ECON 120 Exam 3

A key characteristic of a competitive market is that a. government antitrust laws regulate competition. b. producers sell nearly identical products. c. firms minimize total costs. d. firms have price setting power.

b

As a general rule, when accountants calculate profit they account for explicit costs but usually ignore a. certain outlays of money by the firm. b. implicit costs. c. operating costs. d. fixed costs.

b

At Bert's Bootery, the total cost of producing twenty pairs of boots is $400. The marginal cost of producing the twenty-first pair of boots is $83. We can conclude that the a. average variable cost of 21 pairs of boots is $23. b. average total cost of 21 pairs of boots is $23. c. average total cost of 21 pairs of boots is $15.09. d. marginal cost of the 20th pair of boots is $20.

b

Comparing marginal revenue to marginal cost (i) reveals the contribution of the last unit of production to total profit. (ii) is helpful in making profit-maximizing production decisions. (iii) tells a firm whether its fixed costs are too high. a. (i) only b. (i) and (ii) only c. (ii) and (iii) only d. (i) and (iii) only

b

The exit of existing firms from a competitive market will a. increase market supply and increase market price. b. increase market supply and decrease market price. c. decrease market supply and increase market price. d. decrease market supply and decrease market price.

c

The term shutdown a. and the term exit both refer to short-run decisions that a firm might make. b. and the term exit both refer to long-run decisions that a firm might make. c. whereas the term exit refers to a long-run decision that a firm might make. d. refers to a long-run decision that a firm might make, whereas the term exit refers to a short-run decision that a firm might make.

c

Total cost is the a. amount a firm receives for the sale of its output. b. fixed cost less variable cost. c. market value of the inputs a firm uses in production. d. quantity of output minus the quantity of inputs used to make a good.

c

Which of the following is not a characteristic of a competitive market? a. Buyers and sellers are price takers. b. Each firm sells a virtually identical product. c. Entry is limited. d. Each firm chooses an output level that maximizes profits.

c

Which of the following represents the firm's long-run condition for exiting a market? a. exit if P < MC b. exit if P < FC c. exit if P < ATC d. exit if MR < MC

c

Which of the following statements best reflects a price-taking firm? a. The firm can sell only a limited amount of output at the market price before the market price will fall. b. If the firm were to charge less than the going price, it would maximize its profits and revenues. c. If the firm were to charge more than the going price, it would sell none of its goods. d. Both b and c are correct.

c

Refer to Figure 14-7. At what price is the firm's maximum profit zero? a. $80 b. $90 c. $100 d. $125

c

In the long run a company that produces and sells popcorn incurs total costs of $1,050 when output is 90 canisters and $1,200 when output is 120 canisters. The popcorn company exhibits a. diseconomies of scale because total cost is rising as output rises. b. diseconomies of scale because average total cost is rising as output rises. c. economies of scale because total cost is rising as output rises. d. economies of scale because average total cost is falling as output rises.

d

Refer to Table 14-6. What is the average revenue when 4 units are sold? a. $60 b. $120 c. $125 d. $197

b

A firm produces 400 units of output at a total cost of $1,200. If total variable costs are $1,000, a. average fixed cost is 50 cents. b. average variable cost is $2. c. average total cost is $2.50. d. average total cost is 50 cents.

a

Assume a certain firm in a competitive market is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit. At Q = 999, the firm's total costs equal a. $10,985. b. $10,990. c. $10,995. d. $10,999.

a

Assume a certain firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $20 and its average total cost equals $25. The firm sells its output for $30 per unit. At Q = 999, the firm's profits equal a. $4,990. b. $5,000. c. $5,020. d. $5,030.

a

Consider a firm that operates in a perfectly competitive market. Currently the firm is producing 300 units of output and the price is $20. If marginal cost at 300 units is $22, the firm a. could increase profits by reducing output from 300 units. b. could increase profits by increasing output from 300 units. c. should decide to increase the price above $20. d. should shut down, since it must be losing money.

