Microeconomics Test #2, HPU ECO2030 Principals of Microeconomics - Homework 6, HPU ECO2030 Principals of Microeconomics - Homework 7
Assume that in the short run a firm is producing 100 units of output, has average total costs of $200, and has average variable costs of $150. The firm's total fixed costs are
$5,000
The average fixed cost of producing 3 units of output is
$8
The marginal cost of producing the sixth unit of output is
$8
What do wages paid to factory workers, interest paid on a bank loan, forgone interest, and the purchase of component parts have in common?
All are opportunity costs.
Which of the following is a reason why individual firms under pure competition would not find it gainful to advertise their product?
All firms produce a standardized and homogeneous product.
When a firm is maximizing profit, it will necessarily be
maximizing the difference between total revenue and total cost.
Assume that the market for soybeans is purely competitive, and currently, firms growing soybeans are earning positive economic profits. In the long run, we can expect
new firms to enter, causing the market price of soybeans to fall.
If a profit-seeking competitive firm is producing its profit-maximizing output and its total fixed costs fall by 25 percent, the firm should
not change its output.
The short-run average total cost curve is U-shaped because
of increasing and diminishing returns.
Diseconomies of scale arise primarily because
of the difficulties involved in managing and coordinating a large business enterprise.
A purely competitive firm is precluded from making economic profits in the long run because
of unimpeded entry of new firms to the industry.
Innovations that lower production costs or create new products in perfectly competitive industries
often generate short-run economic profits that disappear in the long run.
In pure competition, if the market price of the product is higher than the minimum average cost of the firms, then
other firms will enter the industry and the industry supply will increase.
The demand schedule or curve confronted by a single purely competitive firm is
perfectly elastic.
When a purely competitive firm is in long-run equilibrium,
price equals marginal cost.
Resources are efficiently allocated when production occurs where
price is equal to marginal cost.
A firm finds that at its MR = MC output, its TC = $1,000, TVC = $800, TFC = $200, and total revenue is $900. This firm should
produce because the resulting loss is less than its TFC.
The Ajax Manufacturing Company is selling in a purely competitive market. Its output is 100 units, which sell at $4 each. At this level of output, total cost is $600, total fixed cost is $100, and marginal cost is $4. The firm should
produce zero units of output.
Allocative efficiency refers to
production at a level where P = MC.
The principle that a firm should produce up to the point where the marginal revenue from the sale of an extra unit of output is equal to the marginal cost of producing it is known as the
profit-maximizing rule.
Which of the following is most likely to be a fixed cost?
property insurance premiums
An industry comprising a very large number of sellers producing a standardized product is known as
pure competition.
A constant-cost industry is one in which
resource prices remain unchanged as output is increased.
Long-run competitive equilibrium
results in zero economic profits.
A patent is the legal right granted to a firm that allows it to
sell its new product exclusively for a given number of years.
Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC. Given this, the firm
should continue producing in the short run but leave the industry in the long run if the situation persists.
Assume that the market for corn is purely competitive, and currently, firms growing corn are suffering economic losses. In the long run, we can expect
some firms to exit, causing the market price of corn to rise.
Past costs that are not affected by new decisions are known as
sunk costs.
The long run is characterized by
the ability of the firm to change all its resources, viz. plant size.
Refer to the diagram. The vertical distance between ATC and AVC reflects
the average fixed cost at each level of output.
Refer to the diagram for a purely competitive producer. The firm's short-run supply curve is
the bcd segment and above on the MC curve.
The difference between the maximum price a consumer is willing to pay for a product and the actual price the consumer pays is
the consumer surplus.
The diagram portrays
the equilibrium position of a competitive firm in the long run.
The basic characteristic of the short run is that
the firm does not have sufficient time to change the size of its plant.
If a firm doubles its output in the long run and its unit costs of production decline, we can conclude that
the firm experiences economies of scale.
Refer to the diagram for a purely competitive producer. If product price is P4,
the firm will earn an economic profit.
If a purely competitive firm is producing where product price exceeds marginal cost of production, then
the firm will fail to maximize profit and resources will be underallocated to the product.
