Economics Test 2

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One strategy for long-term profit maximization is

Innovation

In a simple grass-mowing business, the lawn mower and labor would be

Inputs

What word describes the goods and services that are used to produce outputs for a business?

Inputs

The goods or services purchased by a business for immediate use in the production process are known as

Intermediate inputs

Theodore can make 6 pizzas in one hour. If Theodore's labor has a diminishing marginal product, what must be true about the number of pizzas that Theodore can make in three hours?

It must be less than 18.

Inputs used by a business in the production process include

Labor

The hours of work supplied by various types of workers are referred to by economists as

Labor

The price of labor per unit times the amount of labor used is called

Labor cost

The total cost of production is determined by adding which of the following costs

Labor, capital and land, intermediate inputs, and accumulating business know-how

Fixed costs are also known as __________ costs because they are much harder for a business to change.

Long-term

A market where there is only one seller, and buyers have no good alternative, is called a(n)

Monoploy

What happens to the marginal product of labor if more capital is added to a production process?

More capital generally causes the marginal product of labor to rise.

A _______ monopoly is an industry in which it makes economic sense to have only one provider.

Natural

In a simple lawn-mowing business where you have a push mower and labor as input, by adding an additional input in the form of a gas self-propelled mower (capital), what would be the impact on output?

Output would increase

Average product is not as reliable an indicator of how a business is doing as it used to be because of

Outsourcing labor

In perfect competition, P = MC means

Price equals marginal cost

What is the economic process of turning inputs into outputs that a business will sell to customers?

Production

Economists think of a business as a machine, where you put inputs in one end and get outputs from the other end. This metaphor is called the

Production function

The __________ summarizes the output of the business, given the level of inputs.

Production function

What is the difference between revenue and cost?

Profit

The main objective of a business in a market economy is

Profit maximization

Companies will often spend considerable amounts of money to create a ____________ in regards to their brand name.

Reputation effect

What word describes the money that customers pay for the output of a business?

Revenue

___________ is the amount of money a company receives for selling its product or service.

Revenue

When a business expands production and increases sales, what generally happens to revenue?

Revenue rises because the business is selling more output.

In a market where businesses are earning high profits, new entrants will cause the supply curve to shift to the _________ and the market price to _________.

Right; fall

Marginal cost generally ________ quantity produced.

Rises with

In short-run profit maximization, businesses focus on the ______, holding fixed costs constant.

Short-term cost function

Variable costs are also known as

Short-term costs

Variable costs are relevant for

Short-term everyday decision making

______ shows the potential cost for each level of output.

The cost function

In the process of long-term profit maximization, the business makes decisions under the assumption that it can

Vary all the inputs

Which of the following is most likely to be sold in a perfectly competitive market?

Wheat

Does the stock market resemble a perfectly competitive market?

Yes, the stock market does resemble a perfectly competitive market.

Monopolistic competition is characterized by

a large number of sellers with a similar product.

Microsoft's two main products, Windows and Office, could be examples of

a natural monopoly

Marshall Field's and Sterns Department Stores are examples of low-cost producers in a perfect competition market. (T/F)

False

Outputs are always good. (T/F)

False

Perfect competition requires a nonstandard product. (T/F)

False

The average product is calculated by dividing input by the number of hours worked. (T/F)

False

The short-term cost function assumes that

Fixed costs can't be changed

An example of variable costs is

Hourly labor

An oligopoly occurs when there

are a few sellers in a market.

Monopolies generally _____________ technology and globalization

are reduced in number by

A __________ is anything that might make it more difficult for a competitor to enter a market.

barrier to entry

A ___________ makes it more difficult for a competitor to enter a market.

barrier to entry

Government regulations, such as zoning laws, can act as

barriers to entry

When businesses have market power, they are able to charge a price higher than the price charged by a business in perfect competition. Thus the market power equilibrium on a diagram will be

higher and to the left of the perfect competition equilibrium.

AT&T is an example of a business that used market power to

invest in important research benefiting society

An example of a barrier to entry is

lack of a key resource

Which of the following is NOT an example of a barrier to entry?

lower costs

Marginal revenue is generally __________ for businesses that do not operate under conditions of perfect competition.

lower than the price

Compared to businesses with market power, businesses in perfect competition will charge __________ prices and sell __________ output.

lower; more

From World War II to the early 1970s, GM, Ford, and Chrysler enjoyed

market power

A profit-maximizing monopolist will always charge _______ a perfect competitor would.

more than

A good example of monopolistic competition is

neighborhood restaurants

A profitable business will attract

new competitors

In the long run, monopolistic competition starts to look like

perfect competition

The four main types of market structure are

perfect competition, monopolistic competition, oligopoly, and monopoly.

If music was perfectly competitive, then all performers would

play the same music and charge the same price for concerts

If all of the restaurants in a small town colluded and agreed to raise dinner prices, this would lead to a loss to society because

some dinners that could be served are not.

A business with market power may

sometimes use high profits to research new technologies.

Natural monopolies have been slowly eroded by

technological change

In perfect competition, higher-cost businesses

tend toward oligopolies.

Market power is

the ability to raise prices above the prices that would exist under perfect competition.

