CH 8 Competitive Firm

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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?

$0.

PIC, Refer to Figure 22.3 for a perfectly competitive firm. This firm should shut down at any price below

$10.

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 are the annual explicit costs for the firm described above?

$360,000.

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 are the annual economic costs for the firm described above?

$450,000.

PIC, Refer to the data in Figure 22.1. The total fixed costs for this firm are approximately

$50.

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

$70,000.

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 are the annual implicit costs for the firm described above?

$90,000.

PIC, Suppose the entrepreneur could earn $1,000 as an employee elsewhere. This means the accounting profit is

$925.

PIC,The accounting profit is equal to

$925.

PIC, Suppose the entrepreneur could earn $1,000 as an employee elsewhere. This means the economic profit is

-$75.

PIC, Refer to Figure 22.3 for a perfectly competitive firm. The law of diminishing returns takes effect at an output of

13.

PIC, Refer to the data in Figure 22.1. The profit-maximizing output for this firm is

200 units.

PIC, Refer to Figure 22.3 for a perfectly competitive firm. At a market price of $23, profit per unit is maximized at an output of

31 units.

PIC, Refer to Figure 22.3 for a perfectly competitive firm. At a market price of $23, total profits are maximized at an output of

39.

The long run is

A period long enough for all inputs to be variable.

A production decision involves choosing

A rate of output and is a short-run decision.

The shutdown point occurs where price is below the minimum of

AVC.

Adam Weed is the owner/operator of a flower shop. Last year he earned $250,000 in total revenue. His explicit costs were $175,000 paid to his employees and suppliers (assume that this amount represents the total opportunity cost of these resources). During the year he received three offers to work for other flower shops with the highest offer being $75,000 per year. Which of the following is true about Adam's accounting and economic profit?

Accounting profit = $75,000; economic profit = $0.

If price is greater than marginal cost, a perfectly competitive firm should increase output because

Additional units of output will add to the firm's profits (or reduce losses).

PIC, Refer to Figure 22.3 for a perfectly competitive firm. If the market price is $10,

An economic loss will occur.

The $600 paid in property taxes counts as

An explicit cost.

Assuming the entrepreneur does not pay herself, the $1,000 she could earn as an employee elsewhere is considered

An implicit cost.

Fixed costs

Are constant in the short run.

Explicit costs

Are the sum of actual monetary payments made for resources used to produce a good.

If a perfectly competitive firm wanted to maximize its total revenues, it would produce

As much as it is capable of producing.

If a perfectly competitive firm is producing a rate of output at which MC exceeds price, then the firm

Can increase its profit by decreasing output.

Entrepreneurship

Can result in economic losses.

For the perfectly competitive firm, the marginal revenue is always

Constant.

A firm that makes zero economic profits

Covers all its costs, including a provision for normal profit.

Normal profit

Covers the full opportunity cost of the resources used by the firm.

PIC, Refer to Figure 22.2 for a perfectly competitive firm. The profit-maximizing quantity of output is

D.

Megan used to work at the local pizzeria for $15,000 per year but quit 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 annual profit for her.

Dad says her profit is $19,000 and Mom says her profit is $2,400.

In making a production decision, an entrepreneur

Decides what level of output will maximize profits.

When the short-run marginal cost curve is upward-sloping,

Diminishing returns occurs with greater output.

If diminishing returns exist, then

Each unit produced will cost incrementally more.

Accounting costs and economic costs differ because

Economic costs include the opportunity costs of all resources used, while accounting costs include actual dollar outlays.

PIC, Refer to Figure 22.3 for a perfectly competitive firm. If the market price is $15,

Economic profits will be zero.

PIC, Suppose the entrepreneur could earn $800 as an employee elsewhere. This means the entrepreneur is earning

Economic profits.

The demand curve confronting a competitive firm

Equals the marginal revenue curve.

In defining economic costs, economists emphasize

Explicit and implicit costs while accountants recognize only explicit costs.

If a firm can change market prices by altering its output, then it

Has market power.

When a producer can control the market price for the good it sells, the producer

Has market power.

The demand curve confronting a competitive firm is

Horizontal, while market demand is downward-sloping.

The demand curve for each perfectly competitive firm is

Horizontal.

The short run is the time period

In which some costs are fixed.

In order to sell additional units of their products, competitive firms must

Increase output.

The decision to start or expand a business is known as the

Investment decision.

PIC, Refer to the data in Figure 22.1. The price of this good

Is $1 per unit.

