Econ Chapters 13-15

Profits are maximized at the quantity where

marginal revenue is equal to marginal cost.

a tax per unit will do what to the average fixed cost

nothing, remains unchanged A per-unit tax increases variable cost at an increasing rate. For example, it increases the variable cost of producing 20 burgers by $20, but it increases the variable cost of producing 21 burgers by $21. Therefore, average variable cost, average total cost, and marginal cost will all be greater under this proposal, and average fixed cost will be unaffected

The marginal-cost curve (curve D) intersects the average-total-cost curve (curve C) at the minimum of the average-total-cost curve. The quantity that minimizes the average total cost is called...

the efficient scale.

average revenue is

total revenue (P X Q) divided by the quantity (Q).

as the marginal productivity diminishes, what happens to the total cost curve

total-cost curve increases and gets steeper as the quantity of output increases.

If a firm in a competitive market doubles the quantity of units sold, total revenue will exactly double. True False

true Doubling units sold for a firm in a competitive market will exactly double total revenue. Since marginal revenue is equal to price for a firm in a competitive market, doubling the amount of output will double total revenue.

If the monopoly firm perfectly price discriminates, then the deadweight loss amounts to

$0

George Stigler expressed concern about the trade-offs between market failure and political failure in the American economy. This concern supports which of the following solutions that policymakers can take to respond to the problem of a monopoly? A) Do nothing B) Regulation C) Antitrust laws D) Public ownership

A) Do nothing Some economists, such as George Stigler, argue that it is often best for the government not to try to remedy the inefficiencies of monopoly pricing. This is because determining the role of the government in the economy requires judgments about politics as well as economics.

Wilbur's Bean Emporium serves barbeque sandwiches over the lunch hour. The marginal cost of the 50th barbeque sandwich is $2. The average total cost of the 49th sandwich is $1.75. For Wilbur's Bean Emporium, __________ when output is 50 sandwiches. A) average total costs are rising B) total costs are falling C) average total costs are falling D) average variable costs are falling

A) average total costs are rising The marginal cost of the 50th sandwich is higher than the average total cost of the 49th sandwich, so the marginal cost is pulling up the average total cost when output is 50 sandwiches.

If a firm finds that it could reduce its long-run average total cost by increasing output, then it must be experiencing A) economies of scale. B) constant returns to scale. C) diseconomies of scale. D) coordination problems.

A) economies of scale. Economies of scale exist when the long-run average total cost falls as the quantity of output increases. Coordination problems sometimes cause diseconomies of scale.

If a firm in a competitive market increases the quantity of output sold, total revenue should A) increase. B) decrease. C) remain the same. D) change proportionately to the change in total costs for the firm.

A) increase. Total revenue is the product of price and quantity. Since competitive firms are price takers and changes in output do not affect market price, an increase in output will increase total revenue.

If marginal revenue is currently greater than marginal cost at the current the level of output, then A) increasing output by one unit will increase profits for the firm. B) decreasing output by one unit will increase profits for the firm. C) decreasing output by one unit will not affect profits for the firm. D) increasing output by one unit will decrease profits for the firm.

A) increasing output by one unit will increase profits for the firm. If marginal revenue exceeds marginal cost, then increasing output by one unit will increase profits. The revenue generated from the extra unit exceeds the additional cost and will increase profits.

What is economic welfare generally measured by? A) total surplus B) profit C) the market price of a good D) consumer surplus

A) total surplus Economic welfare is generally measured by the sum of consumer surplus and producer surplus, which is equal to total surplus.

A data analysis firm has an idle computer. If the firm hires another worker to put the idle computer to use, A) variable costs will rise. B) both fixed and variable costs will rise. C) fixed costs will fall. D) variable costs will fall

A) variable costs will rise. The variable cost will rise as a result of hiring an additional worker. The fixed cost will not change as the computer was already purchased.

Under average-cost pricing, the government will raise the price of output whenever a firm's costs increase, and lower the price whenever a firm's costs decrease. Over time, under the average-cost pricing policy, what will the local telephone company most likely do? Allow its costs to increase Work to decrease its costs

Allow its costs to increase Under average-cost pricing, the government will require that the firm charge the price at which long-run average cost intersects the demand curve. If the firm lowers its costs, it will not realize any economic profit because the government will require the firm to lower its price accordingly. If the firm's costs increase, the firm will not suffer economic losses because the government will allow the price to rise accordingly. As a result, the firm faces no incentive to lower costs and no penalty for allowing costs to rise. The firm's costs will likely creep upward over time.

