chap 15

Alana's Confectionary is located in the East Side Village. When the market price of iced brownies is $5, the profit-maximizing output level is 150 brownies. Her average cost is $4, and her variable cost per unit is $3. Alana's marginal cost is _____, and her short-run profits are _____.

$5; $150

_____ allow a profitable company to maintain profits over time.

Barriers to entry

(Scenario: Jillian's Cupcake Shop) Use Scenario: Jillian's Cupcake Shop. Scenario: Jillian's Cupcake Shop Jillian runs a cupcake shop where she sells cupcakes for $1 each. She employs five people, each of whom worked a total of 500 hours last year; she paid them $10 per hour. Her costs of equipment and raw materials add up to $75,000. Her business ability is legendary, and other companies have offered to pay Jillian $100,000 to come to work for them. She also knows she could sell her cupcake shop for $150,000. The bank in town pays an annual interest rate of 3% on all funds deposited with it. Given the information provided, Jillian's explicit financial costs are:

$100,000

Samuel's company is in the following situation: What is the average cost at Samuel's company.

$14.37

Why do average variable costs eventually rise if a company's output increases enough?

Diminishing marginal product occurs, causing average variable costs to rise.

All of the following government policies would create a barrier to entry in a market EXCEPT:

a requirement that there can be no switching costs for consumers.

Ever since Giselle's company developed its new product ten years ago, Giselle has managed its production with little turnover in workers. During that time, the company's average cost has fallen by 30%, due to the refinement of its production methods, thereby achieving greater efficiency. Other rival companies have not achieved such low costs. The cost advantage that Giselle's company now has over rivals is referred to as _____ achieved through _____.

a unique cost advantage; learning by doing

If a company gains market power as an input buyer, then:

the company may be able to purchase inputs at lower prices than other companies who use the same inputs can.

Average cost is:

total cost divided by quantity

In the long run, a company's ability to maintain profits depends on:

barriers to entry

In the long run, a company can remain profitable only if:

barriers to entry are present

The land you own has the only known source of macinannea root, needed to make a special anti-infl

ownership of scarce inputs

When a seller uses a demand-side strategy to create barriers to entry, the seller is trying to:

prevent new entrants from attracting any of the seller's customers.

Emilia is a civil rights lawyer with her own firm. She travels the country and provides legal advice to high-profile clients. Last year, she earned $250,000 in revenue for her services. She pays one employee $50,000 to manage her office in Chicago and pays $30,000 for rent and utilities for that office. Her accountant tells her that if she sold all her office equipment, she could put that money in the bank and earn $3,000 in interest next year. Emilia also has received an offer to teach law at the University of Chicago at a salary of $100,000. Emilia's accounting profit is _____, and her economic profit is _____.

$170,000; $67,000

Samuel's company is in the following situation: What is the price at Samuel's company?

$20.00

Suppose your local Walmart has explicit financial costs of $5 million per year and implicit opportunity costs of $174,000 per year. If the store earned an economic profit of $202,000 last year, the store's accounting profit was:

$376,000

Armand's accountant tells him that he made a profit of $21,300 running a pottery studio in Boston. Armand's wife, an economist, claims Armand lost $21,300 running his pottery studio. This means his wife is claiming that he incurred _____ in _____ costs.

$42,600; implicit opportunity

(Scenario: Accounting and Economic Profit ) Use Scenario: Accounting and Economic Profit. Casey recently inherited $100,000 from her grandmother. Rather than invest the money in a mutual fund that earns 5% per year, she quit her job as a translator for the United Nations, which paid $60,000 per year, and started Casey's Coffee Crush, a small café in Tribeca. The location she rented cost $20,000 for the year. The equipment, café furniture, and coffee machines cost another $60,000. Staff, sales help, and advertising cost yet another $40,000. In her first year, her revenue was $150,000. The implicit opportunity cost of capital of Casey's Coffee Crush is:

$5,000

Maia is thinking of opening a restaurant. She forecasts revenues of $200,000 per year and explicit financial costs of $140,000 per year. She can pursue this opportunity only if she quits her current job as a hair stylist, where she earns $45,000 per year. She would also need to invest $110,000 of her savings to set up the restaurant—funds on which she would otherwise be earning a 6% return. Based on this information, what are Maia's implicit opportunity costs?

