module 5

Economists have long debated whether there is a significant loss of well-being to society in markets that are monopolistically competitive rather than perfectly competitive. Which of the following offers the best reason why some economists believe that monopolistically competitive markets are less efficient than perfectly competitive markets?

In contrast to perfectly competitive markets, neither allocative efficiency nor productive efficiency are achieved in monopolistically competitive markets.

Which of the following is true for a firm with a downward-sloping demand curve for its product?

Price equals average revenue but is greater than marginal revenue.

Which of the following is not a characteristic of long-run equilibrium in a monopolistically competitive market?

Production is at minimum average total cost.

The formula for total fixed cost is

TFC = TC - TVC.

Assume that the medical screening industry is perfectly competitive. Consider a typical firm that is making short-run losses. Suppose the medical screening industry runs an effective advertising campaign which convinces a large number of people that yearly CT scans are critical for good health. How will this affect a typical firm that remains in the industry?

The marginal revenue curve shifts upwards, the firm's output increases along its marginal cost curve, it expands production until it breaks even.

Which of the following describes a difference between the marginal revenue and demand curves of a perfectly competitive firm and a monopolistically competitive firm?

The perfectly competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a monopolistically competitive firm lies below its demand curve.

Which of the following statements is true?

Total cost = fixed cost + variable cost.

Ford Motor Company started producing the Model A at plants scattered around the United States

because diseconomies of scale at its initial River Rouge plant resulted in high production costs.

Monopolistically competitive firms have downward-sloping demand curves. In the long run, monopolistically competitive firms earn zero economic profits. These two characteristics imply that in the long run

monopolistically competitive firms have excess capacity.

In San Francisco there are many restaurants that specialize in a wide variety of cuisines. Patronage at these restaurants is influenced by factors such as tastes, price, and location. This market is

monopolistically competitive.

Which of the following is not a source of technological advancement for a producer?

outsourcing some aspect of production

The entry and exit of firms in a monopolistically competitive market guarantee that

price equals average total cost in the long run.

The change in a firm's total cost from producing one more unit of a good or service is

the definition of marginal cost.

As output increases

the difference between average total cost and average variable cost decreases.

When the marginal product of labor rises

the marginal cost of production falls.

The production function shows

the maximum output that can be produced from each possible quantity of inputs.

If a monopolistically competitive firm lowers its price and, as a result, its total revenue decreases then

the output effect of the price change was less than the price effect.

Hogrocket, which developed the Tiny Invaders game for the iPhone, found that to maintain sales in a profitable competitive market, the price of a product

will usually fall.

Average variable cost can be calculated using any of the formulas below except

Δ(TC - FC)/ΔQ.

A curve showing the lowest cost at which a firm is able to produce a given level of output in the long run is

a long-run average total cost curve.

If, for the last bushel of apples produced and sold by an apple farm marginal revenue exceeds marginal cost, then in producing that bushel the farm

added more to total revenue than it added to total cost.

Minimum efficient scale is defined as the level of output at which

all economies of scale are exhausted.

In the long run

all of the firm's costs are variable costs.

Firms that are price takers

are able to sell all their output at the market price.

The president of Toyota's Georgetown plant was quoted as saying, "Demand for high volumes saps your energy. Over a period of time, it eroded our focus [and] thinned out the expertise and knowledge we painstakingly built up over the years." This quote suggests that

as Toyota expanded its capacity, it experienced diseconomies of scale

Economies of scale exist as a firm increases its size in the long run because of all of the following except

as a firm expands its production, its profit margin per-unit of output increases.

n a diagram showing the average total cost and average variable cost curves, the minimum point of the average total cost is

at a larger level of output than the minimum point of the average variable cost.

If a significant number of consumers switch from consuming traditional baked goods to consuming vegan baked goods, a vegan bakery will likely find its demand curve shifting to the ________ and its marginal revenue curve shifting to the ________ as more competitors enter the market.

left; left

The long run refers to a time period

long enough for a firm to vary all of its inputs, to adopt new technology, and change the size of its physical plant.

