Test 3

A firm sells a product in a perfectly competitive market. The marginal cost of the product at the current optimal level of 1000 units is $2.50. The minimum possible average variable cost is $2. The market price of the product is $2.50. To maximize profits the firm should: - Continue producing 1000 units - Decrease production to less than 1000 units - Increase production to more than 1000 units - Shut down

Continue producing 1000 units

Production Function

Maximum quantity of a good attainable from different combinations of factor inputs

For a pure monopoly to sell a quantity of 10 units. The price must be $8. Marginal revenue at this output level will be: - >$8 and <$16 - <$8 - =$8 - >$16

<$8

Marginal product

Additional output produced as a result of hiring one more worker

It is a "given" that an individual firm selling in a perfectly competitive market will take the market price because: - The firms demand curve is downward sloping - There are no good substitutes for the firm's product - Each producer supplies a negligible fraction of total market - Product differentiation is reinforced by extensive advertising

Each producer supplies a negligible fraction of total market

Economic profit is: - Always larger than accounting profit - The sum of accounting profit and implicit costs - Equal to the distance between total revenue and implicit costs - Equal to the distance between accounting profit and implicit costs

Equal to the distance between accounting profit and implicit costs

To the economist, the economic costs associated with the use of resources include: - Explicit and implicit costs - Neither explicit or implicit costs - Implicit, but not explicit costs - Explicit, but not implicit costs

Explicit and implicit costs

Normal Profit

Firm has 0 economic profit after paying all costs of production

Profit Maximization

Firms should produce additional unit only if it brings in greater revenue

Which of the following is most likely to be an explicit cost for Company X? - Forgone rent from the building owned and used by Company X - Rental payments on IBM equipment - Payments for raw materials purchased form Company X - Transportation costs payed to a nearby trucking firm

Forgone rent from the building owned and used by Company X

Explicit Cost

Payments made by individuals, firms, and government for use of resources owned by others

Clara produces and sells tomatoes in a perfectly competitive market. This implies that Clara's marginal revenue generated from selling an additional unit of tomatoes is always equal to: - Price -Average cost - Variable cost - Profit per unit

Price

At the profit maximizing level of output for a pure monopoly: - Price is greater than marginal cost - Price is equal to marginal cost - Price is less than marginal cost - Total revenue is greater than total cost

Price is greater than marginal cost

Pure monopolies are said to be allocatively inefficient because: - They produce where MR>MC - Price is less than marginal cost - Price is equal to marginal cost - Price is greater than marginal cost

Price is greater than marginal cost

Which idea is inconsistent with perfect competition? - Price-taking behavior - Product differentiation - Freedom of entry or exit for firms - A large number of buyers and sellers

Product differentiation

The short run supply curve for a perfectly competitive firm is the: - Entire MC curve - Segment of the MC curve lying below the MVC curve - Segment of the MC curve lying at and above the MVC curve - Segment of the AVC curve lying to the right of the MC curve

Segment of the MC curve lying at and above the MVC curve

T-Shirt Enterprises is operating in a perfectly competitive market. It is producing 3,000 t-shirts and selling them for $10 each. At this level of output, the average total cost is $10.50 and the average variable cost is $10.20. Based on these data, the firm should: - Shut down in the short run - Decrease production to 2500 t-shirts - Continue to produce 3000 t-shirts - Increase production to 3500 t-shirts

Shut down in the short run

The demand curve faced by a nonincriminating pure monopoly is: - Horizontal - The same as the industry's demand curve - More elastic than the demand curve faced by a perfectly competitive firm - Derived by vertically summing the buyers' individual demand curves

The same as the industry's demand curve

Implicit Costs

Opportunity cost of using owned resources

Short run

one fixed input

Average revenue

total revenue divided by the quantity sold

Price Quantity demanded $7 1 6 2 5 3 4 4 3 5 The marginal revenue generated by the pure monopoly for selling the third unit o output is: - $6 - $1 - $3 - $5

$3

A pure monopoly can sell 20 toys per day for $8 each. to sell 21 toys per day, the price must be cut to $7. The marginal revenue of the 21st toy is: - -$10 - -$13 - +$7 - +$21

-$13

A perfectly competitive firm trying to maximize profits in the short run will expand output: - Until marginal cost begins to rise - Until total revenue equals total cost - Unit marginal cost equals average variable cost - As long as marginal revenue is greater than marginal cost

As long as marginal revenue is greater than marginal cost

At any level of output: - Average variable cost will exceed average total cost in the short run - Marginal cost will exceed average variable cost by the amount of the average fixed cost - Average variable cost will exceed average fixed cost by the amount of the average total cost - Average total cost will exceed average variable cost by the amount of the average fixed cost

Average total cost will exceed average variable cost by the amount of the average fixed cost

In the short run average variable cost for a firm is decreasing, then it follows that: - Average variable cost must be greater than average fixed cost - Average variable cost must be greater than marginal cost - Average fixed cost must be constant - Marginal cost must be decreasing

Average variable cost must be greater than marginal cost

Assume that your the owner of a small bakery in your hometown, which of the following would be a variable cost of production in the short run? - Baking ovens - The interest on business loans - The annual lease payment for use to the building - Baking supplies (flour, salt, etc.)

Baking supplies (flour, salt, etc.)

