Economics Test 3
In long-run equilibrium, a perfectly competitive firm produces the output level that minimizes average total cost. a. True b. False
a. True
The market demand curve in a perfectly competitive industry is downward sloping, while the demand curve faced by an individual perfectly competitive firm is horizontal. a. True b. False
a. True
The behavior of an individual perfectly competitive firm has a perceptible influence on the market price. a. True b. False
b. False
If the market demand curve in a perfectly competitive industry shifts left, the demand curve for each existing firm will: a. shift right. b. shift down. c. shift left. d. shift up.
b. shift down.
In the short run, ATC is not always higher than a. MC b. Zero c. AFC d. AVC
MC
Economists normally assume that the goal of a firm is to: a. maximize profits. b. sell products at the highest prices possible. c. maximize sales revenue. d. sell as many units of output as possible.
Maximize profits
c. QE
Refer to Exhibit 11-10. At output level 0Q, average variable cost equals: a. QD. b. QF. c. QE. d. FE.
d. $18
Refer to Exhibit 11-11. If the output equals four watches per week, then the average total cost of producing a watch equals: a. $3. b. $72. c. $5.50. d. $18.
Which of the following most accurately describes the long-run period?
The long run is of sufficient length to allow a firm to alter its plant capacity and all other factors of production.
An economic profit of zero indicates a satisfactory situation for the firm.
True
If the marginal cost is less than average total cost, average total cost will decrease.
True
In the long run, firms can vary all inputs in the production process.
True
In the short run, some costs are fixed.
True
As exit from a perfectly competitive industry that is currently unprofitable pushes up the market price, producers will move from a situation where price ____ average total cost to one where price ____ average total cost. a. is less than; equals. b. equals; exceeds. c. exceeds; equals. d. equals; is less than.
a. is less than; equals.
Whenever marginal revenue is greater than marginal cost, a profit-maximizing firm should reduce its output. a. True b. False
b. False
d. both (a) and (b)
Refer to Exhibit 11-10. At output level 0Q, average fixed cost equals: a. QF. b. QD. c. ED. d. both (a) and (b)
area BEQ0.
Refer to Exhibit 11-10. At output level 0Q, total variable cost equals:
c. fourth
Refer to Exhibit 11-2. The marginal product of labor begins to diminish with the addition of the ____ picker. a. fifth b. eighth c. fourth d. seventh
FOUR
Refer to Exhibit 11-7. If the firm's goal is to maximize weekly output, how many workers should the firm employ each week? a. four workers b. three workers c. two workers d. one worker
D
Refer to Exhibit 11-9. The short-run average total cost curve is the curve labeled:
d. -$35
Refer to Exhibit 12-4. What is the value of the variable Z shown in the table? a. -$40 b. $0 c. -$38 d. -$35
a. positive economic profits.
Refer to Exhibit 12-7. In the short-run, if the market price is higher than $10, the competitive firm will earn: a. positive economic profits. b. losses but will not shut down. c. zero economic profits. d. losses and will shut down.
Campbell recently began running his brother's lumber mill. Last month he took in $10,000 in sales revenue and paid $6,800 in out-of-pocket costs. He made an economic profit last month if his implicit costs were: a. $2000. b. $4800. c. $6600. d. $3200.
a. $2000.
Cassie produces and sells 400 jars of homemade jelly each month for $3 each. Each month, she pays $200 for jars, $150 for ingredients, and uses her own time, with an opportunity cost of $300. Her economic profits each month are: a. $550. b. $700. c. $850. d. $900.
a. $550.
c. $1,120
a. $900 b. $2,000 c. $1,120 d. $1,260
What do foregone interest on money invested in a firm, wages paid to production workers, interest paid on bank loans, and the purchase of parts for assembly have in common? a. All are opportunity costs. b. All are explicit costs. c. None are opportunity costs. d. All are implicit costs.
a. All are opportunity costs.
Rose, who grows geraniums to sell, is currently producing a level of output at which her marginal cost equals her average variable cost. What must be true about Rose's average total cost at this level of output? a. It is falling with increased output. b. It is at a minimum. c. It is equal to average variable cost. d. It is at a maximum.
a. It is falling with increased output.
