Econ exam #3

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Tom quit his $65,000 a year corporate lawyer job to open up his own law practice. In Tom's first year in business his total revenue equaled $150,000. Tom's explicit cost during the year totaled $85,000. What is Tom's economic profit for his first year in business? a. $0 b. $20,000 c. $65,000 d. $85,000

a. $0

Larry's Lunchcart is a small street vendor business. If Larry makes 15 pretzels in his first hour of business and incurs a total cost of $16.50, his average total cost per pretzel is a. $1.10. b. $6.50. c. $15.00. d. $16.50.

a. $1.10

If Darren sells 300 glasses of iced tea at $0.50 each, his total revenues are a. $150. b. $299.50. c. $300. d. $600.

a. $150

Trevor's Tire Company produced and sold 500 tires. The average cost of production per tire was $50. Each tire sold for a price of $65. Trevor's Tire Company's total profits are a. $7,500. b. $25,000. c. $32,500. d. $67,500.

a. $7,500

We can measure the profits earned by a firm in a competitive industry as a. (P - ATC) ´ Q. b. (P - MC) ´ Q. c. MR ´ MC. d. (MC - ATC) ´ Q.

a. (P-ATC) ' Q

Suppose that a firm operating in perfectly competitive market sells 300 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 $100. (iii)Total revenue equals $300. a. (i) only b. (iii) only c. (i) and (ii) only d. (i), (ii), and (iii)

a. (i) only

Billy's Bean Bag Emporium produced 300 bean bag chairs but sold only 275 of the units it produced. The average cost of production for each unit of output produced was $100. The price for each of the 275 units sold was $95. Total profit for Billy's Bean Bag Emporium would be a. -$3,875. b. $26,125. c. $28,500. d. $30,000.

a. -$3,875

If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then a. a one-unit increase in output will increase the firm's profit. b. a one-unit decrease in output will increase the firm's profit. c. total revenue exceeds total cost. d. total cost exceeds total revenue.

a. a one-unit increase in output will increase the firms profit

A firm produces 400 units of output at a total cost of $1,200. If total variable costs are $1,000, a. average fixed cost is 50 cents. b. average variable cost is $2. c. average total cost is $2.50. d. average total cost is 50 cents.

a. average fixed cost is 50 cents

The fundamental source of monopoly power is a. barriers to entry. b. profit. c. decreasing average total cost. d. a product without close substitutes.

a. barriers to entry

Perfect price discrimination a. eliminates deadweight loss. b. reduces profits to the monopolist. c. decreases the total quantity sold by the monopolist. d. requires arbitrage in order for the monopolist to maximize profits.

a. eliminates deadweight loss

For a firm in a perfectly competitive market, the price of the good is always a. equal to marginal revenue. b. equal to total revenue. c. greater than average revenue. d. equal to the firm's efficient scale of output.

a. equal to marginal revenue

In a competitive market, the actions of any single buyer or seller will a. have a negligible impact on the market price. b. have little effect on market equilibrium quantity but will affect market equilibrium price. c. affect marginal revenue and average revenue but not price. d. adversely affect the profitability of more than one firm in the market.

a. have a negligible impact on the market price

In the short run, a firm that produces and sells cell phones can adjust a. how many workers to hire. b. the size of its factories. c. where to produce along its long-run average-total-cost curve. d. All of the above are correct

a. how many workers to hire

Which of the following statements best reflects a price-taking firm? a. If the firm were to charge more than the going price, it would sell none of its goods. b. The firm has an incentive to charge less than the market price to earn higher revenue. c. The firm can sell only a limited amount of output at the market price before the market price will fall. d. Price-taking firms maximize profits by charging a price above marginal cost.

a. if the firm were to charge more than the going price, it would sell none of its goods

The length of the short run a. is different for different types of firms. b. can never exceed 3 years. c. can never exceed 1 year. d. is always less than 6 months.

a. is different for the different types of firms

Suppose a firm has a monopoly on the sale of a computer game and faces a downward-sloping demand curve. When selling the 50th game, the firm will always receive a. less marginal revenue on the 50th game than it received on the 49th game. b. more average revenue on the 50th game than it received on the 49th game. c. more total revenue on the 50 game than it received on the first 49 game. d. Both b) and c) are correct.

