ABE 204 Exam 3

What are characteristics of a competitive market?

-buyers and sellers are price takers -each firms sells a virtually identical product -each firm chooses an output level that maximizes profits

The Big Box corporation produced and sold 500 units of output. The average cost of production per unit was $50. Each unit sold for a price of $65. The Big Box corporation's total revenues are...

... $32,500

Constant returns to scale occur when the firm's long-run...

... average total costs are constant as output increases.

In the setting of production level, a firm's cost curves...

... by themselves do not tell us what decisions the firm will make

The difference between social cost and private cost is a measure of the...

... cost of an externality

If an aluminum manufacturer does not bear the entire cost of the smoke it emits, it will...

... emit a higher level of smoke than is socially efficient

For any competitive market, the supply curve is closely related to the ...

... firms' costs of production in that market

The marginal product of labor is equal to the...

... increase in output obtained from a one unit increase in labor

A firm has market power if it can...

... influence the market price of the good it sells

Economists assume that the typical person who starts her own business does so with the intention of...

... maximizing profits

A key characteristic of a competitive market is that...

... producers sell nearly identical products

Since air pollution creates a negative externality,...

... social welfare will be enhanced when some, but not all air pollution is eliminated

In the absence of externalities, the "invisible hand" leads a market to maximize...

...total benefit to society from that market

Suppose a firm currently produces 225 units of output per day with 15 workers. The firm is able to produce 235 units of output with a 16th worker. what is the marginal product of the 16th work?

10 units of output

Which of the following statements best reflects a price-taking firm?

If the firm were to charge more than the going price, it would sell none of its goods.

In a market economy, government intervention...

In a market economy, government intervention... may improve market outcomes in the presence of externalities.

Which of the following is NOT a characteristic of a competitive market?

entry is limited

A firm is currently producing 100 units of output per day. The manager reports to the owner that producing the 100th unit costs the firm $5. The firm can sell the 100th unit for $4.75. The firm should continue to produce 100 units in order to maximize its profits [or minimize its losses]. (true or false)

false

A firm's total profit equals its marginal revenue minus its marginal cost. (true or false)

false

Anna borrows $5,000 from a bank and withdraws $1,000 from her personal savings to start a coffee shop. The interest rate is 5 percent for both the bank loan and her personal savings. Her opportunity cost of capital is $250. (true or false)

false

For a firm operating in a competitive market, both marginal revenue and average revenue exceed the market price. (true or false)

false

For a firm operating in a perfectly competitive industry, total revenue, marginal revenue, and average revenue are all equal. (true or false)

false

In a market with positive externalities, the market equilibrium quantity maximizes the welfare of society as a whole. (true or false)

false

Negative externalities lead markets to produce a smaller quantity of a good than is socially desirable, while positive externalities lead markets to produce larger quantity of a good than is socially desirable. (true or false)

false

The graph of the production function plots total cost versus quantity of output. (true or false)

false

The shape of the total-cost curve is unrelated to the shape of the production function. (true or false)

false

When an individual firm in a competitive market increases its production, it is likely that the market price will fall. (true or false)

false

A congestion toll imposed on a highway driver to force the driver to take into account the increase in travel time she imposes on all other drivers is an example of internalizing the externality. (true or false)

true

A firm is currently producing 100 units of output per day. The manager reports to the owner that producing the 100th unit costs the firm $5. The firm can sell the 100th unit for $5. The firm should continue to produce 100 units in order to maximize its profits [or minimize its losses]. (true or false)

true

A firm's incentive to compare marginal revenue and marginal cost is an application of the principle that rational people think at the margin. (true or false)

true

A profit-maximizing firm in a competitive market will decrease production when marginal cost exceeds average revenue. (true or false)

true

Accounting profit is greater than or equal to economic profit. (true or false)

true

An example of an explicit cost would be the wages that a business owner pays her employees. (true or false)

true

Average variable cost is equal to total variable cost divided by quantity of output. (true or false)

true

Because there are many buyers and sellers in a perfectly competitive market, no one seller can influence the market price. (true or false)

true

Buyers and sellers neglect the external effects of their actions when deciding how much to demand or supply. (true or false)

true

By comparing the marginal revenue and marginal cost from each unit produced, a firm in a competitive market can determine the profit-maximizing level of production. (true or false)

true

Diminishing marginal product exists when the production function becomes flatter as inputs increase. (true or false)

true

Economies of scale often arise because higher production levels allow specialization among workers. (true or false)

true

For a firm operating in a perfectly competitive industry, marginal revenue and average revenue are equal. (true or false)

true

If a firm produces nothing, it still incurs its fixed costs. (true or false)

true

Markets sometimes fail to allocate resources efficiently. (true or false)

true

The cost of producing an additional unit of a good is not the same as the average cost of the good. (true or false)

true

The difference between economic profit and accounting profit is that economic profit is calculated based on both implicit and explicit costs whereas accounting profit is calculated based on explicit costs only. (true or false)

true

The government can internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities. (true or false)

true

The social cost of pollution includes the private costs of the producers plus the costs to those bystanders adversely affected by the pollution. (true or false)

true

Variable costs usually change as the firm alters the quantity of output produced. (true or false)

true

When a driver enters a crowded highway he increases the travel times of all other drivers on the highway. This is an example of a negative externality. (true or false)

true

When a transaction between a buyer and seller directly affects a third party, the effect is called an externality. (true or false)

true

When firms internalize a negative externality, the market supply curve shifts to the left. (true or false)

true

*don't forget to study the graphs on the quizzes!*

yuck