Econ 2303 Chapter 6

The license ▼ decreases does not change increases the​ short-run profit-maximizing quantity of candles to produce.

does not change

The last firm to enter earns​ ___________.

zero economic profits

Using your​ graph, calculate the producer surplus in this market. Producer surplus is

.5(base of triangle x height of triangle) = 8

Even though the price of an acre of land increased from​ $6,000 to​ $10,000, the quantity supplied did not change. The price elasticity of supply is

0

When the price of bottled water increased from ​$3.003.00 to ​$4.004.00​, the quantity supplied by a firm increased from 200200 to 216216 bottles. The price elasticity of supply is

0.27

When the price of bottled water increased from ​$2.50 to ​$3.00​, the quantity supplied by a firm increased from 100 to 110 bottles. The price elasticity of supply is nothing.

0.52

For this firm to maximize​ profits, it should _____ ​T-shirts.

100

The graph on the right shows the cost curves of a perfectly competitive firm. If the market price is​ $14 per​ unit, then this firm will produce approximately ▼ 12 4 0 units and will have ▼ negative zero positive economic profits.

12; positive

Larry Krovitz is a salesman who works at a​ used-car showroom in​ Sydney, Australia.​ It's the last week of​ July, but he is yet to meet his sales target for the month. A​ customer, Harold​ Kumar, who wants to buy a Ford​ Fiesta, walks into the showroom. After taking one of the cars for a test​ drive, Harold decides to buy it. While ​$11,000 was the least that Larry would have been willing to accept for that​ car, he quotes a price of ​$17,000. After some​ bargaining, the car is sold for ​$14,000. In this​ case, the producer surplus is ​$_.

17,000-14,000=3,000

If the cost of the car to Larry is ​$11,000​, his profit is ​$______.

17,000-14,000=3000

George is an excellent plumber and Harriet is an excellent carpenter. George can do all of the plumbing and Harriet can do all of the carpentry to fix up sevenseven houses per year. Each earns a wage of ​$40 comma 00040,000 per year. If George and Harriet work together and fix up sevenseven old houses each​ year, their average cost is ​$ nothing.

40,000 x 2= 80,000 80,000/7= 11,429

Fixing up old houses requires plumbing and carpentry. Jack​ (who is a jack of all trades but is a master of​ none) is a decent carpenter and a decent​ plumber, but is not particularly good at either. He can fix up two houses in a year if he does all of the carpentry and plumbing himself. His wage is ​$40 comma 00040,000 per year. ​Jack's average total cost of fixing up twotwo old houses is ​$ nothing.

40,000/2= $20,000

Using the same table ​, what is the marginal cost of the firstfirst unit​ produced? A. 1111. B. 1515. C. 55. D. 0.

5

Crabby​ Bob's is a seafood restaurant in a beach resort in Delaware. Crabby​ Bob's earns a profit each month from May through​ September, suffers losses in​ October, November, and April but remains​ open, and remains closed from December through March. Given that the restaurant market in this town is perfectly​ competitive, which of the following must be​ true? ​(Check all that apply.​) A. From May through​ September, Crabby​ Bob's average revenue is above average total cost. B. From December through​ March, Crabby​ Bob's average revenue is below ATC but is greater than AVC. C. From December through​ March, Crabby​ Bob's average revenue is below average variable cost. D. In​ April, October, and​ November, Crabby​ Bob's average revenue is above average total cost. E. In​ April, October, and​ November, Crabby​ Bob's average revenue is below ATC but is greater than AVC.

A,C,E

Is producer surplus always equal to​ profit? A. Producer surplus is equal to profit when marginal cost is equal to average total cost. B. Producer surplus is equal to profit when marginal cost is equal to fixed costs. C. Producer surplus can never equal​ profit, since profit and producer surplus are based off of different curves. D. Producer surplus will always equal​ profit, since both profit and producer surplus measure the same concept.

