MICRO Exam 2
Because of diminishing returns, marginal cost curves are likely to rise and then fall.
False
If a firm is facing constant returns to scale, its long-run average cost curve is vertical.
False
The marginal cost curve of a perfectly competitive firm is the firm's short-run demand curve.
False
Consider the following costs of owning and operating a car. A $15,000 Fiat 500 Pop financed over 60 months at 7 percent interest means a monthly payment of $297. Insurance costs $100 a month regardless of how much you drive. The car gets 25 miles per gallon and uses regular-grade gasoline that costs $2.10 per gallon. Finally, suppose that wear and tear on the car costs about $0.10 a mile. Which costs are fixed, and which are variable? The marginal cost of driving a mile is $0.18. (Round your response to two decimal places.) I n deciding whether to drive from Atlanta to Las Vegas (about 2,000 miles round-trip) to visit a friend, which costs would you consider? Why?
Fixed costs are the monthly car payment and the cost of insurance; variable costs are the cost of gasoline and costs associated with wear and tear. Variable costs, because they will increase with each mile driven.
Following is information on the production levels of three different firms. Firm A is currently producing at a quantity where it is experiencing increasing returns. Firm B is currently producing at a quantity where it is experiencing diminishing returns. Firm C is currently producing at a quantity where it is experiencing negative returns. If each of the firms cuts back on its labor force, what will happen to its marginal product of labor?
For Firm A, MPL falls . For Firm B, MPL rises . For Firm C, MPL rises .
Marginal cost (MC) measures:
the increase in total cost that results from producing an additional unit of output.
Consider a competitive market with U-shaped cost curves. A stable equilibrium is achieved and the flow of firms in and out of the industry balances out when __________.
the market price is at the minimum of the average total cost curve and firms are earning a normal rate of return
The short-run supply curve of a perfectly competitive firm is:
the portion of the marginal cost curve that lies above minimum average variable cost.
The optimal method of production is:
the production method that minimizes cost for a given level of output.
The vertical distance between the total variable cost curve and the total cost curve represents If marginal cost is above average total cost, average total cost
total fixed cost will increase
Economic profit can be calculated as: The normal rate of return on capital is the opportunity cost of capital.
total revenue −(explicit costs + implicit costs). True
Total cost is the total of out-of-pocket costs, the normal rate of return on capital, and opportunity costs of all factors of production.
true
The concept of economies of scale refers to lower per-unit production costs at higher levels of output. The easiest way to understand this is to look at whether long-run average cost decreases with output (economies of scale) or whether long-run average cost increases with output (diseconomies of scale). If average cost is constant as output rises, there are constant returns to scale. But the concept of falling unit costs is all around us. Explain how the concept of economies of scale helps shed light on the following: Ebooks versus printed books
B. Cost savings would include resource costs, production costs, and distribution costs for ebooks versus printed books.
In addition to gambling, Las Vegas is famous for its live production shows. Close to 100 shows are performed at various venues across the city on any given day, and many of the shows are multi-million dollar productions with months-long waiting lists for the best seats. Box office ticket prices range from less than $10 for a few of the smaller shows to over $200 for some of the major productions. In recent years, a number of these shows have begun offering tickets for sale at half price through discount ticket outlets. These half-price tickets are only available on the day of the show, on a first-come, first-served basis. Using the concept of marginal cost, explain why many of these productions have begun to offer these half-price tickets. Once a show has been scheduled and sufficient seats sold to make it profitable to stage, the marginal cost of filling remaining seats is probably near zero. Even at half-price, the added revenue will exceed the negligible marginal cost of filling the remaining seats, enabling the show's promoter to enhance its profit. Who among the following do you suppose are the most-likely customers to purchase show tickets through these discount ticket outlets? (Check all that apply.)
B. Individuals traveling with a limited entertainment budget. Your answer is correct. C. People having a flexible vacation itinerary and thus needing little certainty in their schedule. Your answer is correct. D. People who are not 'picky' about seat quality (location). Can you think of any reasons why a production show would choose to not offer tickets in this manner? (Check all that apply.) A. The shows are always sold out in advance. B. Perceptions of the show's quality may suffer. C. Ticket sales at regular prices may decline. D. All of the above are plausible. ALL OF THE ABOVE IS THE CORRECT ANSWER
Which of the following is true regarding average fixed cost?
Average fixed cost decreases as output increases.
When marginal cost (MC) is falling, which of the following must be true?
Average variable cost (AVC) is falling.
