chapter 8

If the price that a firm charges is lower than its ____________ of production, the firm will suffer losses.

A. average cost

If a firm's revenues do not cover its average variable costs, then that firm has reached its _________________ .

B. shutdown point

For a perfectly competitive firm, the marginal cost curve is identical to the firm's ________________ .

B. supply curve

In order to produce 100 pairs of oven gloves, Marcia incurs an average total cost of $2.50 per pair. Marcia's marginal cost is constant at $10.00 for every pair of oven gloves produced. The total cost to produce 50 pairs of oven gloves is

D. $200

Briefly explain the nature of a perfectly competitive firm. Briefly discuss the effects of new entrants into a perfectly competitive market on existing firms that have profits in the short run.

A perfectly competitive firm is a price taker, which means that it must accept the prices at which its sell goods and the prices at which it purchases inputs as determined in the market. Firms in a highly competitive market may earn profits in the short run, but the entry of new firms or the expansion of existing firms means that such profits will not persist in the long run.

An _________________ is calculated by subtracting the firm's costs from its total revenues, _______________________________ .

A. accounting profit; excluding opportunity cost

If a firm is producing so that the point chosen along the production possibility frontier is socially preferred, then that firm is said to have reached its

A. allocative efficiency

If a competitive firm experiences a shift in costs of production that decreases marginal costs at all levels of output,

A. expanding output levels at any given price will be profitable.

______________________ refers to the additional revenue gained from selling one more unit.

A. marginal revenue

I'maGoldMiner has benefited from a record rise in gold prices in the global commodities market. While the price of its output is highly influenced by market speculation, if it wants to increase production to take advantage of the current profit-maximizing opportunity, the company

A. must accept market price for its physical capital inputs.

If a perfectly competitive firm is a price taker, then

A. pressure from competing firms will force acceptance of the prevailing market price.

If the quality differences of similar products are mostly imperceptible to the average consumer's eyes, which of the following will most likely play a major role in influencing the decisions of purchasers?

A. price of competing products

When a firm makes plans for investments in physical capital, it compares the _______________ on these investments with ______________________ .

A. projected rates of return; the cost of financial capital to the firm

In Sam's greenhouse operation, labor is the only short term variable input. After completing a cost analysis, if the marginal product of labor is the same for each unit of labor, this will imply that

A. the average product of labor is always equal to the marginal product of labor.

In a free market economy, firms operating in a perfectly competitive industry are said to have only one major choice to make. Which of the following correctly sets out that choice?

A. what quantity to produce

Briefly explain what is meant by: 1) account profit; 2) economic profit; and 3) zero economic profit.

Accounting profit is measured by taking total revenues and subtracting expenditures. Economic profit is measured after taking total revenue, subtracting all expenditures, and also subtracting the opportunity cost of financial capital. Thus, zero economic profit actually means a normal accounting rate of profit.

Briefly describe what the effect of producing a greater quantity of products will be in relation to a perfectly competitive firm.

As a perfectly competitive firm produces a greater quantity of output, its total revenue steadily increases at a constant rate determined by the given market price.

In order to produce 100 oatmeal cookies, GoodieCookieCo incurs an average total cost of $0.25 per cookie. The company's marginal cost is constant at $0.10 for all oatmeal cookies produced. The total cost to produce 50 oatmeal cookies is

B. $20

Economic profit can be derived from calculating total revenues minus all of the firm's costs,

B. including its opportunity costs

I'maSolarPanelCo. manufactures and distributes solar panels in the US market. Two years ago, it had 5 US competitors, but government stimulus in the industry has encouraged 7 new US competitors to enter the market. In these circumstances, I'maSolarPanelCo.'s price for its output

B. is dictated by the forces of demand and supply.

Kate's 24-Hour Breakfast Diner menu offers one item, a $5.00 breakfast special. Kate's costs for servers, cooks, electricity, food, etc. average out to $3.95 per meal. Her costs for rent, insurance cleaning supplies and business license average out to $1.25 per meal. Since the market is highly competitive, Kate should

B. keep the business open in the short-run, but plan to go out of business in the long-run.

In the ________, the perfectly competitive firm will react to losses by __________________________ .

B. long run; reducing production or shutting down

Under perfect competition, any profit-maximizing producer faces a market price equal to its

B. marginal costs

In economic terms, a practical approach to maximizing profits requires an examination of how changes in production affect ________________ and ________________ .

B. marginal revenue; marginal cost

When a firm uses retained profits to invest in more energy efficient equipment, an economist would calculate the _________________ of investing in physical capital.

B. opportunity cost

Firms operating in a market situation that creates ___________________, sell their product in a market with other firms who produce identical or extremely similar products.

B. perfect competition

When a business adopts a strategy of reducing and/or discontinuing production in response to a sustained pattern of losses, it is

B. preparing to exit operations

Idaho farmers can sell as large a quantity of their potato crop as they wish,

B. provided each is willing to accept the prevailing market price.

Even when competitive firms are unable to calculate marginal revenue product directly, _________________________________________ will push wage rates toward the marginal revenue product of labor.

B. the pressures of competition in the labor market

If accounting profits for a firm are 20% of output, and the opportunity cost of financial capital is 8% of output, then what do the firm's economic profits equal?

