Chapters 9 & 10

If economic cost is $96,000 and total revenue is $120,000, what is the economic profit?

$24,000

If at 10 units of output, total fixed cost is $10 and total variable cost is $16, what is total cost?

$26 Reason: Total costs = fixed costs + variable costs.

Which of the following best explains why the price-marginal cost relationship improves as production increases?

At the very early stages of production, marginal product is low, making marginal cost unusually high.

Which of the following explain the concept of explicit costs?

-A firm's monetary payments to those who supply labor services, materials, fuel, and transportation services. -A firm's monetary payments made for the use of resources owned by others.

With economies of scale, a 10% increase in all resources that causes a 20% increase in output results in which of the following?

A decline in average total cost (ATC)

Which of the following is true of average fixed cost when output increases?

Average fixed cost declines as output increases.

What happens to average product when marginal product exceeds it?

Average product continues to rise.

Identify a correct statement about an industry and its individual firms.

Firms can undertake all desired resource adjustments in the long run.

_____costs are part of the simple existence of a firm's plant and must be paid even when output is zero.

Fixed

Economists group industries into ____ distinct market structures

Four

What type of opportunity cost does a firm incur when it uses resources that it already possesses instead of selling them for cash?

Implicit

Greater labor specialization has which of the following effects?

It eliminates the loss of time that occurs whenever a worker shifts from one task to another.

What happens to average product as additional units of labor are added to a fixed plant?

It increases, reaches a maximum, and then decreases.

Which of the following best describes the average variable cost curve?

It is U-shaped.

Which of the following is true of a firm?

Its decisions regarding what output level to produce are typically marginal decisions.

_____competition is considered to be rare in the real world.

Pure

What is the primary cause of diseconomies of scale?

The difficulty of efficiently controlling and coordinating a firm's operations as it becomes a large-scale producer

What happens to fixed costs when the level of production output reaches zero?

They remain unchanged.

In a purely competitive market, a firm's demand schedule is also its

average revenue schdule

In a purely competitive market, price per unit to a buyer equals:

average revenue to a seller

Firms that operate in a purely competitive industry:

do not differentiate their products

Start-up firms achieve ____ of scale from learning by doing and through increased specialization of labor, management, and equipment.

economies

Learning by doing contributes to a firm's ______.

economies of scale

Which of the following best describes the situation of a price-taking firm? A price-taking firm is one of a ______ number of firms producing a product that is identical to that of every other firm in the industry and providing ______ of total market supply.

large; only a fraction

A ______ is a relatively rare market situation in which average total cost is minimized when only one firm produces the good.

natural monopoly

In the short run, a purely competitive firm can maximize its economic profit (or minimize its loss) by adjusting its

output

In a purely competitive industry, buyers view the products of firms B, C, D and E as ______ for the product of firm A.

perfect substitutes

In a purely competitive industry, an increase in the price of the product produced by firm A will cause buyers to ______.

substitute with products of firms B, C, or D

Firms within pure competition are considered to be price

takers

Changes in ______ and changes in prices of variable inputs alter costs and shift the marginal cost or short run supply curve.

technology

The equation for determining economic profit or loss is ______ minus ______.

total revenue; total cost

Which of the following statements explain why the average variable cost curve is U-shaped?

-As output rises from the initial very low levels, greater specialization occurs, and average variable cost declines. -At low levels of output, production is relatively inefficient and costly.

The U-shape of the long-run average-total-cost curve results from which of the following?

-Economies of scale -Diseconomies of scale

Which of the following is an example of labor specialization?

-Hiring more workers in order to subdivide tasks -Assigning each worker one task instead of five or six

Confronted with the market price of its product, a purely competitive producer will ask which three questions?

-If we produce this product, in what amount? -Should we produce this product? -What economic profit or loss will we realize if we produce this product?

Which of the following result from managerial specialization?

-Lower unit costs -Greater efficiency

Which of the following are examples of variable costs?

-Material Costs -Fuel Costs -Transportation services payment

Which of the following are examples of fixed costs?

-Rental Payments -Interest on a firm's debts

Which of the following features occur in a purely competitive market?

-Sales in both national and international markets. -Many independently acting sellers

What are the components of plant capacity?

-Size of the factory building -Amount of machinery and equipment

Which of the following factors will alter costs and shift the marginal cost or short-run supply curve to a new location?

-Technology -Prices of variable inputs

Which of the following are effects of an increase in the price of labor on the cost curves?

-The average-fixed-cost curve remains the same. -The average-variable-cost, average-total-cost, and marginal-cost curves shift upward.

Marginal cost includes which of the following?

-The cost savings resulting from not producing the last unit of output -All the cost associated with producing the last unit of output

A firm's decision about what output level to produce is typically a ______ decision.

Marginal

What type of cost can be saved by not producing the last unit?

Marginal

The change in total revenue that results from selling one more unit of output is called

Marginal Revenue

What is the term for the extra cost of producing one more unit of output?

Marginal cost

Which of the following costs can a firm control directly and immediately?

Marginal costs

What happens to marginal product when total product is increasing but at a decreasing rate?

