Microeconomics

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

$60

Which of the following Gini coefficients indicates that a country has an equal distribution of income?

0 The Gini coefficient ranges from a low of 0 to a high of 1. The higher the coefficient, the more unequal the distribution. Therefore, a value of 0 indicates the most equal distribution of income, and the Lorenz curve is the same as the diagonal line, that is, perfect equality of income distribution and each population percentile receives an equal percentage of the total income.

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?

$125,000

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

$5.00

Which of the following describes a factor of production that is not fully scarce and that can be used simultaneously in the production of more than one good?

Basic knowledge that enhances the organization of all manufacturing assembly lines With this basic knowledge there is nonrival use. It can enhance the production of more than one good simultaneously, without any trade off.

Cost-benefit analysis assumes rational agents do which of the following?

Compare additional costs and additional benefits when making a decision To maximize benefit, rational individuals compare additional costs and additional benefits when making a decision. As long as the additional benefit of an action exceeds the additional cost it will be beneficial to undertake the activity.

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

long-run average total cost

A farmer grows wheat using two inputs: labor and land whose prices are constant. If she doubles her inputs, she finds that the quantity of wheat produced more than doubles. Therefore, it must be true that in this output range her long-run average total cost curve is

downward sloping

A perfectly competitive manufacturing industry pollutes public water in its production process, leaving the water unsuitable for use by the surrounding communities. At the market equilibrium output level, which of the following is true?

marginal social cost exceeds marginal social benefit

When total physical product is at its maximum, marginal physical product must be

equal to zero

Which of the following economic systems primarily relies on prices for allocating resources and goods?

free-market A free-market economy relies on individuals responding to market price signals to allocate resources to the production of goods that are most valued in the market. That is, resources flow to the most valued activity as indicated by prices.

Compared to a market economy, in a command economy there is greater

government involvement in the allocation of resources In a command economy, the means of production are owned by the government. The decision to allocate resources and the distribution of goods and services are determined by the government. It does not primarily rely on markets for allocating resources and goods.

A monopoly is different from a perfectly competitive firm in that a monopoly

has a marginal revenue curve that lies below its demand curve

Assume that a profit-maximizing, perfectly competitive firm hires labor in a perfectly competitive labor market. If the market wage is $12 per hour and the price of the product is $3 per unit, the firm will

hire another worker if the output per hour of the additional worker exceeds 4 units

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

increasing at a constant rate

Collusion, price leadership, and price wars are usually observed in which of the following market structures?

oligopoly

In which of the following market structures do firms recognize their mutual interdependence?

oligopoly

Which of the following is true of both monopolistically competitive and perfectly competitive firms in long-run equilibrium?

price equals average total cost

ABC Limited, Inc., sells its product in a perfectly competitive market for a price of $15 per unit and hires workers at a daily wage of $75. Labor is the only factor cost, and the firm is currently earning profits. If ABC hires one more worker and output increases by 5 units per day, the firm's profits will

remain unchanged

Which of the following best explains why individuals and societies must make choices when presented with alternatives?

resources are scarce The basic economic problem is how to allocate scarce resources to meet unlimited human wants.

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

rise initially, but eventually fall

Which of the following is an example of a nonrival resource?

solar energy Solar energy is nonrival. It can be enjoyed jointly by all, and one person's enjoyment of the sun will not reduce its availability to others; it can be used by anyone without affecting another's use.

Which of the following is necessarily true at a monopolist's profit-maximizing level of output?

Marginal revenue is equal to marginal cost, but less than price.

In the absence of externalities, the perfectly competitive market maximizes economic surplus when

the market is at equilibrium The competitive market in equilibrium is allocatively efficient and maximizes the total economic surplus. In the absence of externalities, the market equilibrium quantity is the same as the socially optimal quantity. At the socially optimal quantity, the marginal benefit of consuming the last unit equals the marginal cost of producing the last unit.

If SteveR Incorporated is a monopolistic producer of diamonds, the firm's demand curve is down- ward sloping because

the number of diamonds SteveR Incorporated offers for sale affects the price of diamonds

A change in which of the following causes a movement along a given demand curve for a normal good?

the price of the good A change in the price of the good (an increase or a decrease), all other things remaining constant, causes a movement along a given demand curve for the good as described by the law of demand. An increase in price causes an upward movement resulting in a decrease in quantity demanded, and a decrease in price causes a downward movement along the demand curve, resulting in an increase in quantity demanded.