a. less marginal revenue on the 50th game than it received on the 49th game

Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura specializes in making wedding cakes. Laura sells 20 wedding cakes per month. Her monthly total revenue is $5,000. The marginal cost of making a wedding cake is $200. In order to maximize profits, Laura should a. make more than 20 wedding cakes per month. b. make fewer than 20 wedding cakes per month. c. continue to make 20 wedding cakes per month. d. We do not have enough information with which to answer the question.

a. make more than 20 wedding cakes per month

One difference between a perfectly competitive firm and a monopoly is that a perfectly competitive firm produces where a. marginal cost equals price, while a monopolist produces where price exceeds marginal cost. b. marginal cost equals price, while a monopolist produces where marginal cost exceeds price. c. price exceeds marginal cost, while a monopolist produces where marginal cost equals price. d. marginal cost exceeds price, while a monopolist produces where marginal cost equals price.

a. marginal cost equals price, while a monopolist produces where price exceeds marginal cost

If firms are competitive and profit maximizing, the price of a good equals the a. marginal cost of production. b. fixed cost of production. c. total cost of production. d. average total cost of production.

a. marginal cost of production

For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $10 and a marginal cost of $7. It follows that the a. production of the 100th unit of output increases the firm's profit by $3. b. production of the 100th unit of output increases the firm's average total cost by $7. c. firm's profit-maximizing level of output is less than 100 units. d. production of the 99th unit of output must increase the firm's profit by less than $3.

a. production of the 100th unit of output increases the firm's profit by $3

The laws governing patents and copyrights a. promote monopolies. b. are intended to serve private interests, not the public's interest. c. have costs but not benefits. d. eliminate the need for firms to engage in research and development.

a. promote monopolies

Entry into a market by new firms will increase the a. supply of the good. b. profits of existing firms. c. price of the good. d. marginal cost of producing the good.

a. supply of the good

analyzing the behavior of the firm enhances our understanding of a. what decisions lie behind the market supply curve. b. how consumers allocate their income to purchase scarce resources. c. how financial institutions set interest rates. d. whether resources are allocated fairly.

a. what decisions lie behind the market supply curve

Katherine gives piano lessons for $20 per hour. She also grows flowers, which she arranges and sells at the local farmer's market. One day she spends 5 hours planting $50 worth of seeds in her garden. Once the seeds have grown into flowers, she can sell them for $150 at the farmer's market. Katherine's accounting profits are a. $100, and her economic profits are $100. b. $100, and her economic profits are $0. c. $0, and her economic profits are $100. d. $0, and her economic profits are $-100.

b. $100, and her economic profits are $0

Trevor's Tire Company produced and sold 500 tires. The average cost of production per tire was $50. Each tire sold for a price of $65. Trevor's Tire Company's total costs are a. $7,500. b. $25,000. c. $32,500. d. $67,500.

b. $25,000

Let L represent the number of workers hired by a firm, and let Q represent that firm's quantity of output. Assume two points on the firm's production function are (L=6,Q=147) and (L=7,Q=174). The marginal product of the seventh worker is a. 25 units of output. b. 27 units of output. c. 37 units of output. d. 174 units of output.

b. 27 units of output

Which of the following is an example of a barrier to entry? a. Dawn charges a higher price than her competitors for her landscape-architecture services. b. Rhianna obtains a copyright for a short story that she wrote and published. c. Debbie offers free samples of her chocolate chip cookies to attract new customers. d. Bev charges a lower price than her competitors for her desktop-publishing services.

b. Rhianna obtains a copyright for a short story that she wrote and published

If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then a. a one-unit increase in output will increase the firm's profit. b. a one-unit decrease in output will increase the firm's profit. c. total revenue exceeds total cost. d. total cost exceeds total revenue.

b. a one-unit decrease in output will increase the firm's profit

A firm produces 300 units of output at a total cost of $1,000. If fixed costs are $100, a. average fixed cost is $10. b. average variable cost is $3. c. average total cost is $4. d. average total cost is $5.