A. Producer surplus is equal to profit when marginal cost is equal to average total cost.

Suppose the market demand for this good declines substantially and the price falls to ​$8 per unit. If the price is ​$8 per​ unit, the firm should​ ___________. A. produceproduce​, because price is greatergreater than the average variable cost of production. B. ​produce, because price is greater than the average fixed cost of production. C. ​produce, because average fixed costs are decreasing. D. not producenot produce​, because total revenue is greatergreater than the total variable costs of production.

A. produceproduce​, because price is greatergreater than the average variable cost of production.

Using your​ graph (a demand curve), the slope of the industry demand curve demonstrates​ __________. A. the realistic assumption that the Law of Demand holds for the good under consideration. B. the Law of Diminishing Returns holds for this good. C. the realistic assumption that the quantity demanded of a good will drop as the price of that good drops. D. the fact that the assumptions of perfect competition are not realistic and therefore do not hold for the industry as a whole.

A. the realistic assumption that the Law of Demand holds for the good under consideration.

Is it possible for accounting profit to be positive and economic profit to be​ negative? A. ​Yes, this could occur if explicit costs were modest and implicit costs were high. B. ​Yes, this could occur if implicit costs were modest and explicit costs were high. C. ​No, economic profit must always be larger than accounting profit. D. ​No, economic profit and accounting profit will always end up being the same.

A. ​Yes, this could occur if explicit costs were modest and implicit costs were high.

What is the difference between accounting profit and economic​ profit? A. Accounting profit subtracts both explicit and implicit costs from total​ revenue, while economic profit only subtracts explicit costs. B. Economic profit subtracts both explicit and implicit costs from total​ revenue, while accounting profit only subtracts explicit costs. C. Accounting profit only subtracts implicit costs from total​ revenue, while economic profit only subtracts explicit costs. D. Economic profit only subtracts implicit costs from total​ revenue, while accounting profit only subtracts explicit costs.

B. Economic profit subtracts both explicit and implicit costs from total​ revenue, while accounting profit only subtracts explicit costs.

How would the introduction of legal or technical barriers to entry affect the​ long-run equilibrium in a perfectly competitive​ market? A. It would create downward pressure on​ prices, causing firms to exit the market. B. It would reduce any downward pressure on prices from entry and allow economic profits in the long run. C. It would make all firms in the market less​ competitive, since any artificial barrier hurts the market overall. D. There would be no effect on the​ market, since there are no barriers to entry in perfectly competitive markets.

B. It would reduce any downward pressure on prices from entry and allow economic profits in the long run.

Which of the following is true about how a firm in a competitive market decides what level of output to produce in order to maximize its​ profit? A. Produce up to the point where price equals average total cost. B. Produce until the additional revenue from one extra unit equals the additional cost of each unit. C. Produce until marginal cost is furthest below average total cost. D. All of the above.

B. Produce until the additional revenue from one extra unit equals the additional cost of each unit.

Which of the following equations calculates the profits of a​ firm? A. Total costsminus−Fixed costs B. Total revenuesminus−Total costs C. Total revenuesminus−Fixed costs D. Total revenues​ + Total costs 6.2.4 concept question

B. Total revenuesminus−Total costs

You are planning to build an apartment building. Your market research department estimates that your revenues will be ​$800 comma 000800,000. Your engineering department estimates the cost will be ​$600 comma 000600,000. You started construction and spent ​$150 comma 000150,000 to build the foundation when the recession begins. This causes the market research department to revise its revenue estimates downward to ​$449 comma 950449,950. Should you complete the apartment​ building? A. ​No, the cost to build is still ​600,000 ​(which includes the ​$150,000 you spent already and the ​$450,000 ​remaining) $449,950. B. ​No, the remaining cost to build is ​$450,000 and you only expect to earn ​$449,950​; you will ignore the 150,000 spent since it is a sunk cost. C. ​Yes, the ​$150,000 is a fixed cost of production so you must complete the building to cover these fixed costs. D. ​Yes, since you have already spent ​$150,000​, you cannot stop construction since that money would be wasted.

