Chapter 6-7 Econ 102 Principles of Microeconomics

Which of the following statements is true?

Accounting profit is greater than or equal to economic profit.

Which of the following is NOT true of a perfectly competitive firm?

It seeks to maximize revenue

If you were to start your own business, your implicit costs would include the:

opportunity cost of the time you spend working at the business

Individual supply curves generally slope ______ because ______.

upward; of increasing opportunity costs

As the market price of a service increases, more potential sellers will decide to perform that service because:

more potential sellers will find that the market price exceeds their reservation price

A price ceiling that is set below the equilibrium price will cause:

producer surplus to fall

An example of an implicit cost is:

the value of a spare bedroom turned into a home office

The accompanying graph shows the cost curves for Moe's mushroom gathering business, which is perfectly competitive. If mushrooms sell for $10 per bushel, and Moe chooses the profit-maximizing quantity, he will gather:

zero bushels

Refer to the accompanying figure. When this market is in equilibrium, total producer surplus in the market is ______ per day.

$250

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the accompanying table. Time cleaning windows (hours/day) Total number of windows cleaned 0 0 1 7 2 11 3 14 4 16 5 17 A second hour cleaning windows will yield additional earnings of ______.

$8

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. The firm depicted in the graph on the right faces a demand curve that is:

horizontal at the market price

A rational seller will sell another unit of output:

if the cost of making another unit is less than the revenue gained from selling another unit

One implication of the shape of the demand curve facing a perfectly competitive firm is that:

if the firm increases its price above the market price, it will earn zero revenue

Suppose that when a perfectly competitive firm produces 1,000 units of output, its total variable cost is $1,900. If the marginal cost of producing the 1,000th unit is $1.70, and if the market price of each unit of output is $1.70, then the firm should:

shut down

Refer to the accompanying graph. If this firm is a price taker and the price of each unit of output is $9, then this firm should:

shut down in the short run

Suppose you own a small business. Last month, your total revenue was $6,000. In addition, you paid: $1,000 in monthly rent for office space, $200 in monthly rent for equipment, $3,000 to your workers in wages for the month, and $1,000 for the supplies you used that month. If you correctly determine that your economic profit last month was negative $200, then it must be true that:

your implicit costs are $1,000 per month

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. If S3 is the market supply curve, then each firm in this market will earn an economic loss of ______ per week.

$1,500

If a firm shuts down in the short run, then its:

economic loss will equal its fixed costs

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. The long-run equilibrium price in this industry is:

$10

Last year Christine worked as a consultant. She hired an administrative assistant for $15,000 per year and rented office space (utilities included) for $3,000 per month. Her total revenue for the year was $100,000. If Christine hadn't worked as a consultant, she would have worked at a real estate firm earning $40,000 a year. Last year, Christine's accounting profit was ______ and her economic profit was ______.

$49,000; $9,000

Suppose a firm uses workers and office space to produce output. The firm is locked into a year-long lease on its office space, but it can easily vary the number of employee-hours it uses each day. The accompanying table describes the relationship between the number of employee-hours the firm uses each day and the firm's daily output. Each unit of output sells for $2, the hourly wage rate is $14, and the rent on the office space is $50 per day. Employee-Hours Per Day Output Per Day 0 0 1 40 4 80 9 120 15 160 23 200 This firm's fixed cost each day is:

$50

Last year Christine worked as a consultant. She hired an administrative assistant for $15,000 per year and rented office space (utilities included) for $3,000 per month. Her total revenue for the year was $100,000. If Christine hadn't worked as a consultant, she would have worked at a real estate firm earning $40,000 a year. Last year, Christine's explicit costs were ______, and her implicit costs were ______.

$51,000; $40,000

Refer to the accompanying graph. If this firm is a price taker, then when the price of each unit of output is $30, how much profit does this firm earn at its profit-maximizing level of output?

$800

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the accompanying table. Time cleaning windows (hours/day) Total number of windows cleaned 0 0 1 7 2 11 3 14 4 16 5 17 How many hours a day should John spend cleaning windows?

2

Suppose Chris is a potter who makes mugs. His total costs depend on the number of mugs he makes each day, as shown in the accompanying table. Number of Mugs Per Day Total Cost Per Day 0 $10 1 $14 2 $19 3 $25 4 $32 5 $40 6 $49 If the market for mugs is perfectly competitive, and mugs sell for $7.50 each, then Chris should make ______ mugs per day.

4

The accompanying graph shows the cost curves for Moe's mushroom gathering business, which is perfectly competitive. Moe's short run supply curve is:

curve A above curve C

Suppose a perfectly competitive firm is producing 77 units of output, and the marginal cost of the 77th unit is 11. If the firm can sell each unit of output for $8 and the firm's revenue is sufficient to cover its variable cost, the firm should:

decrease production

The accompanying graph shows the cost curves for Moe's mushroom gathering business, which is perfectly competitive. If mushrooms sell for $40 per bushel, and Moe chooses the profit-maximizing quantity, he will:

earn positive profit

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. If the market supply curve is given by S1, then in the long run firms will:

enter the market, leading the market supply curve to shift out to S2

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. If the market supply curve is given by S3, then we would expect firms to:

exit the market in the long run

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. If the market supply curve is given by S3, then in the long run firms will:

exit the market, leading the market supply curve to shift back to S2

To produce 150 units of output, a firm must use 3 employees per day. To produce 300 units of output, the firm must use 8 employees per day. Apparently, the firm is:

experiencing diminishing return

One difference between the long run and the short run in a perfectly competitive industry is that:

firms necessarily earn zero economic profit in the long run but may earn positive or negative economic profit in the short run

If it is possible to make a change that will help some people without harming others, then the situation is:

inefficient

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. In the short run, firms in this market will shut down if the market price is:

less than $5

Refer to the table below. Suppose all firms in this industry have identical costs to this firm and are producing 15 units of output. One can predict that: Quantity - Total Revenue - Explicit Costs - Implicit Costs 10 50 36 5 15 75 63 6 20 100 93 7 25 125 125 8 30 150 161 9

new firms will enter the industry.

A situation is efficient if it is:

not possible to find a transaction that will make at least one person better off without harming others.

The accompanying graph shows the cost curves for Moe's mushroom gathering business, which is perfectly competitive. The curve labeled A is upward sloping because:

of diminishing returns to Moe's variable factors of production

Suppose that when a perfectly competitive firm produces 500 units of output a day, it earns an economic loss. If the price of each unit of output is $1.50, then, in the short run, it's clear that this firm:

should not shut down if its total variable cost is less than $750

Suppose that when a firm produces the level of output at which price equals marginal cost, the firm's total revenue is less than its variable cost. In this case, the firm should:

shut down