Microeconomics

The diagram shows the short-run average total cost curves for five different plant sizes of a firm. If in the long run the firm should produce output 0x, it should do it with a plant of size

#2

At an output level of 50 units per day, a firm has average total costs of $60 and average variable costs of $35. Its total fixed costs are

$1,250

The Sunshine Corporation finds that its costs are $40 when it produces no output. Its total variable costs (TVC) change with output as shown in the accompanying table. Use this information to answer the following question. The marginal cost of the third unit of output is

$15

Normal profits are

Considered an implicit cost by economists

The diagram shows the short-run average total cost curves for five different plant sizes of a firm. The position of these five curves in relation to one another reflects

economies and diseconomies of scale

If long-run average total cost decreases as output increases, this is due to

economies of scale

In the graph provided, LRTC = long-run total cost of a firm. The firm is experiencing

economies of scale

(Last Word) Eliminating patents would tend to

encourage innovation in products made up of many different technologies but discourage innovation of easy-to-copy products requiring large R&D costs to create.

3-D printers can reduce the cost of producing items because they

exploit huge economies of scale in production

A firm encountering economies of scale over some range of output will have a

falling long-run average cost curve

Allocative efficiency occurs whenever

it is impossible to produce a net benefit for society by changing the combination of goods and services produced.

The following is cost information for the Creamy Crisp Donut Company. Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 If, other things equal, Creamy Crisp's revenue fell to $286,000,

it would earn a normal profit but not an economic profit

If a firm decides to produce no output in the short run, its costs will be

its fixed costs

Assume a purely competitive, increasing-cost industry is in long-run equilibrium. If a decline in demand occurs, firms will

leave the industry and price and output will both decline

If the long-run supply curve is upward-sloping, it indicates that resource prices fall when

production in the industry decreases in the long run.

The accompanying graphs are for a purely competitive market in the short run. The graphs suggest that as long run adjustments consequently occur, the firms in the industry will find that

profits will decrease.

(Last Word) The development of additive manufacturing technology (3-D printers) is expected to lower prices by doing which of the following?

reducing both large fixed set-up costs and transportation costs

Production costs to an economist

reflect opportunity costs.

Line (2) in the diagram reflects a situation where resource prices

remain constant as industry output expands

A constant-cost industry is one in which

resource prices remain unchanged as output is increased.

The industry represented by the accompanying graph must be one where

resource prices rise when the industry contracts.

Over the range of positive, but diminishing, marginal returns for an input, the total product curve

rises at a decreasing rate

Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC. Given this, the firm

should continue producing in the short run but leave the industry in the long run if the situation persists.

Implicit and explicit costs are different in that

the former refer to nonexpenditure costs and the latter to monetary payments

If a variable input is added to some fixed input, beyond some point the resulting extra output will decline. This statement describes

the law of diminishing returns

When marginal cost is increasing,

total cost must be increasing

Creative destruction is least beneficial to

workers in the "destroyed" industries.

Refer to the provided graph. At which point does marginal product (MP) equal average product (AP) at a specific level of output?

Point B

In the diagram, total product will be at a maximum at

Q3 units of labor

Refer to the diagram. The per unit costs at output level Q that are both attainable and imply the least-cost production for this level of output

are B

ATC

average total cost

In long-run equilibrium under pure competition, all firms will produce at minimum

average total cost

For most producing firms,

average total costs decline as output is carried to a certain level, and then begin to rise

Which of the following outcomes is consistent with a purely competitive market in long-run equilibrium? a) Combined consumer and producer surplus will be maximized. b) P = MC = lowest AVC. c) The minimum willingness to pay equals the maximum acceptable price. d) We would expect all of these to occur in the long run in a purely competitive market.

a) Combined consumer and producer surplus will be maximized.

Which of the following is true of normal profits? a) They are necessary to keep a firm in the industry in the long run. b) They are zero under pure competition in the long run. c) They are excluded from a firm's costs of production. d) They are what attract other firms to enter an industry.

a) They are necessary to keep a firm in the industry in the long run.

