Economics Chapter 6

A firm sells 20 units of a good at a price of $5 per unit. If the average cost of production of the good equals $3 per unit, the firm's revenue is:

$100.

A firm sells 30 units of its product at a price of $5 per unit. It incurs a fixed cost of $100 and a variable cost of $20. The firm's profit is:

$30.

A firm with a fixed cost of $300 every month and variable cost of $200 every month decides to shut down. In such a situation it would lose:

$300 every month.

A firm has an average total cost of $50. If it sells 20 units of its product at $80 each, what is its profit?

$600

A firm producing 10 units of output incurs a total cost of $800. When it produces 11 units, the total cost increases to $890. What is the marginal cost of producing the eleventh unit?

$90

When the price of a good increases by 300%, the quantity supplied of the good increases from 200 units to 900 units. The price elasticity of supply of the good is:

1.17.

The total cost of a firm is $50, the average variable cost is $2, and the average fixed cost is $3. How may units of the output does the firm produce?

10 units

A firm produced 376 units with 10 workers. When the eleventh worker was hired, the output increased to 398 units. The marginal product of the eleventh worker is:

22 units.

A firm produces 200 units of a good when it employs 7 workers. The marginal product of the eighth worker is 46 units. If the eighth worker is hired, the firm's total product will increase to:

246 units

A firm earns $600 of total revenue from selling its product at $200 per unit. If the per-unit cost of producing the good is $150, the firm sells ________ units(s) of the good.

3

If the price elasticity of supply of a good is 2, a 200% increase in the price of the good, will change the quantity supplied by:

400%.

Differentiate between perfectly elastic supply and perfectly inelastic supply. When the price of a good is $100, 50 units are supplied. When the price increases to $300, 250 units are supplied. Calculate the price elasticity of supply of the good.

A good is said to have a perfectly elastic supply when a very small change in the good's price leads to an infinite change in the good's quantity supplied. The price elasticity of supply of such goods equals infinity. On the other hand, a good is said to have a perfectly inelastic supply when the quantity supplied of a good does not change with changes in its price, in which case the price elasticity of supply equals zero. Percentage change in price of the good when price increases from $100 to $300 = 200% Percentage change in quantity supplied of the good from 50 units to 250 units = 400% Hence price elasticity of supply of the good = 400/200 = 2.

What are the conditions that characterize the sellers' side in a perfectly competitive market?

Answer: Three conditions characterize the sellers' side in a perfectly competitive market. These are: a) A large number of sellers participate in the market and no single seller has a large market share. b) All sellers in the market produce identical goods. c) There is free entry and exit of sellers in the market.

Which of the following best describes a good with perfectly elastic supply?

Any increase in the price of the good will induce the firm to supply an infinite quantity of the good.

ATC

Average Total Cost Curve

Which of the following is true?

Economic profits = Accounting profits - Implicit costs

________ occur when the average total cost falls as the quantity produced increases.

Economies of scale

Define the terms "economies of scale," "constant returns to scale," and "diseconomies of scale." Among these three situations, operating in which stage is likely to be most profitable for a firm?

Economies of scale occur when the average total cost falls as the quantity produced increases. Constant returns to scale exist when the average total cost does not change as the quantity produced changes. Diseconomies of scale occur when the average total cost rises as the quantity produced increases. Operating at a stage where economies of scale occur is likely to be most profitable from a firm's point of view. This is because it allows a firm to expand its production with a decrease in the cost incurred per unit of additional output produced.

Which of the following is an example of specialization?

Instead of a worker making an entire shoe, the total productivity increased when different workers were allotted different jobs in the production process.

Which of the following examples best describes the concept of free entry?

Jack has an old cell phone that he wants to sell. He opens an account on eBay and auctions it off.

Which of the following inputs can be changed in the short run?

Labor employed

MC

Marginal Cost Curve

Which of the following relationships correctly identifies the profit maximization condition of a firm in a perfectly competitive market?

Marginal cost = Price = Marginal revenue

Are the terms "shutdown" and "exit" synonymous? What is the optimal shutdown rule for a firm?

