Econ 202 Test 2

What is the formula for Total Fixed cost?

(ATC - AVC) x q

2 Properties of Utility

1) More of a good or service always increases utility. 2) The increases in utility will become smaller and smaller with more consumption of any good or service - The Law of Diminishing Marginal Utility.

You are the owner and only employee of a company that writes computer software that is used by gamblers to collect sports data. Last year you earned a total revenue of $90,000. Your costs for equipment, rent, and supplies were $60,000. To start this business you invested an amount of your own capital that could pay you a return of $40,000 a year. A yearly normal rate of return for your computer software firm would be: A) $60,000 B) $40,000 C) $100,000 D) $130,000

B

______ are likely a fixed cost of a firm a) wages paid to employees b) lease payments for office space c) the payments for supplies d) travel expenses to meet with clients

B

Diminishing returns occurs: a) when the marginal product of the variable input declines when additional units are added to the production process b) when the average amount produced by successive units of a variable input increases. c) when the marginal product of the variable input is constant when additional units are added to the production process d) when the average amount produced by successive units of a variable uncut is negative

a

total fixed cost divded by the number of units of output; a per-unit measure of fixed costs

average fixed costs

the situation in which a firm is earning exactly a normal rate of return

breaking even

Which of the following is most likely to be a variable cost for a firm? a) franchiser's fee that a restaurant must pay to the national restaurant chain b) interest payments made on loans c) monthly rent on office space that it leased for a year d) payroll taxes that are paid on employee wages

d

an increase in a firm's scale of production leads to higher costs per unit produced

decreasing returns to scale, or diseconomies of scale

a curve that shows the quantity of labor supplied at different wage rates. Its shape depends on how households react to changes in the wage rate

labor supply curve

Marginal utility comes only from the _____ unit consumed; total utility comes from ___ units consumed

last, all

when additional units of a variable input are added to fixed inputs, after a certain point, the marginal product of the variable input declines

law of diminishing returns

The ____ ____ is that period of time for which there are no fixed factors of production: Firms can increase or decrease the scale of operation, and new firms can enter the industry and/or existing firms can exit the industry.

long run

that period of time for which there are no fixed factrs of production: Firms can increase or decrease the scale of operation, and new firms can enter and/or exisitng firms can exit the industry

long run

the "envelope" of a series of short-run cost curves

long-run average cost curve (LRAC)

Output price determines potential _______.

revenues

the sum of the marginal cost curves (above AVC) of all the firms in an industry

short-run industry supply curve

2 Changes for the consumer when a price changes for Good Y.

1) The household's opportunity set increases, and the consumer is relatively richer. (income effect) 2) The slope of the Budget Line becomes flatter. The opportunity cost of good X falls and the opp. cost of good Y rises. (substitution effect)

2 Changes for the consumer when a price of good X falls.

1) The household's opportunity set increases, and the consumer is relatively richer. (income effect) 2) The slope of the Budget Line becomes flatter. The opportunity cost of good X falls and the opp. cost of good Y rises. (substitution effect)

Because marginal cost is always _____ in the short run, total variable cost always ____ when output increases. a) positive; increases b) negative; increases c) negative; decreases d) positive; decreases

A

Diminishing marginal returns implies: a) increasing marginal costs b) decreasing marginal costs c) decreasing average fixed costs d) decreasing average variable costs

A

Explain how the following event would affect the cost curves: A company receives notice of a 5 percent increase in its property insurance rate. a) Average fixed cost and average total cost will increase. Average variable costs and marginal cost will not change b) average fixed cost and average total cost will decrease. Average variable cost and marginal cost will not change. c) average fixed cost and average total cost will increase. Average variable cost and marginal cost will decrease. d) average fixed cost and average variable cost will increase. Average total cost and marginal cost will not change.