The demand curve for a monopolistically competitive firm is downward sloping because

the products produced by different firms are not identical

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?

Output: 200 Fixed Cost: $200

Which of the following is true for a monopoly but NOT for a perfectly competitive firm?

The firm faces a downward-sloping demand curve.

In contrast to a market economy, a command economy relies on which of the following?

The government to allocate resources In a command economy, the government or a central authority decides what goods and services to produce, how to produce goods and services, and who consumes goods and services

Which of the following statements about short-run costs is true?

Total fixed cost plus total variable cost equals total cost. In the short run, a firm has both fixed and variable costs, the sum of which is equal to total cost. Also, average fixed cost plus average variable cost will equal average total cost.

Which of the following factors can cause a firm's cost curves to shift upward?

an increase in wages

If the three largest widget producers control 85 percent of the total widget market, then these producers are operating in

an oligopoly

One characteristic of perfectly competitive markets is that individual firms

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

The higher wages college graduates receive are primarily due to

differences in human capital College education represents an investment in human capital that leads to higher wages.

Short-run marginal costs eventually increase because of the effects of

diminishing marginal product

Suppose the price elasticity of supply for gasoline in the short run is estimated to be 0.4. Due to an unexpected surge in the demand for gasoline, the price of gasoline increases by 20 percent. As a result, the quantity supplied of gasoline will

increase by 8 percent The price elasticity of supply measures the responsiveness of quantity supplied to a change in the price. It is calculated as the ratio of the percentage change in quantity supplied to the percentage in price. Given the value of the elasticity and the percentage change in the price of gasoline, the percentage change in quantity can be obtained by multiplying the elasticity of supply by the percentage in the price. That is, 0.4 times 20 percent, which is equal to 8 percent. Thus, the quantity supplied will increase by 8 percent.

A profit-maximizing firm should hire an input up to the point at which

marginal revenue product equals marginal factor cost

In the absence of externalities, which market structure produces the socially optimal quantity?

perfect competition The private market equilibrium in perfect competition is the same as the socially optimal output because the marginal social benefit equals the marginal social cost, where price is equal to marginal cost.

# workers total output of coal 0 0 1 25 2 44 3 60 4 70 5 75 How many workers would the coal company want to hire if the price of coal were competitively priced at $5 per ton and the wage rate were $40 per day?

4

# workers total product 1 15 2 20 3 24 4 27 5 29 The table above shows the short-run output for a perfectly competitive firm. If the price of the product is $10, what is the marginal revenue product of the third worker hired?

$40

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?

$7

At the current prices of goods X and Y, the quantity demanded of good X is 10 units, and the quantity demanded of good Y is 5 units. The cross-price elasticity of demand between goods X and Y is 0.6. A 10 percent increase in the price of good Y will result in which of the following?

A 6 percent increase in the quantity demanded of good X. The cross-price elasticity of demand between goods X and Y is 0.6, which is the ratio of the percentage change in the quantity of good X demanded to the percentage change in the price of good Y. This implies that the 10 percent increase in the price of good Y will result in a 6 percent increase in the quantity demanded of good X. This value is obtained by multiplying the cross-price elasticity by the percentage change in the price of good Y. That is, 0.6 times 10 percent equals 6 percent.

Nation Aga can produce either 3 units of good X or 1 unit of good Y with one hour of labor, while nation Kaza can produce either 4 units of good X or 2 units of good Y with one hour of labor. Assuming that labor is the only input, mutually beneficial exchange can take place between Aga and Kaza if

Aga exchanges 2 1/2 units of good X for 1 unit of good Y Aga has to give-up 3 units of X to produce 1 unit of Y; thus giving-up only 2 1/2 units of X is beneficial. Kaza only gets 2 units of X by giving-up 1 unit of Y; thus receiving 2 1/2 units of X is beneficial.

Assume a decreasing-cost perfectly competitive industry. Which of the following statements is true?

As industry output contracts, each firm's long-run average total cost curve shifts upward.

Which of the following explains why the supply curve is upward sloping?

At a higher price, producers are more able to cover the higher marginal cost associated with increasing production. All other things remaining constant, an increase in price of a good increases profitability, incentivizing sellers to increase the quantity supplied. Thus, as price increases the quantity supplied increases, implying that the supply curve is upward sloping.

