Chapter 8 Micro Questions

A firm may find it optimal to stay in business in the short run even if total revenue does not cover total cost. a. True b. False

A

A firm that is suffering a loss should shut down immediately if total revenue (TR) is less than total variable cost (TVC). a. True b. False

A

A firm will continue to produce if total revenue is greater than total variable cost even if total revenue is less than fixed cost. a. True b. False

A

A firm's total cost of production a. always increases as it produces more output b. can increase or decrease as it produces more output c. increases at a decreasing rate as long as it produces more output d. is fixed in the short run, because inputs are fixed in the short run e. can be minimized by producing where the firm's demand curve crosses the horizontal axis

A

A profit-maximizing firm will never increase production if doing so causes total revenue to decrease. a. True b. False

A

Every firm is constrained by the demand curve for the product it produces. a. True b. False

A

Hannah's Harmonicas sells 1,000 harmonicas each month at a price of $10.00 each. (She could sell as many as she wishes at that price.) If the marginal cost of producing an additional harmonica is $9.60, then a. Hannah should produce additional harmonicas b. Hannah could possibly reduce her profits by producing one additional harmonica c. Hannah must currently be maximizing her profits d. too many harmonicas are being produced, from society's point of view e. Hannah's total economic profit is $400 per month

A

If a firm chooses to produce output at the point where MR equals MC, a. then TR - TC will be maximized if there is a profit b. economic profits will be zero c. there will be positive accounting profits d. there will be positive economic profits e. average cost must equal average revenue

A

If a firm faces a horizontal demand curve, marginal revenue a. is constant regardless of how much output the firm produces b. decreases as the firm produces more output c. increases as the firm produces more output d. decreases if the firm produces less output e. is less than price at most possible output levels

A

If a firm is able to cover its variable costs by operating in the short run then, at its best output level, the a. marginal revenue is equal to marginal cost b. vertical distance between MR and MC is maximized c. vertical distance between TR and TC is minimized d. marginal cost curve lies above the marginal revenue curve e. marginal cost curve is minimized

A

If a firm minimizes its losses by shutting down in the short run, then at all other output levels, a. variable cost would exceed total revenue b. total revenue exceeds total cost c. marginal revenue exceeds marginal cost d. total cost is zero e. total revenue is zero

A

If a firm's total cost rises as output rises, then a. marginal cost is positive b. profit cannot be maximized c. total cost is minimized d. marginal cost equals marginal revenue e. the firm should shut down in the short run

A

If the marginal cost and marginal revenue curves intersect at two different points, then maximum profit occurs at a. the output level where the MC curve crosses the MR curve from below b. the output level where the MC curve crosses the MR curve from above c. both points d. an output level between the two points e. an output level beyond the second point

A

If the price of gasoline rises at the Exxon gas station at a busy intersection, the Mobil station at the same intersection will experience a. an outward shift of the demand curve it faces b. an inward shift of the demand curve it faces c. a rightward movement along the same demand curve it faces d. a leftward movement along the same demand curve it faces e. neither a shift in nor a movement along the demand curve it faces

A

If total revenue falls as more output is produced, a. marginal revenue is negative b. marginal revenue is positive c. marginal cost is negative d. average revenue is negative e. total costs exceed total revenue

A

In the long run, if a firm's total cost exceeds its total revenue at all output levels, it should a. always exit the industry b. always continue operating c. increase the amount of its fixed inputs d. increase the proportion of its total cost that is fixed e. maximize the difference between its marginal revenue and its marginal cost

A

In the short run, if a firm's total variable cost curve lies above its total revenue curve at all possible output levels, the firm's minimum short-run loss a. equals its total fixed cost b. equals zero c. occurs at the maximum point of the total revenue curve d. occurs at the maximum point of its marginal revenue curve e. occurs at the minimum point of its marginal cost curve

A

Leugers Custom Cabinetmakers is currently operating at a profit while producing four custom cabinets per week. At that output level, marginal cost exceeds marginal revenue. In order to maximize profit, Leugers should a. decrease output b. increase output c. leave output at four cabinets per week d. either increase or decrease output, depending on its level of fixed costs e. either increase or decrease output, depending on its level of variable costs