A

Firms that exhibit constant returns to scale have U-shaped long-run average cost curves. Agree or Disagree? a) Disagree: Firms with constant returns to scale will have horizontal long-run average cost curves b) Disagree: Firms with constant returns to scale will have decreasing long-run average cost curves c) Disagree: firms with increasing returns to scale will have U-shaped long-run average cot curves d) Agree

A

If a household's income doubles, its budget constraint will: a) shift out parallel to the old one b) be unaffected c) pivot at the Y-Intercept d) shift in parallel to the old one

A

In the long run: A) there are no fixed factors of production B) a firm can shut down, but it cannot exit the industry c) all firms must make economic profits D) a firm can vary all inputs, but it cannot change the mix of inputs it uses

A

In the short run, a firm: A) has at least one fixed factor of production B) can exit an industry and all of its factors of production are variable C) can enter an industry where positive profits are being earned D) both B and C are correct

A

In the short run: a) firms act to minimize losses or maximize profits b) if current firms are earning a profit, new firms will enter the industry c) all firms that earn a loss will be shut down d) all the above

A

The opportunity cost of capital is: A) the implicit cost of capital B) the present discounted value of capital C) the value of capital D) the out-of-pocket cost of capital

A

When an increase in a firm's scale of production leads to lower average costs, we say that there are: a) economies of scale b) diseconomies of scale c) decreasing returns to scale d) constant returns to scale

A

When the marginal product is at a maximum, the marginal cost is: a) at a minimum b) falling c) rising d) at a maximum

A

What is the formula for Average Fixed Cost?

AFC = (TFC / q)

What is the formula for Total Variable cost?

AVC x q

A firm will begin to experience diminishing returns at the point where: a) marginal product increases b) marginal cost increases c) marginal cost decreases d) both B and C are correct

B

Economic profit is: a) TVC - TFC b) TR - TC c) TR - TFC d) TR - TVC

B

If marginal cost is above average variable cost, then: a) marginal cost must be decreasing b) average variable cost is increasing c) average variable cost is decreasing d) average variable cost is constant

B

In a perfectly competitive market in the long run, profits are driven to zero due to which of the following relationships: a) MC = AVC b) P = SRMC = SRAC = LRAC c) P = d = MR d) MR = MC

B

Marginal Utility (MU) is: a) the total satisfaction gained by the consumption or use of all units a good b) the additional satisfaction gained by the consumption or use of one more unit of something c) the additional satisfaction gained by the consumption or use of all units of a good d) the satisfaction gained by the consumption or use of one more unit of something

B

Marginal cost (MC) intersects the average variable cost (AVC) and the average total cost (ATC): a) where AVC is decreasing and ATC is increasing b) at their lowest, or minimum, points c) where AVC and ATC are both increasing d) at their highest, or maximum, points

B

Marginal cost: a) equals the increase in AVC resulting from producing one more unit b) is the increase in total cost resulting from producing one more unit c) always equals average cost d) is the average cost of production divided by output

B

When Burger Barn hires one worker, 20 customers can be served in an hour. When Burger Barn hires two workers, 50 customers can be served in an hour. The marginal product of the second worker is ______ customers served pr hour. A) 15 B) 30 C) 40 D) 67.5

B

You are the owner and only employee of a company that writes computer software that is used by gamblers to collect sports data. Last year you earned a total revenue of $90,000. Your costs for equipment, rent, and supplies were $60,000. To start this business you invested an amount of your own capital that could pay you a return of $40,000 a year. A) - $40,000 B) - $10,000 C) $10,000 D) $30,000

B

_______ ________ show the maximum bundle of two goods that a household can afford.

Budget constraints

A firm earning zero economic profits is probably suffering losses from the standpoint of general accounting principles. Do you agree or disagree with this argument? It is actually earning a ________ given the extent of the risks involved. The full economic cost including opportunity costs, is included in ______ cost but not in ______ cost. a) normal rate of return (or profit); accounting; economic B) negative accounting profit; economic; accounting C) normal rate of return (or profit); economic; accounting D) negative accounting profit; accounting; economic

C

A firm suffering losses in the short run will continue to operate as long as total revenue at least covers fixed cost. Agree or Disagree? a) Disagree: A firm suffering losses in the short run should continue to operate as long as price is greater than average fixed cost b) A firm suffering losses in the short run should never continue to operate c) A firm suffering losses in the short run should continue to operate as long as price is greater than average variable cost d) agree

C

Economists usually assume that ____ is a fixed input in the _____ run. a) capital; long b) labor; short c) capital; short d) labor; long

C

Explain why opportunity costs are "real" costs even though they do not necessarily involve out-of-pocket expenses. a) those who borrow capital must pay capital owners or investors a normal rate of return B) those who own capital must pay taxes equal to the normal rate of return from bank certificates of deposit C) the capital could have instead earned a normal rate of return invested in risk-free government bonds D) the capital represents an out-of-pocket expense for capital owners or investors

