BECO Exam 2

If all existing firms and all potential firms have the same cost curves, there are no inputs in limited quantities, and the market is characterized by free entry and exit, then the long-run market supply curve

is horizontal and equal to the minimum of long-run average cost for each firm.

Suppose that a firm in a competitive market faces the following revenues and costs: Quantity: Total Revenue: Total Cost: 0, $0, $3 1, $7, $5 2, $14, $8 3, $21, $12 4, $28, $17 5, $35, $23 6, $42, $30 7, $49, $38 The firm will produce a quantity greater than 4 because at 4 units of output, marginal cost

is less than marginal revenue.

The long-run supply curve for a competitive industry

may be upward-sloping if higher-cost firms enter the industry.

The accountants hired by the Brookside Racquet Club have determined total fixed cost to be $75,000, total variable cost to be $130,000, and total revenue to be $125,000. Because of this information, in the short run, the Brookside Racquet Club should

shut down because staying open would be more expensive. $75,000+$130,000=$205,000 $205,000 TC $125,000 TR TC > TR

In a market with 1,000 identical firms, the short-run market supply is the

sum of the quantities supplied by each of the 1,000 individual firms at each price.

When fixed costs are ignored because they are irrelevant to a business's production decision, they are called

sunk costs.

The total variable cost curve is always declining because

we are dividing fixed costs by higher and higher levels of output

In the long run, assuming that the owner of a firm in a competitive industry has positive opportunity costs, she

will earn zero economic profits but positive accounting profits.

The table represents a demand curve faced by a firm in a competitive market. Price: Quantity: $4, 0 $4, 1 $4, 2 $4, 3 $4, 4 $4, 5 For a firm operating in a competitive market, the marginal revenue from selling the 3rd unit is

$4

# of Workers: Output: FC: VC: TC: 0, 0, $50, $0, $50 1, 90, $50, $20, $70 2, 170, $50, $40, $90 3, 230, $50, $60, $110 4, 240, $50, $80, $130 At which number of workers does diminishing marginal product begin?

2 workers.

# of Workers: Output: FC: VC: TC: 0, 0, $50, $0, $50 1, 90, $50, $20, $70 2, 170, $50, $40, $90 3, 230, $50, $60, $110 4, 240, $50, $80, $130 If the firm can sell its output for $1 per unit, what is the profit-maximizing level of output?

230 units.

Suppose that a firm in a competitive market faces the following revenues and costs: Quantity: Total Revenue: Total Cost: 0, $0, $3 1, $7, $5 2, $14, $8 3, $21, $12 4, $28, $17 5, $35, $23 6, $42, $30 7, $49, $38 The firm will not produce an output level beyond

6 units

A competitive firm's short-run supply curve is part of what curve?

Marginal cost.

What represents the firm's short-run condition for shutting down?

Shut down if TR < VC

What assumption is often realistic for a firm in the short run?

The firm can vary the number of workers it employs but not the size of its factory.

What can be added to profit to obtain total revenue?

Total cost.

When adding another unit of labor leads to an increase in output that is smaller than the increases in output that resulted from adding previous units of labor, the firm is experiencing

diminishing marginal product.

Whenever a perfectly competitive firm chooses to change its level of output, its marginal revenue

does not change

The market demand curve for a monopolist is typically

downward sloping

What is the shape of the monopolist's marginal revenue curve?

downward-sloping line that lies below the demand curve

Total cost can be divided into two types of costs:

fixed costs and variable costs.

Competitive markets are characterized by

free entry and exit by firms.

In a competitive market with identical firms,

free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run.

In the long run the market supply

could be upward sloping if the cost of production rises as new firms enter the market.

Patent and copyright laws encourage

creative activity, and research and development

A difference between explicit and implicit costs is that

implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do.

A firm that has little ability to influence market prices operates in a

competitive market.

Jane was a partner at a law firm earning $223,000 per year. She left the firm to open her own law practice. In the first year of business she generated revenues of $347,000 and incurred explicit costs of $163,000. Jane's economic profit from her first year in her own practice is

$-39,000 $347,000-$163,000-$223,000=$-39,000

Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat. Tony's economic profit equals

$-80 $300-$130=$170 $170-$250=$-80

Wanda owns a lemonade stand. She produces lemonade using five inputs: water, sugar, lemons, paper cups, and labor. Her costs per glass are as follows: $0.01 for water, $0.02 for sugar, $0.03 for lemons, $0.02 for cups, and $0.10 for the opportunity cost of her labor. She can sell 300 glasses for $0.50 each. What are Wanda's explicit costs per glass?

