Econ Test 3 Elder

Which of the above marginal cost curves reflects diminishing marginal product?

/ upward slant

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. $85,000 d. $65,000

a. $0

Economists normally assume that the goal of a firm is to (i) sell as much of its product as possible. (ii) set the price of the product as high as possible. (iii) maximize profit. a. (iii) only b. (i), (ii), and (iii) c. (ii) and (iii) only d. (i) and (ii) only

a. (iii) only

For a firm operating in a competitive industry, which of the following statements is not correct? a. Total revenue is constant. b. Marginal revenue is constant. c. Price equals average revenue. d. Price equals marginal revenue.

a. Total revenue is constant.

In the long-run equilibrium of a competitive market, the number of firms in the market adjusts until the market demand is satisfied at a price equal to the minimum of a. average total cost of the marginal firm. b. average variable cost of the marginal firm. c. marginal cost of the marginal firm. d. average fixed cost for the marginal firm.

a. average total cost of the marginal firm.

In a perfectly competitive market, the process of entry and exit will end when a. economic profits are zero. b. accounting profits are zero. c. marginal revenue equals marginal cost. d. price equals minimum marginal cost.

a. economic profits are zero.

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 a. labor to be variable and capital to be fixed. b. capital to be variable and labor to be fixed. c. both labor and capital to be fixed. d. both labor and capital to be variable.

a. labor to be variable and capital to be fixed.

For a firm, the relationship between the quantity of inputs and quantity of output is called the a. production function. b. profit function. c. total-cost function. d. quantity function.

a. production function

A seller in a competitive market can a. sell all he wants at the going price, so he has little reason to charge less. b. influence the market price by adjusting his output. c. influence the profits earned by competing firms by adjusting his output. d. All of the above are correct.

a. sell all he wants at the going price, so he has little reason to charge less

The short-run supply curve for a firm in a perfectly competitive market is a. the portion of its marginal cost curve that lies above its average variable cost. b. likely to slope downward. c. determined by forces external to the firm. d. horizontal.

a. the portion of its marginal cost curve that lies above its average variable cost.

Changes in the output of a perfectly competitive firm, without any change in the price of the product, will change the firm's a. total revenue. b. marginal revenue. c. average revenue. d. All of the above are correct.

a. total revenue

A sunk cost is one that a. was paid in the past and will not change regardless of the present decision. b. changes as the level of output changes in the short run. c. should determine the rational course of action in the future. d. has the most impact on profit-making decisions.

a. was paid in the past and will not change regardless of the present decision.

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. $120 b. $150 c. $50 d. $90

b. $150

Pete owns a shoe-shine business. His accountant most likely includes which of the following costs on his financial statements? (i) shoe polish (ii) rent on the shoe stand (iii) wages Pete could earn delivering newspapers (iv) interest that Pete's money was earning before he spent his savings to set up the shoe-shine business a. (i), (ii), (iii), and (iv) b. (i) and (ii) only c. (iii) and (iv) only d. (i) only

b. (i) and (ii) only

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.

The value of a business owner's time is an example of a. a fixed cost. b. an opportunity cost. c. total revenue. d. an explicit cost.

b. an opportunity cost.

If marginal cost is equal to average total cost, then a. average variable cost is minimized. b. average total cost is minimized. c. marginal cost is zero. d. marginal cost is minimized.

b. average total cost is minimized

A firm that has little ability to influence market prices operates in a a. power market. b. competitive market. c. thin market. d. strategic market.

b. competitive market

If a production function shows declining marginal product of an input as the quantity of the input increases, then the production function exhibits a. increasing marginal product. b. decreasing marginal product. c. increasing returns to scale. d. diminishing profitability.

b. decreasing marginal product.

A production function describes a. the minimal cost of producing a given level of output. b. how a firm turns inputs into output. c. the relationship between cost and output. d. how a firm maximizes profits.

b. how a firm turns inputs into output

Consider a competitive market with a large number of identical firms. The firms in this market do not use any resources that are available only in limited quantities. In this market, an increase in demand will a. increase price both in the short and the long run. b. increase price in the short run but not in the long run. c. increase price in the long run but not in the short run. d. not affect price in either the short or the long run.

b. increase price in the short run but not in the long run.

In order to maximize profits in the short run, a firm should produce where a. average total cost is minimized. b. marginal cost equals marginal revenue. c. marginal revenue exceeds marginal cost by the greatest amount. d. marginal cost is minimized.

b. marginal cost equals marginal revenue

When a firm's only variable input is labor, then the slope of the production function measures the a. quantity of output. b. marginal product of labor. c. total cost. d. quantity of labor.

b. marginal product of labor.