Assume that the equilibrium price in a perfectly competitive industry is $4.25. If a firm in this industry produced and sold 10 units with an average total cost of $5.00, what would be the result would be: a. a loss of $7.50 b. a profit of $0.75 c. a loss of $0.75 d. a profit of $7.50
a. a loss of $7.50
b
Refer to Exhibit 11-13. What is the level of the firm's total fixed cost (in thousands)? a. $8 b. $5 c. $25 d. $0
b. increase output.
Refer to Exhibit 12-3. If the market price increased to $5 in Graph B, this firm should: a. continue producing the same level of output. b. increase output. c. immediately shut down. d. decrease output.
d. $720.
Refer to Exhibit 12-3. Total revenue for the firm in Graph C equals: a. $120. b. $150. c. $600. d. $720.
An economist's measurement of profit differs from an accountant's in that: a. accountants do not always include all of the opportunity costs when calculating total production costs. b. economic profit generally exceeds accounting profit. c. accountants calculate total revenue differently than do economists. d. economists do not always include all of the opportunity costs when calculating total production costs.
a
Economic profits are equal to accounting profits: a. When implicit costs are zero b. In all cases c. In no cases d. When implicit costs equal explicit costs
a
The short run is a time period such that: a. the existing firms in the industry do not have sufficient time to adjust their current rate of output. b. the existing firms in the market do not have sufficient time to increase the size of their existing plants or build new factories. c. the existing firms in the industry do not have sufficient time to adjust the quantity of any inputs which they employ. d. new entrants have sufficient time to build factories and enter the industry.
b
In order to maximize profits, a firm should produce the level of output at which total revenue is maximized. a. True b. False
b. False
Which of the following most accurately describes the long-run period? a. The long run is a period of time in which a firm is unable to vary some of its factors of production. b. In the long run, the firm is able to expand output by utilizing additional workers and raw materials, but not physical capital. c. The long run is of sufficient length to allow a firm to alter its plant capacity and all other factors of production. d. The long run is of sufficient length to allow a firm to transform economic losses into economic profits.
c. The long run is of sufficient length to allow a firm to alter its plant capacity and all other factors of production.
If average total costs are $40 and average variable cost are $20 at 10 units of output and the marginal cost of the 11th unit is $30, what is the average total cost of 11 units? a. $23.00 b. $30.00 c. $20.09 d. $39.09
d. $39.09
A. 0
Refer to Exhibit 12-5. A profit-maximizing firm in a perfectly competitive industry will produce ____ units of output if the market price equals $10. a. 0 b. 450 c. 650 d. 800
d. all variable costs.
Refer to Exhibit 12-5. At a market price of $30, total revenue is sufficient to pay: a. all variable costs and a portion of fixed costs. b. only a portion of the variable costs. c. all costs, fixed and variable. d. all variable costs
c. $6
Refer to Exhibit 12.8. When market price is $2, a competitive profit-maximizing firm's total cost is: a. $12.50. b. $21. c. $6. d. $3.
In long-run equilibrium, the perfectly competitive firm produces: a. at a level of output such that all of the above are true. b. where P = MC = AC. c. where its long-run average cost curve is tangent to its horizontal demand curve. d. at the lowest point on its long-run average cost curve.
a. at a level of output such that all of the above are true.
At the level of output where marginal revenue equals marginal cost, price is less than average total cost but greater than average variable cost. In this instance, a profit-maximizing firm should: a. continue operating at that output level in the short term, since total revenue will cover all of the firm's variable costs and some of its fixed costs. b. continue operating at that output level in the short term, since total revenue will cover all of the firm's fixed costs and a portion of its variable costs. c. cease production as it is incurring an economic loss. d. decrease output to where marginal revenue exceeds marginal cost by the greatest dollar amount.
a. continue operating at that output level in the short term, since total revenue will cover all of the firm's variable costs and some of its fixed costs.
A perfectly competitive firm faces a demand curve that is: a. horizontal and perfectly elastic. b. vertical and perfectly inelastic. c. horizontal and perfectly inelastic. d. vertical and perfectly elastic.
a. horizontal and perfectly elastic.