$.08

Wanda owns a lemonade stand. She produces lemonade using five inputs: water, sugar, lemons, paper cups, and labor. Her costs per glass are as follows: $0.01 for water, $0.02 for sugar, $0.03 for lemons, $0.02 for cups, and $0.10 for the opportunity cost of her labor. She can sell 300 glasses for $0.50 each What are Wanda's implicit costs per glass?

$.10

Wanda owns a lemonade stand. She produces lemonade using five inputs: water, sugar, lemons, paper cups, and labor. Her costs per glass are as follows: $0.01 for water, $0.02 for sugar, $0.03 for lemons, $0.02 for cups, and $0.10 for the opportunity cost of her labor. She can sell 300 glasses for $0.50 each. What are Wanda's total economic costs per glass?

$.18 $.08+$.10=$.18

Brady Industries has average variable costs of $1 and average total costs of $3 when it produces 500 units of output. The firm's total fixed costs equal

$1,000

Katherine gives piano lessons for $20 per hour. She also grows flowers, which she arranges and sells at the local farmer's market. One day she spends 5 hours planting $50 worth of seeds in her garden. Once the seeds have grown into flowers, she can sell them for $150 at the farmer's market. Katherine's accounting profits are

$100, and her economic profits are $0 $150-$50=$100

Wanda owns a lemonade stand. She produces lemonade using five inputs: water, sugar, lemons, paper cups, and labor. Her costs per glass are as follows: $0.01 for water, $0.02 for sugar, $0.03 for lemons, $0.02 for cups, and $0.10 for the opportunity cost of her labor. She can sell 300 glasses for $0.50 each. What are Wanda's total accounting profits?

$126 $.08x300=$24 $.5x300=$150 $150-$24=$126

Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat. Tony's accountant would calculate the total cost of his farming to equal

$130 $130 worth of seeds

Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat. Tony's accounting profit equals

$170 $300-$130=$170

Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat. An economist would calculate Tony's total cost to equal

$380 $300+$130=$430 $25x2=$50 $430-$50=$380

Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat. What is the total opportunity cost of the day that Farmer Tony spent in the field planting wheat?

$380 $300+$130=$430 $25x2=$50 $430-$50=$380

The table represents a demand curve faced by a firm in a competitive market. Price: Quantity: $4, 0 $4, 1 $4, 2 $4, 3 $4, 4 $4, 5 For a firm operating in a competitive market, the average revenue from selling 3 units is

$4

Bev is opening her own court-reporting business. She financed the business by withdrawing money from her personal savings account. When she closed the account, the bank representative mentioned that she would have earned $300 in interest next year. If Bev hadn't opened her own business, she would have earned a salary of $25,000. In her first year, Bev's revenues were $30,000. What is Bev's economic profit?

$4,700 $30,000-$25,000-$300=$$4,700

Cody builds mailboxes. If he charges $20 for each mailbox, his total revenue will be

$500 if he sells 25 mailboxes. $20x$25=$500

Joy sells 200 glasses of iced tea at $0.50 each. Her total costs are $25. Her profits are

$75 200x$.50=$100 $100-$25=$75

Wanda owns a lemonade stand. She produces lemonade using five inputs: water, sugar, lemons, paper cups, and labor. Her costs per glass are as follows: $0.01 for water, $0.02 for sugar, $0.03 for lemons, $0.02 for cups, and $0.10 for the opportunity cost of her labor. She can sell 300 glasses for $0.50 each. What are Wanda's total economic profits?

$96 $.18x300=$54 $.5x300=$150 $150-$54=$96

Comparing marginal revenue to marginal cost: (i) reveals the contribution of the last unit of production to total profit. (ii) is helpful in making profit-maximizing production decisions. (iii) tells a firm whether its fixed costs are too high.

(i) and (ii) only

Suppose that a firm operating in perfectly competitive market sells 100 units of output. Its total revenues from the sale are $500. Which of the following statements is correct? (i)Marginal revenue equals $5. (ii)Average revenue equals $5. (iii)Price equals $5.

(i), (ii), and (iii)

In a perfectly competitive market, the process of entry and exit will end when (i) accounting profits are zero. (ii) economic profits are zero. (iii) price equals minimum marginal cost. (iv) price equals minimum average total cost.