A

Myron worked at a factory where he earned $20,000 per year. One day, he quit his job and opened a bumper sticker business. After one year, his business earned $60,000 in sales revenue and he incurred $30,000 in direct business expenses. If he received no salary from the new business, what is his economic profit? a. $10,000 b. $30,000 c. $60,000 d. $20,000 e. $50,000

A

Profit maximization occurs at the quantity where marginal cost equals marginal revenue. a. True b. False

A

The demand curve facing a firm a. indicates the quantity of output that customers will purchase from that firm, at various prices b. shows the minimum cost of producing any level of output c. is drawn assuming that the firm is operating in the short run d. indicates how much output a profit-maximizing firm will produce, at various prices e. is downward sloping because consumers have less money to spend, the more output they purchase

A

The demand curve facing a firm shows the a. maximum price the firm can charge and still sell any given amount of output b. minimum price the firm can charge and still sell any given amount of output c. minimum price at which the firm will demand any given quantity of output d. maximum price at which the firm will demand any given quantity of output e. minimum quantity of output the firm can sell at any given price

A

The return to owners for innovation and risk taking is a firm's a. economic profit after taxes b. total revenue c. total opportunity cost d. total implicit cost e. money profit after taxes

A

When marginal revenue is positive, total revenue must rise as output increases. a. True b. False

A

A firm's total revenue a. is the profit it earns by producing and selling a particular quantity of output b. varies as output varies along the demand curve the firm faces c. is constant at all points along a fixed demand curve d. is determined by subtracting total profit from total cost e. always decreases as its output increases, because costs rise

B

According to the marginal approach to profit maximization, a. firms should equate total revenue and marginal cost when choosing the optimal output level b. firms should take any action that increases revenue more than costs c. economic profit is zero in the long run d. marginal cost declines until it reaches marginal revenue at the profit-maximizing output level e. marginal costs eventually diminish as more output is produced

B

As long as the marginal revenue curve lies above the horizontal axis, a. total revenue must exceed total cost b. the total revenue curve must have a positive slope c. marginal revenue must exceed marginal cost d. profit must be rising e. the firm must be earning a profit

B

Economists assume that the goal of the firm is to a. maximize total revenue b. maximize profits c. minimize costs d. equate total revenue and total cost e. break even in the long run

B

If Carol's Crayon Factory's price exceeds its average total cost in the short run, then a. it should shut down b. it is earning a profit c. profits are being maximized d. it should increase output e. it should decrease output

B

If a firm shuts down in the short run, then a. total revenue and total cost drop to zero b. total revenue drops to zero, but the firm must still pay its fixed cost c. total revenue drops to zero, but the firm must still pay some variable cost d. total cost drops to zero, but the firm still earns some residual revenues e. neither total revenue nor total cost drops to zero

B

If marginal cost exceeds marginal revenue, a. the firm can increase profits by increasing output b. the firm will lower profits by increasing output c. the firm is maximizing profits d. total cost exceeds total revenue e. average cost equals average revenue

B

If marginal revenue for a firm is negative, a. marginal cost must also be negative b. total revenue will decrease if the firm sells more output c. total revenue must also be negative d. the firm should shut down in the short run e. the lost revenue from having to lower its price is less than the additional revenue from higher sales

B

If the demand curve facing a firm shifts outward, then a. there is a decline in the maximum price the firm can charge at each quantity it may want to sell b. there is an increase in the maximum price the firm can charge at each quantity it may want to sell c. the firm would need to increase the quantity it wants to sell in order to generate a rise in the price d. the firm would need to decrease the quantity it wants to sell in order to generate a rise in the price e. there is a decrease in the maximum quantity the firm can sell at each price it may want to charge

B

Innovations that generate profit for a firm's owners include developing a. both c and d b. all of the following c. markets in new locations d. new products e. new production processes and distribution methods

B

Marginal revenue is defined as the a. total revenue minus total cost b. change in total revenue divided by the change in the quantity of output c. price minus average total cost d. total revenue over the quantity of output e. quantity times price

B

Profit is the payment for a. land and labor b. risk taking and innovation c. capital and labor d. risk taking and capital e. all of the factors of production