Which of the following is most likely a constant cost industry? a. ice cream b. coal c. lumber d. oil
a. ice cream
Darlene runs a fruit and vegetable stand in a medium-sized community where there are many such stands. Her weekly total revenue equals $3,500. Her weekly total cost of running the stand equals $3,500, consisting of $2,500 of variable costs and $1,000 of fixed costs. An economist would likely advise Darlene to: a. keep the stand open because it is generating a normal profit. b. keep the stand open for a while longer because she is covering all of her fixed costs and some of her variable costs. c. keep the stand open for a while longer because she is covering all of her variable costs and some of her fixed costs. d. shut down as quickly as possible because the stand is generating losses.
a. keep the stand open because it is generating a normal profit.
Marginal revenue is: a. the addition to total revenue from selling one more unit of output. b. the additional cost incurred from producing one more unit of output. c. the addition to total profit from selling one more unit of output. d. the addition to total output from hiring one more unit of labor.
a. the addition to total revenue from selling one more unit of output.
B
a. the marginal product of the 3rd worker is 50. b. The region of declining total product not illustrated anywhere in the available data. c. the marginal product of the 5th worker is 60. d. the marginal product of the 7th worker is -30.
In a perfectly competitive market, in response to a permanent decrease in demand: a. the short run equilibrium price will be lower than the eventual long run equilibrium price. b. the short run equilibrium price will be higher than the eventual long run equilibrium price. c. the short run equilibrium price will be the same as than the eventual long run equilibrium price. d. we cannot know whether the short run equilibrium price will be below the eventual long run equilibrium price.
a. the short run equilibrium price will be lower than the eventual long run equilibrium price.
As quantity increases, which of the following must be true if average total costs are rising? a. Average fixed cost must be increasing. b. Marginal cost must be greater than average total cost. c. Marginal cost must be less than average total cost. d. Average fixed cost must be less than average variable cost.
b. Marginal cost must be greater than average total cost.
Marginal revenue for a perfectly competitive firm equals: a. average total cost at all levels of output. b. average revenue at all levels of output. c. marginal cost at all levels of output. d. the addition to total cost from producing one more unit of output.
b. average revenue at all levels of output.
Which of the following factors of production is not variable in the long run? a. highly skilled labor b. land c. All factors are variable in the long run. d. the size of the firm's plant
c. All factors are variable in the long run.
Farmer Brady sells wheat in a market where sellers are price takers. Which of the following is true in regard to Farmer Brady's production and pricing decisions? a. Since the market dictates the price of his product, Farmer Brady will have no incentive to minimize per-unit production costs. b. Farmer Brady will be able to increase the total revenue from the sale of his wheat if he increases the price of the wheat. c. It would be senseless for Farmer Brady to try to increase sales by lowering the price of his product. His entire output can be sold at the market price. d. Since the market dictates the price of his product, Farmer Brady has no production decisions to make.
c. It would be senseless for Farmer Brady to try to increase sales by lowering the price of his product. His entire output can be sold at the market price.
A firm replaces a machine by hiring 3 hourly production workers instead. a. Its fixed costs will rise and its variable costs will fall. b. Both its fixed and variable costs will fall. c. Its fixed costs will fall and its variable costs will rise. d. Both its fixed and variable costs will rise.
c. Its fixed costs will fall and its variable costs will rise.
Why can't a firm in a perfectly competitive industry charge a price above the market-clearing price? a. Perfectly competitive firms are price searchers. b. Firms in a perfectly competitive industry face significant barriers to entry. c. Numerous competitors produce the same product and charge the market price. d. Government-imposed price ceilings prevent prices from being raised.
c. Numerous competitors produce the same product and charge the market price.
A firm is operating at a scale where diseconomies of scale are present. Which of the following could help explain what that means? a. The firm is operating at a scale where the average total cost of production is falling as output expands. b. The firm is operating at a scale where average total cost is constant as output expands. c. The firm has grown so large that average total cost increases as output expands. d. The firm is operating at a scale where total fixed costs are not minimized.
c. The firm has grown so large that average total cost increases as output expands.