Which of the following is a characteristic of a monopoly? A) free entry and exit B) barriers to entry C) one buyer D) rising average total costs

B) barriers to entry

Which of the following describes why the market long-run supply curve would be upward sloping? A) entry of new firms does not change the cost structure of existing firms in the market B) firms have different cost structures. C) consumers have more market power than producers D) all inputs and resources are available in unlimited quantities

B) firms have different cost structures. Market long-run supply curves can be upward sloping if firms have different cost structures. If firms with higher costs enter the market, the price in the market must raise to make entry profitable. This can result in an upward sloping market long-run supply curve.

An increase in market demand in a competitive market will have which effect in the short run? A) the market price will not change B) profits for the firm will increase C) the demand curve faced by firms will shift left D) the market price will decline

B) profits for the firm will increase

Which of the following statements about price discrimination is not true? A) Price discrimination is a rational pricing strategy for a profit-maximizing monopoly. B) Price discrimination adds to social welfare in the form of increased total surplus. C) Price discrimination does not require the firm to separate customers according to their willingness to pay. D) Price discrimination will not be successful in the presence of arbitrage.

C) Price discrimination does not require the firm to separate customers according to their willingness to pay.

One explanation for why the market long-run supply curve slopes upward is because A) firms in a competitive market cannot freely enter or exit. B) prices to adjust efficiently in competitive markets. C) the inputs in production are only available in limited quantities. D) firms have identical cost structures.

C) the inputs in production are only available in limited quantities One explanation for why the market long-run supply curve slopes upward is because the inputs in production are only available in limited quantities. As producers are required to use more available resources, the cost of production will increase allowing the market long-run supply curve to slope upward.

Fixed costs are incurred only if the firm produces a positive quantity of output. True False

False Fixed costs are incurred even if the firm produces nothing at all. Variable costs are incurred only if the firm produces a positive quantity of output.

Monopoly pricing prevents some mutually beneficial trades from taking place. Which of the following is not true about those unrealized, mutually beneficial trade? A) They represent a deadweight loss to society. B) They are not a concern if a market is perfectly competitive. C) They are a function of a reduction in the quantity produced by a monopolist in comparison to a competitive market. D) They are offset by the higher profits earned by a monopolist.

D) They are offset by the higher profits earned by a monopolist. QUESTION 12

Which of the following statements comparing monopoly with competition is correct? A) With or without price discrimination, the consumer surplus under monopoly is larger than it would be under competition. B) A monopolist produces the same level of output but charges a higher price than a competitive firm would. C) Monopolies cannot price discriminate but competitive firms can. D) With perfect price discrimination, the total surplus under monopoly can be the same as under competition.

D) With perfect price discrimination, the total surplus under monopoly can be the same as under competition. Perfect price discrimination describes a situation in which the monopolist knows exactly each customer's willingness to pay and can charge each customer a different price. Although the monopolist gets the entire surplus in every transaction, total surplus under monopoly can be the same as under competition since the socially optimal quantity if often produced.

Which of the following explains why the market long-run supply curve would be upward sloping? A) entry of new firms does not change the cost structure of existing firms in the market B) firms have identical cost structures. C) consumers have more market power than producers D) all inputs and resources are only available in limited quantities

D) all inputs and resources are only available in limited quantities

A competitive market where firms currently earn positive economic profit will see firms exit the industry from increased competition. True False

False A competitive market where firms earn positive economic profit will induce firms to enter into the market. Increased competition will drive profits down.

Diminishing marginal productivity implies that total output decreases as the quantity of the input increases. True False

False Diminishing marginal productivity implies that the marginal product of an input declines as the quantity of the input increases. Even though marginal product declines, it is positive, so total output increases.

The monopolist's supply curve is shown by the marginal cost curve above the minimum point of average total cost, like the competitive firm's supply curve. True False

False QUESTION 7

Average total cost exceeds average variable costs by the value of marginal cost. True False

False Average total cost - average variable cost = average fixed cost. The difference between the two curves is average fixed costs.

