EC Test 3

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Sunk costs are irrelevant for decisions in the short run. T/F

True

Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that the average total cost when 5 units of output are produced is $30, and the marginal cost of the sixth unit of output is $60. What is the average total cost when six units are produced?

$35

Explicit costs are input costs that require an outlay of money by the firm. T/F

True

Suppose that a firm operating in perfectly competitive market sells 200 units of output at a price of $3 each. Which of the following statements is correct? (i) Marginal revenue equals $3. (ii) Average revenue equals $600. (iii) Average revenue exceeds marginal revenue, but we don't know by how much.

(i) only

The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average

. total cost.

Grace is a self-employed artist. She can make 20 pieces of pottery per week. She is considering hiring her sister Kate to work for her. Both she and Kate can make 35 pieces of pottery per week. What is Kate's marginal product?

15 pieces of pottery

For a perfectly competitive firm, the relationship between price (P), marginal revenue (MR), and average revenue (AR) is as follows:

P = AR = MR

The textile industry is composed of a large number of small firms. In recent years, many textile firms have suffered economic losses. Economic theory suggests that these conditions will

cause the market supply to decline and the price of textiles to rise.

A competitive firm will charge a price:

determined on the market, by the market demand and market supply

Which of the following is most likely to occur if a firm experiences coordination problems?

diseconomies of scale

Which of the following represents the firm's long-run condition for exiting a market?

exit if P < ATC

A competitive market is in long-run equilibrium. If demand decreases, we can be certain that price will

fall in the short run. All, some, or no firms will shut down, and some of them will exit the industry. Price will then rise to reach the new long-run equilibrium.

A long-run supply curve is flatter than a short-run supply curve because

firms can enter and exit a market more easily in the long run than in the short run.

Suppose that wheat is produced in a perfectly competitive market. If market demand increases, the individual wheat farmer's marginal revenue will

increase, and her profit-maximizing level of output will increase.

Which of the following is most likely to be a fixed cost in the short run?

interest payments on funds borrowed by a farmer to finance farm machinery

Suppose that a "doggie day care" firm uses only two inputs: hourly workers (labor) and a building (capital). In the short run, the firm most likely considers

labor to be variable and capital to be fixed.

The Chocolate Moose Ice Cream Store is a business that closes from November to April each year. The best explanation for closing during these months is that the store's

marginal costs are less than the revenues.

Chris owns 'Christina's bakery' that currently has 2 workers. The first worker can produce 100 delicious baked goods in one day, and the second worker increased the total production by 80 delicious baked goods in one day. Chris is hiring a 3rd worker. With three workers, what is the likely total production in one day?

more than 180 but less than 260 delicious baked goods

Art's Garage operates in a perfectly competitive market. Suppose that at the point where marginal cost equals marginal revenue, ATC = $20, and AVC = $15. If the price per unit is $10, in the short run Art will

shut down immediately.

Mrs. Smith operates a business in a competitive market. The current market price is $7.50. At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should

shut down in both the short run and long run.

When fixed costs are ignored because they are irrelevant to a business's production decision, they are called

sunk costs.

When price exceeds average variable cost in the short run, a competitive firm's marginal cost curve is regarded as its supply curve because

the marginal cost curve determines the quantity of output the firm is willing to supply at any price.

Suppose that a market is in long-run equilibrium. Then demand increases. Suppose that the entry of new firms into the industry causes the price of a scarce resource used by firms in the industry to increase. The long-run supply curve for this industry would likely be

upward sloping

If the marginal cost curve is U-shaped and intersects the U-shaped average total cost curve at the minimum point on the average total cost curve, which of the following statements is correct?

when the marginal cost curve is below the average cost curve, the average total cost is decreasing as more output is produced.


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