C

Marginal cost (MC) measures: a) the change in profit associated with increased production b) total cost of the inputs required to produce each unit of output c) increase in total cost that results from producing an additional unit of output d) change in fixed costs that result from increased output

C

The law of diminishing marginal utility states: a) the more of any one good consumed in a given period, the more satisfaction (utility) generated by consuming each additional (marginal) unit of the same good b) the more of any one good consumed in a given period, the less total utility is generated c) the more of any one good consumed in a given period, the less satisfaction (utility) generated by consuming each additional (marginal) unit of the same good d) the more of any one good consumed in a given period, the less satisfaction (utility) generated by consuming each additional (total) unit of the same good

C

There are 100 dog kennels in Atlanta. An economist studying the pricing behavior of dog kennels tell you that she is limiting her analysis to a time period that does not allow for any new dog kennels to enter the industry or for any established dog kennels to leave the industry. The time period this economist referred to is the: a) industry run b) long run c) short run d) market period

C

A lawn service company has the following production possibilities. with one, two, three and four workers, the company can mow 4, 9, 12, and 14 lawns per day, respectively. The marginal product of the fourth worker is: A) 4 B) 9 C) 3 D) 2

D

Fixed costs are best described as: a) total variable cost (TVC) divided by the number of units of output b) costs that depend on the level of production chosen c) the change in total cost that results form producing one more unit of output d) costs that are incurred even if the form is currently producing nothing

D

For the following business, what is the likely fixed factor of production that defines the short-run? a) the land b) the showroom and service area c) the installed equipment d) all of the above

D

In the short run, a firm in a perfectly competitive industry will minimize its losses by shutting down if: a) total revenue is less than total variable cost b) market price falls below the minimum point on the average variable cost (AVC) curve c) operating profit is negative d) A and B only

D

Refer to the scenario below to answer the question that follows: A lawn service company has the following production possibilities. with one, two, three and four workers, the company can mow 4, 9, 12, and 14 lawns per day, respectively. The marginal product of the second worker is: A) 4 B) 9 C) 3 D) 5

D

The choice set or opportunity set available to consumers is: a) the best set of options open to consumers b) the set of options that is limited by only income and wealth c) a set of goods always available to consumers regardless of income level d) the set of options that is defined and limitedly a budget constraint

D

The explanation for why marginal cost is positive and rising in the short run is _______ marginal product of labor in the production process. a) zero b) increasing c) constant d) diminishing

D

The short-run supply curve of a perfectly competitive firm is: a) highly inelastic and therefore insensitive to price changes b) the entire marginal cost curve of the firm c) the portion of the marginal cost curve that lies below minimum average variable cost d) the portion of the marginal cost curve that lies above minimum average variable cost

D

You are the owner and only employee of a company that writes computer software that is used by gamblers to collect sports data. Last year you earned a total revenue of $90,000. Your costs for equipment, rent, and supplies were $60,000. To start this business you invested an amount of your own capital that could pay you a return of $40,000 a year. Your accounting profit last year was: A) $60,000 B) $40,000 C) $50,000 D) $30,000

D

the more of any one good consumed in a given period, the less satisfaction (utility) generated by consuming each additional (marginal) unit of the same good

Law of Diminishing Marginal Utility

the additional satisfaction from the last unit consumed

Marginal Utility (MU)

What is the formula for Total Cost?

TFC + TVC

When the consumer's Opportunity Set increases, households purchase more of all normal goods and less of all inferior goods When the consumer's Opportunity Set decreases, households purchase less of all normal goods and more of all inferior goods

The Income Effect

The increases in utility will become smaller and smaller with more consumption of any good or service

The Law of Diminishing Marginal Utility

total fixed costs plus total variable costs

Total Cost (TC)

Total Cost = ? + ?

Total Fixed Costs + Total Variable Costs

A made-up measure of satisfaction.

Utility

Households maximize utility by purchasing the bundle of goods where ( MUx/Px = MUY / Py ) for all pairs of goods.