b. average variable cost is $3

The Doris Dairy Farm sells milk to a dairy broker in Prairie du Chien, Wisconsin. Because the market for milk is generally considered to be competitive, the Doris Dairy Farm does not a. choose the quantity of milk to produce. b. choose the price at which it sells its milk. c. have any fixed costs of production. d. set marginal revenue equal to marginal cost to maximize profit.

b. choose the price at which it sells its milk

In the long run Firm A incurs total costs of $1,200 when output is 30 units and $1,600 when output is 40 units. Firm A exhibits a. diseconomies of scale because total cost is rising as output rises. b. constant returns to scale because average total cost is constant as output rises. c. diseconomies of scale because average total cost is rising as output rises. d. economies of scale because average total cost is falling as output rises.

b. constant returns to scale because average total cost is constant as output rises

In the long run Firm A incurs total costs of $900 when output is 30 units and $1,200 when output is 40 units. Firm A exhibits a. diseconomies of scale because total cost is rising as output rises. b. constant returns to scale because average total cost is constant as output rises. c. diseconomies of scale because average total cost is rising as output rises. d. economies of scale because average total cost is falling as output rises.

b. constant returns to scale because average total cost is constant as output rises

When the marginal product of an input declines as the quantity of that input increases, the production function exhibits a. increasing marginal product. b. diminishing marginal product. c. diminishing total product. d. Both b and c are correct.

b. diminishing marginal product

The market demand curve for a monopolist is typically a. unit price elastic. b. downward sloping. c. horizontal. d. vertical.

b. downward sloping

The defining characteristic of a natural monopoly is a. constant marginal cost over the relevant range of output b. economies of scale over the relevant range of output. c. constant returns to scale over the relevant range of output. d. diseconomies of scale over the relevant range of output.

b. economies of scale over the relevant range of output

The entry of new firms into a competitive market will a. increase market supply and increase market price. b. increase market supply and decrease market price. c. decrease market supply and increase market price. d. decrease market supply and decrease market price.

b. increase market supply and decrease market price

In order to sell more of its product, a monopolist must a. lobby the government for a subsidy. b. lower its price. c. advertise. d. enact barriers to entry in related markets.

b. lower its price

The amount by which total cost rises when the firm produces one additional unit of output is called a. average cost. b. marginal cost. c. fixed cost. d. variable cost.

b. marginal cost

economists normally assume that the goal of a firm is to a. maximize its total revenue. b. maximize its profit. c. minimize its explicit costs. d. minimize its total cost.

b. maximize its profit

Firms that operate in perfectly competitive markets try to a. maximize revenues. b. maximize profits. c. equate marginal revenue with average total cost. d. All of the above are correct.

b. maximize profits

Free entry means that a. the government pays any entry costs for individual firms. b. no legal barriers prevent a firm from entering an industry. c. a firm's marginal cost is zero. d. a firm has no fixed costs in the short run.

b. no legal barriers prevent a firm from entering an industry

A firm cannot price discriminate if it a. has perfect information about consumer demand. b. operates in a competitive market. c. faces a downward-sloping demand curve. d. is regulated by the government.

b. operates in a competitive market

Economic profit is equal to total revenue minus the a. explicit cost of producing goods and services. b. opportunity cost of producing goods and services. c. accounting cost of producing goods and services. d. implicit cost of producing goods and services.

b. opportunity cost of producing goods and services

the things that must be forgone to acquire a good are called a. implicit costs. b. opportunity costs. c. explicit costs. d. accounting costs.

b. opportunity costs

The deadweight loss associated with a monopoly occurs because the monopolist a. maximizes profits. b. produces an output level less than the socially optimal level. c. produces an output level greater than the socially optimal level. d. equates marginal revenue with marginal cost.

b. produces an output level less than the socially optimal level

A perfectly competitive market a. may not be in the best interests of society, whereas a monopoly market promotes general economic well-being b. promotes general economic well-being, whereas a monopoly market may not be in the best interests of society. c. and a monopoly market are equally likely to promote general economic well-being. d. is less likely to promote general economic well-being than a monopoly market.

b. promotes general economic well-being, whereas a monopoly market may not be in the best interests of society.