C. 12% of output

If the price that a firm charges is higher than its ________________ cost of production for that quantity produced, then the firm will earn profits

C. average

If the average product for six workers is fifteen and the marginal product of the seventh worker is eighteen, then

C. average product is rising.

Temperatures have persisted below freezing levels in Florida throughout the months of December and January. As a result, demand for electricity sharply increased and the price of electricity rose sharply. The price of coal also rose. In these circumstances, any resulting shifts in the supply curves for coal miners and electricity producers

C. can also be interpreted as shifts of their respective marginal cost curves.

It is said that in a perfectly competitive market, raising the price of a firm's product from the prevailing market price of $179.00 to $199.00, ____________________.

C. could likely result in a notable loss of sales to competitors

A manufacturer would likely make an ___________ in a market following the long-run process of beginning and expanding production in response to ________________ .

C. entry; a sustained pattern of profits

Why are some producers forced to sell their products at the prevailing market price?

C. high degree of similarity to competitor's products

A perfectly competitive industry is a

C. hypothetical extreme

Which of the following can be thought of as an adjustment for the risks involved with respect to the cost of a firm acquiring financial capital?

C. imposition of hurdle rates of interest

If marginal cost is rising in a competitive firm's short-run production process and its average variable cost is falling as output is increased, then

C. marginal cost is below average variable cost.

The term _________________ refers to a firm operating in a perfectly competitive market that must take the prevailing market price for its product.

C. price taker

If a graph is used to compare total revenue and total cost of a perfectly competitive firm, then the horizontal axis of the graph will represent the _______________ and the vertical axis will represent ______________________ .

C. quantity produced; both total revenue and total costs, measured in dollars.

In the _________, if profits are not possible, the perfectly competitive firm will seek out the quantity of output where _____________________ .

C. short run; losses are smallest

In the _________, the perfectly competitive firm will seek out ________________________ .

C. short run; the quantity of output where profits are highest

In a perfectly competitive market setting, which of the following would be a true statement?

D. Wage rates trend toward marginal revenue product levels.

The fact that a consumer is not required to buy the goods that a given firm produces, as well as the fact that the consumer might want the goods a firm produces, but may choose to buy from other firms instead

D. are two stark realities any business firm must recognize.

In economics, labor demand is synonymous with

D. derived demand

When I'MaGoldMiner chooses what quantity of gold each of it/s mines will produce over the next 12 months, this quantity, along with the prices prevailing in the market for output and inputs, will

D. determine the company's total revenue, total costs, and its profits.

In the ________, the perfectly competitive firm will react to profits by __________________________ .

D. long run; increasing its production

In economics, the term "shutdown point" refers to the point where the

D. marginal cost curve crosses the average variable cost curve.

What happens in a perfectly competitive industry when economic profit is greater than zero?

D. new firms may enter the industry and all of the above

Why would a profit-seeking firm need to tailor its decisions about the quantity of labor inputs that it purchases?

D. to produce the profit-maximizing quantity of output at the lowest possible average cost

Briefly explain how the zero profit point and the shutdown point for a firm operating in a perfectly competitive market are each determined.

For a firm operating in a perfectly competitive market, the point where the marginal cost curve crosses the average cost curve, at the minimum of the average cost curve, is called the zero profit point. The point where that firm's marginal cost curve crosses the average variable cost curve is called the shutdown point.

Briefly explain the relationship between market price and a firm's profitability in perfectly competitive market.

If the market price faced by a perfectly competitive firm is above average cost at the profit-maximizing quantity of output, then the firm is making profits. If the market price is below average cost at the profit-maximizing quantity of output, then the firm is making losses. If the market price is at average cost, at the profit-maximizing level of output, then the firm is making zero profits.

Briefly discuss physical capital investment and long-run average cost in relation to a perfectly competitive market.

In a perfectly competitive market, firms seek out the combination of variable inputs like labor and fixed inputs like physical capital investment inputs that will allow them to produce at the minimum of the long-run average cost curve. If a firm does not produce at the lowest possible average cost, then firms with a lower cost of production will be able to sell at a lower price. Thus, the pressure of competition between firms will shape both the specific kinds of machinery and equipment and the overall quantity of investment in physical capital.

Briefly contrast how firms in a perfectly competitive market will respond to long-run profits and losses. Include an explanation of each response affects the price level.

In the long run, firms will respond to profits through a process of entry, where existing firms expand output and new firms enter the market. Conversely, firms will react to losses in the long run through a process of exit, in which existing firms reduce output or cease production altogether. Through the process of entry in response to profits and exit in response to losses, the price level in a perfectly competitive market will move toward the zero-profit point where the marginal cost curve crosses the average cost curve, at the minimum of the average cost curve.

Briefly contrast when losses will be the smallest for a perfectly competitive firm based on total revenues with when losses for such a firm will be smallest based on marginal revenue.

Losses will be smallest for a completely competitive firm at the quantity of output where total revenues exceed total costs by the greatest amount, or where total revenues fall short of total costs by the smallest amount. Alternatively, losses will be the smallest where marginal revenue, which is price for a perfectly competitive firm, is equal to marginal cost.

Briefly explain what a market will show if perfectly competitive firms produce at the minimum of the long-run average cost curve and explain why this happens. Briefly explain what the market will illustrate when perfectly competitive firms produce at the quantity where P = MC and explain why this happens.

When perfectly competitive firms produce at the minimum of the long-run average cost curve, the market will show productive efficiency, since all the firm's are producing at the lowest possible average cost. When perfectly competitive firms produce at the quantity where P = MC, the market will illustrate allocative efficiency, since each good is being produced up to the quantity where the amount that the good benefits society, which is measured by the price people are willing to pay, is equal to the cost to society, which is measured by the marginal cost of production.