Creative destruction is
the process by which new firms and new products replace existing dominant firms and products.
The difference between the actual price that a producer receives and the minimum acceptable price a producer is willing to accept is
the producer surplus.
The term productive efficiency refers to
the production of a good at the lowest average total cost.
The term allocative efficiency refers to
the production of the product mix most desired by consumers.
A perfectly elastic demand curve for a perfectly competitive producer implies that the firm
can sell as much output as it chooses at the existing price.
Marginal cost is the
change in total cost that results from producing one more unit of output.
Marginal revenue is the
change in total revenue associated with the sale of one more unit of output.
Suppose you find that the price of your product is less than minimum AVC. You should
close down because, by producing, your losses will exceed your total fixed costs.
If the entry or exit of firms does not affect the resource prices in an industry, we refer to it as a
constant-cost industry.
The process by which new firms and new products replace existing dominant firms and products is called
creative destruction.
Suppose the market for corn is a purely competitive, constant-cost industry that is in long-run equilibrium. Now assume that an increase in consumer demand occurs. After all resulting adjustments have been completed, the new equilibrium price will be
the same as the initial equilibrium price, but the new industry output will be greater than the original output.
Refer to the graph. A decrease in fixed costs is shown by
the shift of the short-run average total cost curve from ATC 2 to ATC 1.
Fixed costs are associated with
the short run only.
In a purely competitive industry,
there may be economic profits in the short run but not in the long run.
Diminishing marginal returns become evident with the addition of the
third worker.
Economists use the term imperfect competition to describe
those markets that are not purely competitive.
The Marginal Revenue (MR) = Marginal Cost (MC) rule applies
to firms in all types of industries.
Suppose that, when producing 10 units of output, a firm's AVC is $22, its AFC is $5, and its MC is $30. This firm's
total cost is $270.
Firms seek to maximize
total economic profit.
A firm reaches a break-even point (normal profit position) where
total revenue and total cost are equal.
A purely competitive firm should produce in the short run if its total revenue is sufficient to cover its
total variable costs.
Answer the question on the basis of the following output data for a firm. Assume that the amounts of all nonlabor resources are fixed. Average product is at a maximum when
two workers are hired.
A natural monopoly exists when
unit costs are minimized by having one firm produce an industry's entire output.
Economies and diseconomies of scale explain
why the firm's long-run average total cost curve is U-shaped.
If a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue
will also be $5.
If the market demand for the product increases, in the short run a purely competitive firm
will earn higher profits or experience smaller losses as a result of the change in the market.
Which of the following is an example of "creative destruction"?
Automobile production causes the wagon industry to shut down.
Refer to the diagram. At output level Q, total fixed cost is
BCDE
In a purely competitive industry, each firm
Can easily enter or exit the industry
Productive efficiency refers to
Cost minimization, where P = minimum ATC
Average fixed cost
declines continually as output increases.
The diagram above shows the short-run average total cost (ATC) curves associated with different plant size. As the firm in the diagram expands from plant size #3 to plant size #5, it experiences
diseconomies of scale.
Technological advance improves productivity in a purely competitive industry. This change will result in a shift
down of the individual firm's MC curve, causing the market (industry) supply curve to shift to the right.
If the competitive firm depicted in this diagram produces output Q, it will
earn a normal profit.
If a firm's revenues just cover all its implicit costs, then
economic profit is zero, i.e. the firm makes a normal profit.
The primary force encouraging the entry of new firms into a purely competitive industry is
economic profits earned by firms already in the industry.
Refer to the diagram for a purely competitive producer. If product price is P 3,
economic profits will be zero.
An industry is expected to expand if firms in the industry are earning positive
economic profits.
The ability of Intel to spread product development and other "start-up" costs over a larger number of units of output results in
economies of scale.
The diagram above shows the short-run average total cost (ATC) curves associated with different plant size. As the firm in the diagram expands from plant size #1 to plant size #3, it experiences
economies of scale.
In pure competition, the demand for the product of a single firm is perfectly
elastic because many other firms produce the same product.