At the level of output where marginal revenue equals marginal cost, price is less than average total cost but greater than average variable cost. In this instance, a profit-maximizing firm should: a. cease production as it is incurring an economic loss. b. continue operating at that output level in the short term, since total revenue will cover all of the firm's fixed costs and a portion of its variable costs. c. continue operating at that output level in the short term, since total revenue will cover all of the firm's variable costs and some of its fixed costs. d. decrease output to where marginal revenue exceeds marginal cost by the greatest dollar amount.
c. continue operating at that output level in the short term, since total revenue will cover all of the firm's variable costs and some of its fixed costs.
Economic profits are: a. less than accounting profits even if implicit costs are zero. b. greater than accounting profits even if implicit costs are zero. c. less than accounting profits if implicit costs are greater than zero. d. greater than accounting profits if implicit costs are greater than zero.
c. less than accounting profits if implicit costs are greater than zero.
A firm that is a price taker: a. competes with other producers who produce differentiated products. b. can exert a major influence on the overall market. c. will lose all sales if it prices its product in excess of the market equilibrium price. d. must be a relatively large producer compared to other firms in the market.
c. will lose all sales if it prices its product in excess of the market equilibrium price.
"I'm losing money, but since my fixed costs are so high, I simply cannot afford to shut down." If the firm were attempting to maximize profit, this decision may be: a. incorrect because a firm experiencing economic losses should never continue to operate. b. incorrect since a firm should shut down whenever price falls below average total cost in the short run. c. correct if price is less than average variable cost. d. correct if the firm is covering all of its variable costs.
d. correct if the firm is covering all of its variable costs
A firm has $300 million in revenues and explicit costs of $100 million. If its owners have invested $150 million in the company at an opportunity cost of 10 percent a year, the firm's accounting profit is: a. $150 million. b. $50 million. c. $185 million. d. $200 million.
d. $200 million.
Assume Brad worked as a contractor for a year and had revenues of $120,000 and explicit cost of $70,000. If he could have been paid $80,000 working for a computer company, his accounting profit as a contractor was ____ and his economic profit was ____. a. $50,000; $40,000 b. $40,000; $50,000 c. $10,000; $50,000 d. $50,000; -$30,000
d. $50,000; -$30,000
Which of the following statements is not characteristic of a perfectly competitive industry in long-run equilibrium?Ceteris paribus, there is no tendency for firms to either enter or exit the industry. a. Every firm produces at an output level at which MC = LRATC. b. Ceteris paribus, there is no tendency for firms to either enter or exit the industry. c. No firm earns an economic profit. d. A profit-maximizing firm may produce any output level at which P < LRATC.
d. A profit-maximizing firm may produce any output level at which P < LRATC.
Assume that a firm's total revenue is less than its total cost for the level of output it is producing. In the short run, this firm should: a. contract output. b. expand output. c. shut down. d. There is not enough information to answer the question.
d. There is not enough information to answer the question.
When would you expect economic profits in an industry to be zero? a. When existing firms are growing. b. When firms are entering the industry. c. When firms are leaving the industry. d. When firms have no incentives to enter or exit.
d. When firms have no incentives to enter or exit.
Assume that the equilibrium price in a perfectly competitive industry is $4.25. If a firm in this industry produced and sold 10 units with an average total cost of $5.00, what would be the result would be: a. a profit of $0.75 b. a loss of $0.75 c. a profit of $7.50 d. a loss of $7.50
d. a loss of $7.50
If perfectly competitive industry B is currently realizing economic profits, we would expect that: a. industry output will rise, good B will fall in price, and economic profits will tend to increase. b. industry output will fall, good B will rise in price, and economic profits will tend to disappear. c. industry output will fall, good B will fall in price, and economic profits will tend to disappear. d. industry output will rise, good B will fall in price, and economic profits will tend to disappear.
d. industry output will rise, good B will fall in price, and economic profits will tend to disappear.
A profit-maximizing, price-taking firm should cease production whenever: a. the firm is making a loss. b. the firm is earning zero economic profit. c. the price is less than minimum average fixed cost. d. the price is less than minimum average variable cost.
d. the price is less than minimum average variable cost.