A competitive firm

Is a price taker.

For perfectly competitive firms, price

Is equal to marginal revenue.

Profit

Is the difference between total revenue and total cost.

The perfectly competitive market structure includes all of the following except

Large advertising budgets.

Economic profit is

Less than accounting profit by the amount of implicit cost.

If Microsoft is thinking about building a new factory, it is making a

Long-run decision that may enhance its profit.

A competitive firm should always continue to operate in the short run as long as

MR > AVC.

Which of the following represents the change in total cost that results from a one-unit increase in production?

Marginal cost.

Short-run profits are maximized at the rate of output where

Marginal revenue is equal to marginal cost.

PIC, Refer to Figure 22.3 At quantity level B

Marginal revenue is greater than marginal cost, so the firm should expand production.

All of the following are ways a business can earn economic profits except

Maximize implicit costs but not explicit costs.

The profit motive can encourage businesses to do all of the following except

Maximize social welfare.

In which of the following types of markets does a single firm have the most market power?

Monopoly.

Market structure is determined by the

Number and relative size of the firms in an industry.

Profit per unit is equal to

P - ATC.

A perfectly competitive firm should expand output when

P > MC.

Greater-than-normal profit represents

Payment for entrepreneurship.

A perfectly competitive firm will maximize profits by choosing an output level where

Price equals marginal cost.

A catfish farmer will shut down production when

Price falls below AVC.

A firm experiencing economic losses will still continue to produce output in the short run as long as

Price is above average variable cost.

A firm's total revenue can be determined by

Price times quantity.

When price exceeds average variable cost but not average total cost, the firm should, in the short run,

Produce at the rate of output where MR = MC.

The fact that a perfectly competitive firm's total revenue curve is an upward-sloping straight line implies that

Product price is constant at all levels of output.

Economists assume the principal motivation of producers is

Profit.

Which of the following is generally a fixed cost?

Property taxes on land used in production.

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. To receive a normal profit, the firm described above would have to

Receive $90,000 more in revenue.

If the equilibrium price in a perfectly competitive market for walnuts is $4.99 per pound, then an individual firm in this market can

Sell an additional pound of walnuts at $4.99.

PIC, Refer to the data in Figure 22.1. The shape of the total revenue curve indicates that the price of this good

Stays the same as output rises.

The market price for T-shirts sold in a perfectly competitive market is determined by

Supply and demand.

An investment decision involves choosing

The amount of plants and equipment and is a long-run decision.

Which of the following is the best explanation for why individuals own small businesses?

The expectation of profit.

Normal profit implies that

The factors employed are earning as much as they could in the best alternative employment.

PIC, Refer to Figure 22.3 for a perfectly competitive firm. Which of the following statements is true for this firm between the prices of $10 and $15?

The firm is experiencing economic losses but should continue to produce.

If price is less than marginal cost, a perfectly competitive firm should decrease output because

The firm is producing units that cost more to produce than the firm receives in revenue, thus reducing profits (or increasing losses).

PIC, Refer to Figure 22.3 for a perfectly competitive firm. If the market price is $23,

The firm will have above-normal profits.

The best measure of the economic cost of doing your homework is

The most valuable opportunity you give up when you do your homework.

A perfectly competitive firm is a price taker because

The price of the product is determined by many buyers and sellers.

Which of the following should not be included when calculating accounting profit?

The return on the next best alternative investment opportunity.

Perfect competition is a situation in which

There are many firms and no buyer or seller has market power.

A monopoly occurs when

There is only one producer of a good or service.

The difference between the total revenue and total cost curves at a given output is equal to

Total profit.

A firm maximizes total profit when

Total revenue exceeds total cost by the greatest amount.

Marginal revenue is the change in

Total revenue when output is changed.

Economic profit is the difference between

Total revenues and total economic costs.

In making an investment decision, an entrepreneur

Treats all costs as variable.

Which of the following is a production decision?

Whether the firm should shut down or produce.

Which of the following industries is perfectly competitive?

Wholesale fresh flowers.

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 economic profit for the firm described above?

-$90,000.

Which of the following characterizes a competitive market?

A downward-sloping demand curve for the market.

Implicit costs

Are the costs to produce a good or service for which no direct payment is made.

When a firm minimizes its losses in the short run,

It continues to produce only if price exceeds average variable cost.

Competitive firms cannot individually affect market price because

Their individual production is insignificant relative to the production of the industry.


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