(ii) and (iv) only

# of Workers: Output: FC: VC: TC: 0, 0, $50, $0, $50 1, 90, $50, $20, $70 2, 170, $50, $40, $90 3, 230, $50, $60, $110 4, 240, $50, $80, $130 The marginal product of the fourth worker is The marginal product of the third worker is The marginal product of the second worker is

10 units. 240-230=10 60 units. 230-170=60 80 units. 170-90=80

Suppose that a firm in a competitive market faces the following revenues and costs: Quantity: Total Revenue: Total Cost: 0, $0, $3 1, $7, $5 2, $14, $8 3, $21, $12 4, $28, $17 5, $35, $23 6, $42, $30 7, $49, $38 In order to maximize profits, the firm will produce

6 units of output because marginal revenue equals marginal cost.

What is a characteristic of a natural monopoly?

Average total cost declines over large regions of output.

Which of the following statements regarding a competitive firm is correct?

For all firms, average revenue equals the price of the good.

What is an example of an implicit cost?

Foregone rent on office space owned and used by the firm.

If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then

a one-unit decrease in output will increase the firms profit.

At low levels of production, the firm a. benefits from increased size because it can take advantage of greater specialization. b. has the potential for economies of scale. c. is unlikely to experiences acute problems with coordination. d. All of the above are correct.

a. All of the above are correct.

For a firm operating in a competitive industry, which of the following statements is not correct? a. Total revenue is constant. b. Price equals marginal revenue. c. Marginal revenue is constant. d. Price equals average revenue.

a. Total revenue is constant.

Which of the following statements best expresses a firm's profit-maximizing decision rule?

all of the above: - if marginal revenue is greater than marginal cost, the firm should increase its output. - if marginal revenue is less than marginal cost, the firm should decrease its output. - if marginal revenue equals marginal cost, the firm should continue producing its current level of output.

Fixed costs can be defined as costs that

are incurred even if nothing is produced.

The table represents a demand curve faced by a firm in a competitive market. Price: Quantity: $4, 0 $4, 1 $4, 2 $4, 3 $4, 4 $4, 5 A firm operating in a competitive market maximizes total revenue by producing

as many units as possible.

The marginal cost curve intersects the average total cost curve

at the efficient scale.

In the long-run equilibrium of a market with free entry and exit, marginal firms are operating

at their efficient scale.

When marginal cost exceeds average total cost,

average total cost must be rising.

The firm's efficient scale is the quantity of output that minimizes

average total cost.

Which of the following is not an example of a barrier to entry? a. A musician obtains a copyright for her original song. b. An entrepreneur opens a popular new restaurant. c. A pharmaceutical company obtains a patent for a specific high blood pressure medication. d. Mighty Mitch's Mining Company owns a unique plot of land in Tanzania, under which lies the only large deposit of Tanzanite in the world.

b. an entrepreneur opens a popular new restaurant.

What is a characteristic of a monopoly?

barriers to entry

When firms are said to be price takers, it implies that if a firm raises its price,

buyers will go elsewhere.

Mrs. Smith operates a business in a competitive market. The current market price is $8.50. At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should a. shut down in both the short run and long run. b. shut down her business in the short run but continue to operate in the long run. c. continue to operate in both the short run and long run. d. continue to operate in the short run but shut down in the long run.

c. continue to operate in both the short run and long run.

Suppose a firm in each of the two markets listed below were to increase its price by 20 percent. In which pair would the firm in the first market listed experience a dramatic decline in sales, but the firm in the second market listed would not? a. gasoline and restaurants b. spiral notebooks and college textbooks c. corn and soybeans d. water and cable television

c. spiral notebooks and college textbooks

When a profit-maximizing firm's fixed costs are considered sunk in the short run, then the firm

can safely ignore fixed costs when deciding how much output to produce.

Suppose that a firm in a competitive market is currently maximizing its short-run profit at an output of 50 units. If the current price is $9, the marginal cost of the 50th unit is $9, and the average total cost of producing 50 units is $4, what is the firm's profit? a. $0 b. $450 c. $200 d. $250

d. $250 $9x50=$450 $4x50=$200 $450-$200=$250

Because monopoly firms do not have to compete with other firms, the outcome in a market with a monopoly is often a. not in the best interest of society. b. one that fails to maximize total economic well-being. c. inefficient. d. All of the above are correct.

d. All of the above are correct.

In the long run, a firm will enter a competitive industry if a. total revenue exceeds total cost. b. the price exceeds average total cost. c. the firm can earn economic profits. d. All of the above are correct.

d. All of the above are correct.