a

Marginal cost equals (i) change in total cost divided by change in quantity produced. (ii) change in variable cost divided by change in quantity produced. (iii) the average fixed cost of the current unit. a. (i) and (ii) only b. (ii) and (iii) only c. (i) only d. (i), (ii), and (iii)

a

Refer to Figure 13-4. Which of the above marginal cost curves reflects diminishing marginal product? a. A b. B c. C d. D

a

Refer to Figure 13-5. Which of the curves is most likely to represent average fixed cost? a. A b. B c. C d. D

a

Refer to Figure 13-9. Which of the curves is most likely to characterize the short-run average total cost curve of the smallest factory? a. ATCA b. ATCB c. ATCC d. ATCD

a

Trevor's Tire Company produced and sold 500 tires. The average cost of production per tire was $50. Each tire sold for a price of $65. Trevor's Tire Company's total profits are a. $7,500. b. $25,000. c. $32,500. d. $67,500.

a

Walter used to work as a high school teacher for $40,000 per year but quit in order to start his own painting business. To invest in his painting business, he withdrew $20,000 from his savings, which paid 3 percent interest, and borrowed $30,000 from his uncle, whom he pays 3 percent interest per year. Last year Walter paid $25,000 for supplies and had revenue of $60,000. Walter asked Tyler the accountant and Greg the economist to calculate his painting business's costs. a. Tyler says his costs are $25,900, and Greg says his costs are $66,500. b. Tyler says his costs are $25,000, and Greg says his costs are $65,000. c. Tyler says his costs are $66,500, and Greg says his costs are $66,500. d. Tyler says his costs are $75,000, and Greg says his costs are $41,500.

a

Which of the following expressions is correct? a. accounting profit = economic profit + implicit costs b. accounting profit = total revenue - implicit costs c. economic profit = accounting profit + explicit costs d. economic profit = total revenue - implicit costs

a

Which of these types of costs can be ignored when an individual or a firm is making decisions? a. sunk costs b. marginal costs c. variable costs d. opportunity costs

a

If the market price is $8, how many units of output should the firm produce to maximize profit? a. 5 units b. 6 units c. 7 units d. 8 units

b

Joan grows pumpkins. If Joan plants no seeds on her farm, she gets no harvest. If she plants 1 bag of seeds, she gets 500 pumpkins. If she plants 2 bags, she gets 800 pumpkins. If she plants 3 bags, she gets 900 pumpkins. A bag of seeds costs $100, and seeds are her only cost. Joan's production function exhibits a. increasing marginal product. b. decreasing marginal product. c. constant marginal product. d. Any of the above could be correct.

b

Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura specializes in making wedding cakes. Laura sells 20 wedding cakes per month. Her monthly total revenue is $5,000. The marginal cost of making a wedding cake is $300. In order to maximize profits, Laura should a. make more than 20 wedding cakes per month. b. make fewer than 20 wedding cakes per month. c. continue to make 20 wedding cakes per month. d. We do not have enough information to answer the question.

b

Refer to Figure 13-2. The graph illustrates a typical a. total-cost curve. b. production function. c. production possibilities frontier. d. marginal product of labor curve.

b

Refer to Figure 13-5. Curve C represents which type of cost curve? a. marginal cost b. average total cost c. average variable cost d. average fixed cost

b

Refer to Figure 13-8. Which of the following statements is correct? a. Marginal cost is rising for quantities higher than D because marginal cost is higher than average total cost. b. Average variable cost is declining for quantities less than B because marginal cost is lower than average variable cost. c. Marginal cost is minimized at B because at that quantity, marginal cost equals average variable cost. d. All of the above are correct.

b

Refer to Figure 14-14. Assume that the market starts in equilibrium at point W in panel (b). An increase in demand from D0 to D1 will result in a. a new market equilibrium at point X. b. an eventual increase in the number of firms in the market and a new long-run equilibrium at point Z. c. rising prices and falling profits for existing firms in the market. d. falling prices and falling profits for existing firms in the market.

b

Refer to Figure 14-9. The firm will exit the market for any price on the line segment a. ABCD. b. AB. c. CD. d. None of the above is correct.