Which of the following do antitrust laws not allow the government to do? a) prevent mergers b) promote competition c) break up companies d) collect revenues through the antitrust tax

d) collect revenues through the antitrust tax

A movie theater knows that there are two types of moviegoers: senior citizens and everyone else. For a particular movie, there are 20 senior citizens who will pay $6 for a ticket while there are 100 other people who will pay $10 for a ticket. There are 120 seats available in the theater. Suppose the cost to the movie theater of running the movie is $500, which includes the cost of the rights to the movie, a person to run the film, etc. How much additional profit can the movie theater earn by charging each customer their willingness to pay relative to charge a flat price of $10 per ticket? a) $120 b) $350 c) $200 d) $620

a) $120 If the movie theater charges a flat rate of $10 per ticket, then only the non-senior citizens will purchase a ticket. Therefore profit equals ($10 per ticket x 100 tickets) - $500 = $500. Price discrimination is the business practice of selling the same good at different prices to different customers. If the theater engages in price discrimination, total revenue will be ($6 per senior citizen ticket x 20 senior citizens) + ($10 per ticket x 100 tickets) = $1,120, and total cost is $500. Profit equals total revenue minus total cost, so profit will be $1,120 - $500 = $620 in this case. Therefore, the additional profit the movie theater can earn by charging each customer their willingness to pay is $620 - $500 = $120.

Suppose that a computer software company controls the operating system market. Although the government knows that the price is higher than it would be in the presence of competition, it believes that such profits are crucial to incentivizing innovation in the high-tech industry, a policy goal of the government. Which of the following policy options might most effectively enable the government to achieve its objectives in this situation? a) Do nothing at all. b) Turn the company into a public enterprise. c) Use antitrust laws to increase competition. d) Regulate the firm's pricing behavior.

a) Do nothing at all. If a computer company controls a sizable share of the operating system market, then consumers may believe that the lack of choice or competition is harmful. Yet the government may not have enough evidence to act against the company, or it may be led by politicians who believe in limited government interference in the market. Either situation can lead the government to do nothing at all about a monopoly

Why is monopoly profit not a social problem? a) It represents a transfer from the consumer to the producer with no loss in total surplus. b) Monopolists have lower marginal costs than perfectly competitive firms. c) The size of the economic pie falls when monopoly profits increase. d) Monopolies earn positive profit while competitive firms do not.

a) It represents a transfer from the consumer to the producer with no loss in total surplus.

Which of the following is true if price is below average variable cost for a firm in a competitive market? a) The firm should shut down and limit losses to fixed costs. b) The firm should shut down and incur both variable and fixed costs. c) The firm should continue to operate as long as price equals marginal cost. d) The firm should continue to operate as long as price exceeds marginal cost.

a) The firm should shut down and limit losses to fixed costs. If price is below average variable costs for a firm in a competitive market the firm should shut down. When the firm shuts down in this situation losses are limited to fixed costs.

A firm is producing goods, but experiencing losses. Assuming there is no change in either demand or the firm's cost curves, which of the following statements is true about what will happen in the long run? Check all that apply a) The quantity supplied by each firm will increase. b) The price of fertilizer will decrease. c) The total quantity supplied to the market will increase. d) Marginal cost will increase. e) Average total cost will increase.

a) The quantity supplied by each firm will increase. d) Marginal cost will increase. Because firms are incurring losses, there will be exit in this industry in the long run. This means that the market supply curve will shift to the left, increasing the price of the product to P2. As the price rises, the remaining firms will increase quantity supplied, incurring a higher marginal cost. Exit will continue until price is equal to minimum average total cost. Average total cost will be lower in the long run than in the short run, and the total quantity supplied in the market will fall

A DOWNWARD SLOPING ATC Which of the following statements is not true? a) The shape of the average-total-cost curve indicates that this monopoly stems from ownership of a key resource by a single firm. b) Considering the relationship between average total cost and marginal cost, the marginal-cost curve for this firm must lie entirely below the average-total-cost curve. c) The shape of the average-total-cost curve in the future suggests that the firm is experiencing economies of scale. d) Average total cost would rise if production of this good was divided among more firm.

a) The shape of the average-total-cost curve indicates that this monopoly stems from ownership of a key resource by a single firm. A natural monopoly is a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. A characteristic of a natural monopoly is that a firm's average-total-cost curve continually declines, meaning that it is always experiencing economies of scale. Because average total cost falls if marginal cost is below it, and average total cost rises if marginal cost is above it, this means that the marginal-cost curve for this firm must lie entirely below the average-total-cost curve since it is continually declining.

Explicit costs a) are considered by economists and accountants when measuring a firm's profit. b) do not require an outlay of money by the firm. c) do not enter into an accountant's measure of a firm's profit. d) are not an opportunity cost.

a) are considered by economists and accountants when measuring a firm's profit. Explicit costs are costs that require an outlay of money by the firm. Both economists and accountants consider explicit costs when measuring a firm's profit.