Suppose a firm in a competitive market reduces its output by 20 percent. As a result, the price of its output is likely to a. increase. b. remain unchanged. c. decrease by less than 20 percent. d. decrease by more than 20 percent.

b. remain unchanged

Price discrimination is the business practice of a. bundling related products to increase total sales. b. selling the same good at different prices to different customers. c. pricing above marginal cost. d. hiring marketing experts to increase consumers' brand loyalty.

b. selling the same good at a different prices to different consumers

When a firm experiences continually declining average total costs, a. the firm is a price taker. b. society is better served by having one firm supply the product. c. the firm will earn higher profits than if average total costs are increasing. d. All of the above are correct.

b. society is better served by having one firm supply the product

In a long-run equilibrium, the marginal firm has a. price equal to minimum marginal cost. b. total revenue equal to total cost. c. accounting profit equal to zero. d. All of the above are correct.

b. total revenue equal to total cost

The Big Box corporation produced and sold 500 units of output. The average cost of production per unit was $50. Each unit sold for a price of $65. The Big Box corporation's total revenues are a. $7,500. b. $25,000. c. $32,500. d. $67,500.

c. $32,500

Jacqui decides to open her own business and earns $50,000 in accounting profit the first year. When deciding to open her own business, she turned down three separate job offers with annual salaries of $30,000, $40,000, and $45,000. What is Jacqui's economic profit from running her own business? a. $-55,000 b. $-5,000 c. $5,000 d. $20,000

c. $5,000

Marginal cost tells us the a. value of all resources used in a production process. b. marginal increment to profitability when price is constant. c. amount by which total cost rises when output is increased by one unit. d. amount by which output rises when labor is increased by one unit.

c. amount by which total cost rises when output is increased by one unit

In the long-run equilibrium of a market with free entry and exit, marginal firms are operating a. at the point where average variable cost equals marginal cost. b. at the minimum point on their marginal cost curves. c. at their efficient scale. d. where accounting profit is zero.

c. at their efficient scale

When a firm has a natural monopoly, the firm's a. marginal cost always exceeds its average total cost. b. total cost curve is horizontal. c. average total cost curve is downward sloping. d. marginal cost curve must lie above the firm's average total cost curve.

c. average total cost curve is downward sloping

In the long run, a firm will exit a competitive industry if a. total revenue exceeds total cost. b. the price exceeds average total cost. c. average total cost exceeds the price. d. Both a and b are correct.

c. average total cost exceeds the price

Who is a price taker in a competitive market? a. buyers only b. sellers only c. both buyers and sellers d. neither buyers nor sellers

c. both buyers and sellers

Monopolies use their market power to a. charge prices that equal minimum average total cost. b. increase the quantity sold as they increase price. c. charge a price that is higher than marginal cost. d. dump excess supplies of their product on the market.

c. charge a price that is higher than the marginal cost

For a monopoly market, total surplus can be defined as the value of the good to a. producers minus the cost incurred by consumers. b. producers plus the cost incurred by consumers. c. consumers minus the costs of producing the good. d. consumers plus the cost of producing the good.

c. consumers menu the costs of producing the good

The exit of existing firms from a competitive market will a. increase market supply and increase market price. b. increase market supply and decrease market price. c. decrease market supply and increase market price. d. decrease market supply and decrease market price.

c. decrease market supply and increase market price

A benefit to society of the patent and copyright laws is that those laws a. help to keep prices down. b. help to prevent a single firm from acquiring ownership of a key resource. c. encourage creative activity. d. discourage the production of inefficient products.

c. encourage creative activity

Drug companies are allowed to be monopolists in the drugs they discover in order to a. allow drug companies to charge a price that is equal to their marginal cost. b. discourage new firms from entering the drug market. c. encourage research. d. allow the government to earn patent revenue.

c. encourage research

Suppose that in a competitive market the equilibrium price is $2.50. What is marginal revenue for the last unit sold by the typical firm in this market? a. less than $2.50 b. more than $2.50 c. exactly $2.50 d. The marginal revenue cannot be determined without knowing the actual quantity sold by the typical firm.

c. exactly $2.50

For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $10 and a marginal cost of $11. It follows that the a. production of the 100th unit of output increases the firm's profit by $1. b. production of the 100th unit of output increases the firm's average total cost by $1. c. firm's profit-maximizing level of output is less than 100 units. d. production of the 110th unit of output must increase the firm's profit but by less than $1.

