Micro Economics Study Guide Test 2

Profit per unit is equal to Multiple Choice a. TR - TC. b. P - ATC. c. TR - ATC. d. P - MR.

b. P - ATC.

The demand will be _______________ if the consumer has _________ substitute goods to choose from a. inelastic; more b. elastic; no c. elastic; more d. elastic; less

c. elastic; more

Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What is the accounting profit for the firm described above? Multiple Choice A. $90,000. B. -$90,000. C. $0. D. $200,000.

C. $0. Explanation Accounting profit is equal to revenue ($360,000) minus explicit costs ($360,000), which is $0.

Lashondra is the owner/operator of an interior design firm. Last year she earned $400,000 in total revenue. Her explicit costs were $200,000 (assume that this amount represents the total opportunity cost of these resources). During the year she received offers to work for other design firms. One offer would have paid her $120,000 per year and the other would have paid her $130,000 per year. Lashondra's economic profit is equal to Multiple Choice A. $200,000. B. -$50,000. C. $0. D. $70,000

D. $70,000 Explanation Accounting profit is equal to revenue ($400,000) minus explicit costs ($200,000), which is $200,000. Economic profit is equal to accounting profit ($75,000) minus implicit costs-the best forgone alternative-($130,000); therefore her economic profit is $70,000.

Profit Multiple Choice A. Must be reported to Wall Street quarterly. B. Is the difference between variable costs and fixed costs. C. Is always a number greater than zero. D. Is the difference between total revenue and total cost.

D. Is the difference between total revenue and total cost.

In Figure 20.1, total revenue is maximized at the unit price of Multiple Choice a. $100. b. $50. c. $60. d. $80.

a. $100.

Refer to Figure 23.1 for a perfectly competitive firm. In the long run, this firm would stay in this market only if the market price was equal to or higher than Multiple Choice a. $15. b. $5. c. $10. d. $20.

a. $15. Explanation In the long run, a firm should stay in business only if economic profit is greater or equal to zero. This happens when price is greater than or equal to the minimum average total cost ($15).

Refer to Table 21.5: Table 21.5 QTFCTVCTCAVCMC0 15--1 23 2 43 15 The total cost of 3 units of output in Table 21.5 is a. $30. b. $38. c. $15. d. $23.

a. $30. Explanation Total cost is equal to fixed cost plus variable cost, which is $30.

Which of the following affects the ATC curve for a firm but not the MC curve? a. A change in property taxes. b. A change in payroll taxes. c. A change in profit taxes. d. A change in the price of the good.

a. A change in property taxes. Explanation Fixed costs such as the cost of the basic plants and equipment and property taxes do not vary with the rate of output and therefore do not affect marginal costs but do affect the ATC.

Greater labor productivity means a. Higher output per worker. b. Higher labor cost per unit of output. c. Lower output per labor-hour. d. Lower output per worker.

a. Higher output per worker. Explanation When labor productivity increases, it means that each worker can add more to the total output than before.

Marginal cost pricing in competitive markets results in all but which one of the following? a. Maximization of consumer utility. b. Output being produced where price equals the opportunity cost of the last unit being produced. c. An efficient mix of goods and services being produced. d. The information necessary for consumers to make rational choices between alternative goods and services.

a. Maximization of consumer utility. Explanation The marginal cost pricing characteristic of competitive markets permits society to answer the WHAT to produce question efficiently. The amount consumers are willing to pay for a good (its price) equals its opportunity cost (marginal cost), but that output doesn't necessarily maximize utility or satisfaction.

Which of the following products will have more inelastic demand? a. Medicines. b. Fresh flowers. c. Fast food. d. New cars.

a. Medicines.

The entry of firms into a market a. Reduces the profits of existing firms in the market. b. Shifts the market demand curve to the left. c. Increases the equilibrium price. d. Shifts the market supply curve to the left.

a. Reduces the profits of existing firms in the market. Explanation As more firms enter a market, the market supply curve will shift to the right and cause the market price to drop along with profits.

The marginal physical product of labor in Figure 21.1 is negative for the a. Sixth worker. b. Fifth worker. c. Third worker. d. Fourth worker.

a. Sixth worker. Explanation If total output decreases with the addition of a new worker, the marginal physical product is not only diminishing but is actually negative.

Assume that store brand cereal is an inferior good. If income rises, then the price of store brand cereal will ________ and the quantity sold of store brand cereal will _______. a. fall; fall b. fall; rise c. rise; fall d. rise; rise

a. fall; fall

Assume the price elasticity of demand for U.S. Frisbee Co. Frisbees is 0.5. If the company increases the price of each Frisbee from $12 to $16, the number of Frisbees demanded will a.Decrease by 14.3 percent. b. Increase by 20.0 percent. c. Increase by 7.0 percent. d. Decrease by 33.3 percent.

a.Decrease by 14.3 percent.

