IB Mirco Economics Test Review

If the output of a firm doubles when the firm doubles all of its inputs, the firm must be experiencing

C. Constant returns to scale

At 100 units of output, a firm's total cost is $10,000. If the firm's total fixed cost is $4,000, its AVC is equal to

$60 (TC-TFC=TVC --- TVC/Q=AVC)

if the market price is $10, how many widgets should this profit-maximizing firm produce?

16,000

Which of the following statements about a constant-cost perfectly competitive industry in long-run equilibrium must be true?

A. An increase in demand will cause no change in the long-run equilibrium price.

Which of the following are characteristics of a perfectly competitive industry? I. New firms can enter the industry easily. II. There is no product differentiation. III. The industry's demand curve is perfectly elastic. IV. The supply curve of an individual firm in the industry is perfectly elastic.

A. I and II only

In the short run, which of the following is true of a firm's average total cost of production?

A. It is equal to marginal cost plus average variable cost.

Which of the following MUST be true of the long run?

B. All the factors of production are variable

Economic profit can be calculated as accounting profit minus which of the following?

B. Implicit Costs

At the current production level of good X, price is greater than marginal cost. Which of the following actions would lead to greater efficiency?

B. Increasing the production of good X

Which of the following indicates the presence of economies of scale as the quantity of output increases?

B. Long-run average total cost decreases

Which of the following must be true if a firm is experiencing economies of scale?

B. Long-run average total cost decreases as the firm's output increases.

Suppose that a firm begins to hire workers for a newly completed plant with a fixed amount of machinery. As the firm hires additional workers, one would expect the marginal product to

B. Rise initially, but eventually fall

Assume that olive oil is produced in a constant- cost, perfectly competitive industry, which is currently in long-run equilibrium. If the current price of olive oil is $5 per quart and the demand for olive oil increases, then the price of olive oil will change in which of the following ways in the short run and long run?

B. Short Run: Be more than $5 Long Run: Be equal to $5.00

One characteristic of perfectly competitive markets is that individual firms

B. are free to enter or exit an industry in the long-run

If labor is the only variable input and it costs $15 per hour and if the marginal product of labor is 3 units per hour, the short-run marginal cost of 1 unit of output is approximately

C. $5.00

Assume that total fixed costs are $46, that the average product of labor is 5 units when 10 units of output are produced, and that the wage rate is $12. If labor is the only variable input, what is the average total cost of producing 10 units of output?

C. $7

The table above shows the amount of labor inputs necessary to produce given levels of output. If the cost of a unit of labor is $20 and total fixed cost is $100, the average total cost of producing 20 units of output is

C. $7

The following questions are based on the table below, which gives cost information for a perfectly competitive firm. The average total cost to the firm of producing 2 units of output is

C. $95.00 (AFC+AVC=ATC)

Raheem is currently working as a financial analyst earning $75,000 a year and is considering quitting his current job to start an art gallery. The estimated annual revenue from the art gallery is $175,000. The annual cost of labor, advertising, and acquiring the art inventory is $125,000. What are Raheem's accounting and economic profits if he opens the art gallery?

C. Accounting profit is $50,000, and economic profit is $25,000.

If a firm experiences economies of scale over the entire range of output, the long-run average cost curve will be

C. Downward Sloping

Which of the following is a result of increasing returns to scale?

C. Downward-sloping long-run AVERAGE TOTAL COST CURVE.

In the short run in perfect competition, the industry's demand curve and a firm's demand curve have which of the following slopes?

C. Industry's Demand Curve: Downward Sloping Firm's Demand Curve: horizontal

If a firm's production process exhibits economies of scale, which of the following will occur when the firm's output increases?

C. Its long-run average total costs will fall.

If a firm is experiencing economies of scale, which of the following will decrease as output increases?

C. Long-run average total cost

Suppose a firm's production process exhibits diseconomies of scale. How and why will costs change if the firm reduces its output?

C. Long-run average total cost will decrease because it becomes easier for the firm to manage its workforce.

Which of the following best describes a perfectly competitive market?

