Micro Exam #3 Review

Answer the question on the basis of the following output data for a firm. Assume that the amounts of all non labor resources are fixed. The marginal product of the sixth worker is A) 15 units of output. B) 180 units of output. C) 30 units of output. D) negative.

A) 15 units of output

The theory of creative destruction was advanced many years ago by A) Joseph Schumpeter. B) Alfred Marshall. C) Adam Smith. D) Bill Gates.

A) Joseph Schumpeter.

The total output of a firm will be at a maximum where A) MP is zero. B) AP is at a minimum. C) AP is at a maximum. D) MP is at a maximum.

A) MP is zero.

If a firm decides to produce no output in the short run, its costs will be A) its fixed costs. B) its marginal costs. C) its variable costs. D) zero.

A) its fixed costs.

In the short run, the individual competitive firm's supply curve is that segment of the A) marginal cost curve lying above the average variable cost curve. B) average variable cost curve lying below the marginal cost curve. C) marginal revenue curve lying below the demand curve. D) marginal cost curve lying between the average total cost and average variable cost curves.

A) marginal cost curve lying above the average variable cost curve.

The principle that a firm should produce up to the point where the marginal revenue from the sale of an extra unit of output is equal to the marginal cost of producing it is known as the A) profit-maximizing rule. B) output-maximizing rule. C) break-even rule. D) shut-down rule.

A) profit-maximizing rule.

The term productive efficiency refers to A) the production of a good at the lowest average total cost. B) fulfilling the condition P = MC. C) any short-run equilibrium position of a competitive firm. D) the production of the product mix most desired by consumers.

A) the production of a good at the lowest average total cost.

Accounting profits equal total revenue minus A) total explicit costs. B) total implicit costs. C) total economic costs. D) economic profits.

A) total explicit costs.

The amount of calendar time associated with the long run A) varies from industry to industry. B) is, by definition, any length of time greater than one year. C) is the same for all firms. D) is less than that associated with the immediate market period.

A) varies from industry to industry.

Suppose that a business incurred implicit costs of $200,000 and explicit costs of $1 million in a specific year. If the firm sold 4,000 units of its output at $300 per unit, its accounting profits were A) $100,000 and its economic profits were $0. B) $200,000 and its economic profits were $0. C) $100,000 and its economic profits were $100,000. D) $0 and its economic loss was $200,000.

B) $200,000 and its economic profits were $0.

Which of the following is a feature of a purely competitive market? A) Price differences exist between firms producing the same product. B) Products are standardized or homogeneous. C) The industry's demand curve is perfectly elastic. D) There are significant barriers to entry into the industry

B) Products are standardized or homogeneous.

Which of the following statements is false? A) In the long run, firms would not continue operating at a loss. B) The short run refers to a period of less than one year. C) Firms may continue operating at a loss in the short run. D) In the long run, all inputs can vary in quantity.

B) The short run refers to a period of less than one year.

The demand curve in a purely competitive industry is ________, while the demand curve to a single firm in that industry is ________. A) perfectly elastic; downsloping B) downsloping; perfectly elastic C) perfectly inelastic; perfectly elastic D) downsloping; perfectly inelastic

B) downsloping; perfectly elastic

The primary force encouraging the entry of new firms into a purely competitive industry is A) normal profits earned by firms already in the industry. B) economic profits earned by firms already in the industry. C) government subsidies for start-up firms. D) a desire to provide goods for the betterment of society.

B) economic profits earned by firms already in the industry.

To the economist, total cost includes A) explicit, but not implicit, costs. B) explicit and implicit costs. C) neither implicit nor explicit costs. D) implicit, but not explicit, costs.

B) explicit and implicit costs.

Accounting profits are typically A) greater than economic profits because the former do not take explicit costs into account. B) greater than economic profits because the former do not take implicit costs into account. C) smaller than economic profits because the former do not take implicit costs into account. D) equal to economic profits because accounting costs include all opportunity costs.

B) greater than economic profits because the former do not take implicit costs into account.

Answer the question on the basis of the following output data for a firm. Assume that the amounts of all nonlabor resources are fixed. A) fourth worker. B) third worker. C) second worker. D) sixth worker

B) third worker.

