Chapters 13-17 Review

If MC<MR,

Increase quantity to raise profit.

If MC>MR,

Reduce quantity to raise profit

Economists normally assume that the goal of a firm is to (i)make profit as large as possible even if it means reducing output. (ii)make profit as large as possible even if it means incurring a higher total cost. (iii)make revenue as large as possible. a. (i) and (ii) are true. b. (ii) and (iii) are true. c. (i), (ii), and (iii) are true. d. (i) and (iii) are true.

a. (i) and (ii) are true.

Which of the following statements best reflects the production decision of a profit-maximizing firm in a competitive market when price falls below the minimum of average variable cost? a. The firm will immediately stop production to minimize its losses. b. The firm will continue to produce in the short run but will likely exit the market in the long run. c. The firm will stop production as soon as it is able to pay its sunk costs. d. The firm will continue to produce to attempt to pay fixed costs.

a. The firm will immediately stop production to minimize its losses.

Average fixed cost will be a. falling at all points. b. U-shaped. c. constant. d. rising at all points.

a. falling at all points.

When a profit-maximizing firm in a competitive market has zero economic profit, accounting profit a. is positive. b. could be positive, negative or zero. c. is negative (accounting losses). d. is also zero.

a. is positive.

Diminishing marginal product suggests that a. marginal cost is upward sloping. b. adding additional workers will lower total cost. c. the firm is at full capacity. d. additional units of output become less costly as more output is produced.

a. marginal cost is upward sloping.

Marginal cost is U-shaped because of a. the fact that decreasing marginal product follows increasing marginal product. b. the fact that increasing marginal product follows decreasing marginal product. c. increasing marginal product. d. diminishing marginal product.

a. the fact that decreasing marginal product follows increasing marginal product.

Changes in the output of a perfectly competitive firm, without any change in the price of the product, will change the firm's a. total revenue. b. marginal revenue. c. average revenue. d. All of the above are correct.

a. total revenue.

When a restaurant stays open for lunch service even though few customers patronize the restaurant for lunch, which of the following principles is (are) best demonstrated? (i) Fixed costs are sunk in the short run. (ii) In the short run, only fixed costs are important to the decision to stay open for lunch. (iii) If revenue exceeds variable cost, the restaurant owner is making a profitable strategic decision to remain open for lunch. a. (ii) and (iii) only b. (i) and (iii) only c. (i) and (ii) only d. All are demonstrated.

b. (i) and (iii) only

Average total cost will be a. rising at all points. b. U-shaped. c. falling at all points. d. constant.

b. U-shaped.

When marginal cost exceeds average total cost, a. average total cost must be falling. b. average total cost must be rising. c. average fixed cost must be rising. d. marginal cost must be falling.

b. average total cost must be rising.

The marginal product of labor can be defined as a. change in labor/change in output. b. change in output/change in labor. c. change in profit/change in labor. d. change in labor/change in total cost.

b. change in output/change in labor.

Average total cost tells us the a. cost of the last unit of output, if total cost does not include a fixed cost component. b. cost of a typical unit of output, if total cost is divided evenly over all the units produced. c. variable cost of a firm that is producing at least one unit of output. d. total cost of the first unit of output, if total cost is divided evenly over all the units produced.

b. cost of a typical unit of output, if total cost is divided evenly over all the units produced.

Economies of scale occur when a. average fixed costs are falling. b. long-run average total costs fall as output increases. c. average fixed costs are constant. d. long-run average total costs rise as output increases.

b. long-run average total costs fall as output increases.

Average total cost equals a. change in total costs divided by change in quantity produced. b. (fixed costs + variable costs) divided by change in quantity produced. c. (fixed costs + variable costs) divided by quantity produced. d. change in total costs divided by quantity produced.

c. (fixed costs + variable costs) divided by quantity produced.

Which of the following represents the firm's long-run condition for exiting a market? a. Exit if P < MC b. Exit if P < FC c. Exit if P < ATC d. Exit if MR < MC

c. Exit if P < ATC

Average total cost is very high when a small amount of output is produced because a. marginal cost is high. b. average variable cost is high. c. average fixed cost is high. d. marginal product is high.

c. average fixed cost is high.

When marginal cost is less than average total cost, a. average total cost is rising. b. average variable cost must be falling. c. average total cost is falling. d. marginal cost must be falling.

c. average total cost is falling.

The cost of producing the typical unit of output is the firm's a. marginal cost. b. opportunity cost. c. average total cost. d. variable cost.

c. average total cost.

When firms are said to be price takers, it implies that if a firm raises its price, a. competitors will also raise their prices. b. firms in the industry will exercise market power. c. buyers will go elsewhere. d. buyers will pay the higher price in the short run.

c. buyers will go elsewhere.

If a firm in a perfectly competitive market triples the number of units of output sold, then total revenue will a. more than triple. b. less than triple. c. exactly triple. d. Any of the above may be true depending on the firm's labor productivity.

c. exactly triple.

A production function is a relationship between a. inputs and revenue. b. inputs and costs. c. inputs and quantity of output. d. inputs and profit.

c. inputs and quantity of output.

Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the market price for rubber bands falls below the minimum of its average total cost, but still lies above the minimum of average variable cost, the firm a. should raise the price of its product. b. will shut down. c. will experience losses but will continue to produce rubber bands. d. will be earning both economic and accounting profits.

c. will experience losses but will continue to produce rubber bands.

Which of the following expressions is correct? a. economic profit = total revenue - implicit costs b. accounting profit = total revenue - implicit costs c. economic profit = accounting profit + explicit costs d. accounting profit = economic profit + implicit costs

d. accounting profit = economic profit + implicit costs

As Al's Radiator Company adds workers while keeping the same amount of machinery, some workers may be underutilized because they have little work to do while waiting in line to use the machinery. When this occurs, Al's Radiator Company encounters a. diseconomies of scale. b. increasing marginal returns. c. economies of scale. d. diminishing marginal returns.

d. diminishing marginal returns.

Whenever a perfectly competitive firm chooses to change its level of output, holding the price of the product constant, its marginal revenue a. increases if MR < ATC and decreases if MR > ATC. b. decreases. c. increases. d. does not change.

d. does not change.

The amount by which total cost rises when the firm produces one additional unit of output is called a. fixed cost. b. average cost. c. variable cost. d. marginal cost.

d. marginal cost.

The efficient scale of the firm is the quantity of output that a. minimizes average variable cost. b. maximizes marginal product. c. maximizes profit. d. minimizes average total cost.

d. minimizes average total cost.

Average variable cost will be a. constant. b. falling at all points. c. U-shaped. d. rising at all points.

d. rising at all points.

Marginal cost will be a. U-shaped. b. falling at all points. c. constant. d. rising at all points.

d. rising at all points.