MicroEconomics chapter 7 Study Guide

I'MaGadgetCo. produces and sells widgets. Last year, it produced 9,000 widgets and sold each one for $8. To produce the 9,000 widgets, the company incurred variable costs of $27,000 and a total cost of $36,000. I'MaGadgetCo's average fixed cost to produce 9,000 widgets was

A. $1

_____________ is calculated by taking the quantity of everything that is sold and multiplying it by the sale price.

A. Total revenue

In order to reduce the harmful affects of recession and carbon emissions, the government provided tax incentives for manufacturing firm's to ___________________ that provide alternative, more efficient methods of combining inputs to produce output.

A. acquire energy efficient production technologies

Fixed costs are important because, at least in the ___________, the firm _______________.

B. short run; cannot alter them

Which of the following should typically be ignored because spending has already been made and cannot be changed?

B. sunk costs

In order to determine the average variable cost, the firm's variable costs are divided by _______________________.

B. the quantity of output

The marginal cost curve is generally ______________, because diminishing marginal returns implies that additional units are ________________________.

B. upward-sloping; more costly to produce

______________ include all of the costs of production that increase with the quantity produced.

B. variable costs

____________________________ occur when the marginal gain in output diminishes as each additional unit of input is added.

C. diminishing marginal returns

The term __________________ describes a situation where the quantity of output rises, but the average cost of production falls

C. economies of scale

In order to calculate marginal cost, the change in ______________ is divided by the amount of change in quantity.

C. either total cost or variable cost

________________________ arises where many firms are competing in a market to sell similar but differentiated products.

C. monopolistic competition

Whatever the firm's quantity of production, _____________ must exceed total costs if it is to earn a profit.

C. total revenue

I'MABigCorp. produces and sells kitchen wares. Last year, it produced 7,000 can openers and sold each one for $6. To produce the 7,000 can openers, the company incurred variable costs of $28,000 and a total cost of $45,000. I'MABIGCorp.'s average fixed cost to produce the 7,000 can openers was

D. $2.43

In order to determine ____________, the firm's total costs must be divided by the quantity of its output.

D. average cost

In microeconomics, the term ___________________ is synonymous with decreasing returns of scale.

D. diseconomies of scale

Briefly describe the spectrum of competitive situations faced by firms in markets.

Firms face different competitive situations. At one extreme there is perfect competition, which involves many firms all trying to sell identical products. At the other extreme there is monopoly, which involves only one firm selling a product, and this firm faces no competition. Monopolistic competition and oligopoly fall between the extremes of perfect competition and monopoly. Monopolistic competition is a situation with many firms selling similar, but not identical, products. An oligopoly refers to a situation with few firms that sell identical or similar products.

Briefly discuss marginal costs, including an explanation of how they are calculated; any condition that is typical to them, and what makes knowing them useful.

Marginal costs are calculated by taking the change in total cost or the change in variable cost, and dividing it by the change in output for each possible change in output. Marginal costs are typically rising. A firm can compare marginal cost to the additional revenue it gains from selling another unit to find out whether its marginal unit is adding to profit.

Briefly explain how the total revenue for a profit-seeking firm is determined.

The total revenue for a profit-seeking firm is determined by the price that a firm can charge and the quantity that it can sell, which in turn will be related to demand for its products and on the number of other firms that are selling similar or identical products.

Briefly explain what is meant by the term "fixed costs" and provide three examples of same. What determines a firm's level of fixed costs?

Fixed costs are expenditures that must be made before production starts and that do not change regardless of the level of production, at least not in the short run of weeks and months. Fixed costs can take many forms: for example, machinery or equipment, physical space for a retail or manufacturing business, research and development costs to develop new technology, even an expense like advertising to popularize a brand name. The level of fixed costs varies according to the specific line of business.

If a firm is experiencing _____________________, then as the quantity of output rises, the average cost of production rises.

A. decreasing returns to scale

A situation where the level of output, scale and average costs are all rising is called

A. decreasing returns to scale B. diseconomies of scale D. both a and b are correct

In economics, a firm that faces no competitors is referred to as _________________.

B. a monopoly

Contrast the role of fixed costs and variable costs in economic decisions about future production and pricing.

Fixed costs are sunk costs because they are in the past and cannot be altered. For this reason, fixed costs should play no role in economic decisions about future production or pricing. Variable costs typically show diminishing marginal returns, so that the marginal cost of producing higher levels of output rises. Variable costs can change over time and should continue to play a role in economic decisions about future production or pricing.

Briefly describe the short-run perspective of a firm's total costs. Provide a brief explanation of what a production technology refers to and explain how production technology relates to a firm's long-run perspective.

In a short-run perspective, a firm's total costs can be divided into fixed costs, which a firm must incur before producing any output, and variable costs, which the firm incurs in the act of producing. A production technology refers to a specific combination of labor, physical capital and technology that makes up a particular method of production. In the long run, firms can choose their production technology, and so all costs become variable costs. In making this choice, firms will try to substitute relatively inexpensive inputs for relatively expensive inputs where possible, so as to produce at the lowest possible long-run average cost.

The term _____________ is used to describe the additional cost of producing one more unit.

D. marginal cost

According to the definition of profit, if a profit-maximizing firm will always attempt to produce its desired level of output at the lowest possible cost, then it will

A. do so regardless of what type of competition exists in a market.

The future of cities in the United States and in other countries will be determined by their ability to benefit from the _________________ and to minimize or counterbalance the ______________________.

A. economies of agglomeration; corresponding diseconomies

When __________________ exist, doubling of all inputs will result in more than doubling output, which means __________________________________________.