b

Refer to Table 13-17. Which firm has diseconomies of scale over the entire range of output? a. Firm 1 only b. Firm 2 only c. Firms 1 and 2 only d. Firm 3 only

b

Suppose that a firm has only one variable input, labor, and firm output is zero when labor is zero. When the firm hires 6 workers it produces 90 units of output. Fixed cost of production are $6 and the variable cost per unit of labor is $10. The marginal product of the seventh unit of labor is 4. Given this information, what is the total cost of production when the firm hires 7 workers? a. $66 b. $76 c. $906 d. $946

b

When some resources used in production are only available in limited quantities, it is likely that the long-run supply curve in a competitive market is a. downward sloping. b. upward sloping. c. horizontal. d. vertical.

b

You purchase a $30, nonrefundable ticket to a play at a local theater. Ten minutes into the show you realize that it is not a very good show and place only a $10 value on seeing the remainder of the show. Alternatively you could leave the theater and go home and watch TV or read a book. You place an $8 value on watching TV and a $6 value on reading a book. a. You should leave the theater since the net benefit from seeing the remainder of the show is -$20, while going home will earn you at least $8 of satisfaction. b. You should stay and watch the remainder of the show. c. You should go home and watch TV. d. You should go home and read a book.

b

​Chloe's Café sells gourmet cinnamon rolls. In the long run, the café incurs a total cost of $500 to produce 1,000 cinnamon rolls. If Chloe's Café exhibits economies of scale between 1,000 and 2,000 cinnamon rolls, the long-run average total cost for 1,500 cinnamon rolls is a. ​higher than $0.50. b. ​lower than $0.50. c. ​equal to $0.50. d. ​higher than $500.

b

A firm has a fixed cost of $700 in its first year of operation. When the firm produces 99 units of output, its total costs are $4,000. The marginal cost of producing the 100th unit of output is $200. What is the total cost of producing 100 units? a. $42 b. $900 c. $4,200 d. $4,900

c

Economists normally assume that the goal of a firm is to (i) sell as much of its product as possible. (ii) set the price of the product as high as possible. (iii) maximize profit. a. (i) and (ii) only b. (ii) and (iii) only c. (iii) only d. (i), (ii), and (iii)

c

If Bradley's Butcher Shop sells its product in a competitive market, then a. the price of that product depends on the quantity of the product that Bradley's Butcher Shop produces and sells because the firm's demand curve is downward sloping. b. Bradley's Butcher Shop's total cost must be a constant multiple of its quantity of output. c. Bradley's Butcher Shop's total revenue must be proportional to its quantity of output. d. Bradley's Butcher Shop's total revenue must be equal to its average revenue.

c

In a competitive market the current price is $6. The typical firm in the market has ATC = $5.00 and AVC = $4.50. a. In the short run firms will shut down, and in the long run firms will leave the market. b. In the short run firms will continue to operate, but in the long run firms will leave the market. c. New firms will likely enter this market to capture some of the economic profits. d. The firm will earn zero profits in both the short run and long run.

c

Kelly has decided to start his own business giving sailing lessons. To purchase equipment for the business, Kelly withdrew $1,000 from his savings account, which was earning 3% interest, and borrowed an additional $2,000 from the bank at an interest rate of 7%. What is Kelly's annual opportunity cost of the financial capital that has been invested in the business? a. $30 b. $140 c. $170 d. $300

c

One assumption that distinguishes short-run cost analysis from long-run cost analysis for a profit-maximizing firm is that in the short run, a. output is not variable. b. the number of workers used to produce the firm's product is fixed. c. the size of the factory is fixed. d. there are no fixed costs.

c

Patrice owns a travel agency. Her accountant most likely includes which of the following costs on her financial statements? a. wages Patrice could earn giving tennis lessons b. dividends Patrice's money was earning in the stock market before Patrice sold her stock and leased the space for her travel agency c. the cost of utilities for operating the storefront d. Both b and c are correct.

c

Pete owns a shoe-shine business. Which of the following costs would be implicit costs? (i) shoe polish (ii) rent on the shoe stand (iii) wages Pete could earn delivering newspapers (iv) interest that Pete's money was earning before he spent his savings to set up the shoe-shine business a. (i) and (ii) only b. (iv) only c. (iii) and (iv) only d. (i), (ii), (iii), and (iv)

c

Refer to Figure 14-5. When market price is P7, a profit-maximizing firm's short-run profits can be represented by the area a. P7 × Q5. b. P7 × Q3. c. (P7 - P5) × Q3. d. We are unable to determine the firm's profits because the quantity that the firm would produce is not labeled on the graph.