$51,600 (quit job + return on savings fund)

Corinne is offered a job with a salary of $70,000, which she turns down to start her own business. She uses $20,000 of her own savings to help start the business, savings that had been providing her a return of $1,000 per year. Over her first year in business, Corinne collects total revenue of $180,000 and must cover explicit costs of $105,000. During her first year in business, Corinne's accounting profit is _____, and her economic profit is _____.

$75,000; $4,000

Jillian runs a cupcake shop where she sells cupcakes for $1 each. She employs five people, each of whom worked a total of 500 hours last year; she paid them $10 per hour. Her costs of equipment and raw materials add up to $75,000. Her business ability is legendary, and other companies have offered to pay Jillian $100,000 to come to work for them. She also knows she could sell her cupcake shop for $150,000. The bank in town pays an annual interest rate of 3% on all funds deposited with it. Given the information provided, Jillian's explicit financial costs are:

$80,000

Suppose a local Home Depot has explicit financial costs of $2 million per year and implicit opportunity costs of $44,000 per year. If the store earned an economic profit of $50,000 last year, its accounting profit was:

$94,000

Suppose your local Lowe's home improvement store has explicit financial costs of $3 million per year and implicit opportunity costs of $74,000 per year. If the store earned an economic profit of $22,000 last year, the store's accounting profit was:

$96,000

Until recently, Davina worked as an insurance claims adjuster, earning $30,000 annually. Then she inherited a piece of commercial real estate that had rented for $12,000 annually. Davina decided to leave her job and operate an Italian restaurant in the space she inherited. At the end of the first year, her books showed total revenues of $260,000 and total costs of $230,000 for food, utilities, cooks, and other supplies. Her economic profit at the end of one year is:

-$12,000

(Scenario: Accounting and Economic Profit) Use Scenario: Accounting and Economic Profit. Scenario: Accounting and Economic Profit Casey recently inherited $100,000 from her grandmother. Rather than invest the money in a mutual fund that earns 5% per year, she quit her job as a translator for the United Nations, which paid $60,000 per year, and started Casey's Coffee Crush, a small café in Tribeca. The location she rented cost $20,000 for the year. The equipment, café furniture, and coffee machines cost another $60,000. Staff, sales help, and advertising cost yet another $40,000. In her first year, her revenue was $150,000. The economic profit of Casey's Coffee Crush is:

-$35,000.

Network externalities exist when a good's value to the consumer rises:

as the number of people who use the good increases.

(Figure: Profit Margin 3) JoJo's company data is in the graph below. JoJo would earn a profit:

at any output between three and 14.

(Figure: The Cost Curves for Charlie's Cookie Confections) Use Figure: The Cost Curves for Charlie's Cookie Confections. The curve labeled Wrepresents the firm's _____ cost curve.

average

Total cost divided by the quantity produced is:

average cost

What is the dominant factor determining market price in the long run?

average costs

When a product is characterized by network effects, then the product _____ when more customers use the product.

becomes more valuable to each customer

Mass production typically creates:

cost advantages

Money that is paid for the use of factors of production such as labor and capital is an:

explicit financial cost.

Suppose that the market for ride-sharing services is initially in long-run equilibrium. Subsequently, a decrease in population decreases the demand for rides. In the short run, the price of rides will _____, and the number of rides offered by a typical ride-sharing firm will _____.

fall; fall

Which of the following government policies would create a direct barrier to entry for new sellers in a market?

granting a patent to the developer of a new product

Lenore operates a tool rental firm and will earn a profit in the short run when she produces the profit-maximizing quantity and the price is:

greater than average cost

When a market has free entry and exit, in the long run, sellers:

have zero economic profits.

Marcella is deciding whether to start a bakery in her hometown. She should start it if she expects that:

her average revenue will exceed her average cost.

Suppose the New York Rangers can rent out Madison Square Garden (the arena where they play hockey) to American Hockey League (AHL) affiliates for $11,000 per game. The $11,000 per game is the _____ cost of capital.

implicit opportunity

Economic profit is:

less than accounting profit if there are implicit opportunity costs

Google is often cited as an example of a company that grew into a monopolist through:

network externalities

A company's profit margin per unit sold equals:

price minus average cost.