B

The behavior of firms is best understood by focusing on a. money profit b. economic profit c. accounting profit d. economic profit minus implicit costs e. money profit minus explicit costs

B

The demand curve facing a firm acts as a constraint by a. shifting to the left and right as suppliers vary their quantities b. showing the maximum price that could be charged to sell a specific output level c. showing the minimum quantity of output that a firm needs to produce at a specific price d. limiting sales to those who are first in line when the product is distributed e. relating the actions and decisions of buyers and sellers in the market

B

To develop a useful picture of a firm's behavior, economists assume that the a. firm's goal is to maximize total revenue b. firm's goal is to maximize profit c. firm's goal is to minimize marginal cost d. roles of owner, manager and worker are performed by the same individuals e. roles of owner, manager and worker are interchangeable

B

Using a TR-TC graph, a firm maximizes profit by producing the output level where the greatest a. vertical distance occurs between the MR and MC curves b. vertical distance occurs between the TR and TC curves, and the TR curve is above the TC curve c. total revenue occurs d. horizontal distance occurs between the TR and TC curves, and the TR curve is above the TC curve e. horizontal distance occurs between the MR and MC curves, and the MR curve is rising

B

When a firm faces a downward-sloping demand curve, marginal revenue a. is constant regardless of how much output the firm produces b. is less than price c. increases as the firm produces more output d. decreases if the firm produces less output e. is equal to the price per unit of output

B

William quits his job where he earns an annual salary of $75,000 and opens a management consulting business, charging an hourly rate of $120. He works out of his home, converting a storeroom into an office. (Zoning restrictions prevent William from renting out the room.) Start-up costs are financed by selling $15,000 worth of bonds he inherited that were earning annual interest payments of $900. During his first year, William incurs expenses for supplies and utilities that total $3,500. The total cost of production in the first year equals a. $94,400 b. $79,400 c. $4,400 d. $3,500 e. $19,400

B

According to the marginal approach to profit maximization, firms should increase output as long as total revenue is rising. a. True b. False

B (???)

In order to maximize profits, a firm should decrease output whenever total cost exceeds total revenue. a. True b. False

B (???)

Economic profit is another name for accounting profit. a. True b. False

B (economic profit takes into account implicit costs, accounting profit does not)

If a firm enjoys a revenue of $500 from two units of output and $600 from three units of output, then its marginal revenue must be rising. a. True b. False

B (marginal revenue is decreasing because 500/2 is greater than 600/3)

If average fixed cost exceeds average variable cost, a firm should shut down in the short run. a. True b. False

B (only shut down if total variable cost exceeds total revenue)

In the short run, profit maximization typically occurs where total revenue is at its maximum. a. True b. False

B (where MR = MC)

A firm's total revenue a. can be read off the demand curve it faces, but only if we know total cost of production b. can be read off the demand curve it faces, but only if we know how must output the firm sells c. is found by multiplying price per unit by the number of units produced and sold d. is equal to profit when inputs are fixed in the short run e. will be positive at any level of output

C

Accounting profit is defined as a. total revenue minus opportunity cost b. total revenue minus all costs of production c. total revenue minus explicit costs d. the sum of marginal revenues received from all units produced e. the difference between marginal revenue and marginal cost

C

Economic analysis assumes that, for each output level, the firm a. operates at minimum point of its average total cost curve b. operates at minimum point of its long-run average total cost curve c. seeks lowest possible cost of producing that quantity of output d. produces at maximum point of its total revenue curve e. produces at maximum point of its total product curve

C

For every firm that faces a downward-sloping demand curve for its output, a. marginal cost exceeds marginal revenue at all output levels b. marginal revenue equals the price of the last unit sold c. marginal revenue is less than the price of the last unit sold d. marginal revenue exceeds the price of the last unit sold e. marginal cost exceeds the price of the last unit sold

C

If a firm faces a downward-sloping demand curve, its marginal revenue is a. less than its marginal cost b. greater than price c. less than price d. equal to price e. equal to its total revenue

C

If a firm has an accounting profit of $2,350,000 and implicit costs totaling $150,000, then its economic profit equals a. $2,350,000 b. $2,500,000 c. $2,200,000 d. $150,000 e. $2,000,000

