ECON 300 Exam 2

The figure above shows a typical perfectly competitive corn farm, whose marginal cost curve is MC and average total cost curve is ATC. The market is initially in a long-run equilibrium, where the price is $3.00 per bushel. Then, the market demand for corn decreases and, in the short run, the price falls to $2.50 per bushel. Corn production is a constant-cost industry. In the long run, the price of corn is ________ and a typical farm produces ________ bushels of corn.

$2.50; 250,000

The figure above shows a typical perfectly competitive corn farm, whose marginal cost curve is MC and average total cost curve is ATC. The market is initially in a long-run equilibrium, where the price is $3.00 per bushel. Then, the market demand for corn decreases and, in the short run, the price falls to $2.50 per bushel. Corn production is a constant-cost industry. In the short run, the price of corn is ________ and a typical farm produces ________ bushels of corn.

$3.00; 300,000 (P=minimum of ATC)

Suppose you have purchased a non-refundable plane ticket and, at the last moment, you cannot take the trip. You can, however, sell the ticket. If you paid $700 for the ticket, the cost of sending the ticket to someone through overnight mail is $20, and you spend $10 on a courier to get the ticket to the post office for overnight delivery, what is the minimum you should accept for the ticket?

$30 because the $700 is a sunk cost.

Which of the following would shift the MC curve for cigarettes?

$4 wage increase

After the 100th bicycle was produced the total cost of production was $10,000 and fixed costs were $4,000. The Marginal cost of the 100 the bicycle was $80. Average Variable Cost of the 100th bicycle is ____

$60

What is the long​ run?

An amount of time needed to make all production inputs variable.

Why might learning by doing decrease the​ long-run average cost of​ production?

As cumulative output​ increases, workers become more​ adept, and the speed at which they produce increases.

If you observe that your average product is just beginning to​ decline, should you hire any more​ workers? What does this situation imply about the marginal product of your last worker​ hired?

At the point where average product begins to​ decline, marginal product is equal to average product. Since total product continues to​ increase, it may still be advantageous to hire another worker.

Bubba Burgers has discovered there are economies of scope available to the restaurant. Which is most likely to be a response to this discovery?

Bubba adds grilled chicken sandwiches to the menu

Which of the following is an example of the law of diminishing marginal​ returns?

Holding capital​ constant, when the amount of labor increases from 5 to​ 6, output increases from 20 to 25. Then when labor increases from 6 to​ 7, output increases from 25 to 28.

Which of the following would cause the AFC curve for cigarettes to shift up? I. An Increase in annual property tax. II. An increase in the cigarette tax (charged per pack). III. An increase in the cost of electricity. IV. An increase in advertising expenditure

I & IV

learning

LRAC is lower at each level of productions

because of the relationship between a perfectly competitive firm's demand curve and its marginal revenue curve. the profit maximization condition for the firm can be written as

P=MC

Which of the following is an example of a sunk​ cost?

The amount a company originally paid for specialized equipment for a plant.

the marginal product of labor is

The change in the total product resulting from a change in the labor input.

You are an employer seeking to fill a vacant position on an assembly line. Are you more concerned with the average product of labor or the marginal product of labor for the last person​ hired?

The marginal product because it measures the effect the last person hired has on​ output, or total product. This helps determine the revenue generated by hiring an another​ worker, which can be compared with the cost of hiring an another worker.

Learning by doing is represented by

a decrease in the average total cost curve.

economies of scale

a doubling of output requires less than a doubling of cost. refers to the range of output over which the long-run average cost falls as output increases.

a price taker is

a perfectly competitive firm; a firm that cannot influence the market price

The short run is

a period of time during which some inputs can be varied and some cannot.

A​ firm's long-run average cost​ (LAC) curve is downward sloping. Each​ short-run average cost​ (SAC) curve will be tangent to the LAC curve at

a point to the left of the minimum of the SAC curve

which of the following statements is true regarding the differences between economic and accounting costs?

accounting costs include only explicit costs

an there be constant returns to scale in an industry with an​ upward-sloping supply​ curve? Explain. Constant returns to scale with an​ upward-sloping long-run industry supply curve

are possible because proportional increases in inputs yielding the same proportional increase in output may induce higher input prices.

short-run

at least one input is fixed--does not vary with output

which always decreases when output increases?

average fixed cost

for consideration of such issues as labor's productivity would shift the total product curve up and ____________

average product of labor

At the point where average variable cost reaches its minimum value

average variable cost equals marginal cost.

one of the main reasons diseconomies of scale occurs is

because of the growing complexity and potential mistakes of management and organizational sturcture production

a technological improvement that increases productivity would shift the total product curve up and _________

both the average product curve and the marginal product curves upward

in an increasing-cost industry, expansion of output

causes input prices to rise as demand for them grows

in perfect competition, the industry demand curve is _________ and the firms' demand curve is _______ price of the product is determined where the industry ________, but the

downward-sloping; horizontal

Product Homogeneity

each producer is selling an identical product or service

long-run equilibrium price of wheat is $5 a bushel. Farmer Sally has a minimum LAC of $3 due to high-quality land. The extra $2 per bushel is ________

economic rent

long-run equilibrium price of wheat is $5 a bushel. compared to every other wheat farmer, sally has an extra $2 of accounting profit for every bushel of wheat due to high-quality land. The extra $2 bushel is ________.

economic rent

There is no direct relationship between economies of scale and economies of scope because

economies of scale pertain to one output and economies of scope pertain to more than one output.