Nation Alpha can produce either 3 units of good X or 1 unit of good Y with one hour of labor, whereas nation Beta can produce either 4 units of good X or 2 units of good Y with one hour of labor. Assuming that labor is the only input, which of the following is true?

Beta has an absolute advantage in the production of good X Beta has an absolute advantage in the production of good X given that it can produce more XX in an hour than Alpha can (4 is greater than 3).

Assume that a monopolist is producing in the inelastic portion of its demand curve. Which of the following will occur if the monopolist decreases its price?

Both total revenue and profits will decrease.

An entrepreneur has earned enough total revenue to cover her accounting costs, but economic losses are being incurred. What must be true?

Her accounting profits are less than her implicit costs.

Which of the following statements describes an economy confronting scarcity?

If more of one good is produced, less of another good must be produced. With scarce resources that are fully employed, if more of one good is produced, less of another good must be produced. Scarcity means that society faces trade offs.

Which of the following correctly describes the income effect associated with the law of demand?

If the price of a normal good decreases, the purchasing power of a consumer's income increases and therefore consumers will be willing and able to purchase more of the good. The price decrease of a normal good increases the purchasing power of consumer income and allows the consumer to buy more of the good

Which of the following is true of the marginal cost curve?

It intersects the average variable cost curve and the average total cost curve at each curve's minimum point.

A collusive agreement to fix prices among firms in an oligopolistic industry is most likely to be broken under which of the following conditions?

It is easy for new firms to enter into the industry.

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?

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

Assume an economy is using all its available resources efficiently to produce only two goods, X and Y. As more of good X is produced, what happens to the production of good Y?

Less of good Y is produced as resources move from producing good Y to producing good X. The economy uses all its resources fully and efficiently. If greater production of good X is desired than the current level, then resources need to be moved from the production of good Y to the production of good X. This situation illustrates the economic trade-offs that arise from the lack of sufficient resources. For every unit increase in the production of good X, some units of good Y need to be given up. Thus more X means less of good Y will be produced.

If Nation X produces coffee at a higher opportunity cost than Nation Y, which of the following is true?

Nation Y must have a comparative advantage in producing coffee. Given that Nation Y has a lower opportunity cost than Nation X , it must have a comparative advantage.

Suppose that Habib has a weekly fixed budget and spends it all on music downloads and snacks. At his current combination of consumption, the marginal utility of the last dollar spent on music downloads is greater than the marginal utility of the last dollar spent on snacks. Has Habib maximized his utility?

No, because he can increase his total utility by purchasing more music downloads and fewer snacks. The utility-maximizing condition is not fulfilled. Utility maximization requires that the marginal utility of the last dollar spent on music downloads must equal the marginal utility of the last dollar spent on snacks. He can maximize his utility by purchasing more music downloads and fewer snacks. Purchasing more music down loads will reduce the marginal utility of music downloads, decreasing the marginal utility per dollar, and reducing the number of snacks increases the marginal utility of snacks, increasing the marginal utility per dollar; the net impact will be to increase total utility.

Which of the following indicates that a perfectly competitive firm is in long-run equilibrium?

Price equals marginal cost, which equals average total cost.

In which of the following cases would government intervention in a market result in an increase in the quantity sold?

Providing producers of a product with a per unit subsidy A subsidy provided by the government to producers in effect lowers the cost of producing the product, which increases profitability and will increase the number of sellers, thereby shifting the market supply curve to the right. Binding price floors and price ceilings will always result in a smaller quantity being bought and sold than the equilibrium quantity. In the case of a binding price floor (a minimum price allowed by law), the quantity bought and sold will be the quantity demanded. In the case of a binding price ceiling, the quantity bought and sold will be the quantity supplied.

Which of the following is associated with a command economy?

Public ownership of the means of production In a command economy, resources are publicly owned, and their uses are determined by a central planning agency.

Which of the following best explains why the short-run average total cost curve is U-shaped?

Spreading total fixed costs over a larger output, and eventually diminishing returns

Assume that the market for a good is in equilibrium at a price of $20 and a quantity of 100 units. After the government imposes a $5 per-unit excise tax on the good, the price that buyers pay for the good increases by $3. Which of the following are possible values for the government tax revenue and deadweight loss in the market?