A firm produces 500 units of output at a total cost of $1,500. If total variable costs are $500, then a) average variable cost is $1. b) average fixed cost is $3. c) average total cost is $4. d) marginal cost is $2.

a) average variable cost is $1. TC = FC + VC. $1,500 = FC + $500, so FC = $1,000. AFC = FC/Q = $1,000/500 = $2. ATC = TC/Q = $1,500/500 = $3. AVC = VC/Q = $500/500 = $1. We are unable to determine MC from the information given.

A firm in the short run a) cannot avoid paying fixed costs if the firm shuts down. b) cannot avoid paying variable costs if the firm shuts down. c) can avoid paying fixed costs if the firm shuts down. d) can avoid paying fixed costs by operating where profits are maximized.

a) cannot avoid paying fixed costs if the firm shuts down. A firm in the short run cannot avoid paying fixed costs if the firm shuts down. In the short run a firm has to pay fixed costs whether it operates or not.

If there is a reduction in market demand in a competitive market, then in the short run prices will a) decrease. b) not move from the minimum of average total cost. c) not move from the minimum of marginal cost. d) increase.

a) decrease. A reduction in market demand in a competitive market will reduce market price. As price declines profits for firms in the market will decline as well.

When a monopoly decreases its output and sales, the output effect works to ______ total revenue, and the price effect works to ______ total revenue. a) decrease; increase b) increase; increase c) decrease; decrease d) increase; decrease

a) decrease; increase Marginal revenue is the amount of revenue that the firm receives for each additional unit of output. It is very different for monopolies versus competitive firms. When a monopoly decreases the amount it sells, this action has a price effect-the price rises which tends to increase total revenue-and an output effect-less output is sold which tends to decrease total revenue-on total revenue.

If a firm chooses to produce at its efficient scale, it should choose the output level where a) marginal cost intersects with average total cost. b) average variable cost is minimized. c) average fixed cost is minimized. d) marginal cost is minimized.

a) marginal cost intersects with average total cost.

what all increases with a lump sum tax

average total cost average fixed cost

what all increases with a tax per unit

average variable cost average total cost marginal cost

Profits for a firm can be calculated using which of the following formulas? a) AFC *Q b) (P - ATC)*Q c) (P - MC) *Q d) (ATC - AVC)*Q

b) (P - ATC)*Q Profits can be generalized by using the simplified expression (P - ATC)*Q. The difference between price and average total costs shows the average profit per unit. Multiply by Q and you have a measure for total economic profits.

Which of the following would be an example of a firm in a competitive market? a) Pfizer, Inc. b) An Iowa corn farmer c) the Los Angeles Lakers d) Google, Inc.

b) An Iowa corn farmer A competitive market is defined as a market with many buyers and sellers that trade a nearly identical product. An Iowa corn farmer exists in a market with many sellers with nearly identical output.

Which of the following is not a difference between monopolies and perfectly competitive markets? a) Monopolies charge a price higher than marginal cost while perfectly competitive firms charge a price equal to marginal cost. b) Average revenue is equal to the market price for a competitive firm but not for a monopoly. c) Monopolies face downward-sloping demand curves while perfectly competitive firms face horizontal demand curves. d) Monopolies can earn profit in the long run while perfectly competitive firms earn zero profit.

b) Average revenue is equal to the market price for a competitive firm but not for a monopoly. Because a monopoly is the only seller of a good, the demand curve it faces is the same as the market demand curve which slopes downward. This is unlike a competitive firm which faces a horizontal demand curve since it is a price taker. This means that a monopoly must lower its price in order to sell more of its product, which implies marginal revenue for a monopoly is less than the price it is able to charge. Because a monopoly chooses to produce the quantity at which marginal revenue equals marginal cost, this means that monopolies charge a price higher than marginal cost while perfectly competitive firms charge a price equal to marginal cost. Regarding profit, monopolies can make positive profit in the long run but competitive firms make zero profit in the long run. Lastly, average revenue for all firms, whether competitive or not, is total revenue divided by quantity produced.

Which of the following statements is true? a) When a competitive firm sells an additional unit of output, its revenue increases by an amount less than the price. b) Average revenue is the same as price for both competitive and monopoly firms. c) When a monopoly firm sells an additional unit of output, its revenue increases by an amount equal to the price. d) Competitive firms and monopolies are subject to the price effect.

b) Average revenue is the same as price for both competitive and monopoly firms. Marginal revenue is the amount of revenue that the firm receives for each additional unit of output. It is very different for monopolies versus competitive firms because of the price effect. The price effect means that the monopoly's marginal-revenue curve lies below its demand curve. Therefore, when a monopoly firm sells an additional unit of output, its revenue increases by an amount less than the price, but for competitive firms its revenue increases by an amount equal to the price since they are price takers and thus not subject to the price effect. Moreover, average revenue for all firms, whether competitive or not, is total revenue divided by quantity produced.

