microeconomics chapter 9

D. Shut down production

A perfectly competitive firm is experiencing the following short-run price and costs: P = $0.80, ATC = $2.20, AVC = $1.30, MC = $0.80. What short-run decision should this firm make? A. Keep output the same B. Increase the price it is selling at C. Increase the output it is producing D. Shut down production

C. Marginal cost is equal to marginal revenue

A perfectly competitive firm will maximize profits at the output level where which of the following is true? A. Average cost is equal to marginal revenue B. Marginal cost is total revenue C. Marginal cost is equal to marginal revenue D. Average total cost is equal to average revenue

A. Price-taker

A single firm in a perfectly competitive market is a _________. A. Price-taker B. Price-maker C. Quantity-taker D. Quality-maker

D. Loss of $40,000

Accountants tell a franchise owner that she earned $30,000 in profits last year. The owner knows that most of her business acquaintances earned at least $70,000 in profits is similar franchises. Which of the following is true? Her firm earned an economic __________. A. Profit of $30,000 B. Profit of $100,000 C. Loss of $100,000 D. Loss of $40,000

A. Positive

Accounting profits at a firm's economic profit break-even point are ________. A. Positive B. Negative C. Zero D. Equal to the firm's total revenue

C. Decrease; increase by more than in the short run

Assume a constant-cost industry in a competitive market. What are the long-term effects of the following change? A decrease in variable costs in the long run will cause the equilibrium price to ______________ and the equilibrium quantity in the market to ______________. A. Not change; not change B. Increase; decrease C. Decrease; increase by more than in the short run D. Decrease; increase less than in the short run

B. Increase; decrease

Assume a constant-cost industry in a competitive market. What are the long-term effects of the following change? An increase in fixed costs will ______________ the equilibrium price and ______________ equilibrium quantity in the market. A. Not change; not change B. Increase; decrease C. Decrease; increase D. Not change; increase

D. Not change; increase

Assume a constant-cost industry in a competitive market. What are the long-term effects of the following change? An increase in the demand for the good will ______________ the equilibrium price and ______________ equilibrium quantity in the goods' market. A. Increase; increase B. Increase; decrease C. Decrease; not change D. Not change; increase

C. Decrease; increase

Assume a constant-cost industry in a competitive market. What are the short-term effects of the following change? A decrease in variable costs in the short run will ______________ the equilibrium price and ______________ equilibrium quantity in the goods' market. A. Not change; not change B. Increase; decrease C. Decrease; increase D. Not change; increase

A. Not change; not change

Assume a constant-cost industry in a competitive market. What are the short-term effects of the following change? An increase in fixed costs will ______________ the equilibrium price and ______________ equilibrium quantity in the market. A. Not change; not change B. Increase; increase C. Decrease; increase D. Not change; increase

A. Increase; increase

Assume a constant-cost industry in a competitive market. What are the short-term effects of the following change? An increase in the demand for the good will ______________ the equilibrium price and ______________ equilibrium quantity in the goods' market. A. Increase; increase B. Increase; decrease C. Decrease; not change D. Increase; not change

D. Decrease; increase

Assume a decreasing-cost industry in a competitive market. What are the long term effects of the following change? An increase in the demand for the good will ______________ the equilibrium price and ______________ equilibrium quantity in the goods' market. A. Increase; increase B. Increase; decrease C. Decrease; not change D. Decrease; increase

A. Increase; increase

Assume an increasing-cost industry in a competitive market. What are the long term effects of the following change? An increase in the demand for the good will ______________ the equilibrium price and ______________ equilibrium quantity in the goods' market. A. Increase; increase B. Increase; decrease C. Decrease; not change D. Not change; increase

The total revenue for 1000 is $20,000 and for 1001 it's $20,020. The average revenue is $20 for both. Marginal revenue is 20 as the firm increases from 1000 to 1001.

Assume that a perfectly competitive firm can sell as much of its product as it wants at a market price of $20. Calculate total revenue and average revenue at production levels of 1000 and 1001 and marginal revenue as the firm goes from 1000 to 1001. Describe the relationship among the variables.

