Microeconomics Exam 3

If a competitive firm is producing a level of output where marginal revenue exceeds marginal cost, the firm could increase profits if it

increased production.

Implicit costs

input costs that do not require an outlay of money by the firm

Explicit costs

input costs that require an outlay of money by the firm

The long-run market supply curve is...

is always more elastic than the short-run market supply curve.

true or false: If total revenue is $100, explicit costs are $50, and implicit costs are $30, then accounting profit equals $50.

true

true or false: If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal-cost curve will be U-shaped.

true

true or false: In the long run, if firms are identical and there is free entry and exit in the market, all firms in the market operate at their efficient scale.

true

true or false: The average-total-cost curve in the long run is flatter than the average-total-cost curve in the short run.

true

true or false: When marginal costs are below average total costs, average total costs must be falling.

true

true or false All costs are variable in the long run

true.

If an input necessary for production is in limited supply so that an expansion of the industry raises costs for all existing firms in the market, then the long-run market supply curve for a good could be

upward sloping.

Average variable cost

variable costs divided by the quantity of output

A grocery store should close at night if the

variable costs of staying open are greater than the total revenue due to staying open.

In long-run equilibrium in a competitive market, firms are operating at

1. the minimum of their average-total-cost curves. 2. the intersection of marginal cost and marginal revenue. 3. their efficient scale. 4. zero economic profit.

If there are implicit costs of production....

Accounting profit will exceed economic profit

When a small firm expands the scale of its operation, why does it usually first experience increasing returns to scale? When the same firm grows to be extremely large, why might a further expansion of the scale of operation generate decreasing returns to scale?

As a small firm expands the scale of operation, the higher production level allows for greater specialization of the workers and long-run average total costs fall. As an enormous firm continues to expand, it will likely develop coordination problems and long-run average total costs begin to increase.

The efficient scale of production is the quantity of output that minimizes

Average total cost

When marginal costs are below average total costs...

Average total costs are falling

If marginal costs equal average total costs...

Average total costs are minimized

If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal-cost curve will

Be U shaped

If a production function exhibits diminishing marginal product, its slope....

Becomes flatter as the quantity of the input increases

If a production function exhibits diminishing marginal product, the slope of the corresponding total-cost curve....

Becomes steeper as the quantity of output increases

In the long run, if a very small factory were to expand its scale of operations, it is likely that it would initially experience

Economies of scale

If a firm is producing a level of output where marginal revenue exceeds marginal cost, would it improve profits by increasing output, decreasing output, or keeping output unchanged? Why?

If MR > MC, increasing output will increase profits because an additional unit of production increases revenue more than it increases costs.

Accounting profit is equal to total revenue minus is what?

Explicit costs.

true or false: In the long run, as a firm expands its production facilities, it generally first experiences diseconomies of scale, then constant returns to scale, and finally economies of scale.

False, a firm generally experiences economies of scale, constant returns to scale, and diseconomies of scale as the scale of production expands.

true or false: Average total costs are total costs divided by marginal costs.

False, average total costs are total costs divided by the quantity of output

True or false: If the production function for a firm exhibits diminishing marginal product, the corresponding total-cost curve for the firm will become flatter as the quantity of output expands.

False, diminishing marginal product means that it requires ever greater amounts of an input to produce equal increments of output so total costs rise at an increasing rate.

true or false: The efficient scale for a firm is the quantity of output that minimizes marginal cost.

False, efficient scale minimizes average total costs

true or false: A competitive firm's long-run supply curve is the portion of its marginal-cost curve that lies above its average-variable-cost curve.

False, it is the portion of the MC curve that lies above its average-total-cost curve.

true or false: A competitive firm's short-run supply curve is the portion of its marginal-cost curve that lies above its average-total-cost curve

False, it is the portion of the MC curve that lies above its average-variable-cost curve.

true or false: When a production function gets flatter, the marginal product is increasing.

False, marginal product is the slope of the production function, so marginal product is decreasing when the production function gets flatter.

true or false: If marginal cost exceeds marginal revenue at a firm's current level of output, the firm can increase profit if it increases its level of output.

False, the firm increases profits if it reduces output

true or false: In the short run, if the price a firm receives for a good is above its average variable costs but below its average total costs of production, the firm will temporarily shut down.