Tax revenue is $300, deadweight loss $100 The answer can be found through the process of elimination. We can rule out Options A and B because there is always a deadweight loss unless either demand or supply is perfectly inelastic. If demand were perfectly inelastic, the buyer price would have increased by the amount of the tax. If supply were perfectly inelastic, the buyer price would not have increased at all. Since buyer price increased by $3 , we know that neither supply nor demand is perfectly inelastic, which rules out Options "A" and "B" . We can also rule out Options "D" and "E" . The tax collected by the government could only be $500 if the equilibrium quantity did not change after the tax was implemented. The only case in which the equilibrium quantity would not change after the tax is implemented is if either demand or supply is perfectly inelastic. But we know that neither demand nor supply is perfectly inelastic. Therefore, the government revenue must increase by something less than $500. The only option in which there is some deadweight loss and the tax revenue collected by the government is less than $500 is Option "C".

Which of the following would cause the supply of good X to become more elastic?

The ability to easily reallocate inputs to production of good X Elasticity is a measure of responsiveness of quantity supplied to changes in price. The ability to reallocate resources easily allows producers to respond to changes in price quickly. One of the determinants of the elasticity of supply is the time period it takes to respond to changes in market conditions. The ability to easily reallocate inputs lessens the time period to adjust and respond. Thus, supply becomes more elastic.

Suppose the small country of Aronow imports 40,000kg of bananas. The global price of bananas is $0.50 per kg. The government of Aronow collects tariff revenues of $4,000 from banana imports. Which of the following is true?

The consumers in Aronow pay a price of $0.60$0.60 per kg of bananas. Imports are equal to 40,000. The tax collected by the government is $4,000. The tax collected by the government is equal to the tariff times the amount of imports, $4000=tariff ** 40,000. Therefore, the tariff must be $.10. Given the global price is $.50, the price paid by domestic consumers is the global price plus the tariff, which is $.50+$.10=$.60

An increase in the price of good X causes buyers to want to buy more of good Y. Which of the following explains the resulting change in the market?

The demand curve for good Y will shift to the right because the goods are substitutes. The goods are substitutes because an increase in the price of good X causes buyers to want to buy more of good Y. An increase in the price of good X results in an increase in demand for the substitute good Y, which is represented by a rightward shift of the demand curve for good Y.

The market for tomatoes is in equilibrium at the price of $10, and quantity of 50 tomatoes. If consumer surplus is $400 and total surplus is $650, what is the producer surplus in the tomato market and why?

The producer surplus is $250, because the total surplus less what consumers receive must go to producers. Total surplus == consumer surplus ++ producer surplus. Since the total surplus is $650 and consumer surplus is $400, the producer surplus is $650−$400=$250

Which of the following will occur as a result of a decrease in the prices of the inputs used to produce a good?

The quantity supplied would increase at each possible price for the good. A decrease in input prices lowers the cost of production and shifts the supply curve to the right. As a result, more of the good will be offered for sale at each possible price for the good.

A perfectly competitive firm, earning economic profits, produces and sells 100 units of output at a price of $20 per unit. If its marginal cost of increasing output to a rate of 101 units is $18, which of the following statements is correct?

The total profit from selling 101 units is $2 greater than the total profit from selling 100 units.

Assume that the market for a good is characterized by a downward-sloping demand curve and an upward-sloping supply curve. Suppose that there is an improvement in technology for producing the good. Which of the following would occur?

The total surplus (the sum of consumer and producer surpluses) in the market would increase. The improvement in production technology shifts the supply curve to the right. A shift in the supply curve to the right lowers the equilibrium price and raises the equilibrium quantity. Total consumer surplus would increase with the decrease in price and the increase in quantity. The change in total producer surplus would be indeterminate because of the offsetting effects of the price and quantity change on producer surplus. However, any loss in producer surplus resulting from a lower price would be transferred to consumer surplus. Thus, total surplus in the market would definitely increase.

Which of the following will initially result from an increase in the market demand for a good?

There will be a temporary shortage at the original equilibrium price. A shift of the demand curve to the right will create a shortage at the original equilibrium price, which will be eliminated by a rising price to reach a new equilibrium.

The closer income distribution moves toward complete equality, the closer the Lorenz curve moves to

a diagonal line The Lorenz curve is a graph on which the cumulative percentage of total national income is plotted against the cumulative percentage of the corresponding population. The closer the curve is to a straight diagonal line, the more equal the distribution of income.