A. Increase; increase

Assume that competitive firms and a competitive market are in long-run equilibrium. Assume a constant cost industry. In the short-run, an increase in demand will cause firm output to ______________ and the market price to ______________. A. Increase; increase B. Remain the same; increase C. Remain the same; remain the same D. Increase; remain the same

C. No change in output

Assume that competitive firms and a competitive market are in long-run equilibrium. In the short run, what will be the effects of an increase in fixed costs on the output of a typical firm in a competitive market? A. An increase in output B. A decrease in output C. No change in output D. Cannot tell

B. A decrease in output

Assume that competitive firms and a competitive market are in long-run equilibrium. In the short run, what will be the effects of an increase in variable costs on the output of a typical firm in a competitive market? A. An increase in output B. A decrease in output C. No change in output D. Cannot tell

C. Exit; decreased

Assume that competitive firms and a competitive market are in long-run equilibrium. What will happen in the long run as a result of that increase in variable costs in the previous question? Firms will ______________ because profits have ______________. A. Enter; decreased B. Enter; increased C. Exit; decreased D. Exit; increased

C. Exit; decreased

Assume that competitive firms and a competitive market are in long-run equilibrium. What will happen in the long run if fixed costs increase? Firms will ______________ because economic profits have ______________. A. Enter; decreased B. Enter; increased C. Exit; decreased D. Exit; increased

D. Remain the same; have increased

Assume that competitive firms and a competitive market are in long-run equilibrium. What will happen in the long run in that same constant cost industry? Prices will ______________ and the market output will ______________ when compared to the levels prior to the increase in demand. A. Have increased; have increased B. Remain the same; remain the same C. Have increased; remain the same D. Remain the same; have increased

A. Increase; not change; not change

Assume the price of coffee increases. If the market for tea is perfectly competitive and a constant cost industry, what will happen to the tea market in the long run? Output will ______________; prices will ______________; and economic profits will ______________Indicate whether increase, decrease, cannot tell, or no change as before the price shift is correct for each blank space. A. Increase; not change; not change B. Decrease; increase; increase C. Increase; not change; decrease D. Decrease; decrease; not change

15

Calculate the economic losses for Firm 1 if they decide to produce -$____. output = 10 AFC= $1 AVC= $2 price=$1.50

120

Calculate the economic losses for Firm 2 if they decide to not produce -$____. output = 20 AFC = $6 AVC = $8 price = $9

100

Calculate the economic losses for Firm 2 if they decide to produce -$____. output = 20 AFC = $6 AVC = $8 price = $9

10

Calculate the economics losses for Firm 1 if they decide not to produce -$____. output = 10 AFC= $1 AVC= $2 price=$1.50

C. Should increase its level of output

Consider a perfectly competitive firm. When the market price is greater than both the firm's marginal cost and average variable cost, the firm ________. A. Is maximizing profits B. Should shut down C. Should increase its level of output D. Should reduce its level of output

B. Increase short-run average costs and long-run average costs.

Consider the effect on costs of an increase in wages in an economy. What is the increase likely to do? A. Increase short-run average costs, but not increase long-run average costs. B. Increase short-run average costs and long-run average costs. C. Increase long-run average costs, but not increase short-run average costs. D. Increase neither short-run or long-run average costs, businesses will use less labor and more capital.

B. There are no significant obstacles preventing firms from entering and leaving the industry

Consider the market structure of perfect competition. What does the lack of entry barriers indicate? A. All firms will end up producing a unique and different product B. There are no significant obstacles preventing firms from entering and leaving the industry C. No new firms can enter an already-established industry D. Firms can enter the industry easily but cannot exit the industry easily

A. Always less

Economic profits are ______________ than accounting profits. A. Always less B. Always more C. Sometimes more D. Sometimes less

D. The same as the price line

For a firm in a perfectly competitive industry, the demand curve for its own product is _________. A. Vertical B. Downward sloping C. The same as the marginal cost curve D. The same as the price line

A. The market price

For a firm in a perfectly competitive market, average revenue equals ________. A. The market price B. Average total cost C. Fixed cost D. Price divided by quantity

marginal revenue = price

For a perfectly competitive firm, what is marginal revenue equal to?

most efficient and lowest cost firms survive

From the point of view of efficiency, which firms are the ones that survive in the long run?

C. Price

Given all the characteristics of perfect competition, which of the following is the main factor that affects consumers' decisions on which firm to purchase a good from? A. Opinions of friends B. Quality of the good C. Price D. Reputation of the firm

market supply found by adding all Qs of firms at given market price -ex: at $15 all 3 firms produce 5000 (total 15,000) and at $10 all firms produce 3000 (total 9000)

How do we obtain the market supply when we know individual firm supply curves?

when MR=MC or when P=MC for perfectly competitive firms -when MR>MC firm can increase profits by producing more -when MR<MC produce/sell goods increase costs more than revenue

How does a firm choose the output level that maximizes its profit?

when P>ATC firm making profit -P=ATC = zero revenue -P<ATC losses

How does a perfectly competitive firm choose the output level that maximizes profits?

horizontal line aka perfectly elastic

How does the individual demand curve for a perfectly competitive firm look line?

use marginal analysis -if additional revenue earned from sale > marginal cost of product of that unit, farmer should produce it

How does the perfectly competitive firm decide how much to produce?

-positive econ profit = firms enter, supply increase, price decrease, econ profit decrease, stop when econ profit no longer being earned -negative econ profit = firm exit, supply decrease, price increase, econ losses decrease, stop when reach 0 (no more losses)

How is long run equilibrium attained in a perfectly competitive market, depending on what kind of economic profits firm make in the short run?