Which of these arguments supports splitting up monopolies? a) Consumers have an easier time dealing with small firms. b) Competition is almost always more efficient. c) Smaller firms usually have lower average production costs. d) Large firms are unwilling to invest in new-product development.

b) Competition is almost always more efficient.

Which of the following statements is correct? a) In the long run, all costs are fixed. b) In the long run, there are no fixed costs. c) In the short run, there are no fixed costs. d) In the short run, all costs are fixed.

b) In the long run, there are no fixed costs. n the long run, there are no fixed costs. In the short run, at least one cost is fixed, but not all costs are fixed.

Which of the following is not true about a natural monopoly? a) It is not likely to be concerned about new entrants eroding its monopoly power. b) It is taking advantage of diseconomies of scale. c) It would experience a higher average total cost if more firms entered the market. d) It is taking advantage of economies of scale.

b) It is taking advantage of diseconomies of scale. A natural monopoly is a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. Some examples of a natural monopoly include transportation systems and the distribution of water or electricity. A characteristic of a natural monopoly is that a firm's average-total-cost curve continually declines, meaning that it is always experiencing economies of scale. Moreover, they are usually protected from competition because of significant barriers to entry despite the ability to sustain long-run profits.

When a monopolist is regulated on the basis of cost, a) a monopolist is still able to generate excessive economic profits. b) there is no incentive for the monopolist to reduce its cost. c) it provides an incentive for the monopolist to lower its cost of production. d) it causes the monopolist's costs to rise above that of a competitive firm.

b) there is no incentive for the monopolist to reduce its cost.

Suppose that a government that is skeptical of efforts to regulate prices charged by private companies is nevertheless concerned that an electric utility company is taking advantage of consumers with unfair pricing policies. Which of the following policy options might most effectively enable the government to achieve its objectives in this situation? a) Regulate the firm's pricing behavior. b) Turn the company into a public enterprise. c) Use antitrust laws to increase competition. d) Do nothing at all.

b) Turn the company into a public enterprise. When a natural monopoly, such as an electric utility, is forced to sell itself to a public institution, the private monopoly will become a public enterprise. Such a policy option, which might be chosen by a government skeptical of the benefits of price regulation, is generally the European approach to providing utilities. A potential drawback of this approach is that government managers may have little incentive to keep costs down.

When a monopolist increases the number of units it sells, there are two effects on revenue: the output effect and the price effect. Which of the following statements describes the output effect? a) When a monopoly increases the amount it sells, more output it sold, which tends to decrease total revenue. b) When a monopoly increases the amount it sells, more output is sold, which tends to increase total revenue. c) When a monopoly increases the amount it sells, the price falls, which tends to decrease total revenue. d) When a monopoly increases the amount it sells, less output is sold, which tends to decrease total revenue.

b) When a monopoly increases the amount it sells, more output is sold, which tends to increase total revenue.

GianCarlo used to work as an architect for $50,000 per year but quit in order to start his own photography business. To invest in his photography business, he withdrew $20,000 from his savings, which paid 2% interest, and borrowed $40,000 from his brother, whom he pays 3% interest per year. Last year GianCarlo paid $10,000 for supplies and had revenues of $70,000. GianCarlo asked William the accountant and Henry the economist to calculate his photography business's annual costs. a) William says his costs are $61,600, and Henry says his costs are $61,600. b) William says his costs are $11,200, and Henry says his costs are $61,600. c) William says his costs are $10,000, and Henry says his costs are $61,600. d) William says his costs are $10,000, and Henry says his costs are $120,000.

b) William says his costs are $11,200, and Henry says his costs are $61,600. William the accountant will include explicit costs only. Explicit costs include cost of supplies ($10,000) and interest paid on the loan from his brother ($1,200), for total accounting costs of $11,200. Henry the economist will include explicit and implicit costs. Implicit costs include forgone earnings as an architect ($50,000) and forgone interest on savings ($400), so implicit costs are $50,400, and total economic costs are $11,200 + $50,400 = $61,600.