Utility Maximization Rule

the average amount produced by each unit of a variable factor of production

average product

total cost divided by the number of units of output

average total cost

total variable cost divided by the number of units of output

average variable cost

Economic costs: a) are equal to total revenue minus accounting profit b) include both a normal rate of return on investment and the opportunity cost of each factor of production c) are the opportunity cost of each factor of production minus any interest charges paid on borrowed funds d) are equal to the direct costs of hirining all factors of production

b

The marginal products of the first, second, and third workers are 20, 12, and 8 respectively. If four workers can produce 45 units of output, then the marginal product of the fourth worker is ______. a) 4 b) 5 c) 40 d) 45

b

Total revenue minus total cost is equal to: a) marginal revenue b) profit c) the rate of return d) net cost

b

limits imposed on household choices by income, wealth, and product prices

budget constraint

Economic profit is: a) P x (q - ATC) b) (P + ATC) x q c) (P - ATC) x q d) (P x q) / ATC

c

Economists usually assume that labor is ____ input in the _____ run. a) a fixed; long b) part fixed and part variable; long c) a variable; short d) a fixed; short

c

The shutdown point for a perfectly competitive firm is the: a) lowest point on the ATC curve b) lowest point on the marginal cost curve c) lowest point on the AVC curve d) point at which a firm's long-run supply curve ends

c

Total cost is calculated as: a) the sum of average fixed cost and average variable cost b) sum of all the firms explicit costs c) the sum of total fixed cost and total variable cost d) the product of average total cost and price

c

You are the owner and only employee of a company that writes computer software that is used by gamblers to collect sports data. Last year you earned a total revenue of $90,000. Your costs for equipment, rent, and supplies were $60,000. To start this business you invested an amount of your own capital that could pay you a return of $40,000 a year. During the year your economic costs were: A) $60,000 B) $40,000 C) $100,000 D) $130,000

c

the most important opportunity cost that is included in economic cost is the opporunity cost of _____.

capital

technology that relies heavily on capital instead of human labor

capital intensive technology

the set of options that is defined and limited by a budget constraint

choice set or opportunity set

an increase in a firm's scale of production has no effect on costs per unit produced

constant return to scale

the decisions we make under constraints that exist in the marketplace

constrained choice

If a firm's economic profit is $0, then it must be true that: a) TR equals TVC b) TR equals TFC c) TFC is zer d) TR equals TC

d

If economic profit is zero, a firm: a) earns a positive but below normal rate of return b) earns a negative rate of return c) will leave the industry d) earns exactly a normal rate of return

d

Suppose a competitive industry experiences external diseconomies. If so, then: a) a firm's long-run average cost increases with output along the long-run average cost curve b) a firm's long-run average cost curve shifts down when industry output expands c) a firm can produce more efficiently by decreasing its size d) long-run average costs increase when industry output expands

d

A paradox stating that (1) the things with the greatest value in use frequently have little or no value i exchange and (2) the things with the greatest value in exhcnage frequently have little or no value in use

diamond/water paradox

When the Income Effect of a wage increase dominates the Substitution Effect, the Supply of Labor is ____ ___

downward sloping

profit that accounts for both explicit costs and opportunity costs

economic profit

When the budget line becomes flatter, the opportunity cost of good X ___, and the opp. cost of good Y _____.

falls, rises

the complex set of institutions in which suppliers of capital (households that save) and the demand for capital (firms wanting to invest) interact

finanaical capital market

an organization that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand

firm

any cost that does not depend on the firms level of output. These costs are incurred even if the firm is producing nothing.

fixed costs

undifferentiated products; products that are identitical to, or indistinguishable form, one another

homogenous products

the budget constraint is defined by __, ____, and ____

income, wealth, prices

an increase in a firm's scale of production leads to lower costs per unit produced

increasing returns to scale, or economies of scale

technology that relies haveily on human labor instead of capital

labor intensive technology

the increase in total cost that results from producing 1 more unit of output.

marginal cost

the additional output that can be produced by adding one more unit of a specific input

marginal product

the additional revenue that a firm takes in when it increases output by one additional unit.

marginal revenue

the additional satisfcation gained by the consumption or use of one more unit of a good or service

marginal utility

the smallest size at which long-run average cost is at its minimum

minimum efficient scale (MES)

a rate of return on capital that is just sufficient to keep owners and invetors satisfied. For relatvely risk-free firms, it should be nearly the same as the interest rate on risk-free government bonds

normal rate of return

the production method that minimizes cost for a given level of output

optimal method of production

the scale of plant that minimizes long-run average cost

optimal scale of plant

If Income increases, the budget line shifts ____ parallel.