Marginal product is positive but falling.

What happens to marginal product when total product is increasing at an increasing rate?

Marginal product is rising.

From an economic standpoint, the break-even point is the level of output at which a firm makes a(n) ______ profit.

Normal

When the marginal cost of an additional unit of output exceeds the marginal revenue, what should the firm do?

Not produce that additional unit of output

Which of the following best describes a pure monopoly?

One firm selling a single unique product, where entry of additional firms is blocked and there is considerable control over price

Which best describes economic costs?

Payments that must be made to obtain a resource

Which resource requires the most time for a firm to adjust, given a change in demand?

Plant Capacity Also includes capital resources

In a purely competitive market, marginal revenue is a constant that is equal to which of the following?

Price

Which of the following is a method of calculating economic profit in pure competition?

Price minus average total cost multiplied by quantity

Which of the following improves as production increases?

Price-marginal cost relationship

Which of the following explains why a firm would not produce a unit of output where MC exceeds MR?

Producing it would add more to costs than to revenue, and profit would decline or loss would increase.

Which market structure has the fewest obstacles to entry or exit?

Pure competition

______ is relatively rare in the real world, although this market model is highly ______ to several industries.

Pure competition; relevant

A purely competitive firm's total revenue curve will

have a constant slope because each extra unit of sales increases total revenue by a constant amount

The quantity of a product supplied by a firm in pure competition should _____ as long as price rises.

increase

A purely competitive firm can maximize its economic profit (or minimize its loss) by adjusting only its output because it ______.

is a price taker

When total product declines, marginal product ______.

is negative

Economies of scale explain the downward-sloping part of the ______ curve.

long-run average-total-cost

The two ways to determine the level of output at which a firm will realize maximum profit or minimum loss are to compare total revenue to ______ and to compare marginal revenue to ______.

total cost; marginal cost

A firm should always stop producing if its average ______ cost is ______ price.

variable; greater than If the price is greater than the firm's average variable costs but less than its average total cost, the firm should continue producing because the loss it will incur is less than the fixed costs it will pay when shut down.

Which industry requires the most time for its firms to alter plant capacity?

Aircraft Manufacturing

Which of the following best describes pure competition?

An industry involving a very large number of firms producing identical products and in which new firms can enter or exit the industry very easily.

What is meant by the phrase "spreading the overhead"?

As production increases, average fixed cost declines.

Which of the following is true where the marginal product curve intersects the average product curve?

Average product is at its maximum.

Which curve first falls and then rises?

Average variable cost curve -The average fixed cost curve starts high and then declines as output rises.

An increase in the price of labor has no effect on which cost curve?

Average-fixed-cost

Which of the following explains why a purely competitive firm's demand curve is perfectly elastic?

Because the individual firm is a price taker, the marginal revenue curve coincides with the firm's demand curve.

Which of the following best summarizes why firms in purely competitive industries do not differentiate their products?

Because there are so many of them selling a standardized product

How is total cost calculated?

By adding total fixed cost and total variable cost

In pure competition, marginal revenue and ____ are equal

price

In pure competition, to calculate economic profit, we first calculate the difference between _____ and average total cost and then multiply it by output.

price

A firm's total revenue is calculated as

price time quanity produced

Total revenue equals ______ times ______.

price; quantity

The MR = MC rule is known as the:

profit-maximizing rule

Increased labor ______ becomes more achievable as a plant increases in size.

specialization

One explanation for the U-shaped average variable cost curve is that greater ______ yields more efficiency and variable cost per unit of output declines

specialization

How is marginal cost (MC) calculated?

By dividing the change in total cost by the change in output

Which best characterizes variable costs?

Costs that change with the level of output

Assuming technology and production techniques are fixed and cannot change, if beyond some point of production a firm experiences declining units of additional output with each additional unit of labor input, then the firm is experiencing the effects of the law of ______.

Diminishing Returns

By using economies of scale, successful start-up firms are able to shift their short-run cost curves in which directions?

Downward and to the right

The ______ cost of any resource used to produce a good is the value or worth the resource would have in its best alternative use. Multiple choice question.

Economic

What is another term for economies of scale?

Economies of mass production

Accounting profit is what remains after a firm has paid its _______ costs.

Explicit

______costs are the monetary payments a firm makes to purchase resources from others.

Explicit

Which factors illustrate that the demand curve for a purely competitive firm is perfectly elastic?

-The firm cannot obtain a higher price by restricting its output. -The firm does not need to lower its price to increase its sales volume.

Average total cost (ATC) for any output level Q is found by:

-adding average fixed cost (AFC) and average variable cost (AVC) at that output. -dividing total cost (TC) by that output (Q).

A purely competitive firm's demand schedule is equal to which of the following?

-marginal revenue -average revenue

A company has three workers. It adds an additional laborer and its total product increases by 21. What is the company's marginal product?

21 Reason: Marginal product is the change in total product divided by the change in input: 21/1 = 21.

In pure competition, if the first unit of output sold increases total revenue from $0 to $131, marginal revenue for that unit is $131. If the second unit sold increases total revenue from $131 to $262, marginal revenue is again $131. The third unit sold increases total revenue to $______ and marginal revenue is now $______.