GianCarlo used to work as an architect for $50,000 per year but quit in order to start his own photography business. To invest in his photography business, he withdrew $20,000 from his savings, which paid 2% interest, and borrowed $40,000 from his brother, whom he pays 3% interest per year. Last year GianCarlo paid $10,000 for supplies and had revenues of $70,000. GianCarlo asked William the accountant and Henry the economist to calculate his photography business's annual profit. a) William says his profit is $58,800, and Henry says his profit is $58,800. b) William says his profit is $58,800, and Henry says his profit is $8,400. c) William says his profit is $60,000, and Henry says his profit is $8,400. d) William says his profit is $60,000, and Henry says he lost $50,000.

b) William says his profit is $58,800, and Henry says his profit is $8,400. Explicit costs include cost of supplies ($10,000) and interest paid on the loan from his brother ($1,200). Implicit costs include forgone earnings as an architect ($50,000) and forgone interest on savings ($400). Accounting profit equals total revenue minus explicit costs ($70,000 - $11,200 = $58,800). Economic profit equals total revenue minus both explicit and implicit costs ($70,000 - $61,600 = $8,400).

Which of the following is an example of a market force that can prevent firms from successfully price discriminating? a) high average total cost b) arbitrage c) anti-trust laws d) collusion

b) arbitrage question 6

A tractor company plans to operate out of its current factory, which is estimated to last 25 years. All cost decisions it makes during the 25-year period a) involve only maintenance of the factory. b) are short-run decisions. c) are long-run decisions. d) represent fixed-cost decisions.

b) are short-run decisions. All cost decisions are short-run decisions as long as the company has a fixed input (plant size).

A monopolist's profits with price discrimination will be _____ if the firm charged just one price. a) lower than b) higher than c) the same as d) possibly lower than

b) higher than Price discrimination is the business practice of selling the same good at different prices to different customers. Practicing price discrimination allows monopolies to increase the quantity sold without reducing prices on all units sold. By charging different prices to different customers, a monopolist can increase its profit.

Suppose a firm has a monopoly on the sale of boomerangs and faces a downward-sloping demand curve. When selling the 20th boomerang, the firm will always receive ________ on the 20th boomerang then it received on the 19th boomerang. a) more average revenue b) less marginal revenue c) more total revenue d) more marginal revenue

b) less marginal revenue MR is always less than P - downward sloping demand curve - always receive less MR for each additional output

Marginal cost is increasing when a) marginal product is increasing. b) marginal product is diminishing. c) we are dividing fixed costs by higher and higher levels of output. d) marginal product first decreases, then increases.

b) marginal product is diminishing. Increasing marginal cost (curve D) reflects diminishing marginal product. When the marginal product of labor is diminishing, producing an additional unit of output requires a lot of additional labor and is thus increasingly costly.

The relationship between the quantity of an input and the quantity of output is called the a) production possibilities frontier. b) production function. c) profit function. d) total cost function.

b) production function.

Fixed costs that are not relevant to production decisions are known as a) implicit costs b) sunk cost c) opportunity costs. d) explicit costs

b) sunk cost

If a firm produces nothing, _____ costs are zero, and the firm will incur _____ costs. a) fixed and variable; no b) variable; fixed c) fixed; variable d) opportunity; variable

b) variable; fixed If a firm produces nothing, variable costs will be zero. Fixed costs are incurred even if the firm produces nothing at all.

In the long-run, firms in a competitive market will have a) negative economic profit. b) zero economic profit. c) economic profit proportionate to marginal costs. d) positive economic profit.

b) zero economic profit.

Melody owns and runs a hot yoga studio. Assume that Melody has no fixed costs and that her only costs of production are the instructors she hires to teach classes. Melody's output is measured in terms of the number of students who take classes in a given week. When Melody hires one instructor, the studio's output is 300 students. When Melody hires two instructors, the studio's output is 500 students, and when Melody hires three instructors, the studio's output is 600 students. The average total cost when Melody hires two instructors is $5. What is the total cost when Melody hires two instructors? a) $2,000 b) $3,000 c) $2,500 d) $10

c) $2,500 ATC = TC/Q, so TC = ATC x Q. TC = $5 x 500 = $2,500. Note that ATC is a function of cost per unit of output, not cost per input.

Which of the following statements is not correct about how competitive firms differ from monopolies? a) Monopolies must lower their price in order to sell more of their product, while competitive firms do not. b) Competitive firms do not have to worry about the price effect lowering their total revenue. c) Monopolies cannot make positive profit in the long run but competitive firms can. d) Marginal revenue for a competitive firm equals price, while marginal revenue for a monopoly is less than the price it is able to charge.

c) Monopolies cannot make positive profit in the long run but competitive firms can. Because a monopoly is the only seller of a good, the demand curve it faces is the same as the market demand curve which slopes downward. This is unlike a competitive firm which faces a horizontal demand curve since it is a price taker. This means that a monopoly must lower its price in order to sell more of its product, which implies marginal revenue for a monopoly is less than the price it is able to charge. The price effect states that in order to increase the amount a producer sells, it must lower its price; because competitive firms are price-takers, this does not apply to them but it does apply to monopolies. Lastly, monopolies can make positive profit in the long run but competitive firms make zero profit in the long run.