No, the terms "shutdown" and "exit" are not synonymous. Shutdown refers to a short-run decision to not produce anything during a specific period of time. When a firm shuts down, it still incurs its fixed costs. On the other hand, exit refers to a long-run decision by a firm to leave the market. The optimal shutdown rule for a firm suggests that a firm should shut down if the price of the good it produces falls below its average variable cost. In situations, where the price is less than the average variable cost, for every unit of a good that the firm sells, it is paying its variable inputs more than what it is receiving from the sale of the good. As a result, the firm would lose more than the fixed cost that it would lose by shutting down—it would also lose a portion of the variable cost.

Which of the following statements is true of the short run?

Only some of a firm's input can be varied in the short run.

Which of the following is true about price elasticity of supply?

Price elasticity of supply = Percentage change in quantity supplied / Percentage change in price

Define the terms "production" and "production function." Differentiate between the short run and the long run based on the usage of inputs by a firm.

Production refers to the process of transforming inputs to outputs. The relationship between the quantity of inputs used and the quantity of outputs produced is referred to as the production function. In terms of usage of inputs, the basic difference between the short run and the long run is that in the short run only some of the firm's inputs can be varied while other inputs are fixed. However, in the long run, a firm can vary all of its inputs and there are no fixed inputs.

________ are costs that, once committed, can never be recovered and should not affect current and future production costs.

Sunk costs

Which of the following refers to diminishing marginal returns?

The additional output produced in a firm decreased as more workers were hired.

Which of the following situations depicts diseconomies of scale?

The average total cost of a firm increases from $50 to $55 when it increases its production from 10 units to 20 units.

Which of the following is an example of a sunk cost?

The cost incurred in painting a new office space

Which of the following is an example of a variable cost?

The cost of electricity used in the office

Firm A and Firm B produce the same goods but with different inputs. If the inputs used by firm A are more easily available than the inputs used by firm B, then which of the following statements is true?

The elasticity of supply of firm A will be higher than the elasticity of supply of firm B.

A firm uses workers, land, and machinery for its production process. Which of the following statements is then true?

The firm can change its output level in the long run by changing any or all of its three inputs.

Consider the following two scenarios: i) The marginal product of a worker in a firm is 10 units. When an additional worker is employed, his marginal product is less than 10 units. ii) The average total cost of a firm producing 10 units of output is $200. When it produces an additional unit, the average total cost increases to $300. What is the difference between these scenarios? What could be the reason behind both phenomena occurring? Does specialization explain any of the above situations?

The first scenario represents diminishing marginal returns (in this case, diminishing marginal product of labor), while the second scenario represents increasing variable cost (for a given set of fixed costs), which results from increasing marginal cost, which in turn results from diminishing marginal returns. The Law of Diminishing Marginal Returns states that in all production processes, if more and more of one input is added keeping all other inputs fixed, the marginal product of that input will start to decrease eventually, a result of decreasing productivity. Diminishing returns occur when only one input is increased, keeping all the other inputs fixed. Hence, it is a short-run phenomenon. The reason for diminishing returns to exist is that over-employment of one input with other inputs fixed will eventually lead to fewer of the fixed inputs available per unit of the variable input. This will at some point lead to a fall in the productivity of the variable input. As productivity decreases (less additional output for each additional input), the average cost per unit increases. This stage is characterized by the upward sloping portion of the average (variable and total) cost curves. Specialization does not explain either of the above two scenarios. Specialization occurs when workers develop a particular skill set because of performing a particular work duty over a period of time. Instead of leading to diminishing return or diseconomies of scale, specialization instead is likely to result in an increase in returns with increasing input or output.

The output of a bakery is 250 loaves of bread, when 10 workers are employed. If one more worker is hired, the total output increases to 275 loaves. Given that labor is the only variable input that the bakery uses, and the market wage rate is $10, calculate the marginal cost when employment is increased from 10 to 11 workers.

The marginal cost when 275 loaves are produced = Change in total cost / Change in total output = $10/25 = $0.40.

Which of the following statements is true of the marginal product of an input?

The marginal product of an input can take negative values.

Which of the following is NOT an element of a seller's decision-making process in a perfectly competitive market?

The number of buyers

Which of the following statements about the short run and long run is true?

The number of firms in the industry is fixed in the short run, but in the long run the number can change.

Differentiate between the terms "revenue" and "profit." Assume that a firm sells 20 units of a good at a price of $5 per unit. If the average total cost of the firm is $3 per unit, calculate the firm's profit.