Firm 1 produces product A​ only, and firm 2 produces product B only. Firm 3 produces the same amount of A as firm 1 AND the same amount of B as firm 2. All three firms use​ state-of-the-art production​ techniques, but firm​ 3's total costs are less than the sum of the other two​ firms' total costs. We can conclude that there are

economies of scope in producing products A and B.

You are employed by a firm in a competitive market as a manager and you have superior skills that no other manager has which leads to lower AC and a large increase in accounting profit for your firm. What will happen in the long-run? True or False? As long as your skills cannot be copied by managers in other companies your firm will continue to enjoy positive economic profit.

false

T or F: If a firm hires a currently unemployed​ worker, the opportunity cost of utilizing the​ worker's services is zero. This statement is

false because the worker's time otherwise spent in unpaid household work has value

What assumptions are necessary for a market to be perfectly​ competitive? In light of what you have learned in this​ chapter, why is each of these assumptions​ important? For a market to be perfectly​ competitive,

firms must be price​ takers, firms must produce a homogeneous​ product, and firms must be able to easily enter and exit the market.

If firms can easily enter and exit a​ market, then

firms will produce at minimum average cost in the long run

A production input that can only be varied in the long run is called a

fixed input

In the long run, profits will equal zero in a competitive market because of

free entry and exit

when a firm sees that many companies are entering the market, according to the learning curve, the firm would choose

high levels of output to shift average cost curve down over time

the perfectly competitive firm's marginal revenue curve is

horizontal

Suppose a firm must pay an annual​ tax, which is a fixed​ sum, independent of whether it produces any output. How does this tax affect the​ firm's fixed,​ marginal, and average​ costs? With a​ lump-sum tax, the fixed cost of production will

increase

Suppose a firm must pay an annual​ tax, which is a fixed​ sum, independent of whether it produces any output. How does this tax affect the​ firm's fixed,​ marginal, and average​ costs? with a lump-sum tax, the average cost of production will

increase

suppose the firm is charged a tax that is proportional to the number of items it produces.​ Again, how does this tax affect the​ firm's fixed,​ marginal, and average​ costs? With a proportional​ tax, and the average cost of production will

increase

suppose the firm is charged a tax that is proportional to the number of items it produces.​ Again, how does this tax affect the​ firm's fixed,​ marginal, and average​ costs? With a proportional​ tax, the marginal cost of production will

increase

which of the following would increase AFC?

increase in property taxes; increase in interest rate

suppose a firm must pay an annual tax, which is a fixed sum, independent of whether it produces any output. how does this tax affect the firm's fixed, marginal, and average variable cost?

increases; stays the same; stays the same

When the average product is decreasing, marginal product

is less than average product

the supply curve for a competitive firm is

its MC curve above the minimum point of the AVC curve.

Each year Noland's Lawn Gnomes sales 5 million lawn gnomes. Despite the fact that input prices have not changed, the long run average cost of producing 5 million gnomes decreased. This is due to

learning

diseconomies of scale

management becomes more complicated

if average cost is decreasing

marginal cost is less than average cost

the law of diminishing returns refers to diminishing

marginal returns

economies of scope refers to

multiproduct firms

The Brotherhood for the Respect, Elevation, and Advancement of Dishwashers (BREAD) advocates that customers should tip the staff that wash dishes and bus tables. In the long run, would dishwashers benefit if they were generally tipped?

no

Jose rents office space for​ $20,000 per year. He uses the office to fill out tax returns for​ 1,000 clients per year. If the office rent increases to​ $25,000 per​ year, the marginal cost of filling out tax returns will

not change

which of the following is true?

one of the key assumptions is that firm's most important goal is to maximize profit

Distinguish between economies of scale and economies of scope. Why can one be present without the​ other? Economies of scale occur when

output can be doubled for less than a doubling; however, economies of scope occur when joint output is less costly than the sum of the costs of producing multiple outputs separately.