A perfectly competitive firm produces 3,000 units of a good at a total cost of $36,000. The price of each good is $10. Calculate the firm's short-run profit or loss.

loss of $6,000

A firm's total profit can be calculated as all of the following except

marginal profit times quantity sold.

The profit-maximizing rule for a monopolistically competitive firm is to select the quantity at which

marginal revenue equals marginal cost.

Vipsana's Gyros House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a gyro is $2.00. Vipsana pays her employees $60 per day. She also incurs a fixed cost of $120 per day. Calculate Vipsana's variable cost per day when she produces 50 gyros using two workers?

$220

Golda Rush quit her job as a manager for Home Depot to start her own hair dressing salon, Goldilocks. She gave up a salary of $40,000 per year, invested her savings of $30,000 (which was earning 5 percent interest) and borrowed $10,000 from a close friend, agreeing to pay 5 percent interest per year. In her first year, Golda spent $18,000 to rent a salon, hired a part-time assistant for $12,000 and incurred another $15,000 in expenses on equipment and hairdressing material. Based on this information, what is the amount of her explicit costs?

$45,500

Which of the following is a reason why a firm would experience diseconomies of scale?

As the size of the firm increases it becomes more difficult to coordinate the operations of its manufacturing plants.

In the mid-1990s, cattle ranchers in the United States kept raising cattle even though prices were at a ten-year low and below average total cost. What is the likely explanation for this?

Continuing to operate resulted in smaller losses than would have been incurred by shutting down.

Firms in perfectly competitive industries are unable to control the prices of the products they sell and earn a profit in the long run. Which of the following is one reason for this?

Firms in these industries sell identical products.

How are sunk costs and fixed costs related?

In the short run they are equal to each other.

Which of the following describes the relative positions of the demand curve and the average total cost ( ATC) curve of a monopolistically competitive firm that earns a profit in the short run?

In the short run, the firm's demand curve will lie above its ATC curve. The demand curve will be tangent to the ATC curve in the long run.

Excess capacity is a characteristic of monopolistically competitive firms. What does excess capacity mean?

It means that firms do not produce the output level that corresponds to the minimum point on their average total cost curves.

Letters are used to represent the terms used to answer this question: price ( P), quantity of output ( Q), total cost ( TC) and average total cost ( ATC). Which of the following equations is equal to a firm's average profit?

P - ATC

If production displays economies of scale, the long-run average cost curve is

downward sloping.

Firms in perfect competition are price takers because

each firm is too small relative to the market to be able to influence price.

For a firm in a perfectly competitive market, price is

equal to both average revenue and marginal revenue

The average total cost of production

equals total cost of production divided by the level of output.

The rules of accounting generally require that ________ costs be used for purposes of keeping a company's financial records and for paying taxes. These costs are sometimes called ________ costs.

explicit; accounting

Average fixed costs of production

fall as long as output is increased.

Long-run equilibrium under monopolistic competition and perfect competition is similar in that

firms break even.

Max Shreck, an accountant, quit his $80,000-a-year job and bought an existing tattoo parlor from its previous owner, Sylvia Sidney. The lease has five years remaining and requires a monthly payment of $4,000. The lease

is a fixed cost of operating the tattoo parlor.

Bill owns "Bill's Home of Blues" a store that specializes in selling CDs and DVDs of blues musicians of the 1960s and 1970s. Bill took out a loan from his bank to pay for his store and its initial inventory. Bill pays the bank $900 per week for his loan. The $900 bank payment

is a fixed cost.

If a monopolistically competitive firm breaks even, the firm

is earning an accounting profit and will have to pay taxes on that profit

The long-run supply curve for a perfectly competitive, constant-cost industry

is horizontal.

The marginal revenue curve for a perfectly competitive firm

is the same as its demand curve.

A monopolistically competitive firm that is profitable in the short run will face competition that will eventually eliminate the firm's profits in the long run. But the firm can stave off competition and continue to earn economic profits if

it can find new ways to differentiate its product.