Natural monopolies include

the local water company

The easiest way to have a monopoly today is

to have the government protect you

The profit-maximizing rule says that a seller will expand output up to the point

where marginal revenue equals marginal cost

Refer to Table 5.1, which gives Farmer McColl's marginal cost function for barley. If Farmer McColl is currently producing 20 bushels of barley, which of the following is the market price for a bushel of barley?

$0.60

Refer to Table 5.1, which gives Farmer McColl's marginal cost function for barley. If Farmer McColl is currently producing 25 bushels of barley, which of the following could be the market price for a bushel of barley?

$0.75

If a local car dealership can sell 8 cars per day at a price of $25,000 each, but must reduce the price to $24,000 to sell one more car, what is the marginal revenue of the 9th car?

$16,000

If a local diner can sell 50 burgers per day at a price of $5 each, but must reduce the menu price to $4.95 to sell one more burger, what is the marginal revenue of the 51st burger?

$2.45

If Sara can produce 25 muffins for a total cost of $15, but her production process is subject to increasing marginal costs, which of the following could be the total cost of producing 100 muffins?

$80

Refer to Table 5.1, which gives Farmer McColl's marginal cost function for barley. Suppose Farmer McColl is one of 20 farmers in the barley market, and all of the farmers have identical marginal cost functions. If the market price of barley is $1.00 per bushel, which of the following could be the total amount of barley produced in the market?

700

What word describes the money that a business pays for its inputs?

Costs

The local department store used to be ___________ before technological change.

A monopoly

__________ is paid communication with potential customers in a public medium, such as newspapers and television.

Advertising

Which of the following is an example of a profit-maximizing business?

An accountant who makes her living preparing tax returns for other people.

Inputs to production do NOT include

Average product

Output divided by the number of hours worked or by the number of workers is called

Average product

Refer to Table 5.1, which gives Farmer McColl's marginal cost function for barley. If the current market price for barley is $1.00 per bushel, how much barley should Farmer McColl produce?

Between 30 and 40 bushels

The technology or knowledge necessary for the production process is called

Business know-how

The difference between long-term and short-term profit maximization is that in the short term,

Businesses focus on achieving as much profit as they can, given that fixed costs cannot be changed.

The long-lived physical equipment and structures that a business uses in its production process are called

Capital

If two or more oligopolistic companies work together to keep their prices high and split the market between them, this is called

Collusion

Profit is the difference between revenue and

Cost

If you add too many inputs, your business may experience

Diminishing marginal product

Many times, technology is _____ in the equipment a company buys.

Embodied

If June can earn $1,500 in revenue from painting two houses, how much can she earn in revenue from painting three houses? (Assume she is just one housepainter in a large market of housepainters, and that she can easily find a third customer.)

Exactly $2,250

Businesses will generally shut down if they lose money for one or two years. (T/F)

False

Cost is what a business receives after subtracting expenses from revenue. (T/F)

False

Inputs for a business are the goods and services that it sells to its customers. (T/F)

False

In perfect competition, a profit-maximizing business will expand until its _________ equals the market price.

Marginal cost

The added expense of producing one more unit of output is called the

Marginal cost

_________ is the added cost to produce one more unit of output.

Marginal cost

The extra amount of output a business can generate by adding one more hour of labor is called

Marginal product

The additional money a business gets from producing and selling one more unit of output is

Marginal revenue

_____________ is the added revenue from producing and selling one more unit of output.

Marginal revenue

A profit-maximizing business will increase production as long as

Marginal revenue exceeds marginal cost

As the market price of a good rises, businesses will respond by producing more of that good because

Marginal revenue exceeds marginal cost after the price increase.

___________ is the ability to raise prices above the level perfect competition would produce by restricting the quantity supplied.

Market power

In perfect competition, all businesses in a market produce at the point where ________ equals __________.

Market price; marginal cost

Economists generally assume that the main goal of most businesses in the economy is to

Maximize profits

A business can escape perfect competition by building a better, more innovative product. (T/F)

True

A production function tells you, given the inputs, what the output will be. (T/F)

True

Advertising a brand can help create a reputation effect. (T/F)

True

Businesses have two types of cost: fixed and variable. (T/F)

True

In a market with perfect competition, given enough time and no barriers to entry, profits will tend toward zero in the long run. (T/F)

True

In perfect competition, a profit-maximizing business will expand until its marginal cost equals the market price. (T/F)

True

In perfect competition, all buyers and sellers are price takers. (T/F)

True

In perfect competition, if there are no barriers to entry, only the lowest-cost businesses survive over the long run. (T/F)

True

Marginal cost is the added expense of producing one more unit of output. (T/F)

True

Marginal revenue is the additional revenue a business gets from producing or selling one more unit of input. (T/F)

True

Revenue is the money that customers pay for the output of a business. (T/F)

True

The marginal product is the extra amount of output a firm can generate by adding one more hour of labor (or one more worker. (T/F)

True

Under the right circumstances, competition could be a win-win proposition for companies and consumers. (T/F)

True

An example of an oligopoly is the

airline industry

If two drugstores in a market agree that they will both sell Fritos at a higher price, and neither will undercut the other, this is called

collusion


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