A free-rider problem exist when

a good is nonexcludable in consumption. When goods are nonexcludable, individuals can consume the good without paying their share of the cost.

An example of a good that is nonrival and nonexcludable is

a lighthouse Individuals cannot be excluded from taking advantage of a lighthouse (nonexcludable), and the use of a lighthouse by one individual does not affect another individual from using the lighthouse (nonrival). A lighthouse is a public good.

Oren's father tells Oren he can have one dessert after dinner. He can choose from a scoop of ice cream, a slice of apple pie, a cup of chocolate pudding, or a piece of fruit. Oren prefers chocolate pudding to a piece of fruit; he prefers apple pie to chocolate pudding; and he prefers ice cream to apple pie. If Oren chooses a scoop of ice cream, what is his opportunity cost?

a slice of apple pie Apple pie is the next best alternative to ice cream. By choosing the ice cream, Oren gave up the opportunity to enjoy apple pie, the next best alternative.

The marginal revenue product of labor is the

additional revenue a firm earns when the firm employs and additional unit of labor

Which of the following is an example of a scarce factor of production?

airplanes Airplanes are capital goods used to produce transportation services; therefore they are a factor of production. Airplanes are also scarce.

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

all factors of production are variable

Consider the market for arugula, a normal good. Which of the following changes would result in an increase in both the equilibrium price and the equilibrium quantity of arugula?

an increase in population This is the correct answer. An increase in population causes demand to increase. When demand increases, the demand curve shifts to the right. A shift to the right in the demand curve raises the equilibrium price and equilibrium quantity.

In the short run, which of the following costs must continuously decrease as output produced increases?

average fixed cost

When marginal product exceeds average product, which of the following must be true?

average product is increasing

Which of the following is a source of monopoly power?

barriers to entry

Assume there are two goods in a market economy. The amount of each good produced is determined by

buyers and sellers' interactions in the market for each good The interaction of buyers and sellers in the market determines the quantity produced of a good.

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

constant returns to scale

Antitrust laws are intended to

control monopolies and maintain a competitive market environment Antitrust law is intended to promote competition.

Assuming a linear downward-sloping demand curve, as a monopoly firm sells additional units of output, its marginal revenue will

decrease continuously

If a perfectly competitive firm is producing where marginal cost is rising and greater than marginal revenue, to maximize profits it should

decrease the level of production

A merger of two firms may increase economic efficiency by

decreasing average total cost through an increase in economies of scale

Which of the following is true if a monopolist's marginal revenue is negative at the current level of output?

demand for its product is price inelastic

In a perfectly competitive labor market, an increase in an effective minimum wage will result in

fewer workers being hired

A power company decides to use wind turbines to provide electricity instead of coal. Which basic economic question does this decision answer in a free market economy?

how will goods or services be produced Using a wind turbine determines how electricity is provided or what resources are used to produce it. By specifying the resources to be used, it determines the method by which they will be produced. Therefore, it answers the question how goods and services will be produced.

Which of the following policies would result in an increase in the quantity supplied of a good in a market?

impose a binding price floor A binding price floor raises the legal price, giving an incentive to sellers to produce and sell greater quantity. The binding price floor results in a surplus at the binding price.

For an unregulated monopolist, the profit- maximizing quantity will always be

in the elastic region of the demand curve

A 10 percent increase in the price of a good results in a 4 percent increase in total revenue. From this information, it can be concluded that the demand over this range of prices

is inelastic The demand elasticity can be determined by applying the total revenue test because whether total revenue increases, decreases, or remains the same when price changes depends on the price elasticity of demand. Price and total revenue move in opposite directions if demand is elastic and move in the same direction if demand is inelastic. In this case, an increase in the price resulted in an increase in total revenue. Thus, demand must be inelastic. That is, the percentage increase in price outweighs the percentage decrease in quantity demanded, resulting in a net increase in total revenue

A firm estimates that the absolute value of the price elasticity of demand for its signature sandwich is 2. If the firm increases its sandwich price by 10 percent, what will happen to the quantity demanded?

it will decrease by 20 percent The absolute value of the price elasticity of demand is 2 and is equal to the percentage change in quantity demanded divided by the percentage change in price. Therefore the percentage change in quantity demanded will be 20% (this is calculated by multiplying the 2 by 10%). The price elasticity of demand illustrates the negative relationship between price and quantity demanded. Therefore an increase in price by 10% will result in a decrease in quantity demanded by 20% for an absolute value of a price elasticity of demand of 2.