B. ​No, the remaining cost to build is ​$450,000 and you only expect to earn ​$449,950​; you will ignore the 150,000 spent since it is a sunk cost.

Minimum efficient scale is the lowest level of output where​ long-run average total cost is minimized. Firm​ 3's minimum efficient scale occurs when the output is​ ______ unit(s). A. 1. B. 3. C. 2. D. 4.

B. 3

The graph to the right shows the average total cost​ (ATC), average variable cost​ (AVC), marginal cost​ (MC), and marginal revenue​ (MR) curves for a firm in a perfectly competitive market. In order to maximize​ profits, this firm should produce approximately​ _________ units of output. A. 15 B. 7 C. 11 D. 8

C. 11

Under which of the following examples is it likely that the accounting profit is positive and the economic profit is​ negative? A. Using a restaurant you purchased to sell Mexican food instead of Italian food. B. Opening a bank branch near a university campus. C. If you open an amusement park in the middle of New York City. D. Such a​ scenario, where accounting cost is positive and economic profit is​ negative, is not possible.

C. If you open an amusement park in the middle of New York City.

If demand shifts to the left​ (decreases), the last firm that entered​ ____________. A. earns positive economic​ profits, leading to new firms entering the market. B. is indifferent between producing or exiting the market and so the outcome is indeterminate. C. earns negative economic profits and so exits the market. D. earns negative economic profits and thus undertakes​ cost-cutting measures to return to profitability.

C. earns negative economic profits and so exits the market.

Suppose the market demand for this good declines substantially and the price falls to ​$44 per unit. If the price is ​$44 per​ unit, the firm should​ ___________. A. ​produce, because price is greater than the average fixed cost of production. B. ​produce, because average fixed costs are decreasing. C. not produce​, because price is less than the average variable cost of production. D. produce​, because total revenue is lessless than the total variable costs of production.

C. not produce​, because price is lessless than the average variable cost of production.

Using what you have found in the previous two​ questions, what would be the​ firm's average variable costs if it produced at the​ profit-maximizing quantity? A. ​$100. B. ​$400400. C. ​$10. D. ​$0.10.1.

C. ​$10.

The graph on the right shows the cost curves for a random firm competing in a perfectly competitive market. Given the shape of the​ curves, we know that curve A represents​ __________, curve B represents​ __________, and curve C represents​ _________. A. ​AFC; ATC; AVC B. ​ATC; AVC; MC C. ​MC; ATC; AVC D. ​MC; AVC; AFC

C. ​MC; ATC; AVC

Suppose one firm accounts for 55 percent of the global market share for a​ product, while 147 other firms account for the remaining 45 percent of the market. With such a large number of buyers and​ sellers, is this market likely to be​ competitive? A. ​Yes, markets are only competitive if there is at least one firm large enough to act as a price setter for all other firms. B. ​Yes, a competitive market is characterized by having many​ firms, regardless of size. C. ​No, even though there are many firms in the​ market, there is one firm large enough to influence the market price. D. ​No, even with such a large number of buyers and​ sellers, there must be barriers to entry for this market to stay competitive.

C. ​No, even though there are many firms in the​ market, there is one firm large enough to influence the market price.

Would a​ profit-maximizing firm continue to operate if the price in the market fell below its average cost of production in the short​ run? A. ​Yes, firms should keep producing until price falls below marginal cost. B. ​No, a firm should never produce if its price falls below average total cost. C. ​Yes, but only if price stayed above average variable cost. D. ​Yes, but only if price was below average variable cost.

C. ​Yes, but only if price stayed above average variable cost.\ check out screenshot 6.3 review problem 9

Which of the following equations represents the​ firm's average variable​ cost? A. 400+0.1q. B. 400/q + 0.1q C. 0.1q2. D. 0.1q.