How can the economic efficiency of a monopolist not be measured? a) by the area above marginal cost but beneath demand from the monopoly output to the socially-efficient output b) by deadweight loss c) by the monopolist's profit d) by the value of the unrealized trades that could be made if the monopolist produced the socially-efficient output

c) by the monopolist's profit Deadweight loss is the reduction in economic well-being that results from the monopoly's use of market power. Because the profit-maximizing quantity produced by a monopolist is less than the socially-efficient output, the value of the unrealized trades represents deadweight loss in this market. Graphically this is the area above marginal cost but beneath demand from the monopoly output to the socially-efficient output.

If a firm finds that increases in output lead to increases in long-run average total cost, then it must be experiencing ____________________ , which could be caused by __________________. a) economies of scale; specialization b) constant returns to scale; coordination problems c) diseconomies of scale; coordination problems d) diseconomies of scale; specialization

c) diseconomies of scale; coordination problems

Which of the following is not correct with respect to firms in a competitive market in the long-run? a) price is equal to average total cost b) economic profits are zero c) price is above average total cost d) price is equal to marginal cost

c) price is above average total cost

Which of the following is a likely effect from firms entering into a competitive market? a) the market supply curve will shift left b) the demand for the product should increase. c) the profits for existing firms will decline. d) the market price for the product should increase

c) the profits for existing firms will decline.

If a firm in a competitive market decreases the quantity of output sold, total revenue should a) remain the same. b) should change proportionately to the change in total costs for the firm. c) increase. d) decrease.

d) decrease.

Refer to the Scenario. Grace owns a pumpkin patch. One spring day, Grace spends 12 hours planting $200 worth of seeds in her pumpkin patch. She expects that the seeds she planted will yield $500 worth of pumpkins. Grace is also an avid golfer and provides golf lessons at the local country club. Grace charges $30 per hour for her golf lessons. Grace's economic profit from her pumpkin patch equals: a) -$30. b) $500. c) $300. d) -$60

d) -$60 Economic profit equals total revenue minus opportunity costs (explicit and implicit). Grace has $500 in revenue, $200 in explicit costs (seeds), and $360 in implicit costs (forgone income from golf lessons), so economic profit = $500 - $200 - $360 = -$60.

Which of the following is not an example of price discrimination? a) A movie theater charges a lower price for a matinee showing than a night-time showing of a movie. b) A local bar offers a Ladies Night promotion where women get drinks half off. c) A university provides low-interest loans for a certain number of low-income students. d) A hair salon charges a higher price for a haircut if you get your hair washed than if you don't.

d) A hair salon charges a higher price for a haircut if you get your hair washed than if you don't. Price discrimination is the business practice of selling the same good at different prices to different customers based on things like gender, age, income, etc. In this case, the hair salon charging different prices for a haircut depending on whether or not you get your hair washed does not represent the same good so this is not an example of price discrimination.

Which of the following is not an example of price discrimination? a) Hotel rates for AAA members are lower than for nonmembers. b) Greyhound offers a lower price for weekend travel compared to weekday rates on the same routes. c) Kellogg-s cereal provides cents-off coupons for its product. d) An ice cream shop charges more money for ice cream in a cone versus a cup.

d) An ice cream shop charges more money for ice cream in a cone versus a cup. Price discrimination is the business practice of selling the same good at different prices to different customers based on things like gender, age, income, etc. In this case, the ice cream parlor charges different prices for ice cream in a cup versus a cone which does not represent the same good. This is not an example of price discrimination.

Which of the following statements about antitrust laws is true? a) Antitrust laws are only used in cases where a single firm controls 100% of a national market. b) Antitrust laws give the government power to increase the efficiency of both competitive and non-competitive markets. c) Antitrust laws automatically prevent mergers between companies that produce similar products. d) Antitrust laws can reduce social welfare if they prevent mergers that would lower costs through more efficient joint production.

d) Antitrust laws can reduce social welfare if they prevent mergers that would lower costs through more efficient joint production. While antitrust laws are intended to prevent concentration in a single industry, these laws allow some mergers among companies selling similar products. Such mergers help firms take advantage of economies of scale, and as long as they don't result in a firm with substantial market power to engage in monopoly practices, antitrust laws are not applied.