Ronny's Pizza House operates in the perfectly competitive local pizza market. If the price of pizza cheese increases (ceteris paribus), what is the expected impact on Ronny's profit-maximizing output decision?

output decreases because marginal cost curve shifts upward

Economic rent

positive difference between the actual payment made for a factor of production (such as land, labor or capital) to its owner and the payment level expected by the owner, due to its exclusivity or scarcity

If firms produce a homogeneous​ product, then

products will be perfectly substitutable with one another

which of the following is likely to be a variable input in the short-run?

raw materials and an employee

Suppose a firm must pay an annual​ tax, which is a fixed​ sum, independent of whether it produces any output. How does this tax affect the​ firm's fixed,​ marginal, and average​ costs? with a lump-sum tax, the marginal cost of production will

remain unchanged

suppose the firm is charged a tax that is proportional to the number of items it produces.​ Again, how does this tax affect the​ firm's fixed,​ marginal, and average​ costs? With a proportional​ tax, the fixed cost of production will

remain unchanged

Assuming an increasing cost industry, when demand increases in a perfectly competitive market, in the long run the price of the product ________ the initial price and the quantity ________.

rises above; increases

the total cost of making 100 donuts is $100. the marginal cost of the 100st donut is $1.10. the average total cost of the 100th donut is

rising

economies of scope

situation in which joint output of a single firm is greater than output that could be achieved by two different firms when each produces a single product

Which of the following is NOT a result of learning that helps a firm reduce its costs as its cumulative output​ increases?

the firm can negotiate with suppliers for lower input prices

shut down rule

the firm should shut down if the price of the product is less than the MIN average variable cost of production at the profit-maximizing point

in perfect competition, the long run equilibrium price is

the long run marginal cost (P =MC); the minimum long run average total cost (P=min AC)

the law of diminishing returns applies to

the short run only

If the elasticity of supply is less elastic than the elasticity of

the tax will be borne mostly by consumers regardless of who the tax is charged to.

At the current level of output, long-run marginal cost is $100 and long-run average cost is $175. This implies that:

there are economies of scale

In the short run when some inputs are​ fixed, marginal cost must eventually rise as a​ firm's output increases because

there will eventually be diminishing marginal products for the firms variable inputs

Why might you expect the marginal product of additional workers to diminish​ eventually? ​Eventually, as successive workers continue to be added to the production​ process,

they may no longer be able to specialize, and output will increase at a diminishing rate.

If firms are price​ takers, then

they will produce where price equals marginal cost

T or F: If the owner of a business pays himself no​ salary, then the accounting cost is​ zero, but the economic cost is positive. This statement is

true because economic costs include opportunity costs such as the value of the business​ owner's time.

T or F: A firm that has positive accounting profit does not necessarily have positive economic profit. This statement is

true because economic costs will be greater than accounting costs if implicit costs exist.

In an increasing −cost ​industry, the​ long-run industry supply curve is

upward sloping

A firm uses 100 hours of labor and 20 units of capital to produce 5,000 bicycles a day. Labor's marginal product is 4 bicycles per day and the marginal product of capital is 10 bicycles per day. Each unit of labor costs $20 and each unit of capital costs $40 per hour. If the firm wants to continue producing 5,000 bicycles per day at the lowest possible cost, it should

use more capital and less labor

A firm uses 80 hours of labor and 6 units of capital to produce​ 10,000 gadgets per day.​ Labor's marginal product is 4 gadgets per hour and the marginal product of capital is 20 gadgets per unit. Each unit of labor costs​ $8 per hour and each unit of capital costs​ $50 per unit. If the firm wants to continue producing​ 10,000 gadgets per day at the lowest possible​ cost, it should

use more labor and less capital

A production input that can be varied in both the short run and the long run is called a

variable input

a few sellers may behave as if they operate in a perfectly competitive market if the market demand is

very elastic

After the 100th bicycle was produced the total cost of production was $10,000 and fixed costs were $4,000. The Marginal cost of the 100th bicycle was $80. Which of the following is true?

with the production of the 100th bicycle AVC increased and AC decreased

The menu at Jose​'s coffee shop consists of a variety of coffee​ drinks, pastries, and sandwiches. The marginal product of an additional worker can be defined as the number of customers that can be served by that worker in a given time period. JoseJose has been employing one​ worker, but is considering hiring a second and a third. Explain why the marginal product of the second and third workers might be higher than the first. The marginal product of the second and third workers might be increasing because

workers can specialize at a separate task​, and output will increase at an increasing rate.

Sam has his own lawn mowing business. He brings in $5,700 of revenue each month. Should he stay in business?•Explicit Costs -Gas: 100 gallons per month at $3 per gallon, $300 -Workers: 2 workers at $1600 per worker per month, $3200•Implicit Costs -Sam's time: Could earn $1600 per month at his best alternative employment, $1600. -Sam owns two lawn mowers, a truck, and a utility trailer: He could rent them to another firm for $600 per month, $600. What is Sam's Economic Profit?

zero