D. 0.1q.

Salmon fishing in Alaska is a seasonal​ business; May through September is the best time to bait salmon and halibut. Toland​ Fisheries, a small commercial​ fishery, recorded its highest ever catch last year. They started this​ year's fishing season with the same number of workers and equipment. With the new season also starting​ well, Toland has increased hiring substantially.​ However, the fishery did not make any additional investment in trawlers and other fishing equipment. Other things remaining​ unchanged, what is likely to happen to the marginal product of each new worker in the short​ run? A. It will change​ cyclically, meaning that it will cycle up and down as more workers are hired. B. It will be increasing at an increasing​ rate, meaning each additional worker will have a higher marginal product of labor than the previous one hired. C. It will be the same as the previous workers​ hired, meaning each additional worker will have the same marginal product of labor as the previous one hired. D. It will be increasing at a decreasing​ rate, meaning each additional worker will have a lower marginal product of labor than the previous one hired.

D. It will be increasing at a decreasing​ rate, meaning each additional worker will have a lower marginal product of labor than the previous one hired.

In the long​ run, if Toland Fisheries would like to increase the productivity of its​ workers, it will need to​ ____________. A. charge more for its services. B. charge less for its services. C. hire more workers. D. increase its amount of capital and equipment.

D. increase its amount of capital and equipment.

Suppose the market demand for this good declines substantially and the price falls to ​$2 per unit. If the price is ​$2 per​ unit, the firm should​ ___________. A. ​produce, because average fixed costs are decreasing. B. produceproduce​, because total revenue is lessless than the total variable costs of production. C. ​produce, because price is greater than the average fixed cost of production. D. not producenot produce​, because price is lessless than the average variable cost of production.

D. not producenot produce​, because price is lessless than the average variable cost of production.

Suppose the market for​ T-shirts in the country of Argonia is perfectly​ competitive, and the price of a​ T-shirt is​ $20. A producer in this market has the following total cost and marginal cost​ functions: TC(q)=400+0.1q2 MC(q)=0.2q What part of the total cost function represents fixed​ costs? A. 0.2 B. 0.1q2 C. 0.1 D. 400

D. 400

Supply curves can have varying degrees of price elasticity. Show graphically a perfectly​ elastic, a perfectly​ inelastic, and a​ unit-elastic supply curve. ​1.) Using the line drawing​ tool, draw a supply curve that is perfectly elastic. Label your curve ​'SPerfectly Elastic​'. 2.) Using the line drawing​ tool, draw a supply curve that is perfectly inelastic. Label your curve ​'Upper S Subscript Perfectly InelasticSPerfectly Inelastic​'. Carefully follow the instructions above and only draw the required object. ​3.) Using the line drawing​ tool, draw a supply curve that is​ unit-elastic. Label your curve ​'Upper S Subscript Unit minus ElasticSUnit−Elastic​'.

Perfectly elastic: straight horizontal Perfectly inelastic: vertical unit elastic: start at (0,0) and go up with a slope of 1

Is the firm making any profit when it produces at the​ profit-maximizing output​ level? The firm would make ​$____

PxQ= 20x100 = $2,000 TC(100)=400 + 0.1(100)^2= 1,400 2,000-1,400=600

Suppose there is a product that is being sold in a perfectly competitive market. If the demand for the product decreases​, producer surplus will ▼ decrease increase since this change results in a lowerlower ​price, which means there is ▼ more less area between the supply curve and the market price for the good.

decrease; less

The higher minimum wage ____________ the​ short-run profit-maximizing quantity of candles to produce.

decreases

According to your​ graph, when some sellers enterenter a competitive​ market, the equilibrium price ▼ and the equilibrium quantity ▼ .

decreases; increases

Some cities have much stricter zoning laws and regulatory controls than other cities​ (zoning laws regulate the uses of land in a​ city). A recent study found that increases in the demand for housing in cities with strict zoning laws led to large increases in the price of housing. It also claimed that in cities with lax zoning​ laws, increases in the demand for housing led to much smaller increases in the price of housing. This likely occurred since stricter zoning laws and regulatory controls​ __________. A. impact the demand for​ construction, causing the demand curve to decrease​ (shift left). B. limit the availability of land for​ construction, causing the price elasticity of supply to increase​ (become more​ elastic). C. impact the demand for​ construction, causing the demand curve to increase​ (shift right). D. limit the availability of land for​ construction, causing the price elasticity of supply to decrease​ (become more​ inelastic).