Which of the following is not a result of allowing drug companies to be monopolists in the drugs they discover? a) It encourages research. b) It increases the overall welfare of society through better health because drug companies continually produce better medications. c) It increases the availability of expensive but useful medications. d) It lowers the price consumers will have to pay on these drugs.

d) It lowers the price consumers will have to pay on these drugs.

If the government regulates the price that a natural monopoly can charge to be equal to the firm's average total cost, which of the following is not true? a) There will be deadweight loss in this market. b) The firm will earn zero profits. c) The firm will not have an incentive to lower its production costs. d) The firm will earn positive profits.

d) The firm will earn positive profits. If the regulated price for a natural monopolist equals average total cost, the monopoly earns exactly zero economic profit and it has no incentive to lower its costs since its price is tied to average total cost. Because the monopolist's price doesn't reflect the marginal cost of producing the good, deadweight loss still exists in this market.

If a monopolist can practice perfect price discrimination, which of the following is not true? a) The monopoly will maximize profits. b) The monopolist will eliminate consumer surplus. c) The monopolist will produce the socially-efficient level of output. d) The monopolist will not eliminate deadweight loss.

d) The monopolist will not eliminate deadweight loss.

What is one reason to regulate electric companies instead of using antitrust laws to break up these monopolies? a) They provide productive resources for competitive firms. b) They are not maximizing profit. c) They create positive externalities. d) They are usually natural monopolies.

d) They are usually natural monopolies.

If there is a reduction in market demand in a competitive market, then in the short run prices will a) not move from the minimum of average total cost. b) not move from the minimum of marginal cost. c) increase. d) decrease.

d) decrease. A reduction in market demand in a competitive market in the short run will decrease prices. As the market demand curve shifts left, people are willing to buy fewer units at every price. As a result, price will decline in the short run.

In the ______, all costs are ________. a) long run, fixed b) short run, variable c) short run, fixed d) long run, variable

d) long run, variable In the long run, all costs are variable. In the short run, at least one cost is fixed, but not all costs are fixed.

When marginal product is rising, the marginal cost of producing another unit of output is (rising/declining) and when marginal product is falling marginal cost is (declining/rising.)

declining rising

The length of the short run can never exceed 5 years. True False

false The length of the short run is the time period for which at least one factor of production for the firm is fixed and is different for different types of firms.

When average total cost equals marginal cost, marginal cost is at its minimum. True False

false When marginal cost is less than average total cost, average total cost is declining. When marginal cost is greater than average total cost, average total cost is rising. When marginal cost equals average total cost, the marginal cost curve intersects the average total cost curve at minimum average total cost.

An example of an explicit cost is forgone interest payments when the money is invested in one's business. True False

false Forgone interest payments are an implicit opportunity cost.

a tax per unit will do what to the marginal cost

increase A per-unit tax increases variable cost at an increasing rate. For example, it increases the variable cost of producing 20 burgers by $20, but it increases the variable cost of producing 21 burgers by $21. Therefore, average variable cost, average total cost, and marginal cost will all be greater under this proposal, and average fixed cost will be unaffected

a tax per unit will do what to the average total cost

increase A per-unit tax increases variable cost at an increasing rate. For example, it increases the variable cost of producing 20 burgers by $20, but it increases the variable cost of producing 21 burgers by $21. Therefore, average variable cost, average total cost, and marginal cost will all be greater under this proposal, and average fixed cost will be unaffected

a tax per unit will do what to the average variable cost

increase A per-unit tax increases variable cost at an increasing rate. For example, it increases the variable cost of producing 20 burgers by $20, but it increases the variable cost of producing 21 burgers by $21. Therefore, average variable cost, average total cost, and marginal cost will all be greater under this proposal, and average fixed cost will be unaffected

a lump sum cost will do what to the average total cost

it will increase The lump-sum tax causes an increase in fixed cost. Therefore, only average fixed cost and average total cost will rise in this case.

a lump sum tax will do what to the average fixed cost

it will increase it The lump-sum tax causes an increase in fixed cost. Therefore, only average fixed cost and average total cost will rise in this case.

a lump sum tax will do what to the average variable cost?

it will remain unchanged The lump-sum tax causes an increase in fixed cost. Therefore, only average fixed cost and average total cost will rise in this case.

a lump sum tax will do what to the marginal tax

it will remain unchanged The lump-sum tax causes an increase in fixed cost. Therefore, only average fixed cost and average total cost will rise in this case.

An increase in market demand for a product in a competitive market will raise profits for firms currently in the market. True False

true An increase in market demand in a competitive market in the short run will have the effect of raising price. The increase in demand will also raise profits for firms that currently exist in the market.