When profit-maximizing firms in competitive markets are earning profits, a. market supply must exceed market demand at the market equilibrium price. b. new firms will enter the market. c. the most inefficient firms will be encouraged to leave the market. d. market demand must exceed market supply at the market equilibrium price.

b. new firms will enter the market.

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

b. opportunity cost of producing goods and services.

When a perfectly competitive firm decides to shut down, it is most likely that a. fixed costs exceed variable costs. b. price is below the firm's average variable cost. c. marginal cost is above average variable cost. d. marginal cost is above average total cost.

b. price is below the firm's average variable cost

The assumption of a fixed number of firms is appropriate for analysis of a. neither the short run nor the long run. b. the short run but not the long run. c. both the short run and the long run. d. the long run but not the short run.

b. the short run but not the long run

The Three Amigo's company produced and sold 500 dog beds. The average cost of production per dog bed was $50. Each dog be sold for a price of $65. The Three Amigo's total costs are a. $7,500. b. $32,500. c. $25,000. d. $67,500.

c. $25,000.

A firm has a fixed cost of $500 in its first year of operation. When the firm produces 100 units of output, its total costs are $3,500. When it produces 101 units of output, its total costs are $3,750. What is the marginal cost of producing the 101st unit of output? a. $275 b. $340.91 c. $250 d. $350

c. $250

Scenario 14-4 The information below applies to a competitive firm that sells its output for $40 per unit. • When the firm produces and sells 150 units of output, its average total cost is $24.50. • When the firm produces and sells 151 units of output, its average total cost is $24.55. Refer to Scenario 14-4. When the firm increases its output from 150 units to 151 units, its marginal cost is a. $33.00. b. $34.25. c. $32.05. d. $29.95.

c. $32.05

Walter builds birdhouses. He spends $5 on the materials for each birdhouse. He can build one in 30 minutes. He is semi-retired but earns $8 per hour at the local hardware store. He can sell a birdhouse for $20 each. The implicit cost for one birdhouse is a. $5. b. $9. c. $4. d. $8.

c. $4

Fixed costs can be defined as costs that a. vary in proportion with production. b. are incurred only when production is large enough. c. are incurred even if nothing is produced. d. vary inversely with production.

c. are incurred even if nothing is produced.

If Franco's Pizza Parlor knows that the marginal cost of the 500th pizza is $3.50 and that the average total cost of making 499 pizzas is $3.30, then a. average total costs are falling at Q = 500. b. average variable costs must be falling. c. average total costs are rising at Q = 500. d. total costs are falling at Q = 500.

c. average total costs are rising at Q=500

If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then a. average revenue exceeds marginal cost. b. the firm is earning a positive profit. c. decreasing output would increase the firm's profit. d. All of the above are correct.

c. decreasing output would increase the firm's profit.

The difference between accounting profit and economic profit is a. explicit costs. b. marginal product. c. implicit costs. d. total revenue.

c. implicit costs.

If a competitive firm is selling 500 units of its product at a price of $8 per unit and earning a positive profit, then a. its average revenue is greater than $8. b. its marginal revenue is less than $8. c. its total cost is less than $4,000. d. All of the above are correct.

c. its total cost is less than $4,000.

When a profit-maximizing competitive firm finds itself minimizing losses because it is unable to earn a positive profit, this task is accomplished by producing the quantity at which price is equal to a. average fixed cost. b. sunk cost. c. marginal cost. d. average variable cost.

c. marginal cost

Which of the following is the best example of a variable cost? a. annual property tax payments for a building b. monthly rent payments for a warehouse c. monthly wage payments for hired labor d. annual insurance payments for a warehouse

c. monthly wage payments for hired labor

When existing firms in a competitive market are profitable, an incentive exists for a. existing firms to raise prices. b. new firms to seek government subsidies that would allow them to enter the market. c. new firms to enter the market, even without government subsidies. d. existing firms to increase production.

c. new firms to enter the market, even without government subsidies.

If there is an increase in market demand in a perfectly competitive market, then in the short run a. the demand curves for firms will shift downward. b. the demand curves for firms will become more elastic. c. profits will rise. d. there will be no change in the demand curves faced by individual firms in the market.

c. profits will rise

The short-run supply curve for a firm in a perfectly competitive market is a. determined by forces external to the firm. b. likely to slope downward. c. the portion of its marginal cost curve that lies above its average variable cost. d. horizontal.

c. the portion of its marginal cost curve that lies above its average variable cost.

