Monitoring is often used by firms in an attempt to decrease
shirking.
One problem with compensation systems is that
sometimes a manager is rewarded for an objective other than maximizing profits.
What is one of the biggest differences between a sole proprietorship and a corporation?
Corporation shareholders elect the managers of the firm.
If a competitive firm cannot earn profit at any level of output during a given short-run period, then which of the following FALSE?
It will minimize its loss by decreasing output so that price exceeds marginal cost.
A firm bought a pizza over for $13,500 and if it shut down now, could sell the oven for $9,500. Which of the following statements is TRUE?
The relevant cost of the oven when considering shutting down is $4,000.
If the present value of all future revenue is positive, then
Unable to determine with the information given.
According to economists, competitive firms
are price takers.
In deciding whether to operate in the short run, the firm must be concerned with the relationship between price of the output and
average variable cost.
By shutting down, a firm
stops receiving revenue but and is stuck with its fixed costs.
If a short-run fixed cost is sunk, then
the cost cannot be avoided by shutting down.
Supply chain management refers to
the decisions around which stages of production to handle internally and which to buy from others.
A firm's vertical dimension refers to
the degree to which it participates in the various stages of producing the products and services it sells.
A firm's profit is
the difference between revenue and cost.
If the present value of all future profit is positive, then
the firm should remain operating, even if it earns negative profit in the short run.
The agency problem can be avoided if
the goals of the owner and manager are aligned.
A conflict between an owner and a manager may occur when
the manager is seeking to maximize leisure time.
Vertical restraints in a contract
can approximate the outcome of a vertical merger.
If a firm makes zero economic profit, then the firm
can be earning positive business profit.
All of the following are characteristics of an oligopolistic market EXCEPT
cartels eventually form to keep prices high.
A ________ is a governance structure where owners are not personally liable.
corporation
In which governance form so shareholders own the company?
corporation
Limited liability is a benefit to
corporations.
If a profit-maximizing firm finds that, at its current level of production, MR < MC, it will
decrease output.
American Apparel is an example of
extreme vertical integration.
Which entity produces the greatest proportion of U.S. gross national product?
firms
In a monopolistically competitive market
firms are price setters.
An oligopoly
has barriers to entry.
If a profit-maximizing firm finds that, at its current level of production, MR > MC, it will
increase output.
If manager performance is easily observable then
the owner can directly reward the manager.
Monitoring a manager can be difficult if
the owner cannot easily observe the manager's actions.
Vertically integrated firms can use transfer pricing
to shift profit.
A firm will shut down in the short run if
total revenue from operating would not cover variable costs.
Under perfect competition
transaction costs are low.
If a manager is unsure what the entire profit function looks like, then she can
A) decrease output slightly to see if profits increase. B) increase output slightly to see if profits increase. C) Both A and B.
An organization that converts inputs (like Labor, Capital etc.) into output can be a
A) firm. B) sole proprietorship. C) corporation. D) All of the above.
Vertical integration can
A) lower transaction costs due to lower costs of writing and enforcing contracts. B) increase management costs and complexity. C) reduce problems between owners and managers. D) All of the above.
If a competitive firm maximizes short-run profits by producing some quantity of output, which of the following must be true at that level of output?
A) p = MC B) MR = MC C) p ≥ AVC D) All of the above
Market structure depends upon
A) the ease of entry and exit. B) the ability of firms to differentiate their goods and services. C) the number of firms in the market. D) All of the above.
A common incentive owners offer managers is
A) the year-end bonus. B) stock options. C) profit sharing. D) All of the above.
A firm sets its output where
marginal profit is zero.
A firm sets its output where
marginal revenue minus marginal cost equals zero (MR - MC = 0).
Economists typically assume that the owners of firms wish to
maximize profits.
A firm that backward vertically integrates
may be producing its own inputs.
Vertical integration
may be undertaken to avoid government regulations.
If a firm goes out of business because of negative economic profits, its books
might indicate a positive accounting profit.
If a firm is operating at an output level where losses are minimized the firm
is maximizing profits.
Firms might vertically disintegrate when
it becomes more profitable for a firm to specialize.
A firm's horizontal dimension refers to
its size in its primary market.
A firm should always shut down if its revenue is
less than its avoidable costs.
If marginal revenue equals marginal cost, the firm is maximizing profits as long as
marginal cost exceeds marginal revenue for greater levels of output.