A. Price equals minimum average cost.

If a perfectly competitive industry is in long-run equilibrium, then which of the following is true? A. Price equals minimum average cost. B. Price equals minimum marginal cost C. Accounting profits for all firms are zero D. Economic profits for all firms are positive

A. $3 million

If accounting profits equal $10 million for a firm and the owners could likely earn $7 million in a similar business, the firm's economic profit is ________. A. $3 million B. $7 million C. $10 million D. $13 million

B. $8 million

If accounting profits equal $15 million for a firm and the owners could likely earn $7 million in a similar business, the firm's economic profit is ________. A. $3 million B. $8 million C. $15 million D. $22 million

D. Zero economic profits; smaller

If all firms in a perfectly competitive industry are required to adopt antipollution devices, the long-run results would be that the firms would be earning ______________ and the industry will be producing ______________ amounts of output. A. Economic losses; greater B. Zero economic profits; greater C. Economic losses; smaller D. Zero economic profits; smaller E. Economic profits; greater

B. Downward sloping

In a perfectly competitive industry, the industry demand curve is __________. A. Upward sloping B. Downward sloping C. Horizontal D. Vertical

C. Not sell any units at all

In a perfectly competitive market, a single firm that sets its price a small amount above the market price will do which of the following? A. Make lower profits than other firms, but the exact difference depends on the elasticity of demand for the product B. Have lower revenues but receive zero economic profits C. Not sell any units at all D. Earn profits higher than other firms as long as the other firms continued to charge the market price

D. Perfectly elastic

In perfect competition, the demand curve for an individual's firm product is _________. A. Downward sloping B. Relatively elastic C. Perfectly inelastic D. Perfectly elastic

B. Increase

In the case of an increase in demand, what will happen to the economic profits of the typical competitive firm? Economic profits will ________. A. Not change B. Increase C. Decrease D. Cannot tell

C. Decrease

In the case of an increase in fixed costs, what will happen to the economic profits of the typical competitive firm? Economic profits will ________. A. Not change B. Increase C. Decrease D. Cannot tell

A. An increase in output

In the short run, how will a decrease in variable costs affect the output of a typical firm in a competitive market? A. An increase in output B. A decrease in output C. No change in output D. Cannot tell

A. An increase in output

In the short run, how will an increase in demand affect the output of a typical firm in a competitive market? A. An increase in output B. A decrease in output C. No change in output D. Cannot tell

C. No change in output

In the short run, how will an increase in fixed costs affect the output of a typical firm in a competitive market? A. An increase in output B. A decrease in output C. No change in output D. Cannot tell

B. Price equals marginal cost

In the short run, perfectly competitive firms will produce where which of the following is true? A. Marginal revenue is less than price B. Price equals marginal cost C. Price equals average cost D. Average cost is a minimum

D. Total economic profits

In the theory of firm behavior, we assume that firms attempt to maximize _________. A. Total revenue B. Marginal revenue C. The number of customers D. Total economic profits

B. The good sold by one firm is a perfect substitute of the good sold by another firm in the same market.

Regarding perfect competition, what does it mean when the goods sold by the firms in a market are homogeneous? A. Firms can produce the same good with different inputs and different costs. B. The good sold by one firm is a perfect substitute of the good sold by another firm in the same market. C. The firms in the market are the same size. D. The goods sold by one firm are complements of the goods sold by another firm in another market.

A. Wages B. Raw materials D. Rent

Select all explicit costs from the list below. Multiple answers A. Wages B. Raw materials C. Revenues D. Rent E. Profit earned in similar businesses

E. Profit earned in similar businesses

Select all implicit costs from the list below. A. Wages B. Raw materials C. Revenues D. Rent E. Profit earned in similar businesses

No because they lose more if they produce.

Should Firm 1 produce? Why or why not? if they produce: -$15 don't produce: -$10

Yes because they have more losses if they don't produce.

Should Firm 2 produce? Why or why not? if they produce: -$100 don't produce: -$120

C. Supply; increase

The addition of a single firm in a competitive market will cause the market ______________ to ______________. A. Demand; increase B. Demand; decrease C. Supply; increase D. Supply; decrease E. Supply and demand; not change

A. Individual buyers and sellers cannot affect the market price.

The clothing and attire retail market has seen an increased number of firms entering the industry. Thus, there is a lot of competition in markets for many types of clothing. What is the result of this high amount of competition? A. Individual buyers and sellers cannot affect the market price. B. Firms have a lot of flexibility in pricing their products. C. One individual firm can determine the market price. D. Some firms must necessarily leave since the prices will be too low.