Scenario 13-1 Korie wants to start her own business making custom furniture. She can purchase a factory that costs $400,000. Korie currently has $500,000 in the bank earning 3 percent interest per year. Refer to Scenario 13-1. Suppose Korie purchases the factory using $200,000 of her own money and $200,000 borrowed from a bank at an interest rate of 6 percent. What is Korie's annual opportunity cost of purchasing the factory? a. $15,000 b. $3,000 c. $6,000 d. $18,000

d. $18,000

Tsintah weaves traditional Navaho rugs. She weaves and sells 50 rugs. Her average cost of production per rug is $50. She sells each rug for a price of $65. Tsintah's total revenues are a. $5,750. b. $750. c. $2,500. d. $3,250.

d. $3,250.

In the long run, a firm will enter a competitive industry if a. total revenue exceeds total cost. b. the price exceeds average total cost. c. the firm can earn economic profits. d. All of the above are correct.

d. All of the above are correct.

Suppose that you value a hat from your favorite university at $20. The university bookstore has the hat on sale for $15. You purchase the hat but lose it on the way home. What should you do? Assume that losing the hat does not alter how you value it. a. Do not purchase another hat regardless of the price. b. Wait until the cost of the hat falls to $5 or less before purchasing another hat. c. Wait until the cost of the hat falls to $15 or less before purchasing another hat. d. Go back to the bookstore and purchase another hat.

d. Go back to the bookstore and purchase another hat.

In a competitive market the current price is $5. The typical firm in the market has ATC = $5.50 and AVC = $5.15. a. New firms will likely enter this market to capture any remaining economic profits. b. In the short run firms will continue to operate, but in the long run firms will leave the market. c. The firm will earn zero profits in both the short run and long run. d. In the short run firms will shut down, and in the long run firms will leave the market.

d. In the short run firms will shut down, and in the long run firms will leave the market.

In the transition from the short run to the long run, the number of firms in a competitive industry is a. decreasing. b. fixed. c. increasing at a constant rate. d. able to adjust to market conditions.

d. able to adjust to market conditions.

Average total cost is very high when a small amount of output is produced because a. average variable cost is high. b.marginal cost is high. c. marginal product is high. d. average fixed cost is high.

d. average fixed cost is high.

Land of Many Lakes (LML) sells butter to a broker in Albert Lea, Minnesota. Because the market for butter is generally considered to be competitive, LML a. cannot choose either the price at which it sells it butter or the quantity of butter that it produces. b. can choose the price at which it sells its butter but not the quantity of butter that it produces. c. can choose both the price at which it sells its butter and the quantity of butter that it produces. d. can choose quantity of butter that it produces but not the price at which it sells its butter.

d. can choose quantity of butter that it produces but not the price at which it sells its butter.

Which of the following is not a characteristic of a competitive market? a. Buyers and sellers are price takers. b. Each firm chooses an output level that maximizes profits. c. Each firm sells a virtually identical product. d. Entry is limited.

d. entry is limited

If Farmer Brown plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 5 bushels of wheat. If he plants 2 bags, he gets 9 bushels. If he plants 3 bags, he gets 12 bushels. A bag of seeds costs $120, and seeds are his only cost. Farmer Brown's marginal-cost curve is a. U-shaped. b. decreasing. c. constant. d. increasing.

d. increasing

A firm that shuts down temporarily has to pay a. both its variable costs and its fixed costs. b. its variable costs but not its fixed costs. c. neither its variable costs nor its fixed costs. d. its fixed costs but not its variable costs.

d. its fixed costs but not its variable costs.

When marginal revenue equals marginal cost, the firm a. must be generating positive accounting profits. b. should increase the level of production to maximize its profit. c. must be generating positive economic profits. d. may be minimizing its losses rather than maximizing its profit.

d. may be minimizing its losses rather than maximizing its profit.

In a competitive market, a. accounting profit is driven to zero as firms freely enter and exit the market. b. the goods offered by the different sellers are unique. c. there are only a small number of sellers. d. no single buyer or seller can influence the price of the product.

d. no single buyer or seller can influence the price of the product.

A profit-maximizing firm in a competitive market will always make marginal adjustments to production as long as a. average revenue is equal to marginal cost. b. average revenue is greater than average total cost. c. marginal cost is greater than average total cost. d. price is above or below marginal cost.

d. price is above or below marginal cost.

Which of the following industries is most likely to exhibit the characteristic of free entry? a. electricity b. satellite radio c. mineral mining d. tennis shoes

d. tennis shoes

When price is greater than marginal cost for a firm in a competitive market, a. the firm should decrease output to maximize profit. b. the firm must be minimizing its losses. c. marginal cost must be falling. d. there are opportunities to increase profit by increasing production

d. there are opportunities to increase profit by increasing production

When a competitive firm doubles the quantity of output it sells, its a. profits must increase. b. marginal revenue doubles. c. average revenue doubles. d. total revenue doubles.

d. total revenue doubles