Eliminating patents would tend to
encourage innovation in products made up of many different technologies but discourage innovation of easy-to-copy products requiring large R&D costs to create.
Long-run adjustments in purely competitive markets primarily take the form of
entry or exit of firms in the market.
A purely competitive seller is
a "price taker."
To the economist, total cost includes
explicit and implicit costs.
Cash expenditures a firm incurs to pay for resources are called
explicit costs.
If production is occurring where marginal cost of production exceeds the price of the product, the purely competitive firm will
fail to maximize profit and resources will be overallocated to the product.
In the provided diagram, at the profit-maximizing output, total profit is
fgab.
Refer to the diagrams, which pertain to a purely competitive firm producing output q and the industry in which it operates. In the long run we should expect
firms to leave the industry, market supply to fall, and product price to rise.
The short run is characterized by
fixed plant capacity.
Patents are most likely to infringe on innovation
for products that incorporate many different technologies into a single product.
If the demand curve faced by a single profit-maximizing firm is downward-sloping, the firm cannot be
a purely competitive firm.
Which of the following is most likely to be an implicit cost for Company X?
forgone rent from the building owned and used by Company X
Which of the following is most likely to be a variable cost?
fuel and power payments
A constant-cost industry is one in which
if 100 units can be produced for $100, then 150 can be produced for $150, 200 for $200, and so forth.
The MR = MC rule applies
in both the short run and the long run.
To economists, the main difference between the short run and the long run is that
in the long run all resources are variable, while in the short run at least one resource is fixed.
The prices of raw materials increase in a purely competitive industry. This change will result in a(n)
increase (upward shift) in the marginal cost curve for firms in the industry.
If a purely competitive constant-cost industry is realizing economic profits, we can expect industry supply to
increase, output to increase, price to decrease, and profits to decrease.
Entrepreneurs in purely competitive industries
innovate to lower operating costs and generate short-run economic profits.
A decreasing-cost industry is one in which
input prices (e.g. labor wages or raw material costs) fall or technology improves as the industry expands.
The diagram shows the average total cost curve for a purely competitive firm. At the long-run equilibrium level of output, this firm's economic profit
is $400.
The diagram shows the average total cost curve for a purely competitive firm. At the long-run equilibrium level of output, this firm's total cost
is $400.
The diagram shows the average total cost curve for a purely competitive firm. At the long-run equilibrium level of output, this firm's total revenue
is $400.
A patent gives a firm the power to charge a price that
is higher than marginal cost.
Assume the XYZ Corporation is producing 20 units of output. It is selling this output in a purely competitive market at $10 per unit. Its total fixed costs are $100 and its average variable cost is $3 at 20 units of output. This corporation
is making an economic profit of $40.
In the provided diagram, the profit-maximizing output
is n.
The minimum efficient scale of a firm
is the smallest level of output at which long-run average total cost is minimized.
If a firm increases all of its inputs by 10 percent and its output increases by 10 percent, then
it is encountering constant returns to scale.
If a firm decides to produce no output in the short run, its costs will be
its fixed costs.
Allocative efficiency occurs when the
marginal cost of production of a good equals the marginal benefit to society.
The first, second, and third workers employed by a firm add 24, 18, and 9 units to total product, respectively. Therefore, we can conclude that
marginal product of the third worker is 9.
Profit-maximizing firms (e.g. in a perfectly competitive industry) will determine the profit-maximizing (or loss-minimizing) output by equating
marginal revenue and marginal cost.
DASH Airlines is considering the addition of a flight from Red Cloud to David City. The total cost of the flight would be $1,100, of which $800 are fixed costs already incurred. Expected revenues from the flight are $600. DASH should
add this flight, because marginal revenue exceeds marginal costs and total revenue exceeds total variable cost.
In the long run,
all costs are variable costs.
For a purely competitive seller, price equals
all of these.
Refer to the graph. Which one of the following would cause a move from point b on short-run average total cost curve ATC 1 to point e on short-run average cost curve ATC 2?
an increase in the wage rate
Fixed cost is
any cost that does not change when the firm changes its output.
The law of diminishing returns indicates that
as extra units of a variable resource are added to a fixed resource, marginal product will decline beyond some point.