393; 131

Which of the following illustrates constant returns to scale?

A firm's 10% increase in given inputs, causing a proportionate 10% increase in output

Which of the following explains why a purely competitive firm is a price taker?

A purely competitive firm offers only a negligible fraction of total market supply and therefore must accept the price determined by the market

Which of the following market structures produces only a standardized product?

A purely competitive market

Which of the following is a characteristic of a monopolistically competitive market?

A relatively large number of sellers producing differentiated products

Why does the law of diminishing returns not account for the U-shape of the long-run average-total-cost curve?

In the long run all resources and inputs are variable.

What is the firm's most likely response if price is exactly equal to minimum average variable cost?

Indifference to producing or shutting down

Which of the following best describes oligopoly?

Involves only a few sellers of a standardized or differentiated product, so each firm is affected by the decisions of its rivals.

How does labor specialization allow a worker to become more proficient?

It allows a worker to focus on fewer tasks and become more skilled in performing those tasks.

A firm grows from one to three plants. As a result, the firm's sales increase, leading to greater marketing expertise. This is an example of which of the following?

Learning by doing

From the industry's viewpoint, the _____ run includes enough time for existing firms to dissolve and leave the industry or for new firms to be created and enter the industry.

Long

A firm cannot avoid paying fixed costs in the

Long Run

A time period during which a firm can adjust the quantities of all the resources that it employs, including plant capacity, is known as which of the following?

Long Run

A planning curve is another term for which of the following?

Long run average-total-cost curve

By expanding the size of its operations, a growing firm is able to experience economies of scale to do which of the following?

Lower its average total costs

Which of the following sections of a long-run average total cost curve depicts constant returns to scale?

The flat section

Which of the following best illustrates diseconomies of scale?

The increase in average total costs as a firm expands the size of its plant in the long run

What does the long-run average-total-cost curve show?

The lowest average total cost at which any chosen output level can be produced after the firm has had time to make adjustments in plant size

Which of the following best describes the economic break-even point?

The point where total revenue covers all costs, but there is no economic profit.

Which of the following best describes marginal revenue?

The revenue that an additional unit of output contributes to total revenue

What is the definition of total product (TP)?

The total quantity, or total output, of a particular good or service produced

What is the term for the total quantity of a specific good produced?

Total Product

Multiplying product price by output reveals which of the following?

Total Revenue

The price, multiplied by the firm's output or goods produced, equals ______.

Total Revnue

How is average fixed cost determined?

Total fixed cost divided by output

What is the definition of average variable cost?

Total variable cost divided by change in output (Q)

True or false: Firms within pure competition will produce standardized products.

True

True or false: Hourly labor, raw materials, and fuel are examples of resources a firm can easily adjust.

True

True or false: In an industry with an extended range of constant returns to scale, firms of varying sizes can coexist and be equally profitable.

True

A purely competitive firm's total revenue (TR) is a straight line that slopes ______ and to the ________

Upward/Right

If price is below a firm's minimum average _______ cost, the firm will not operate.

Variable

After a company has determined that it should produce a product and the amount of the product to produce, what basic question should it ask?

What economic profit (or loss) will we realize?

When is marginal cost at its minimum?

When marginal product is at its maximum

When will a firm earn an economic profit?

When price is greater than average total cost.

When total product is at its maximum, marginal product is ______.

Zero

A basic feature of the purely competitive market is the presence of ______.

a large number of sellers

A firm operating in a purely competitive market is a price taker because it ______.

cannot change the market price, it can only adjust to it

Pure ______ involves a very large number of firms.

competition

In a perfectly competitive market, the demand curve for an individual firm is perfectly _____ at the market price

elastic

Each purely competitive firm's demand curve is perfectly _______ at the equilibrium price.

elastic, flat, or horizontal

The profit-maximizing rule of MR=MC states that in the short run, the firm will maximize profit or minimize loss by producing the output for which marginal revenue ______ marginal cost.

equal

An oligopoly has ___ sellers and must consider the decisions of its rivals in determining its own ___ and output.

few; price

A marketing supervisor works in a small plant where she performs a range of duties. As the company grows and hires additional supervisors, she is able to spend the bulk of her time in her area of expertise. In this example, the company has increased its ______.

managerial specialization

A firm would not produce a unit of output where ______.

marginal cost exceeds marginal revenue

If all workers are hired at the same price, the marginal cost of producing each extra unit of output falls provided the ______ of each additional worker is rising.

marginal product

Average product declines when ______.

marginal product is less than average product

A firm will break even where ______ will just cover ______ because the revenue per unit and the average total cost per unit are equal.

marginal revenue; total cost

The marginal-product curve is a mirror image of the ______ curve.

marginal-cost

In heavy industries, small firms are unlikely to realize ______ and will be unable to compete with large-scale producers.

minimum efficient scale

The lowest level of output at which a firm can minimize long-run average costs is called ______.

minimum efficient scale

In which market model do firms rely on product differentiation to distinguish themselves from the competition?

monopolistic competition