Answer the question based off the following information: TFC= Total fixed cost MC= Marginal cost TVC= Total variable cost Q= Quantity of output P= Product price Select the marginal cost: - Change in TVC/Q - Change in TVC/ Change in Q - P-Q/ Change in Q - Change in TFC/ Change in Q

Change in TVC/ Change in Q

Marginal Revenue

Change in revenue resulting from a one-unit increase in output

Marginal product of labor refers to the the: - Last unit of output produced by labor at the end of each period - Change in total product resulting from employing one more unit of labor - Total product divided by the number of units of labor employed - Smallest amount of output produced by labor

Change in total product resulting from employing one more unit of labor

Variable costs are: - Sunk costs - Costs that change everyday - Costs that change with the amount of outputs a firm produces - The change in total cost associated with the production of an additional unit of output

Costs that change with the amount of outputs a firm produces

Average fixed cost: - Equals marginal cost when average total cost is at its minimum - May be found by adding average variable cost and average total cost - Graphs as a U-shaped curve - Declines continually as output increases

Declines continually as output increases

A firm sells a product in a purely competitive market. The marginal cost of the product at the current output level of 500 units is $1.50. The minimum possible average variable cost is $1. The market price of the product is $1.25. To maximize profits the firm should: - Continue producing 500 units - Decrease production to less than 500 units - Increase production to more than 500 units - Shut down

Decrease production to less than 500 units

The reason the marginal cost curve eventually increases as output increases for the typical firm is because of: - Diseconomies of scale - Diminishing marginal utility - Diminishing marginal returns - Increasing opportunity cost

Diminishing marginal returns

The main difference between the short run and the long run is that: - The short run always refers to a time period of less than 5 years - The long run always refers to a period of 1 year or longer - In the short run, some inputs are fixed and some are variable - In the long run, all inputs are fixed

In the short run, some inputs are fixed and some are variable

A firm sells a product in a purely competitive market. The marginal cost of the product at the current output level of 800 units is $3.50. The minimum possible average variable cost is $3. The market price of the product is $4. To maximize profits, the firm should: - Continue producing 800 units - Decrease production to less than 800 units - Increase production to more than 800 units - Shut down

Increase production to more than 800 units

Suppose that a pure monopoly calculates that at its present output level, marginal revenue is $1 and marginal cost is $2. The monopoly could maximize profits or minimize losses by: - Increasing price and increasing output - Increasing price and decreasing output - Decreasing price and leaving output unchanged - Leaving price unchanged and decreasing output

Increasing price and decreasing output

Fixed costs are those costs that are: - Unchanging through time - Zero if the firm produces no output in the short run - Independent of the amount of output a firm produces in the short run - Dependent of the amount of output a firm produces in the short run

Independent of the amount of output a firm produces in the short run

A perfectly competitive firm's output is currently such that its marginal revenue is $5 and marginal cost is $4. Assuming profit maximization, the firm should: - Cut prices and increase output - raise price and decrease output - Leave price unchanged and increase output - Leave price unchanged and decrease output

Leave price unchanged and increase output

The short run supply curve of a perfectly competitive firm is based primarily on its: - AVC curve - ATC curve - AFC curve - MC curve

MC curve

Many people believe that monopolies charge any price they want to without affecting sales. Instead, the output level for a profit-maximizing pure monopoly occurs where: - Marginal cost equals average revenue - Marginal revenue equals average cost - Average total cost equals average revenue - Marginal revenue equals marginal cost

Marginal revenue equals marginal cost

One of the defining characteristics of a pure monopoly is that: - Monopoly is a price taker - Monopoly uses advertising - Monopoly uses a product with no close substitutes - Entry into the industry is relatively easy, but exit is difficult

Monopoly uses a product with no close substitutes

Long run

Multiple inputs, improved technology, increase/decrease size of firm

A pure monopoly may generate economic profits because: - Of advertising - marginal revenue is constant as sales increase - Of barriers to entry - Of rising average fixed cost

Of barriers to entry

Which of the following would be an implicit cost for a firm? -The cost of worker wages and salaries for the firm - The cost of leasing a building for the firm - The cost paid for production supplies for the firm - The cost of wages forgone by the owner of the firm

The cost of wages forgone by the owner of the firm

One argument for having the government regulate natural monopolies is that without regulation: - These monopolies usually produce things that are potentially harmful to our health - These monopolies produce at a level where price is greater than marginal cost - These monopolies produce at a level where price is less than marginal cost - The industry would become perfectly competitive and there would be too many firms in the market to achieve efficiency

These monopolies produce at a level where price is greater than marginal cost

Total product

Total amount of output produced with a given amount of resources

Marginal cost can be defined as the change in: - Total fixed cost resulting from the production of an additional unit of output - Total cost resulting from the production of an additional unit of output - Average total cost resulting from the production of an additional unit of output - Average variable cost resulting from the production of an additional unit of output

Total cost resulting from the production of an additional unit of output

Average product

Total output produced by a firm divided by the quantity of workers

A pure monopoly will generate an economic profit whenever: - Total revenue is less than total cost - Total revenue is equal to total cost - Total revenue is greater than total cost - Price is greater than average variable cost

Total revenue is greater than total cost

If a firm operating in a perfectly competitive industry is confronted with an equilibrium market price of $5, its marginal revenue: - May be greater or less than $5 - Will also be $5 - Will be less than $5 - Will be greater than $5

Will also be $5

Productive Efficency

a good or service is produced at the lowest possible cost

allocative efficiency

producing a good or service consumers value most

'According to law the low of diminishing marginal returns: - Total product will fall and then rise as additional units of an input are employed - Employing additional inputs will diminish total product - the additional product generated by additional units of an input will eventually diminish - The additional inputs necessary to and additional unit of output will diminish

the additional product generated by additional units of an input will eventually diminish