C. Many small firms producing a homogeneous product and facing no significant barriers to entry

Assume that the fixed cost is $50. Based on the cost and output data in the table above, what is the marginal cost when the firm increases its output from three to four units and the average total cost of producing 4 units?

C. Marginal Cost: $25 Average Total Cost: $35

Assume that a firm uses only one variable input. If a firm is experiencing diminishing returns, which of the following is true as more of the variable input is used?

C. Marginal cost will increase.

Reff Corp is a firm with total revenue of $1,000, marginal cost of $5, and average variable cost of $4. Both the output and the input markets are perfectly competitive, and Reff Corp is currently in long-run equilibrium. Reff Corp's output and total fixed cost of production must be equal to which of the following?

C. Output: 200 Fixed Cost: $200

What does the minimum efficient scale measure?

C. The smallest output level at which long-run average total cost is minimized.

The table below shows a production function for a firm All of the following can be concluded from the information in the table EXCEPT:

C. This is a production function for a PERFECTLY COMPETITIVE FIRM

As output of a firm increases, the difference between the firm's average total cost and its average variable cost gets smaller because the firm's

C. average fixed cost is decreasing

Shelby is an entrepreneur who has decided to open a small advertising firm. She rents office space at a cost of $25,000 per year, she has employed an assistant at a salary of $30,000 per year, and she incurs annual utility and office supply expenses of $20,000. Her best alternative is to work elsewhere and to earn a salary of $50,000 per year. How much annual revenue must her firm receive so that Shelby earns zero economic profit?

D. $125,000

If the marginal cost of producing the first unit of some good is $20 and the marginal cost of producing the second unit is $30, the average variable cost of producing 2 units is

D. $25

Which of the following is always true of the relationship between average and marginal costs?

D. Average variable costs are increasing when marginal costs are higher than average variable costs.

For a firm where labor is the only variable input, which of the following happens when diminishing returns set in?

D. Marginal cost begins to decrease

The graph above shows the total revenue and total cost curves for a firm in which type of market structure and what is the profit-maximizing quantity?

D. Market structure: perfect competition Quantity: Q3

The reason that firms in perfect competition earn zero economic profit in the long run is that

D. There are no barriers to entry or exit

A constant-cost, perfectly competitive gadget industry is in long-run equilibrium. An increase in the number of consumers of gadgets will most likely result in

D. a higher short-run price for gadgets, followed by an increase in the quantity produced

The diagram above shows a perfectly competitive firm's short-run cost curves. If the price of the output increases from $8 to $10, the profit-maximizing firm will

D. increase output to 18 units because this is the output at which price equals marginal cost

Based on the cost and output data in the table above, a perfectly competitive firm will shut down if price falls below

E. $15

According to the table above, which shows the costs of production for a firm, the average total cost of producing 3 units of output is

E. 20.00

At a firm's current rate of output, the marginal cost is $65, the average variable cost is $35, the average fixed cost is $30, and the product price is $65. Which of the following statements is true for the firm?

E. Economic profits are zero because price equals average total cost.

If total revenue is increasing as output increases, marginal revenue is always

E. Greater than zero

When a perfectly competitive firm sells additional units of output, its total revenue will

E. Increasing at a constant rate

Assume that a profit-maximizing firm is perfectly competitive in both the output and the factor markets and is at its long-run equilibrium. The firm's output is 100 units, its total revenue is $600.00, and the fixed cost of production is $50.00. Based on this information, which of the following is true for the firm?

E. Its marginal cost is $6.00, and its average variable cost is $5.50.

Economies of scale exist when

E. Long-run average total cost decreases as output increases

The chart below gives a firm's total cost of producing different levels of output. The profit-maximizing level for output for this firm is

E. impossible to determine from the information given

Which of the following is true about a firm's average VARIABLE cost?

E. it will equal AVERAGE TOTAL COST when fixed costs are ZERO.

At market price of $6, the profit-maximizing rate of output will result in

normal profits