Stricter zoning laws and regulatory controls on residential construction limit the availability of land in the housing market. A restriction on the total land available for housing is likely to reduce the price elasticity of supply for housing.​ So, as the demand for housing​ increases, supply is unable to fully respond to the increased​ demand, leading to a steeper increase in prices. D. limit the availability of land for​ construction, causing the price elasticity of supply to decrease​ (become more​ inelastic).

When this firm produces the​ profit-maximizing quantity of​ T-shirts, its average total cost equals ​$___.

TC(100)= 400+0.1(100)^2=1,400 1,400/total cost of 100 = 14

To the right is the average total cost curve for a competitive firm. What is the relationship between the average total cost curve​ (ATC) and the marginal cost curve​ (MC)? 6.2 review Question 4

When the ATC curve is​ decreasing, we know that the MC curve is below the ATC curve​, and when the ATC curve is​ increasing, we know that MC is above the ATC curve .

The International Space Station​ (ISS) is a habitable satellite that was launched by NASA and space agencies of other countries. In​ 2009, NASA was considering shutting down the ISS within the next 5 to 6 years. Among those who were opposed to this idea of​ de-orbiting the ISS was Senator Bill​ Nelson, who was quoted as saying​ "If we've spent a hundred billion​ dollars, I​ don't think we want to shut it down in​ 2015." The​ "hundred billion​ dollars" that Senator Nelson is referring to is known as ▼ a sunk cost an opportunity cost a marginal cost .

a sunk cost

A firm is experiencing economies of scale when its ▼ average total cost total cost marginal cost declines as more output is produced. for more: screenshot 6.text problem 12

average total cost

Consider a market where there are many firms with different cost structures. When determining which firms enter the market​ first, we look at​ ____________. A. marginal cost. B. fixed costs. C. average variable cost. D. average total cost.

average total cost

In a perfectly competitive​ market, a seller ▼ can cannot choose to raise the price of its good since all sellers in the market produce ▼ different goods identical goods ​, so raising the price would result in ▼ earning long-run profits losing all its customers.

cannot identical goods losing all its customers

The graph on the right shows the​ long-run average total cost curve for a perfectly competitive firm. Refer to points​ A, B, and C on the graph and identify where the firm would experience economies of​ scale, constant returns to​ scale, and diseconomies of scale. At point​ A, the firm experiences ▼ constant returns to scale economies of scale diseconomies of scale At point​ B, the firm experiences ▼ economies of scale constant returns to scale diseconomies of scale At point​ C, the firm experiences ▼ economies of scale constant returns to scale diseconomies of scale 6.5 Review question 12

economies of scale constant returns to scale diseconomies of scale

Given this​ information, the​ senator's comment is ▼ flawed accurate ​, since these types of costs ▼ should not should affect current and future decisions.

flawed; should not

When comparing the accounting profit with economic​ profit, it must be true that the accounting profit is ▼ less than or equal to exactly equal to greater than or equal to economic profit.

greater than or equal to

According to your​ graph, when some sellers exitexit a competitive​ market, the equilibrium price ▼ decreases increases and the equilibrium quantity ▼ decreases increases .

increase; decreases

accounting profit

is the difference between a​ firm's revenues and explicit costs.

Economic profit

is the difference between a​ firm's revenues and the sum of its implicit and explicit costs.