False, the firm will continue to operate in the short run as long as price exceeds average variable costs.

true or false: The only requirement for a market to be perfectly competitive is for the market to have many buyers and sellers.

False, the goods offered for sale are largely the same and (possibly) firms can freely enter or exit the market.

true or false: The short-run market supply curve is more elastic than the long-run market supply curve.

False, the long-run market supply curve is more elastic than the short-run market supply curve.

true or false: The average-total-cost curve crosses the marginal-cost curve at the minimum of the marginal-cost curve.

False, the marginal-cost curve crosses the average-total-cost curve at the minimum of the average-total-cost curve.

true or false: In the long run, perfectly competitive firms earn small but positive economic profits

False, they earn zero economic profits in the long run

true or false: Wages and salaries paid to workers are an example of implicit costs of production.

False, wages and salaries are explicit costs of production because dollars flow out of the firm.

Which of the following is not a characteristic of a competitive market?

Firms generate small but positive economic profits in the long run

Under what conditions would the long-run market supply curve be upward sloping?

If an input necessary for production is in limited supply or if firms have different costs.

Why must the long-run equilibrium in a competitive market (with free entry and exit) have all firms operating at their efficient scale?

In the long-run equilibrium, firms must be making zero economic profits so that firms are not entering or exiting the industry. Zero profits occur when P=ATC, and for the competitive firm P=MC determines the production level. P=ATC = MC only at the minimum of ATC.

Why is the short-run market supply curve upward sloping while the standard long-run market supply curve is perfectly elastic?

In the short run, firms cannot exit or enter the market, so the market supply curve is the horizontal sum of the upward-sloping MC curves of the existing firms. However, in the long run, if the price is above or below minimum ATC, firms will enter or exit the market causing the price to always return to minimum ATC for each firm, but the total quantity supplied in the market rises and falls with the number of firms. Thus, the market supply curve is horizontal.

If a firm is operating in the area of constant returns to scale, what will happen to average total costs in the short run if the firm expands production? Why? What will happen to average total costs in the long run? Why?

In the short run, the size of the production facility is fixed, so the firm will experience diminishing returns and increasing average total costs when adding additional workers. In the long run, the firm will expand the size of the factory and the number of workers together, and if the firm experiences constant returns to scale, average total costs will remain fixed at the minimum.

Is the salary of management in a firm a fixed cost or a variable cost? Why?

It is a fixed cost because the salary paid to management doesn't vary with the quantity produced.

What constitutes a competitive firm's long-run supply curve? Explain.

It is the portion of the firm's marginal-cost curve that lies above its average-total-cost curve because the firm maximizes profit where , and in the long run, the firm must cover its total costs or it should exit the market.

What constitutes a competitive firm's short-run supply curve? Explain.

It is the portion of the firm's marginal-cost curve that lies above its average-variable-cost curve because the firm maximizes profit where P=MC , and in the short run, fixed or sunk costs are irrelevant and the firm must only cover its variable costs.

What is the efficient scale of a firm?

It is the quantity of production that minimizes average total cost.

In the short run, the competitive firm's supply curve is the

portion of the marginal-cost curve that lies above the average-variable-cost curve.

Suppose the price for a firm's output is above the average variable cost of production but below the average total cost of production. Will the firm shut down in the short run? Explain. Will the firm exit the market in the long run?

No. In the short run, the firm's fixed costs are sunk costs so the firm will not shut down because it only needs to cover its variable costs. Yes. In the long run, the firm must cover total costs, and if P < ATC, the firm generates losses in the long run and it will exit the market.

true or false: A firm maximizes profit when it produces output up to the point where marginal cost equals marginal revenue.

true

Total revenue

The amount a firm receives for the sale of its output

After the market has returned to long-run equilibrium, is the price higher, lower, or the same as the initial price? Are there more, fewer, or the same number of firms producing in the market?

The price has returned to its initial level. There are fewer firms producing in this market.

Economic profit is equal to total revenue minus is what?

The sum of implicit and explicit costs.

What are the three conditions that characterize a competitive market?

There are many buyers and sellers, the goods offered for sale are largely the same, and firms can freely enter or exit the market.

If a firm is in a competitive market, what happens to its total revenue if it doubles its output? Why?