C

If a firm is producing the level of output at which the total cost curve intersects the total revenue curve, a. profit is positive b. profit is maximized c. profit is zero d. costs are minimized e. average revenue is maximized

C

If a firm shuts down in the short run, a. it exits the industry b. losses would equal its variable costs c. losses would equal its fixed costs d. profits would be zero e. losses would equal to zero

C

If a firm's short-run total cost curve lies above its total revenue curve at all output levels, the goal of the firm should be to a. minimize total cost b. maximize total revenue c. minimize its loss d. minimize marginal cost e. maximize marginal revenue

C

Suppose that Carla's Candy Shop finds that at the current level of output, marginal revenue is below marginal cost and average variable cost is below price. If the market price is held constant, Carla's Candy Shop should _____ in order to maximize profits. a. raise output b. reduce its price c. reduce output d. close down e. maintain its current output level

C

The change in total profit when a firm increases its output by one unit equals a. total revenue minus total cost b. total revenue minus marginal revenue c. marginal revenue minus marginal cost d. total revenue minus marginal cost e. marginal revenue plus marginal cost

C

The demand curve facing a firm a. indicates the amount of raw materials and other inputs the firm will purchase, at various prices b. indicates the amount of the good demanded from that firm by a particular consumer, at various prices c. indicates the amount of output that customers will purchase from the firm, at various prices d. shows the minimum price at which the firm can sell any given quantity of output e. is horizontal in the long run, but upward sloping in the short run

C

Under the total revenue and total cost approach to profit maximization, a. firms equate total variable cost to total revenue in order to maximize profit b. profit is maximized when fixed cost falls to zero c. firms choose the level of output at which total revenue is the greatest distance above total cost when the firm earns an economic profit d. firms choose the level of output at which the changes in revenue and cost both equal zero e. total revenue is maximized when profit is zero

C

William quits his job where he earns an annual salary of $75,000 and opens a management consulting business, charging an hourly rate of $120. He works out of his home, converting a storeroom into an office. (Zoning restrictions prevent William from renting out the room.) Start-up costs are financed by selling $15,000 worth of bonds he inherited that were earning annual interest payments of $900. During his first year, William incurs expenses for supplies and utilities that total $3,500. If William bills 500 hours of consulting time in the first year, he earns an economic profit equal to a. $55,600 b. -$15,000 c. -$19,400 d. -$34,400 e. $41,500

C

A firm is currently is selling its output for $30 per unit. If the firm reduces the price to $29 in order to boost sales, marginal revenue will a. equal $30 b. equal $29 c. be between $30 and $29 d. be less than $29 e. exceed $30

D

A firm is indifferent between staying in business and shutting down in the short run when, at the loss-minimizing level of output, a. total revenue equals total cost b. average total cost is at its minimum c. total revenue exceeds total cost d. total revenue equals total variable cost e. total variable cost equals total cost

D

All of the following, except one, are included in the profit earned by a firm's owners. Which is the exception? a. the reward for developing new products b. the reward for moving an established business into new geographic markets c. the reward for risk taking d. salaries that compensate for the owners' time e. dividend payments to the stockholders

D

Assume that a firm is able to cover its variable costs if it operates in the short run. If marginal cost equals $0 for all output levels, then the firm's profit-maximizing output level occurs where a. total cost is minimized b. marginal revenue is maximized c. marginal revenue is minimized d. marginal revenue equals $0 e. total revenue is minimized

D

If a firm is experiencing an economic loss in the long run, then a. it must be experiencing an accounting loss b. it should stay in business if it can cover its fixed costs c. the market must be too large d. it should exit from the industry e. price exceeds marginal cost

D

If a firm's managers inappropriately decide to operate where total revenue is maximized, they will continue to increase output a. as long as marginal revenue exceeds marginal cost b. as long as marginal cost exceeds marginal revenue c. as long as the total revenue curve is above zero d. as long as the marginal revenue curve is above the horizontal axis e. until the total revenue curve intersects the total cost curve

D

If a firm's short-run total cost curve lies above its total revenue curve at all output levels, the firm should a. always shut down in the short run b. always operate in the short run c. operate in the short run if the maximum operating loss is less than its total fixed cost d. operate in the short run if the minimum operating loss is less than its total fixed cost e. operate in the short run if the average operating loss is less than its total fixed cost