Use the following data to answer the question. The letters A, B, and C designate three successively larger plant sizes. In the long run, the firm should use plant size "A" for

10 to 30 units of output

Answer the question on the basis of the following cost data. The average total cost of producing 3 units of output is

$16

The Sunshine Corporation finds that its costs are $40 when it produces no output. Its total variable costs (TVC) change with output as shown in the accompanying table. Use this information to answer the following question. The average total cost of 3 units of output is

$35

Answer the question on the basis of the accompanying table that shows average total costs (ATC) for a manufacturing firm whose total fixed costs are $10. The marginal cost of the fourth unit of output is

$37

Refer to the cost data provided. How much is the firm's total fixed costs?

$400

Assume that in the short run a firm is producing 100 units of output, has average total costs of $200, and has average variable costs of $150. The firm's total fixed costs are

$5,000

The table shows three short-run cost schedules for three plants of different sizes that a firm might build in the long run. What is the long-run average cost of producing 30 units of output?

$7

Answer the question on the basis of the following cost data The marginal cost of producing the sixth unit of output is

$8

Answer the question on the basis of the following cost data. The average fixed cost of producing 3 units of output is

$8

Refer to the provided table. The average variable cost of producing 3 units of output is

$9.33

(Consider This) Approximately what percentage of start-up firms in the United States go bankrupt within the first two years?

22

The following data show the relationship between total costs and output in the short run. The firm's marginal costs are equal to average total cost somewhere between units

3 and 4

Refer to the provided graphs. They show the long-run average total cost (LRATC) for a product. Which graph would most probably be applicable to a natural monopoly?

Graph A

Efficiency or deadweight losses occur in purely competitive markets when P = MC = lowest ATC. (T/F)

False

If a firm increases all its inputs by 10 percent and its output increases by 15 percent, the firm is experiencing diseconomies of scale (T/F)

False

If start-up firms can quickly shift the short-run cost curves up and to the left, they would improve their chances of becoming profitable. (T/F)

False

In purely competitive market, the entry and exit of firms will push price toward equality with marginal revenue. (T/F)

False

Long-run supply curves for a purely competitive industry can never be downsloping. (T/F)

False

When entrepreneurs in competitive industries successfully innovate to lower production costs, it usually results in long-run economic profits for the firm. (T/F)

False

The theory of creative destruction was advanced many years ago by

Joseph Schumpeter

Suppose a firm sells its product at a price lower than the per-unit implicit costs of producing it. Which of the following statements is definitely true?

The firm may earn positive accounting profits but will face economic losses

Under what conditions would an increase in demand lead to a lower long-run equilibrium price?

The firms in the market are part of a decreasing-cost industry.

An underallocation of resources is occurring in a purely competitive industry whenever the price of the product is greater than marginal cost. (T/F)

True

Consumer surplus is the difference between the maximum price a consumer is willing to pay for a good and the market price of the product. (T/F)

True

In long-run equilibrium, a competitive firm produces where P = MR = MC = minimum ATC and the firm earns normal economic profits. (T/F)

True

Marginal product is highest where marginal cost is lowest. (T/F)

True

Producer surplus is the difference between the market price a producer receives for a product and the minimum price producers are willing to accept for a product. (T/F)

True

Variable costs are costs that change directly with output (T/F)

True

When the total product is at its maximum level, the marginal product is zero. (T/F)

True

The accompanying graph shows the long-run supply and demand curves in a purely competitive market. The curves suggest that this industry is

a constant-cost industry.

(Consider This) In order to apply the concept of diminishing returns to study time,

all inputs to the learning process except for study time must be assumed to be fixed

Purely competitive industry X has constant costs and its product is an inferior good. The industry is currently in long-run equilibrium. The economy now goes into a recession and average incomes decline. The result will be

an increase in output, but not in the price, of the product.

Fixed cost is

any cost that does not change when the firm changes its output

Which of the following statements is true? a) Diminishing marginal returns means that total output decreases as more of the variable inputs are employed b) Diminishing marginal returns means that in order to increase output at a constant rate, the firm must add larger and larger quantities of the variable inputs c) Diminishing marginal returns implies that there will never be increasing returns to scale d) Diminishing marginal returns implies that the firm's profits will be shrinking as it produces more of its product

b) Diminishing marginal returns means that in order to increase output at a constant rate, the firm must add larger and larger quantities of the variable inputs

Which of the following statements about a competitive firm is correct? a)To maximize profits, a competitive firm should produce the output level at which total revenue is greatest. b) In long-run equilibrium, a competitive firm will produce at the point of minimum average costs. c) A competitive firm will produce in the short run so long as total receipts are sufficient to cover total fixed costs. d) A competitive firm will close down in the short run whenever price is less than the minimum attainable average total cost.

b) In long-run equilibrium, a competitive firm will produce at the point of minimum average costs.

