QUIZ 3

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At 500 units of output, total cost is $35,000 and total variable cost is $22,000. What does total fixed cost equal at 500 units?

$13,000 - total cost - total variable cost

Consider the following information about a business Diane opened last year: price = $10; quantity sold = 25,000; implicit cost = $55,000; explicit cost = $160,000. What was Diane's economic profit?

$35,000 - Accounting Profit = Total Revenue - Explicit Cost - Economic Profit = Accounting Profit - Implicit Cost

Consider the following information about a business Diane opened last year: price = $10; quantity sold = 25,000; implicit cost = $55,000; explicit cost = $160,000. What was Diane's accounting profit?

$90,000 - Accounting Profit = Total Revenue - Explicit Cost

Economic Profit =

- Accounting Profit - Implicit Costs - Total Revenue - Explicit Costs + Implicit Costs

Oligolopy

- Entry Conditions: high barriers - Number of Firms: few - Product Type: identical or differentiated - Market Power: significant by generally do not compete on price

Monopolistic Competition

- Entry Conditions: low barriers - Number of Firms: many - Product Type: differentiated - Market Power: some power over price by finding niche

Monopoly

- Entry Conditions: very high barriers - Number of Firms: one - Product Type: unique - Market Power: high power over price

Perfect Competition

- Entry Conditions: very low barriers - Number of Firms: Many - Product Type: Identical - Market Power: none, price-taker

In the theory of perfect competition,

- buyers and sellers of the product know everything that there is to know about the product. - the single firm's demand curve is horizontal and the market demand curve is downward sloping.

Explicit Cost

A cost incurred when an actual (monetary) payment is made.

Implicit Cost

A cost that represents the value of resources used in production for which no actual (monetary) payment is made (opportunity cost).

Normal Profit Definition

A firm that earns normal profit is earning revenue equal to its total costs (explicit plus implicit costs). This is the level of profit necessary to keep resources employed in that particular firm.

Long Run

A period of time in which all inputs in the production process can be varied (no inputs are fixed).

Short Run

A period of time in which some (at least one) inputs in the production process are fixed.

Identify two ways to compute average total cost (ATC).

ATC = TC/Q and ATC = AFC + AVC

Variable Input

An input whose quantity can be changed as output changes.

Fixed Input

An input whose quantity cannot be changed as output changes.

Fixed Cost

Costs that do not vary with output; the costs associated with fixed inputs.

Variable Cost

Costs that vary with output; the costs associated with variable inputs.

Which of the following is not an assumption of the theory of perfect competition?

Each firm produces and sells a differentiated product.

Economic Costs =

Explicit Costs + Implicit Costs

For a perfectly competitive firm, profit maximization or loss minimization occurs at the output at which

MR = MC

Does a real-world market have to meet all the assumptions of the theory of perfect competition before it is considered a perfectly competitive market?

No, probably no real-world market meets all the assumptions of the theory of perfect competition. All that is necessary is that a real-world market behave as if it satisfies all the assumptions.

Profit (Marginal Curve) =

Profit = (P-ATC) x Q

Marginal Physical Product

The change in output that results from changing the variable input by one unit, holding all other inputs fixed

Marginal Cost

The change in total cost that results from a change in output: MC = ΔTC/Δ Q.

Accounting Profit Definition

The difference between total revenue and explicit costs.

Economic Profit Definition

The difference between total revenue and total cost, including both explicit and implicit costs.

Minimum Efficient Scale

The lowest output level at which average total costs are minimized.

Economic profit is the difference between total revenue and ________.

The sum of explicit and implicit costs.

Total Cost

The sum of fixed costs and variable costs. TC = TFC + TVC

Which of the following statements is false?

The theory of perfect competition is completely and accurately descriptive of most real-world firms.

Accounting Profit =

Total Revenue - Explicit Costs

Average Total Cost/Unit Cost

Total cost divided by quantity of output: ATC = TC / Q.

Average Fixed Cost

Total fixed cost divided by quantity of output: AFC = TFC / Q.

Average Variable Cost

Total variable cost divided by quantity of output: AVC = TVC / Q.

Five months ago Wilson opened up a health club. Which of the following is an implicit cost related to health club?

Wilson previously worked as an accountant, earning $3,000 a month.

Normal Profit =

Zero Economic Profit

If, for the last unit of a good produced by a perfectly competitive firm, MR > MC, then in producing that unit the firm

added more to total revenue than it added to total costs.

The price at which a perfectly competitive firm sells its product is determined by

all sellers and buyers of the product.

Perfectly competitive firms are price takers for all of the following reasons except that

barriers to enforce firms to sell at the market price.

The theory of perfect competition generally assumes that

buyers and sellers act independently of other buyers and sellers.

Marginal Physical Product (MPP) =

change in total output/ change in total input

A "price taker" is a firm that

does not have the ability to control the price of the product it sells.

The market demand curve in a perfectly competitive market is

downward sloping.

Economies of Scale

exist when inputs are increased by some percentage and output increases by a greater percentage, causing unit costs to fall.

Diseconomies of Scale

exist when inputs are increased by some percentage and output increases by a smaller percentage, causing unit costs to rise.

Constant Return to Scale

exist when inputs are increased by some percentage and output increases by an equal percentage, causing unit costs to remain constant.

A cost that is incurred when an actual monetary payment is made is a(n) _________ cost.

explicit

A cost of resources used on production for which no actual monetary payment is made is a(n) ________ cost.

implicit

As the marginal physical product of the variable input ________, the marginal cost _______.

increase; decrease & decrease; increase

Production

is a transformation of resources or inputs into goods and services

The demand curve for a perfectly competitive firm

is perfectly horizontal.

The perfectly competitive firm will seek to produce the output level for which

marginal cost equals marginal revenue.

The change in output that results from changing a variable input by one unit, holding all other inputs fixed, is called the marginal ______ product of the variable input.

physical

Marginal revenue is

the change in total revenue brought about by selling an additional unit of the good.

If MR > MC, then

the firm can increase its profits or minimize its losses by increasing output.

Which of the following curves should one look at to obverse the law of diminishing marginal returns?

the marginal physical product curve

For a perfectly competitive firm,

the marginal revenue curve and the demand curve are the same.

Real-world markets that approximate the four assumptions of the theory of perfect competition include

the soft drink market.

Profit (Total Curve) =

total revenue - total cost


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