The revenue of a firm is equal to the price of the goods multiplied by the quantity of goods sold. On the other hand, the profit of a firm is equal to the difference of the revenue that a firm earns and the costs it incurs. If a firm sells 20 units of a good at $5 each, its revenue is equal to 20 × $5 or $100. If the average total cost of the firm is $3, the total cost it incurs is 20 × $3 or $60. Hence, profits of the firm are $100 - $60 or $40.

A bakery that produces 100 loaves of bread has a variable cost of $50 and a fixed cost of $200. Calculate the total cost, average total cost, average variable cost, and average fixed cost of the bakery.

The total cost that the bakery incurs = $50 + $200 = $250. The average total cost of the bakery = $250/100 = $2.50. The average variable cost of the bakery = $50/100 = $0.50. The average fixed cost of the bakery = $200/100 = $2.

Which of the following statements is true of the long run?

There are no fixed inputs in the long run.

Which of the following statements is true of a perfectly competitive market?

There is free entry and exit in the market.

Which of the following statements identifies the difference between variable costs and fixed costs?

Variable costs of a firm are zero after it shut downs, whereas it continues to incur the fixed costs of production in the short run.

Is it possible for an input to have a negative marginal product?

Yes, sometimes if a variable input is continued to be acquired even after the stage of diminishing returns, it can actually lead to a fall in total output. Hence, it is possible for an input to have a negative marginal product.

Exit of a firm refers to:

a long-run decision by a firm to leave the market.

Entry of new firms into an existing market causes:

a rightward shift of the market supply curve.

Consider a textile factory operating in the short run. Classify the following costs that the firm incurs as variable costs, sunk costs, and fixed costs. a) Cost of issuing identity cards to all workers b) Wages paid to workers of the factory c) Yearly rent paid for production space d) Tax paid on the sale of its products

a) Cost of issuing identity cards to all employees is a sunk cost as it is not to be considered while making future production decisions. b) Wages paid to workers at the mill are variable costs as they change with changes in the output of the production unit. c) Yearly rent paid for the production space is a fixed cost as the mill has to pay this rent irrespective of the output produced. d) Tax paid on the sale of the firm's products is a variable cost as the tax will vary depending on the output sold by the firm.

alculate the price elasticity of supply for the following goods. Also comment on the elasticity in each case. a) When the price of a good is $100, 200 units are supplied. But when the price increases to $300, 220 units are supplied. b) When the price of a good is $50, 50 units are supplied. But when the price decreases to $30, 10 units are supplied.

a) Percentage change in price = 200% Percentage change in quantity supplied = 10% Price elasticity of supply = 10/200 = 0.05 The good has a relatively inelastic supply. b) Percentage change in price = -40% Percentage change in quantity supplied = -80% Price elasticity of supply = -80/-40 = 2 The good has a relatively elastic supply.

If the market for bottled water is perfectly competitive, how will the following aspects differ in the short run and in the long run? a. Use of inputs b. Market supply curve of bottled water when firms have identical cost structures c. Profitability of firms with identical cost structures d. Condition to stop production e. Average cost curves of a firm f. Number of firms

a. Firms producing bottled water can change only variable inputs like the labor employed in production in the short run, while a few other inputs remain fixed. On the other hand, in the long run, there are no fixed inputs and the firm can vary the quantity of all inputs used. b. The market supply curve of bottled water when firms have identical cost structures is upward sloping in the short run. In contrast, in the long run the market supply curve of firms with identical cost structures is horizontal. c. Firms with identical cost structures can earn positive economic profits in the short run. On the other hand, in the long run, all firms with identical costs participating in the market for bottled water will earn zero economic profits. d. In the short run, firms should continue production as long as the price of bottled water is greater than or equal to the average variable cost the firm faces. If the price falls below the average variable cost, the firm should stop production in the short run. In the long run, a firm should stop producing bottled water or exit from the market if the price of bottled water is less than the average total cost of the firm, or if the total cost exceeds total revenue. e. The short-run average cost curves of firms will lie above the long-run average cost curves of the firms. This happens because, in the short run, a few inputs are fixed and do not allow for an optimal combination of fixed and variable inputs at times. On the other hand, in the long run, all inputs are variable, allowing for better input combinations and thus lower costs. f. The number of firms operating in the market is fixed in the short run. In the long run, there is possible entry and exit of firms, and as such the number of firms operating in the market can change.