When a purely competitive industry is in long-run equilibrium, which statement is true? a) Average total cost is less than marginal cost. b) Price and average total cost are equal. c) Marginal cost is at its maximum level. d) Marginal revenue is greater than price.

b) Price and average total cost are equal.

Which statement is correct? a)Marginal cost is the change in average cost when there is a change in output of 1 unit. b)The marginal cost curve cuts the average variable cost curve at its lowest point c)The marginal cost curve cuts the average variable cost curve at an output greater than where the marginal cost curve cuts the average cost curve d)If average variable cost is increasing, then average total cost must be increasing too

b) The marginal cost curve cuts the average variable cost curve at its lowest point

The accompanying graph shows the long-run supply and demand curves in a purely competitive market. We know that in this market, the marginal

benefit exceeds marginal cost at the output level of Q2.

marginal benefit formula

change in total benefit/change in quantity

Marginal Costs Formula

change in total cost / change in quantity

Marginal cost can be defined as the

change in total cost resulting from one more unit of production

marginal utility formula

change in total utility/change in quantity

The fact that the life expectancy of a US business is rather short—just 10.2 years—is a reflection of the consequences of

competition and creative destruction.

In which of the following industries are economies of scale exhausted at relatively low levels of output?

concrete mixing

The accompanying graph shows the long-run supply and demand curves in a purely competitive market. The curves suggest that in this industry, the dollars' worth of other products that have to be sacrificed in order to produce each unit of the output of this industry is

constant

Variable costs are

costs that change with the level of production

All of the following are long-run changes, except a) an industry expanding as more firms enter it. b) a firm moving into larger production facilities to expand production. c) some firms deciding to leave an industry and the industry contracts. d) a firm producing more output by acquiring more raw materials for its existing factory.

d) a firm producing more output by acquiring more raw materials for its existing factory.

As output increases, average fixed costs

decrease

The long-run supply curve under pure competition is derived by observing what happens to market price and quantity when market

demand changes and all consequent long-run adjustments have occurred.

Total fixed cost (TFC)

does not change as total output increases or decreases

A constant-cost industry is one in which

if 100 units can be produced for $100, then 150 can be produced for $150, 200 for $200, and so forth.

Which of the following is not a source of economies of scale?

inelastic resource supply curves

Refer to the diagram. At output level Q,

marginal product is falling

At the point where diminishing marginal returns of an input sets in, the

marginal product starts to decrease

Refer to the diagram. If labor is the only variable input, the average product of labor is at a

maximum at point b

Diseconomies of scale occur mainly because

of the inherent difficulties involved in managing and coordinating a large business enterprise

Innovations that lower production costs or create new products

often generate short-run economic profits that do not last into the long run.

In pure competition, if the market price of the product is higher than the minimum average cost of the firms, then

other firms will enter the industry and the industry supply will increase.

When total product is increasing at an increasing rate, marginal product is

positive and increasing

Because the marginal product of a variable resource at first increases and then decreases as the output of the firm is increased,

total cost at first increases at a decreasing rate and then increases at an increasing rate

At the Amarillo Piano Company, the average product of labor stays constant at 5, regardless of how much labor is employed. This implies that

the marginal product of labor is constant

The difference between the actual price that a producer receives and the minimum acceptable price a producer is willing to accept is

the producer surplus

The term productive efficiency refers to

the production of a good at the lowest average total cost.

Answer the question on the basis of the following output data for a firm. Assume that the amounts of all nonlabor resources are fixed. Diminishing marginal returns become evident with the addition of the

third worker

average total cost formula

total cost / quantity

average fixed cost formula

total fixed cost/quantity

average variable cost formula

total variable cost / quantity

With the creation and growth of the Internet, vacationers can now book their own flights, hotels, rental cars, and other travel logistics online. If this capability resulted in creative destruction, which of the following industries would we have expected to decline the most as a result?

travel agencies

Which of the following constitutes an implicit cost to the Johnston Manufacturing Company?

use of savings to pay operating expenses instead of generating interest income

At what point does marginal product equal average product?

where average product is equal to its maximum value

Economies and diseconomies of scale explain

why the firm's long-run average total cost curve is U-shaped