Which of the following constitutes an implicit cost to the Johnston Manufacturing Company? A) rent paid for the use of equipment owned by the Schultz Machinery Company B) use of savings to pay operating expenses instead of generating interest income C) economic profits resulting from current production D) payments of wages to its office workers

B) use of savings to pay operating expenses instead of generating interest income

Which of the following definitions is correct? A) Accounting profit + economic profit = normal profit. B) Economic profit − implicit costs = accounting profits. C) Economic profit = accounting profit − implicit costs. D) Economic profit − accounting profit = explicit costs.

C) Economic profit = accounting profit − implicit costs.

Which of the following industries most closely approximates pure competition? A) steel B) agriculture C) clothing D) farm implements

C) clothing

Entrepreneurs in purely competitive industries A) utilize pricing strategies to generate short-run economic profits. B) have no incentive to innovate because in the long run they will earn no economic profits. C) innovate to lower operating costs and generate short-run economic profits. D) rarely try to innovate because of a lack of financial resources.

C) innovate to lower operating costs and generate short-run economic profits.

In the short run, a purely competitive seller will shut down if product price A) is less than ATC. B) is greater than MC. C) is less than AVC. D) equals average revenue.

C) is less than AVC

A purely competitive firm does not try to sell more of its product by lowering its price below the market price because A) this would be considered unethical price chiseling. B) its demand curve is inelastic, so total revenue will decline. C) it can sell all it wants to at the market price. D) its competitors would not permit it.

C) it can sell all it wants to at the market price.

The term allocative efficiency refers to A) minimization of the AFC in the production of any good. B) the level of output that coincides with the intersection of the MC and AVC curves. C) the production of the product mix most desired by consumers. D) the production of a good at the lowest average total cost.

C) the production of the product mix most desired by consumers.

Assume that in the short run a firm is producing 100 units of output, has average total costs of $200, and has average variable costs of $150. The firm's total fixed costs are A) $500. B) $50. C) $0.50. D) $5,000.

D) $5,000.

In pure competition, price is determined where the industry A) total cost is less than total revenue. B) demand intersects the individual firm's marginal cost curve. C) average total cost equals total variable cost. D) demand and supply curves intersect.

D) demand and supply curves intersect.

The MR = MC rule applies A) in the short run but not in the long run. B) in the long run but not in the short run. C) only to a purely competitive firm. D) in both the short run and the long run

D) in both the short run and the long run

Assume the XYZ Corporation is producing 20 units of output. It is selling this output in a purely competitive market at $10 per unit. Its total fixed costs are $100 and its average variable cost is $3 at 20 units of output. This corporation A) is realizing a loss of $60. B) is maximizing its profits. C) should close down in the short run. D) is realizing an economic profit of $40.

D) is realizing an economic profit of $40.

The basic characteristic of the short run is that A) a firm does not have sufficient time to change the amounts of any of the resources it employs. B) the firm does not have sufficient time to cut its rate of output to zero. C) barriers to entry prevent new firms from entering the industry. D) the firm does not have sufficient time to change the size of its plant.

D) the firm does not have sufficient time to change the size of its plant.

In a purely competitive industry, A) there will be no economic profits in either the short run or the long run. B) economic profits may persist in the long run if consumer demand is strong and stable. C) there may be economic profits in the long run but not in the short run. D) there may be economic profits in the short run but not in the long run

D) there may be economic profits in the short run but not in the long run

In a graph for a firm in pure competition with the quantity of output measured on the horizontal axis, the total revenue curve is A) horizontal. B) downward-sloping. C) vertical. D) upward-sloping.

D) upward-sloping.

A purely competitive firm that is earning positive profits in its short-run equilibrium situation will continue to earn positive profits at the long-run equilibrium.

False

Allocative efficiency is achieved by equalizing consumer surplus and producer surplus.

False

The short run is a period of time during which all costs are fixed costs

False

When new firms enter a purely competitive industry, the market supply curve will shift to the left

False

After all long-run adjustments have been completed, a firm in a competitive industry will produce that level of output where average total cost is at a minimum.

True

In pure competition, resources are optimally or efficiently allocated when production occurs at the output level where P = MC.

True

The long-run supply curve for a decreasing-cost industry is downsloping

True

The process by which new firms and new products destroy existing dominant firms and their products is called creative destruction

True