Suppose Jan started up a small lemonade stand business last month. Variable costs for Jan's lemonade stand now include the cost of a. lemons and sugar. b. paper cups. c. the wages paid to her hourly workers. d. All of the above are correct.

d. All of the above are correct.

Which of the following is not a characteristic of a competitive market? a. Each firm sells a virtually identical product. b. Buyers and sellers are price takers. c. Each firm chooses an output level that maximizes profits. d. Entry is limited.

d. Entry is limited

You purchase a $30, nonrefundable ticket to a play at a local theater. Ten minutes into the show you realize that it is not a very good show and place only a $10 value on seeing the remainder of the show. Alternatively you could leave the theater and go home and watch TV or read a book. You place an $8 value on watching TV and a $6 value on reading a book. a. You should leave the theater since the net benefit from seeing the remainder of the show is -$20, while going home will earn you at least $8 of satisfaction. b. You should go home and watch TV. c. You should go home and read a book. d. You should stay and watch the remainder of the show.

d. You should stay and watch the remainder of the show. You already paid for the nonrefundable ticket.

A seller in a competitive market a. can sell all he wants at the going price, so he has little reason to charge less. b. will lose all his customers to other sellers if he raises his price. c. considers the market price to be a "take it or leave it" price. d. All of the above are correct.

d. all of the above are correct.

Which of the following is not a property of a firm's cost curves? a. Marginal cost must eventually rise as a result of diminishing marginal product. b. Economies of scale will exist when average total cost falls as output rises. c. Average total cost is U-shaped. d. Average total cost will cross marginal cost at the minimum of marginal cost.

d. average total cost will cross marginal cost at the minimum of marginal cost.

Carol owns a running shoe store that operates in a perfectly competitive market. If running shoes sell for $120 per pair and the average total cost per pair of shoes is $125 at the profit-maximizing output level, then in the long run a. average total costs will fall. b. the equilibrium price per pair of shoes will fall. c. more firms will enter the market. d. some firms will exit from the market.

d. some firms will exit from the market. Profit < Avg. TC at the profit maximizing output level.

Suppose that a "doggie day care" firm uses only two inputs: hourly workers (labor) and a building (capital). In the short run, the firm most likely considers

labor to be variable and capital to be fixed.

Diseconomies of scale occur when a firm's

long-run average total costs are increasing as output increases.

Constant returns to scale occur when a firm's

long-run average total costs do not vary as output increases.

Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura specializes in making wedding cakes. Laura sells 20 wedding cakes per month. Her monthly total revenue is $5,000. The marginal cost of making a wedding cake is $300. In order to maximize profits, Laura should

make fewer than 20 wedding cakes per month.

The competitive firm's short-run supply curve is its

marginal cost curve, but only the portion above the minimum of average variable cost.

At the profit-maximizing level of output,

marginal revenue equals marginal cost.

Max sells maps. The map industry is competitive. Max hires a business consultant to analyze his company's financial records. The consultant recommends that Max increase his production. The consultant must have concluded that Max's

marginal revenue exceeds his marginal cost.

Economists assume that the typical person who starts her own business does so with the intention of

maximizing profits.

Free entry means that

no legal barriers prevent a firm from entering an industry.

The marginal product of labor can be defined as the change in

output divided by the change in labor.

The simplest way for a monopoly to arise is for a single firm to

own a key resource

Because many good substitutes exist for a competitive firm's product, the demand curve that it faces is

perfectly elastic

In the short run, a firm operating in a competitive industry will produce the quantity of output where price equals marginal cost as long as the

price is greater than average variable cost.

For a monopoly firm, what equality is always true?

price= average revenue

For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $10 and a marginal cost of $7. It follows that the

production of the 100th unit of output increases the firms profit by $3.

A total-cost curve shows the relationship between the

quantity of output produced and the total cost of production.

A production function is a relationship between inputs and

quantity of output.

Explicit costs

require an outlay of money by the firm.

Thirsty Thelma owns and operates a small lemonade stand. When Thelma is producing a low quantity of lemonade she has few workers and her equipment is not being fully utilized. Because she can easily put her idle resources to use,

the marginal cost of one more glass of lemonade is smaller than if output were high.

The amount of money that a firm pays to buy inputs is called

total cost.

The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average

total cost.

Average total cost is equal to

total cost/output

Accounting profit is equal to

total revenue minus the explicit cost of producing goods and services.