A. economies of scale; a larger factory can produce at a lower average cost than a smaller company.

The term "constant returns to scale" describes a situation where

A. expanding all inputs does not change the average cost of production.

A firm's ___________ consist of expenditures that must be made before production starts that typically, over the short run, _______________ regardless of the level of production.

A. fixed costs; do not change

The economies-of-scale curve is a long-run average cost curve, because

A. it allows all factors of production to change.

Marcella operates a small, but very successful art gallery. All but one of the following can be classified as a variable cost arising from the physical inputs Marcella requires to operate her business. Which is it?

A. physical space for the gallery

If a paper mill shuts down its operations for three months so that it produces nothing, its __________________ will be reduced to zero

A. variable costs

Briefly explain what the term "agglomeration economies" refers to and briefly describe what the fundamental reason for the development of this particular type of economy relates to. Provide two examples of factors associated with agglomeration economies and identify what these factors help to explain. Identify two factors that would lead to diseconomies and briefly explain how the future of many of the world's cities will be likely be determined.

Agglomeration economies refer to the economies created by the concentration of large populations in a large city. The fundamental reason for agglomeration economies relates to the idea of economies of scale in a broad sense. Examples of the factors associated with agglomeration economies include: cities provide a large group of nearby customers, so that businesses can produce at an efficient economy of scale; they also provide a large group of workers and suppliers, so that business can hire easily and purchase whatever specialized inputs they need; many of the attractions of cities, like sports stadiums and museums, can only operate if they can draw on a large nearby population base, and cities are also big enough to offer a wide variety of products, which is what many shoppers are looking for. These agglomeration factors help to explain why every economy, as it develops, has an increasing portion of its population living in urban areas. At some point, agglomeration economies must turn into diseconomies due to negative factors that include: traffic congestion may reach a point where the gains from being geographically nearby are counterbalanced by how long it takes to travel. High densities of people, cars and factories can mean more garbage and air and water pollution. Facilities like parks or museums may become overcrowded. There may be economies of scale for negative activities like crime, because high densities of people and businesses, combined with the greater impersonality of cities, make it easier for illegal activities as well as legal ones. The future of cities, both in the United States and in other countries around the world, will be determined by their ability to benefit from the economies of agglomeration and to minimize or counterbalance the corresponding diseconomies.

Briefly discuss average costs, including how they are calculated, how they are typically appear on a graph, and what they relate to profitability.

Average cost is calculated by taking total cost and dividing by total output at each different level of output. Average costs are typically U-shaped on a graph. If a firm's average cost of production is lower than the market price, a firm will be earning profits.

Briefly discuss average variable costs, including how they are calculated, how they typically on a graph, and how they are related to determining profitability.

Average variable cost is calculated by taking variable cost and dividing by the total output at each level of output. Average variable costs are typically U-shaped. If a firm's average variable cost of production is lower than the market price, then the firm would be earning profits if fixed costs are left out of the picture.

I'MaPizzaCo. produces and sells specialty pizzas. Last year, it produced 8,000 mushroom, sausage and spinach pizzas and sold each one for $8. To produce these 8,000 specialty pizzas, the company incurred variable costs of $24,000 and a total cost of $40,000. I'MaPizzaCo's average fixed cost to produce 8,000 specialty pizzas was

B. $2

In the US economy, nearly half of all the workers employed by private firms work at

B. 18,000 large firms that employ more than 500 workers.

Which of the following falls outside of the classification of business expenditures that fall into the category of variable costs?

B. costs of research and development

In microeconomics, the term _____________________ is synonymous with economies of scale.

B. increasing returns to scale

_____________________ help to explain why every economy, as it develops, has an increasing proportion of its population living in urban areas.

C. Agglomeration factors

____________ tells a firm whether it can earn profits given the price in the market.

C. Average cost

___________ include all spending on labor, machinery, tools, and supplies purchased from other firms.

C. Total costs

The _____________________ curve will always lie below the curve for average cost because average cost includes _____________ in the numerator of the calculation.

C. average variable cost; fixed costs

A situation known as _____________________ occurs when all production inputs are allowed to expand, but that expansion does not result in much of a change in the average cost of production.

C. constant returns to scale

The ______________ of all firms can be broken down into some common underlying patterns.

C. cost structure

Which of the following falls outside of the classification of business expenses that fall into the category of fixed costs?

C. costs incurred in the act of producing

Approximately what percentage of the US labor force is employed by firms that have fewer than 100 employees?

D. 35%

If a solar panel manufacturer wants to look at its total costs of production in the short run, which of the following would provide a useful starting point?

D. divide total costs into two categories: fixed costs that can't be changed in the short run and variable costs that can be

Economies of scale may arise from all but one of the following. Which one is it?

D. government economic subsidies protect firms from competition to avoid losses.

Why would labor be treated as a variable cost?

D. producing larger quantities of a good or service generally requires more workers

If I'maJuiceCo. establishes a bottling plant in Delaware, it will most likely

D. use production technologies that conserve on the number of workers.

If a comparison between average cost and price reveals whether a firm is earning profits, then a comparison between average variable cost and price reveals

D. whether the firm is earning profit if fixed costs are left out of the calculation.

Briefly explain what is meant by the term "variable costs" and provide three examples of same.

Variable costs are a firm's costs that are incurred in the act of producing and will increase with the quantity produced. Labor is treated as a variable cost, as are the costs of physical inputs, like the metal and plastic involved in manufacturing a car or the cloth for making shirts and trousers.