If a technological advance increases a firm's labor productivity, we would expect its
average total cost curve to fall.
The accompanying table gives cost data for a firm that is selling in a purely competitive market. If the market price for this firm's product is $35, it will produce
6 units at a loss of $90.
The accompanying table applies to a purely competitive industry composed of 100 identical firms. At the equilibrium price, each of the 100 firms in this industry will produce
600,000 units of output.
The accompanying table gives cost data for a firm that is selling in a purely competitive market. If the market price for this firm's product is $68.10, it will produce
8 units at an economic profit of $130.72.
The accompanying table gives cost data for a firm that is selling in a purely competitive market. If the market price for this firm's product is $87, it will produce
9 units at an economic profit of $281.97.
Which of the following is a feature of a purely competitive market?
Products are standardized or homogeneous.
The total variable cost of producing 5 units is
$37
Suppose that a business incurred implicit costs of $200,000 and explicit costs of $1 million in a specific year. If the firm sold 4,000 units of its output at $300 per unit, its accounting profits were
$200,000 and its economic profits were $0.
The accompanying table gives cost data for a firm that is selling in a purely competitive market. At 3 units of output, total variable cost is ________ and total cost is ________.
$20; $70
The accompanying table applies to a purely competitive industry composed of 100 identical firms. For each of the 100 firms in this industry, marginal revenue and total revenue will be
$3 and $18,000, respectively.
Suppose that Joe sells pork in a purely competitive market. The market price of pork is $3 per pound. Joe's marginal revenue from selling the 12th pound of pork would be
$3.
The accompanying table applies to a purely competitive industry composed of 100 identical firms. If each of the 100 firms in the industry is maximizing its profit and earning only a normal profit, each must have an average total cost of
$3.
The accompanying table applies to a purely competitive industry composed of 100 identical firms. If each of the 100 firms in the industry is maximizing its profit, each must have a marginal cost of
$3.
The accompanying table gives cost data for a firm that is selling in a purely competitive market. We can infer that, at zero output, this firm's total fixed, total variable, and total costs are
$150, zero, and $150, respectively.
The average total cost of producing 3 units of output is
$16
The accompanying table gives cost data for a firm that is selling in a purely competitive market. If the market price for this firm's product is $15, it will produce
0 units at a loss of $150.
Refer to the diagram. At output level Q, total variable cost is
0BEQ
Refer to the diagram. At output level Q, total cost is
0BEQ + BCDE.
The marginal product of the sixth worker is
15 units of output.
The accompanying table applies to a purely competitive industry composed of 100 identical firms. If each of the 100 firms in the industry is maximizing its profit and earning only a normal profit (i.e. zero economic profit), each must have a total cost of
20,000
The accompanying table applies to a purely competitive industry composed of 100 identical firms. The equilibrium price in this purely competitive market is
3
Which of the following distinguishes the short run from the long run in pure competition?
Firms can enter and exit the market in the long run but not in the short run.
Which of the following is true concerning purely competitive industries?
In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits.
Which of the following is true under conditions of pure competition?
No single firm can influence the market price by changing its production level.
Refer to the diagram for a purely competitive producer. The lowest price at which the firm should produce (as opposed to shutting down) is
P2
Which of the following is an important characteristic of a purely competitive seller's demand curve?
Price and marginal revenue are equal at all levels of output.
Assume a firm closes down in the short run and produces no output. Under these conditions,
TFC and TC are positive, but TVC is zero.
Which of the following is not a necessary characteristic of a purely competitive industry?
The industry or market demand is highly elastic.
If you operated a small bakery, which of the following would be a variable cost in the short run?
baking supplies (flour, salt, etc.)
Refer to the diagram for a purely competitive producer. The firm will produce at a loss at all prices
between P2 and P3.
Under pure competition, in the long run
both allocative efficiency and productive efficiency are achieved.
If for a firm P = minimum ATC = MC, then
both allocative efficiency and productive efficiency are being achieved.
Refer to the diagram. By producing at output level Q,
both productive and allocative efficiency are achieved.