In the long run:

all factors of production can be changed.

Sellers in a perfectly competitive market:

are price takers.

A firm should shut down in the short run if the price is less than the:

average variable cost.

The marginal cost curve intersects:

both the average variable cost curve and the average total cost curve at their minimum.

When the marginal cost curve lies above the average cost curve, ________.

both the marginal cost curve and the average cost curve slope upward

In the long run, a firm

can vary all its inputs.

What a firm must pay for its inputs is referred to as its:

cost of production.

Free entry is said to exist in an industry when:

entry is unfettered by any special legal or technical barriers.

A good with a perfectly inelastic supply has a price elasticity of supply:

equal to zero.

When price is less than the firms' minimum average total cost, ________.

existing firms will leave the market

A business entity that produces goods or services is referred to as a(n):

firm.

In the short run, when a firm is about to begin production it pays only:

fixed costs.

A good is said to have an elastic supply if its price elasticity of supply is:

greater than one.

In a perfectly competitive market, because an individual seller tends to sell only a fraction of the total amount of the good produced:

his individual choices do not affect market outcomes.

The long-run average cost curve connects the lower part of the short-run cost curves because:

in the long run, firms have more flexibility to change input combinations.

If the marginal cost of a perfectly competitive firm producing a good is $50 and the market price of the good is $100, the firm should:

increase its output.

When the marginal product ________, the marginal cost ________.

increases; decreases

If the percentage change in the quantity supplied of a good is less than the percentage change in price of the good, the good is said to have a(n):

inelastic supply.

Price in a perfectly competitive market:

is affected by the combined decision of all sellers.

Marginal revenue:

is the change in total revenue associated with producing one more unit of output.

As the amount of inventories maintained by a firm increases:

its elasticity of supply increases.

The short-run supply curve of a competitive firm is the portion of:

its marginal cost curve that lies above its average variable cost curve.

A firm will maximize profit at the level of output where:

its marginal revenue equals marginal cost.

In a competitive market, there are a ________ number of buyers and a ________ number of sellers.

large; large

Short-run cost curves

lie above long-run cost curves.

The change in the total output of a firm associated with using one more unit of an input is referred to as the:

marginal product of the input.

The equilibrium price in a market occurs where the:

market demand and the market supply curves intersect.

The goal of a seller is primarily to:

maximize profits.

A supply curve shows the relationship between:

output and prices.

with a small decrease in the price of a good, the quantity supplied falls to zero, the supply of the good is said to be:

perfectly elastic.

In a perfectly competitive market:

price is always equal to marginal revenue.

In the long run, a firm should exit when:

price is less than average total cost.

The process by which inputs are transformed to outputs is referred to as:

production.

The entry and exit of firms in a perfectly competitive market is mostly dependent on:

profitability.

Net benefits of sellers represent their:

profits.

A firm is said to be a price taker if it:

sells as much of any good as it wants at the prevailing market price.

A short-run decision by a firm to not produce anything during a specific period is referred to as a(n):

shutdown.

Increases in the marginal product of labor can be attributed to:

specialization of workers.

The Law of Diminishing Marginal Returns states that:

successive increases in inputs eventually lead to less additional output.

Total cost of production refers to the:

sum of variable costs and fixed costs.

When the marginal cost curve lies below the average cost curve, ________.

the average cost curve slopes downward

The equilibrium price of a good sold in a competitive market is $10. If an individual firm decides to sell its product at a price higher than $10, ________.

the firm will lose all its consumers

If new firms are expected to enter an existing market, ________.

the market price is likely to fall

The long-run supply curve of a firm is:

the portion of its marginal cost curve that lies above its average total cost curve.

Total revenue earned from the sale of a good is:

the product of price and quantity of the good sold in the market.

A production function establishes the relationship between:

the quantity of inputs used and the quantity of output produced.

In a perfectly competitive market:

the sellers produce identical goods.

Marginal cost is the change in the

total cost associated with producing one more unit of output.

Profits equal:

total revenue minus total costs.

Specialization is the result of:

workers developing a certain skill set.