c

Refer to Table 13-15. What is variable cost when output equals 30 units? a. $4 b. $40 c. $90 d. $130

c

Refer to Table 13-7. What is the value of B? a. $25 b. $50 c. $100 d. $200

c

Refer to Table 14-10. This firm should continue to produce and sell units as long as the marginal cost of production is less than or equal to a. $3. b. $5. c. $7. d. $9.

c

Refer to Table 14-17. Based upon this information, if the firm is producing the profit maximizing output, how much profit does the firm make? a. $32. b. ​$40. c. $4. d. $6.

c

Since the 1980s, Wal-Mart stores have appeared in almost every community in America. Wal-Mart buys its goods in large quantities and, therefore, at cheaper prices. Wal-Mart also locates its stores where land prices are low, usually outside of the community business district. Many customers shop at Wal-Mart because of low prices. Local retailers, like the neighborhood drug store, often go out of business because they lose customers. This story demonstrates that a. consumers do not react to changing prices. b. there are diseconomies of scale in retail sales. c. there are economies of scale in retail sales. d. there are diminishing returns to producing and selling retail goods.

c

Suppose a certain firm is able to produce 165 units of output per day when 15 workers are hired. The firm is able to produce 181 units of output per day when 16 workers are hired, holding other inputs fixed. The marginal product of the 16th worker is a. 10 units of output. b. 11 units of output. c. 16 units of output. d. 181 units of output.

c

A competitive firm would benefit from charging a price below the market price because the firm would achieve (i) higher average revenue. (ii) higher profits. (iii) lower total costs. a. (i) only b. (ii) and (iii) only c. (i), (ii), and (iii) d. None of the above is correct.

d

A profit-maximizing firm in a competitive market is able to sell its product for $7. At its current level of output, the firm's average total cost is $10. The firm's marginal cost curve crosses its marginal revenue curve at an output level of 9 units. The firm experiences a a. profit of more than $27. b. profit of exactly $27. c. loss of more than $27. d. loss of exactly $27.

d

Cindy's Car Wash has average variable costs of $2 and average fixed costs of $3 when it produces 100 units of output (car washes). The firm's total cost is a. $100. b. $200. c. $300. d. $500.

d

Kate is a florist. Kate can arrange 20 bouquets per day. She is considering hiring her husband William to work for her. Together Kate and William can arrange 35 bouquets per day. What is William's marginal product? a. 55 bouquets b. 35 bouquets c. 22.5 bouquets d. 15 bouquets

d

On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires 2 workers. He is able to produce 4,400 bushels of wheat when he hires 3 workers. Which of the following possibilities is consistent with the property of diminishing marginal product? a. The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers. b. The farmer is able to produce 5,400 bushels of wheat when he hires 4 workers. c. The farmer is able to produce 5,200 bushels of wheat when he hires 4 workers. d. Any of the above could be correct.

d

Refer to Figure 13-3. Which of the following is true of the production function (not pictured) that underlies this total cost function? (i) Total output increases as the quantity of inputs increases but at a decreasing rate. (ii) Marginal product is diminishing for all levels of input usage. (iii) The slope of the production function decreases as the quantity of inputs increases. a. (i) only b. (ii) and (iii) only c. (i) and (iii) only d. (i), (ii), and (iii)

d

Refer to Figure 14-10. If there are 500 identical firms in this market, what is the value of Q2? a. 12,000 b. 60,000 c. 240,000 d. 300,000

d

Refer to Figure 14-8. Which segment of the supply curve represents the firm shutting down? a. ABCD b. BCD c. CD d. AB

d

Refer to Table 13-1. What is total output when 3 workers are hired? a. 15 b. 60 c. 105 d. 135

d

The marginal cost curve crosses the average total cost curve at a. the efficient scale. b. the minimum point on the average total cost curve. c. a point where the marginal cost curve is rising. d. All of the above are correct.

d