outward

when income doubles, the budget line shifts ___ parallel.

outward

the process by which inputs are combined, transformed, and turned into outputs

production

A numerical or mathematical expression of a relationship between inputs and outputs. It shows units of total product as a funciton of units of inputs

production function or total product function

the quantitative relationship between inputs and outputs

production technology

difference between total revenue and total cost

profit

An increase in Income is a ____ _____ _____ because the opportunity costs of either good does not change.

pure income effect

annual flow of net income generated by an investment expressed as a percentage of the total investment

rate of return

the set of opportunities to purchase real goods and services available to a household as determined by prices and money income

real income

When the price of a good decreases, the budget constraint swivels to the ____ increasing the opportunities available and expanding choice

right

The _____ ______ is the period of time for which two conditions hold: the firm is operating under a fixed scale (fixed factor) of production, and firms can neither enter nor exit an industry.

short run

the period of time for which two conditions hold: the firm is operating under a fixed scale (fixef factor) of production, and firms can neither enter nor exit an industry.

short run

The _____ of the budget constraint determines the opportunity cost of purchasing another unit of good X or good Y, and is also the relative price of the 2 goods.

slope

the process of dividing total fixed costs by more units of output. Average fixed cost declines as quantity rises

spreading overhead

The opportunity cost of good X falls and the opp. cost of good Y rises. Consumers purchase less of the good whose opportunity cost has risen Consumers purchase more of the good whose opportunity cost has fallen

substitution effect

changing the ____ of prodction will change the relationship between input and output quantities

technology

total of (1) out-of-pocket costs and (2) opportunity cost of all factors of production

total cost

the total of all costs that do not change with output even if output is zero

total fixed costs (overhead)

the amount received from the sale of the product (q x P)

total revenue

the total amount that a firm takes in from the sale of its product: the price per unit times the quantity of output the firm decides to produce (P x q)

total revenue

the total amount of satisfcation obtained from consumption of a good or service

total utility

the toal of all costs that vary with output in the short run

total variable cost

a graph that shows the relationship between total variable cost and the level of a firm's output

total variable cost curve

True or False: There are no fixed costs in the long run

true

When the Substitution Effect of a wage increase dominates the Income Effect, the Supply of Labor is ____ _____.

upward sloping

the satisfaction a product yields

utility

equating the ratio of the marginal utility of a good to its price for all goods

utility-maximizing rule

The cost of jet fuel used in Southwest Airlines is an example of a _____ cost.

variable

a cost that depends on the level of production chosen

variable cost

When a firm earns a normal rate of return, it is earning a __ profit

zero

A lawn service company has the following production possibilities. with one, two, three and four workers, the company can mow 4, 9, 12, and 14 lawns per day, respectively. The marginal product of the third worker is: A) 4 B) 9 C) 3 D) 5

C

If a firm shuts down in the short run, then a) its economic profits are zero b) fixed costs are greater than variable costs c) its losses are equal to its fixed costs d) it must be the case that its revenues from operating were less than its total costs

C

In the short-run, firms earning a profit will want to ______ their profits while firms suffering losses will want to ________ their loses. a) minimize; maximize b) maximize; maximize c) maximize; minimize d) minimize; minimize

C

When marginal cost (MC) is falling, which of the following must be true: a) average variable cost (AVC) is increasing b) average total cost is increasing c) Average variable cost (AVC) is falling d) average fixed cost (AFC) is increasing

C

Price decreases will _____ a household's choice set a) not change b) decrease c) sometimes increase and other times decrease d) increase

D

Good Y is called a _____ _____, where it's so inferior, than the Demand Curve is upward sloping. They are theoretical and not likely for most inferior goods.

Giffen Good

A households' goal is to:

Maximize their Total Utility

contains all affordable bundles of good X and Y.

Opportunity set

an industry structure in which there are many firms, each small relative to the industry, producing identitical products and in which no firm is large enough to have any control over prices.

Perfect competition

By participating in the market, you reveal something about your preferences.

Revealed Preferences

the total level of satisfaction.

Total Utility ( TU )