Because of conflict and political instability in Country Y , millions of its citizens emigrate to Country X. Which of the following best explains what will happen to Country X's production possibilities curve (PPC) ?

its PPC will shift outward over time Economic growth through more resources will cause an outward shift in the PPCPPC . Emigration will increase Country X's labor force. The growth in the labor force is one factor that causes economic growth.

A well-known fast-food franchise substantially increases the price of its hamburgers, and loses only some of its customers. Which of the following best explains why the franchise has not lost all of its customers

its hamburgers are differentiated

A monopolistically competitive firm advertises in order to

make the demand for its product less price elastic

The market supply curve for a product is derived from the individual firm supply curves by

summing the quantities each producer sells at each possible price The supply curve describes the relationship between prices and quantities supplied for each producer in the market. The market supply curve is obtained by horizontally summing the individual supply curves (that is, by adding the quantities supplied at each possible price by each producer in the market).

Marginal resource (factor) cost can be defined as

the change in total resource cost caused by the addition of one more unit of a resource

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

there are no barriers to entry or exit

From the point of view of economic efficiency, a monopolist produces

too little of a good and charges too high a price

A perfectly competitive profit-maximizing firm will continue to hire additional units of an input as long as the

value of the marginal product of the input exceeds the price of the input

A monopolistically competitive profit-maximizing firm is currently producing and selling 2,000 units of output. At this output level, marginal revenue is $9, average revenue is $10, and the average variable cost is $8. The product price is

$10

A firm is producing 100 units of output at a total cost of $400. The firm's average variable cost is $3 per unit. What is the firm's total fixed cost?

$100

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

$25

A firm produces 400 books and sells each book for $15. If the explicit cost of producing the books is $4,500 and the implicit cost is $1,000, the firm's economic profit is

$500

# workers total output of coal 0 0 1 25 2 44 3 60 4 70 5 75 The marginal physical product of the second worker is

19

Assume the government implements a policy that causes a market to produce the socially optimal level of output. Which of the following must be true?

Equating marginal private benefit and marginal private cost must have resulted in inefficiencies in the market. A market will produce where marginal private benefit equals marginal private cost. Therefore, either the demand curve did not capture all the benefits of the good or the supply curve did not capture all the costs of the good, which led to an inefficient use of resources and a suboptimal level of output being produced in the market.

If a perfectly competitive industry is in long-run equilibrium, which of the following is most likely to be true?

Firms are earning a return on investment that is equal to their opportunity costs.

Suppose that price in a perfectly competitive industry decreases and it is now below minimum average total cost but remains above minimum average variable cost. Which of the following will occur in the short run?

Firms will produce the output at which marginal cost equals the new 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.

I and II only

A perfectly competitive producer of steel rods and steel beams employs 100 workers with identical skills. If steel rods and steel beams sell for the same price, which of the following rules should the producer always follow to use the 100 workers efficiently? I. Allocate workers so that the average cost of producing beams equals the average cost of producing rods. II. Allocate workers so that the marginal product of labor is the same in both rod production and beam production. III. Allocate half the workers to rod production and half the workers to beam production.

II only

Which of the following statements regarding accounting profits, opportunity costs, and economic profits is true?

If accounting profits are less than opportunity costs, there will be economic losses. Total revenue minus explicit costs equals accounting profits. Subtracting opportunity costs from accounting profits yields economic profits. Therefore, if accounting profits are less than opportunity costs, there will be economic losses.

Which of the following best describes the relationship between the average total cost curve and the marginal cost curve in the short run?

If the average total cost curve is rising, the marginal cost curve is above the average total cost curve.

A cartel is difficult to maintain for which of the following reasons?

Individual cartel members are tempted to cheat on the agreement.

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

Industry's Demand Curve: downward sloping Firm's Demand Curve: horizontal

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

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

Assume that a firm is maximizing short-run profits and that price is greater than average variable cost. Which of the following must be true at the firm's level of output?

Marginal revenue is equal to marginal cost.

Assume Nadia voluntarily leaves a job with a salary of $100 per day to open and run a restaurant instead. After deducting all explicit costs from the restaurant revenues, Nadia has a gain of $120. Assuming there are no additional implicit costs, which of the following statements is true?