Using the same tabl ​, what is the marginal cost of the secondsecond unit​ produced? A. 5 B. 15 C. 11 D. 0.

mc= Change in total cost/change in output 11

Calculate the price elasticity of supply in the following​ examples, then determine if supply is relatively elastic or​ inelastic, or perfectly elastic or inelastic. When the price of a pen increased from ​$2.502.50 to ​$3.003.00​, the quantity supplied by a firm increased from 100100 to 150150 pens. The price elasticity of supply is nothing.

midpoint formula 2.20

In this​ case, the price elasticity of supply is ▼ perfectly elastic perfectly inelastic relatively elastic relatively inelastic .

perfectly inelastic

In this​ case, the price elasticity of supply is ▼ perfectly inelastic relatively inelastic relatively elastic perfectly elastic .

perfectly inelastic

Producer surplus is the difference between the ▼ and the ▼ supply curve price consumers pay demand curve chapter 6. review Question 10

price consumers pay; supply curve

Producer surplus is the difference between the ▼ demand curve price consumers pay and the ▼ price consumers pay demand curve supply curve The graph on the right depicts the supply and demand curves for a market in competitive equilibrium. ​1.) Using the triangle drawing​ tool, highlight the area on the graph that represents producer surplus. Label this area 'PS'. 6.4 Review Question 10

price consumers pay; supply curve

All firms in a perfectly competitive market are said to be​ __________. A. price leaders. B. price neutral. C. profitable in the long run. D. price takers.

price takers

In this​ case, the price elasticity of supply is ▼ relatively inelastic relatively elastic perfectly elastic perfectly inelastic .

relatively elastic (it is greater than 1)

In this​ case, the price elasticity of supply is

relatively inelastic

In this​ case, the price elasticity of supply is ▼ relatively inelastic perfectly elastic relatively elastic perfectly inelastic .

relatively inelastic (it is less than 1)

Candle makers in Town B do not need a license. Town​ B, however, has passed a new minimum wage law that increasesincreases the minimum wage that candle makers in Town B pay their workers. Assume that the candle market is perfectly competitive. i. Does this higher minimum wage shift a candle​ maker's short-run average fixed cost​ curve? ii. Does this higher minimum wage shift a candle​ maker's short-run average variable cost​ curve? iii. Does this higher minimum wage shift a candle​ maker's short-run​ profit-maximizing choice of the number of candles to​ produce? With the higherhigher minimum​ wage, the​ short-run average fixed cost curve ▼ shifts up shifts down remains unchanged and the​ short-run average variable cost curve ▼ shifts up shifts down remains unchanged.

remains unchanged; shifts up

If some sellers exitexit a competitive​ market, how will this affect its​ equilibrium? ​1.) Using the​ 3-point drawing​ tool, show the impact if some sellers exitexit a competitive market. Label your new curve appropriately. ​2.) Using the point drawing​ tool, show the new equilibrium price and quantity. Label this point​ 'A'.

screenshot 6. Review Question 14

If some sellers enterenter a competitive​ market, how will this affect its​ equilibrium? ​1.) Using the​ 3-point drawing​ tool, show the impact if some sellers enterenter a competitive market. Label your new curve appropriately. ​2.) Using the point drawing​ tool, show the new equilibrium price and quantity. Label this point​ 'A'.

screenshot 6.14

click not he table icon

screenshot 6.2.2

Every candle maker in Town A must have a license. The cost of a license is the same regardless of the number of candles a business produces. Assume that the candle market is perfectly competitive. i. Does this license shift a candle​ maker's short-run average fixed cost​ curve? ii. Does this license shift a candle​ maker's short-run average variable cost​ curve? iii. Does this license shift a candle​ maker's short-run​ profit-maximizing choice of the number of candles to​ produce? With the​ license, the​ short-run average fixed cost curve ▼ shifts down shifts up remains unchanged and the​ short-run average variable cost curve ▼ shifts up remains unchanged shifts down.

shifts up; remains unchanged

If the total fixed costs of production​ increase, then the average total cost curve ▼ shifts down remains unchanged shifts up ​, the average variable cost curve ▼ shifts up remains unchanged shifts down ​, and the marginal cost curve ▼ shifts down remains unchanged shifts up.

shifts up; remains unchanged; remains unchanged

This problem tells us that one of the sources of economies of scale is ▼ fixed costs specialization diminishing returns .

specialization