c. firm's profit-maximizing level out output is less than 100 units

For any competitive market, the supply curve is closely related to the a. preferences of consumers who purchase products in that market. b. income tax rates of consumers in that market. c. firms' costs of production in that market. d. interest rates on government bonds.

c. firms' costs of production in that market

economists in the field of industrial organization study how a. central banking policies affect financial markets. b. firms' demand for labor and individuals' supply of labor affect resource markets. c. firms' decisions about prices and quantities depend on market conditions. d. externalities and public goods affect the environment.

c. firms' decisions about prices and quantities depend on market conditions

In a natural monopoly, a. society would be better off if antitrust laws were used to create many different firms in the market. b. the marginal cost curve is positively sloped. c. if the government requires marginal cost pricing, it will likely have to subsidize the firm. d. the marginal revenue curve is horizontal.

c. if the government requires marginal cost pricing, it will likely have to subsidize the firm

A difference between explicit and implicit costs is that a. explicit costs must be greater than implicit costs. b. explicit costs do not require a direct monetary outlay by the firm, whereas implicit costs do. c. implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do. d. implicit costs must be greater than explicit costs.

c. implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do.

A firm has market power if it can a. maximize profits. b. minimize costs. c. influence the market price of the good it sells. d. hire as many workers as it needs at the prevailing wage rate.

c. influence that market price of the good it sells

An example of an explicit cost of production would be the a. cost of forgone labor earnings for an entrepreneur. b. lost opportunity to invest in capital markets when the money is invested in one's business. c. lease payments for the land on which a firm's factory stands. d. Both a and c are correct.

c. lease payments for the land on which a firm's factory stands

At the profit-maximizing level of output, a. marginal revenue equals average total cost. b. marginal revenue equals average variable cost. c. marginal revenue equals marginal cost. d. average revenue equals average total cost

c. marginal revenue equals marginal cost

For a firm in a competitive market, an increase in the quantity produced by the firm will result in a. a decrease in the product's market price. b. an increase in the product's market price. c. no change in the product's market price. d. either an increase or no change in the product's market price depending on the number of firms in the market.

c. no change in the product's market price

A benefit of a monopoly is a. efficient production. b. decreasing long-run marginal costs. c. profit that can be invested in research and development. d. All of the above are correct.

c. profit that can be invested in research and development

One problem with government operation of monopolies is that a. a benevolent government is likely to be interested in generating profits for political gain. b. monopolies typically have rising average costs. c. the government typically has little incentive to reduce costs. d. a government-regulated outcome will increase the profitability of the monopoly.

c. the government typically has little incentive to reduce costs

an example of an opportunity cost that is also an implicit cost is a. a lease payment. b. the cost of raw materials. c. the value of the business owner's time. d. All of the above are correct.

c. the value of the business owners time

Additional firms often do not try to compete with a natural monopoly because a. they fear retaliation in the form of pricing wars from the natural monopolist. b. they are unsure of the size of the market in general. c. they know they cannot achieve the same low costs that the natural monopolist enjoys. d. the natural monopoly does not make a large profit.

c. they know they cannot achieve the same low costs that the natural monopolists enjoys

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 marginal cost of the third worker hired is $40, and the average total cost when three workers are hired is $50. What is the total cost of production when three workers are hired? a. $50 b. $90 c. $120 d. $150

d. $150

Suppose that a firm operating in perfectly competitive market sells 100 units of output. Its total revenues from the sale are $500. Which of the following statements is correct? (i)Marginal revenue equals $5. (ii)Average revenue equals $5. (iii)Price equals $5. a. (i) only b. (iii) only c. (i) and (ii) only d. (i), (ii), and (iii)

d. (i), (ii), and (iii)

Because monopoly firms do not have to compete with other firms, the outcome in a market with a monopoly is often a. not in the best interest of society. b. one that fails to maximize total economic well-being. c. inefficient. d. All of the above are correct.

d. All of the above are correct

A firm that is the sole seller of a product without close substitutes is a. perfectly competitive. b. monopolistically competitive. c. an oligopolist. d. a monopolist.

d. a monopolist

Antitrust laws allow the government to a. prevent mergers. b. break up companies. c. promote competition. d. All of the above are correct.