Refer to Table 21.5: Table 21.5 QTFCTVCTCAVCMC0 15--1 23 2 43 15 The average variable cost of the second unit of output in Table 21.5 is a. $15.00. b. $6.00. c. $8.00. d. $4.00.

b. $6.00. Explanation AVC is equal to VC ($12) divided by quantity (2), which is $6.00.

Which of the following is a long-run concept? Multiple Choice a. Diminishing returns b. Diseconomies of scale. c. Fixed costs. d. Diminishing marginal productivity.

b. Diseconomies of scale. Explanation Economies or diseconomies of scale occur when changes in the size (scale) of the plants and equipment change the minimum average costs. In the short run, plant and equipment resources are fixed. Therefore, economies and diseconomies of scale are long-run concepts.

When a computer firm is producing a level of output at which MC is greater than price, from society's standpoint the firm is producing too a. Little because society is giving up more to produce additional computers than the computers are worth. b. Much because society is giving up more to produce additional computers than the computers are worth. c. Much because society would be willing to give up more alternative goods in order to get additional computers. d. Little because society would be willing to give up more alternative goods in order to get additional computers.

b. Much because society is giving up more to produce additional computers than the computers are worth. Explanation Losses in a particular industry indicate that consumers want a different mix of output (fewer of that particular industry's goods).

In a competitive market, a. Sellers don't have market power but buyers do. b. Neither buyers nor sellers have market power. c. Buyers don't have market power but sellers do. d. Buyers and sellers both have market power.

b. Neither buyers nor sellers have market power. Explanation A perfectly competitive industry has several distinguishing characteristics, including many buyers and sellers, identical products, and low entry barriers. Because of the many buyers and sellers, neither buyers nor sellers will have market power.

A firm should shut down production when Multiple Choice a. P > minimum AVC. b. P < minimum AVC. c. P = MC. d. P = minimum ATC.

b. P < minimum AVC. Explanation A firm that shuts down will lose all its fixed costs. Therefore, a firm should shut down only if the losses from continuing production exceed fixed costs. This happens when price is less than average variable cost.

The In The News article "Tesla Banks on Gigafactory" says that a. The investment will be a variable expense. b. Teslas plan is a long-run production decision, and the company plans to enjoy economies of scale. c. The new plant will likely result in diseconomies of scale. d. The plan to build a gigafactory is a short-run production decision.

b. Teslas plan is a long-run production decision, and the company plans to enjoy economies of scale. Explanation The long run is a planning period when all inputs are variable. Because the plant is not built yet, Tesla is in a long-run planning period. Tesla can spread the fixed costs of the plant over many cars and thus will enjoy economies of scale.

When the average total cost curve is rising, the marginal cost curve will be a. Below the average fixed cost curve. b. Falling with greater output. c. Above the average total cost curve. d. Below the average total cost curve.

c. Above the average total cost curve. Explanation If the marginal cost is greater than the average total cost, the average total cost must be increasing. For instance, if you have a 3.5 GPA (grade point average) and get a 4.0 in your last (marginal) economics class, your GPA will rise.

Megan used to work at the local pizzeria for $15,000 per year but quit in order to start her own deli. To buy the necessary equipment, she withdrew $20,000 from her inheritance (which paid 8 percent interest). Last year she paid $25,000 for ingredients and $500 per month rent but had revenue of $50,000. She asked her dad the accountant and her mom the economist to calculate her costs for her. Multiple Choice a. Dad says her cost is $31,000 and Mom says her cost is $35,000. b. Dad says her cost is $9,000 and Mom says her cost is $2,400. c. Dad says her cost is $31,000 and Mom says her cost is $47,600. d. Dad says her cost is $25,000 and Mom says her cost is $16,600.

c. Dad says her cost is $31,000 and Mom says her cost is $47,600. Explanation Profit is equal to revenue minus costs. An accountant will consider only explicit costs, whereas an economist will consider economic costs, which include explicit and implicit costs.

Sam's surf shop has total costs of $2,000 when it is not producing any surfboards. This means that a. Variable costs are $2000. b. The shop is very inefficient in its production. c. Fixed costs are $2,000. d. Fixed costs are zero.

c. Fixed costs are $2,000. Explanation The initial dominance of falling AFC, combined with the later resurgence of rising AVC (due to increasing MC), is what gives the ATC curve its characteristic U shape.

If the elasticity of demand for cigarettes is 0.4, a seller should a. Decrease price to increase total revenue. b. Increase price because the percentage change in quantity demanded will be greater than the price effect. c. Increase price to increase total revenue. d. Reduce price to maximize profits.

c. Increase price to increase total revenue.