On a graph of a company's cost, revenue, and demand curves, the company's profit margin can be identified as the gap between _____ and _____ for a given quantity.

price; average cost

If price is greater than average cost at the profit-maximizing quantity in the short run, a firm will:

produce at a profit

A company engaged in brand proliferation is _____ to _____.

producing many versions of its product; reduce profitable opportunities for new entrants

Which of the following is NOT one of the ways companies create barriers to entry through unique cost advantages?

regulations

Suppose that the market for cab rides in a community is initially in long-run equilibrium. Subsequently, an increase in population increases the demand for cab rides. In the short run, the market price will _____, and the number of rides offered by a typical cab driver will _____.

rise; rise

When firms in a market with free entry and exit experience economic losses, then:

some sellers will exit the market, reducing average seller losses.

If a product's usefulness increases with the number of users:

it is characterized by network externalities.

The table provides daily data on Artem's Sandwich Shop. Use these data to answer the question. What is Artem's profit margin?

$1

The Bowery Hotel is located on Third Street in Manhattan. Suppose the hotel has explicit financial costs of $200,000 per year and implicit opportunity costs of $50,000 per year. If the hotel earned an economic profit of $50,000 last year, the hotel's accounting profit equaled:

$100,000

Which of the following statements is true?

A firm with economic profits will also have accounting profits.

What attracts new sellers into a market?

Existing sellers in the market earning economic profits.

(Figure: Demand and Average Cost Curves) Which of the following diagrams represents the demand and average cost curves of a firm in the long run, given free entry and exit?

Firm D (acc and demand curve just touch)

Assume that there is free entry and exit in the management consulting market. How profitable can Mario expect his new consulting business to be in the long run?

It will experience zero economic profits.

In the short run, a firm produces output and earns negative profits if:

NOT price<average cost

Michelle owns the largest florist shop in her town. Each week, she orders a truckload of flowers from the flower wholesaler. The other two florists in town order only one-third as many flowers. Because Michelle's order fills the delivery truck, the wholesaler sells flowers to her at a lower price than the other florists must pay. How will this situation impact potential new entrants?

New florists will be discouraged from entering the market because of the difficulty of competing on cost.

Which of the following is NOT a strategy used by a company to "lock-in" customers to ensure demand for its product?

Pressuring the government to require a license for entry into the market

In the short run, a firm makes zero profits if it produces the quantity at which:

Price - Average Cost = 0

How does a business owner know if it is financially worthwhile to open a business?

The business earns economic profits.

Which of the following does NOT occur in a market when one or more sellers exits the market?

The market demand rises.

In which of the following situations would a seller be better able to survive a price war than other sellers in a given market?

The seller has cost curves that are lower than those of other sellers in the market.

Suppose that the market for cab rides is initially in long-run equilibrium. Subsequently, an increase in population increases the demand for cab rides. In the short run, the typical cab driver is likely to:

earn an economic profit

Because _____ profit is calculated based on _____ costs, it allows firm owners to make better decisions about _____.

economic; total; entering and exiting a market

(Figure: Market for Designer Clothing) Use Figure: Market for Designer Clothing. In the long run, firms will:

enter this market until all firms earn zero economic profit.

Economic profits encourage firms to _____ the industry, and losses encourage firms to _____ the industry.

enter; exit

When developing laws and regulations, elected government leaders are often biased in favor of the interests of established companies over those of new entrants because:

established companies and their employees are voters who have clear interests in preserving the success of established companies.

If a seller can create switching costs for its product, then:

it is difficult or costly for customers to switch to another seller of the product.

Kevin sells books. If Kevin is making positive economic profits in the short run, then in the long run:

new firms will enter the industry

Portia is graduating from dental school and has a job offer with a salary of $140,000 from a chain of dental clinics. However, she wants to set up her own dental practice instead. To do this, she would need to invest her own funds in new equipment that would cost $80,000—funds that have been earning her a return of 10% per year. Portia estimates that her practice would have revenue of $470,000 per year and annual explicit financial costs of $330,000. What would Portia's economic profit or loss be if she sets up her own practice?

not a loss of $80,000

As output rises, average fixed costs:

not fall and then rise

If some firms are incurring economic losses, then in the long run, the:

number of firms in the industry will decrease.

The market for electrician services is initially in long-run equilibrium, but then there is a decrease in the market demand for electrician services. One expects that in the long run, the economic profits of typical firms will be:

zero

When there is free entry and exit of sellers in an industry, in the long run, sellers will have:

zero economic profits