Chapter 6 Microeconomics
When the price of bottled water increased from $2.50 to $3.00, the quantity supplied by a firm increased from 100 to 110 bottles. The price elasticity of supply is
0.52
You are one of 5 identical firms (i.e., you all have the same costs) that sell widgets. Each day you have a fixed cost of $9 to operate. The marginal cost of your first widget is $1; second is $2; third $3; fourth $7; and for the fifth it is $8. You have a capacity constraint of 5, and you can only produce a whole number of widgets. The average variable cost (AVC) for a firm that produces 2 widgets is
1.50
The market-level quantity supplied given the market price of a widget is $2.50 is
10 widgets
George is an excellent plumber and Harriet is an excellent carpenter. George can do all of the plumbing and Harriet can do all of the carpentry to fix up eight houses per year. Each earns a wage of $40,000 per year. If George and Harriet work together and fix up eight old houses each year, their average cost is
10,000
The graph to the right shows the average total cost (ATC), average variable cost (AVC), marginal cost(MC), and marginal revenue (MR) curves for a firm in a perfectly competitive market. In order to maximize profits, this firm should produce approximately _________ units of output.
11
Fixing up old houses requires plumbing and carpentry. Jack (who is a jack of all trades but is a master of none) is a decent carpenter and a decent plumber, but is not particularly good at either. He can fix up two houses in a year if he does all of the carpentry and plumbing himself. His wage is $40,000 per year. Jack's average total cost of fixing up two old houses is ______
20,000
Minimum efficient scale is the lowest level of output where long-run average total cost is minimized. Firm 3's minimum efficient scale occurs when the output is ______ unit(s).
3
Calculate the price elasticity of supply in the following examples, then determine if supply is relatively elastic or inelastic, or perfectly elastic or inelastic. When the price of a pen increased from $2.00 to $2.25, the quantity supplied by a firm increased from 200 to 300 pens. The price elasticity of supply is
3.40
Suppose the market-level demand is fixed at 18. In other words, there is perfectly inelastic demand. In the short run, the equilibrium price will be
7
Do firms 1 and 2 experience economies of scale? Or do they experience diseconomies of scale?
Firm 1 is experiencing economies of scale, while firm 2 is experiencing diseconomies of scale.
Under which of the following examples is it likely that the accounting profit is positive and the economic profit is negative?
If you open an amusement park in the middle of New York City.
You are planning to build an apartment building. Your market research department estimates that your revenues will be $850,000. Your engineering department estimates the cost will be $550,000. You started construction and spent $150,000 to build the foundation when the recession begins. This causes the market research department to revise its revenue estimates downward to $399,950. Should you complete the apartment building?
No, the remaining cost to build is $400,000 and you only expect to earn $399,950; you will ignore the $150,000 spent since it is a sunk cost.
When comparing the accounting profit with economic profit, it must be true that the accounting profit is to___________economic profit.
greater than or equal
Assuming free entry and exit of other firms, based on the ATC curve, the price in the long run will be
$8
The graph on the right shows the cost curves for a random firm competing in a perfectly competitive market. Given the shape of the curves, we know that curve A represents __________, curve B represents__________, and curve C represents _________.
MC; ATC; AVC
Is it possible for accounting profit to be positive and economic profit to be negative?
Yes, this could occur if explicit costs were modest and implicit costs were high.
If firms are perfectly competitive, the equilibrium price in the long run will be
$5 and the equilibrium quantity will be 3 units.
Even though the price of an acre of land increased from $6,000 to $10,000, the quantity supplied did not change. The price elasticity of supply is
0
If the market price were $10 per bag, this firm would produce
3 bags
What is the difference between accounting profit and economic profit?
Economic profit subtracts both explicit and implicit costs from total revenue, while accounting profit only subtracts explicit costs.
Which of the following equations calculates the profits of a firm?
Total revenues−Total costs
A firm is experiencing economies of scale when its______declines as more output is produced.
average total cost
To the right is the average total cost curve for a competitive firm. What is the relationship between the average total cost curve (ATC) and the marginal cost curve (MC)? 1.) Using the 3-point curve drawing tool, draw the marginal cost curve for this firm in a competitive market. Label your curve 'MC'. Carefully follow the instructions above and only draw the required object. When the ATC curve is decreasing, we know that the MC curve is ___________, and when the ATC curve is increasing, we know that MC is ________________
below the ATC curve above the ATC curve.
According to your graph, when some sellers enter a competitive market, the equilibrium price ____ and the equilibrium quantity ______
decreases, increases
The graph on the right shows the long-run average total cost curve for a perfectly competitive firm. Refer to points A, B, and C on the graph and identify where the firm would experience economies of scale, constant returns to scale, and diseconomies of scale. At point A, the firm experiences At point B, the firm experiences At point C, the firm experiences
economies of scale constant returns to scale diseconomies of scale
Given this information, the senator's comment is___________, since these types of costs _________affect current and future decisions.
flawed, should not
In this case, the price elasticity of supply is
perfectly inelastic
Producer surplus is the difference between the___________ and the _______
price consumers pay, supply curve
In a perfectly competitive market, a seller cannot choose to raise the price of its good since all sellers in the market produce identical goods, so raising the price would result in losing all its customers. All firms in a perfectly competitive market are said to be __________.
price takers
In this case, the price elasticity of supply is
relatively elastic
In this case, the price elasticity of supply is
relatively inelastic
This problem tells us that one of the sources of economies of scale is
specialization
he International Space Station (ISS) is a habitable satellite that was launched by NASA and space agencies of other countries. In 2009, NASA was considering shutting down the ISS within the next 5 to 6 years. Among those who were opposed to this idea of de-orbiting the ISS was Senator Bill Nelson, who was quoted as saying "If we've spent a hundred billion dollars, I don't think we want to shut it down in 2015." The "hundred billion dollars" that Senator Nelson is referring to is known as
sunk cost