When a firm minimizes its losses in the short run, a. The firm enters or exits from the market. b. The firm makes an investment decision. c. It continues to produce only if price exceeds average variable cost. d. It continues to produce only if price exceeds marginal revenue.

c. It continues to produce only if price exceeds average variable cost. Explanation If the price (or MR) is less than ATC but greater than AVC, then a perfectly competitive firm is losing less than its fixed costs and should continue producing in the short run in order to minimize its losses.

An investment decision involves choosing a. A rate of output and is a long-run decision. b. The amount of plants and equipment and is a short-run decision. c. The amount of plants and equipment and is a long-run decision. d. A rate of output and is a short-run decision.

c. The amount of plants and equipment and is a long-run decision. Explanation An investment decision is the long-run decision to build, buy, or lease plants and equipment, or to enter or exit an industry.

If two goods are substitute goods, Multiple Choice a. The percentage change in quantity demanded for good X will rise if there is a reduction in the price of good Y. b. The percentage change in quantity demanded for good X will stay the same if there is an increase in the price of good Y. c. The percentage change in quantity demanded for good X will fall if there is a reduction in price of good Y. d. If the price of good X increases, the demand for good Y falls.

c. The percentage change in quantity demanded for good X will fall if there is a reduction in price of good Y.

Table 21.1 Units of LaborUnits of Output00115235345452 With which unit of labor do diminishing marginal returns first appear in Table 21.1? Multiple Choice a. The fourth. b. The first. c. The third. d. The second.

c. The third. Explanation The marginal physical product is 15, 20, 10, and 7 when you add each worker respectively, so diminishing marginal returns appear with the third worker as 20 is less than 10.

Perfectly competitive firms cannot individually affect market price because Multiple Choice a. The government exercises control over the market power of competitive firms. b. Demand is perfectly inelastic for their goods. c. There are many firms, none of which has a significant share of total output. d. There is an infinite demand for their goods.

c. There are many firms, none of which has a significant share of total output. Explanation A firm that has market power can control the market price for the good it sells, unlike a perfectly competitive firm that risks losing all of its customers, who will shop elsewhere, if the firm increases the price of its product.

Refer to Figure 22.3 for a perfectly competitive firm. This firm should shut down at any price below A. $4. b. $23. c. $15. d. $10

d. $10 Explanation A firm should shut down only if the losses from continuing production exceed fixed costs. This happens when total revenue is less than total variable cost or price is less than average variable cost.

Refer to the data in Figure 22.1. The price of this good a. Is $100 per unit. b. Is $50 per unit. c. Varies as output changes. d. Is $1 per unit.

d. Is $1 per unit. Explanation The total revenue curve of a perfectly competitive firm is an upward-sloping straight line, with a slope equal to price. From the graph, you can see that the price is $1.00.

Assume apples and oranges are substitutes. Suppose apple growers launch a successful advertising campaign that convinces consumers apples are a better product. As a result the cross-price elasticity of apples and oranges will become a. More negative. b. More positive. c. Less negative (move closer to zero). d. Less positive (move closer to zero).

d. Less positive (move closer to zero).

A perfectly competitive firm should expand output when a. P > ATC. b. P < MC. c. P < ATC. d. P > MC.

d. P > MC.

In the $80 to $40 price range in Figure 20.1, demand is Multiple Choice a. Price-elastic. b. Unitary elastic. c. Perfectly price-elastic. d. Price-inelastic.

d. Price-inelastic.

The entry of firms into a market, ceteris paribus, a. Shifts the market demand curve to the left. b. Decreases the equilibrium output in the market. c. Shifts the market supply curve to the left. d. Reduces the economic profit of each firm already in the market.

d. Reduces the economic profit of each firm already in the market. Explanation As more firms enter a market, the market supply curve will shift to the right and cause the market price to drop along with profits.

Refer to Figure 23.5 for a perfectly competitive firm. If more efficient production techniques were developed in this market, which of the following changes would we expect to occur, ceteris paribus? a. The ATC alone would decrease. b. The ATC alone would increase. c. The ATC, MC, and market price would all increase. d. The ATC, MC, and market price would all decrease.

d. The ATC, MC, and market price would all decrease. Explanation Advances in technological or managerial knowledge and human or physical capital increase our productive capability and therefore cause the MC and the ATC curves to decrease.

The World View article on the rise in gold prices indicates that Multiple Choice a. The law of supply is true because as the price of gold rises, the quantity supplied of gold actually falls. b. The quantity supplied falls when the price of gold rises. c. The law of supply is not really relevant to the article. d. The law of supply is true: as the price of gold rises, miners around the world search for new deposits of gold.

d. The law of supply is true: as the price of gold rises, miners around the world search for new deposits of gold.