Total revenue doubles. This is because, in a competitive market, the price is unaffected by the amount sold by any individual firm.

true or false: If a competitive firm sells three times the amount of output, its total revenue also increases by a factor of three.

True

true or false: If a firm continues to employ more workers within the same size factory, it will eventually experience diminishing marginal product

True

true or false: In a competitive market, both buyers and sellers are price takers

True

What is the shape of the marginal-cost curve in the typical firm? Why is it shaped this way?

Typically, the marginal-cost curve is U-shaped. The firm often experiences increasing marginal product at very small levels of output as workers are allowed to specialize in their activities. Thus, marginal cost falls. At some point, the firm will experience diminishing marginal product, and the marginal-cost curve will begin to rise.

Explain the relationship between marginal cost and average total cost

When marginal cost is below average total cost, the average-total-cost curve must be falling. When marginal cost is above average total cost, the average-total-cost curve must be rising. Thus, the marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost.

You go to your campus bookstore and see a coffee mug emblazoned with your university's shield. It costs $5, and you value it at $8, so you buy it. On the way to your car, you drop it, and it breaks into pieces. Should you buy another one or should you go home because the total expenditure of $10 now exceeds the $8 value that you place on it? Why?

You should buy another mug because the marginal benefit ($8) still exceeds the marginal cost ($5). The broken mug is a sunk cost and is not recoverable. Therefore, it is irrelevant.

Sunk cost

a cost to which one is already committed and is not receivable

Exit

a long-run decision to permanently cease production and leave the market

Competitive market

a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker

Shut down

a short-run decision to temporarily cease production during a specific period of time due to current market conditions

true or false: For a competitive firm, marginal revenue equals the price of the good it sells.

true

If the long-run market supply curve for a good is perfectly elastic, an increase in the demand for that good will, in the long run, cause

an increase in the number of firms in the market but no increase in the price of the good.

In the long run, some firms will exit the market if the price of the good offered for sale is less than

average total cost.

Price takers

buyers and sellers in a competitive market that must accept the price that the market determines

Fixed costs

costs that do not vary with the quantity of output produced.

Variable costs

costs that vary with the quantity of output produced

If a competitive firm doubles its output, its total revenue....

doubles

For a competitive firm, marginal revenue is

equal to the price of the good sold.

Average fixed costs

fixed costs divided by the quantity of outputs

Which of the following markets would most closely satisfy the requirements for a competitive market?

gold bullion

The competitive firm maximizes profit when it produces output up to the point where

marginal cost equals marginal revenue

If all firms in a market have identical cost structures and if inputs used in the production of the good in that market are readily available, then the long-run market supply curve for that good should be

perfectly elastic.

In the long run, the competitive firm's supply curve is the

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

Marginal revenue

the change in total revenue from an additional unit sold

Marginal product

the increase in output that arises from an additional unit of input

Marginal cost

the increase in total cost that arises from an extra unit of production

Total cost

the market value of the inputs a firm uses in production

true or false: If the price of a good rises above the minimum average total cost of production, positive economic profits will cause new firms to enter the market, which drives the price back down to the minimum average total cost of production

true

true or false: If there are implicit costs of production, accounting profits will exceed economic profits

true

Economies of scale

the property whereby long-run average total cost falls as the quantity of output increases

Diseconomies of scale

the property whereby long-run average total cost rises as the quantity of output increases

Constant returns to scale

the property whereby long-run average total cost stays the same as the quantity of output changes.

Diminishing marginal product

the property whereby the marginal product of an input declines as the quantity of the input increases

Efficient scale

the quantity of output that minimizes average total cost

Production function

the relationship between quantity of inputs used to make a good and the quantity of output of that good

Average total cost

total cost divided by the quantity of output

Average revenue

total revenue divided by the quantity sold

Profit

total revenue minus total cost

Economic profit

total revenue minus total cost, including both explicit and implicit costs.

Accounting profit

total revenue minus total explicit cost

True or false: Fixed costs plus variable costs equal total costs.true

true

True or false: In the long run, if the price firms receive for their output is below their average total costs of production, some firms will exit the market.

true

True or false: Total revenue equals the quantity of output the firm produces times the price at which it sells its output.

true

true or false: In the short run, the market supply curve for a good is the sum of the quantities supplied by each firm at each price.

true