Nadia has an economic profit of $20 Total revenue minus explicit costs equals accounting profits. Deducting any opportunity costs from accounting profits yields economic profits. Rational decision making should include all costs, and, thus, be based on economic profit or loss. In this example, accounting profit is stated as $120$120. Subtracting the opportunity cost of forgone wages ($100)($100) yields an economic profit of $20$20. Economic profit is positive since accounting profit exceeds the opportunity cost of lost wages.

If the only two firms in an industry successfully collude to maximize their joint profit, the price for the product will be

above the marginal cost of production

If a new tax on capital increases a firm's fixed cost of production, which of the following will occur in the short run?

average total cost will increase

Monopolies are inefficient compared to perfectly competitive firms because monopolies

charge a price greater than marginal cost

As its output increases, a firm's short-run marginal cost will eventually increase because of

diminishing returns

The last worker currently employed by a firm has a marginal product of 3 units per hour and is paid $20 per hour. Assuming that both the labor market and product market are perfectly competitive and that the product's price is $5 per unit, the firm should do which of the following?

employ fewer workers

Which of the following is an example of a positive externality?

immunizations that prevent the spread of disease With a positive externality, the marginal social benefit exceeds the marginal private benefit at all levels of output of a good or a service consumed. Being vaccinated against contagious diseases protects not only the individuals vaccinated, but also those who are not vaccinated. Thus, the marginal social benefit of immunizations exceeds the marginal private benefit.

F&D Manufacturing Company increases all its inputs by 50 percent each. If F&D's output increases by 100 percent, then F&D is experiencing

increasing returns to scale

A monopolist is inefficient from society's point of view because

it underproduces output and charges a price above marginal cost

A single-price monopolist's marginal revenue is

less than its price

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?

marginal cost will increase

A profit-maximizing firm will continue to hire workers until the marginal revenue product of labor is equal to the

marginal factor cost

For a firm hiring labor in a perfectly competitive labor market, the marginal revenue product curve slopes downward after some point because as more of a factor is employed, which of the following declines?

marginal product

Assume that labor is the only variable input. If a firm's short-run marginal cost is increasing as output rises, which of the following must be true?

marginal product of labor is decreasing

The most profitable level of output for any firm operating in the short run is the level of output at which

marginal revenue equals marginal cost

An industry consists of 100 small firms, and the largest firm accounts for only 2 percent of sales. Brand names are considered a signal of quality. The industry described is best classified as

monopolistically competitive

In the absence of barriers to entry, a typical firm is currently in long-run equilibrium. Assume there is an increase in the market demand for the good that the firm is producing. Which of the following will happen in the long run?

new firms will enter the market The increase in market demand shifts the market demand curve to the right, resulting in an increase in the price. As a result, all existing firms will increase output to where marginal cost equals marginal revenue and earn positive economic profit in the short run. In the long-run, incentivized by the short-run profits, new firms will enter the market, driving economic profits down to zero.

The use of game theory to explain strategic behavior among firms is most associated with which of the following market structures?

oligopoly

A monopolist produces two unrelated goods, X and Y. The demand for X is currently price elastic and the demand for Y is currently price inelastic. To increase its total revenue, the firm should change the price of X and Y in which of the following ways?

price of X: decrease price of Y: increase

A monopolist introduces a technological innovation that lowers the marginal cost and average cost of production. The price of the good and the level of output are most likely to change in which of the following ways?

price: decrease level of output: increase

Compared to a perfectly competitive industry with the same demand and cost curves, a monopoly's price and output will be which of the following?

price: higher output: lower

A single-price monopolist is currently producing in the inelastic portion of its market demand curve. In order to maximize profits, the monopolist should change the price and output in which of the following ways?

price: increase output: decrease

If the marginal cost curve of a monopolist shifts up, which of the following will occur to the monopolist's price and output?

price: increase output: decrease

Assume that a profit-maximizing monopoly is charging a single price. If the monopoly can price discriminate and charge each consumer what he or she is willing to pay, which of the following will occur?

the quantity of output produced will increase

In the short run, assume diminishing marginal product of labor sets in with the hiring of the second worker. Which of the following will remain constant as a firm produces more output?

total fixed cost Total fixed cost will remain unchanged as output increases (or decreases) in the short run, since the firm cannot add more capital resources in the short run.