Economic losses are when a firm earns less than the normal profits. If most firms can earn a 10% profit on sales and one specific firm earns a 4% profit on sales the accounting profit would be 4% and the economic losses are 6%.

What are economic losses? Can a firm earn accounting profits and economic losses at the same time? Explain.

D. Zero

What are economic profits at a firm's break-even point? A. Positive and equal to fixed costs B. Positive and equal to opportunity costs C. Negative D. Zero

no fixed costs, all costs variable, firms have free entry and exit

What are the characteristics of the long run in a perfectly competitive market?

-small firm and all produce identical products -many buyers available to buy and many sellers available to sell -sellers and buyers have relevant info to make rational decision -free entry and exit

What are the four characteristics of perfectly competitive markets?

-number of competitors -product type (identical vs. differentiated) -barriers of entry -influence over price

What are the four factors that we analyze in order to determine which type of market we are in?

-perfect competition -monopoly -oligopoly -monopolistic competition

What are the four types of market structures?

1. should firm produce at all? -P<AVC= shut down -P>AVC = firm produce 2. if producing how much to produce? -level where MR=MC

What are the two conditions of a short-run equilibrium?

firm's marginal cost curve above the shutdown point -> upward slope

What is the supply curve for a perfectly competitive firm?

creates technologically and allocatively efficient outcome aka Pareto efficient outcome

What kind of outcome, from efficiency standpoint is a perfectly competitive market creating?

A. Has a positive accounting profit

When a firm earns zero economic profits, it has/does which of the following? A. Has a positive accounting profit B. Has a negative accounting profit C. Cannot continue to produce and should shut down D. Has opportunity costs that are larger than accounting profits

when MR>AVC

When should a firm keep producing?

A. It is difficult or impossible for a firm to enter and compete in the market

Which of the following is NOT true regarding perfectly competitive markets? A. It is difficult or impossible for a firm to enter and compete in the market B. All firms in the market are price takers C. Homogenous goods are sold by the firms D. The market contains many buyers and sellers

C. Easy entry for firms

Which of the following is a characteristic of perfect competition? A. Differentiated products B. A small number of firms competing C. Easy entry for firms D. None of the above

D. A single firm can influence the demand for its product by advertising.

Which of the following is not true regarding a firm in perfectly competition? A. The firm's marginal revenue function is equal to the market price. B. The market demand and supply curves determine the market price. C. The demand curve for a single firm's product is horizontal. D. A single firm can influence the demand for its product by advertising.

C. P = MR

Which of the following is true for a single firm in a perfectly competitive industry? A. P = ATC B. MR = AVC C. P = MR D. P > MR

B. The opportunity cost of society for making the good is equal to society's value of the good.

Why are perfectly competitive markets considered economically efficient? A. There is only a small amount of deadweight loss B. The opportunity cost of society for making the good is equal to society's value of the good. C. Consumers enjoy the goods produced in these markets most D. Firms always have low and identical costs

C. Its production level is too small to affect the market

Why can't a single firm in a perfectly competitive industry influence the market price? A. Its costs are too high B. It is not allowed to advertise C. Its production level is too small to affect the market D. It is a price maker

normal profit

accounting profit that can be earned elsewhere; opportunity cost of capital and other inputs supplied; accounting profit that is foregone

break even point

aka zero economic profit; accounting profits positive; firms where accounting profit = average firm earns (so no profit); not bankrupt but not doing any better compared to next best alternative

perfectly competitive market

buyers and sellers all producing same product, aware of quality and price, can enter and exit easily -ex: agriculture, stock market, small organic farmers

marginal revenue

change in total revenue as firm sells one more unit of good/service

implicit costs

cost a business bears by being in its business and not another; opportunity cost

explicit costs

cost a business pays by writing a check or paying cash -ex: rent, cost of materials, interests on loans

oligopoly

few competitors, more price influence, identical or differentiated product, significant barriers

price taker

firm takes price given by market supply and demand conditions and can do nothing to change price -ex: farmers

monopoly

great deal but not total price influence; only one firm; one product; significant barriers to entry; other end of spectrum

decreasing cost industry

industry expands and price of inputs decreases; long run supply downward slope

constant cost industry

industry expands and price of inputs don't change; long run supply line horizontal

increasing cost industry

industry expands and price of inputs increases; long run supply upward slope

monopolistic competition

many firms, differentiated product, no barriers, some price influence

perfect competition

many other firms producing identical goods; no price control; unusual and one end of spectrum; many firms; no barriers

total revenue

price x quantity

accounting profits

total revenue - explicit costs

average revenue

total revenue / the quantity sold

economic profit

total revenue minus total cost, including both explicit and implicit costs; accounting profits - normal profits; total rev - total opp cost

zero profit point

where MC crosses AC

shutdown point

where MC crosses AVC; if below AVC ____________ bc can't even cover variable costs