D

Myron worked at a factory where he earned $20,000 per year. He quit his job and opened a bumper sticker business. After one year, his business earned $60,000 in sales revenue and he incurred $30,000 in direct business expenses. If he received no salary from the new business, what is his accounting profit? a. $10,000 b. $20,000 c. $40,000 d. $30,000 e. $60,000

D

Under the total revenue and total cost approach to profit maximization, a. firms equate total cost and total revenue in order to maximize profit b. the profit-maximizing output level is equivalent to the total revenue-maximizing output level c. when total costs are minimized, profits are maximized d. firms choose the output level where TR - TC is greatest e. total cost must always exceed total revenue in the long run

D

What is true only at the output level where price equals average total cost? a. Marginal cost equals marginal revenue. b. Profit is maximized. c. Losses are minimized. d. Profit is zero. e. Cost is minimized.

D

When a firm incurs losses in the short run, the most important consideration in determining whether to continue producing is whether a. marginal cost equals marginal revenue b. average total cost is at its minimum c. average variable cost is at its minimum d. revenues cover some of its fixed costs and all of its variable cost e. total revenue exceeds total cost

D

When there are implicit costs of production, a. accounting and economic profit are equal b. opportunity costs of production are zero c. explicit costs of production are small d. accounting profit will exceed economic profit e. economic profit will exceed accounting profit

D

Whenever a decrease in output leads to an increase in profit, the a. marginal revenue curve lies above the marginal cost curve b. total cost curve intersects the total revenue curve c. marginal cost curve is parallel to the marginal revenue curve d. marginal cost curve lies above the marginal revenue curve e. total cost curve lies above the total revenue curve

D

Which of the following does not apply to a firm that has shut down in the short run? a. Variable cost is zero. b. Total revenue is zero. c. Total cost exceeds total revenue. d. Total cost is zero. e. Fixed cost is positive.

D

In order to maximize its profit in the short run, an airline should offer an additional flight whenever a. its marginal revenue exceeds its sunk costs b. it marginal revenue exceeds its average total cost c. the average seat price exceeds its sunk costs d. the average seat price exceeds its average total cost e. the additional revenue exceeds the additional costs

E

In the short run, if a firm's total variable cost curve lies everywhere above its total revenue curve, the firm should produce a. the output level that minimizes average total cost b. the output level that minimizes average variable cost c. the output level that minimizes the distance between marginal cost and marginal revenue d. the output level that maximizes the distance between marginal cost and marginal revenue e. no output

E

Many gift shops along the ocean shut down during the winter because a. revenues cannot cover fixed costs b. marginal revenue does not equal marginal cost c. costs are minimized by shutting down d. revenues are maximized by shutting down e. revenues cannot cover variable costs

E

Marginal revenue is a. the change in total revenue divided by total output b. total revenue divided by total output c. total revenue minus total cost then divided by total output d. the change in total revenue divided by the change in price of output e. the change in total revenue divided by the change in total output

E

The additional revenue received by a firm from selling one more unit of output is known as a. total revenue b. price c. average revenue d. marginal cost e. marginal revenue

E

The difference between accounting profit and economic profit relates to a. the manner in which revenues are defined b. how total revenue is calculated c. the market structure for the firm's industry d. the price of the good in the market e. the manner in which costs are defined

E

The two important contributions of entrepreneurs are a. innovation and independent wealth b. good management skills and honesty c. risk taking and honesty d. good management skills and independent wealth e. innovation and risk taking

E

Whenever marginal cost exceeds marginal revenue, a. profit declines if the firm reduces output b. profit increases if the firm increases output c. the firm should shut down d. losses decrease if the firm increases output e. profit declines if the firm increases output

E

Which of the following determines the maximum price a firm may charge for a particular quantity of output? a. the firm's supply curve b. opportunity costs c. explicit and implicit costs of production d. the minimum point of the average total cost curve e. the demand curve facing the firm

E

Which of the following rules is most consistent with profit maximization? a. expand output when MR < MC b. reduce output when MR > MC c. expand output when TR > TC d. reduce output when TR > TC e. expand output when MR > MC

E