Jessica sells carrots at a small vegetable stand in a weekly farmers' market that contains many such stands. On average, she produces and sells 150 pounds of carrots at $0.50 per pound. Her total cost of producing carrots is $75 per week. She needs to decide whether or not to increase the production of carrots. She has been told that the market for carrots demonstrates constant returns to scale. If this is the case, what is the average cost to produce each pound of carrots when she increases production to 300 pounds of carrots per week?
$0.50 per pound.
A perfectly competitive firm sells pineapples for $4 each. MR = MC at a quantity of 600 units. Average total cost at the profit-maximizing quantity is $2.75. This firm is earning a profit of A firm that is earning a positive profit in the short run and expects to continue doing so has an incentive to expand its scale of operation in the long run.
$750 True
Other than maximizing winnings, are there any other considerations Danny should take into account when deciding on how fast to drive?
A, C, and D should be taken into account.
When P = SRMC = SRAC = LRAC, an industry is considered to be:
A. in long-run competitive equilibrium. B. in long-run noncompetitive equilibrium. C. at the shutdown point. D. making zero profits. E. A and D only. A AND D ONLY IS CORRECT
When P = SRMC = SRAC = LRAC, an industry is considered to be:
A. in long-run competitive equilibrium. B. in long-run noncompetitive equilibrium. C. at the shutdown point. D. making zero profits. E. A and D only. A AND D ONLY IS CORRECT (E)
A representative firm in a perfectly competitive industry will continue to expand its operation so long as:
A. it is earning positive profits. B. there are economies of scale to be realized. C. new firms have incentive to enter the industry. D. A and B only. E. All of the above. ALL OF THE ABOVE IS CORRECT
If an industry realizes positive economic profits, new firms and investment will gravitate toward that industry. Those industries that suffer economic losses will tend to lose firms and investment. At the point where economic profits are neither positive nor negative (zero), the industry is said to have achieved:
A. long-run macroeconomic equilibrium. B. long-run competitive equilibrium. C. P = SRMC = SRAC = LRAC. D. B and C only. Your answer is correct. E. All of the above. B AND C ONLY IS THE CORRECT ANSWER
Total revenue (TR) is best characterized by which of the following?
A. TR = Profit + Total cost. B. TR = P×q. C. TR is the total amount that a firm takes in from the sale of its product. D. All of the above. ALL OF THE ABOVE IS CORRECT
For the given average total cost (ATC) curve, average variable cost (AVC) curve, and marginal cost (MC) curve, which of the following are true regarding the average fixed cost (AFC) curve? (Check all that apply.)
AFC is the vertical distance between the ATC and AVC curves. The AFC curve is a downward-sloping curve.
For each of the following, decide whether you agree or disagree and explain your answer: A firm earning positive profits in the short run always has an incentive to increase its scale of operation in the long run. A firm suffering losses in the short run will continue to operate as long as total revenue at least covers fixed cost.
Disagree. It has an incentive to expand its scale of operation only if it expects to continue to earn profits. Disagree: It should continue to operate as long as price is greater than average variable cost.
For each of the following, decide whether you agree or disagree and explain your answer: A firm earning positive profits in the short run always has an incentive to increase its scale of operation in the long run. A firm suffering losses in the short run will continue to operate as long as total revenue at least covers fixed cost.
Disagree. It has an incentive to expand its scale of operation only if it expects to continue to earn profits. Disagree: It should continue to operate as long as total revenue is greater than variable costs.
Do you agree or disagree with the following statement? Firms that exhibit increasing returns to scale are on the part of the long-run average cost curve that slopes upward.
Disagree. a firm exhibiting increasing returns to scale would be on the portion of the long-run curve that slopes downward
Do you agree or disagree with the following statement? Firms that exhibit constant returns to scale have U-shaped long-run average cost curves
Disagree. the long-run average cost curve would be relatively flat at all output levels
What can be said of a firm's short-run supply curve?
It is the marginal cost curve of the competitive firm.
Megatron is a competitive firm operating under the following conditions: Price of output is $3.00, the profit-maximizing level of output is 20,000 units, and the total cost (full economic cost) of producing 20,000 units is $120,000. The firm's only fixed factor of production is a $300,000 stock of capital (a building). If the interest rate available on comparable risks is 7 percent, should this firm shut down immediately in the short run?
It should shut down because total revenue is less than variable costs.
The following table represents data for Randle's Candles.
PIC ON PHONE and IN NOTEBOOK
For the given total cost (TC) curve and total variable cost (TVC) curve, which of the following are true regarding the total fixed cost (TFC) curve? (Check all that apply.)
TFC is the vertical distance between the TC and TVC curves. The TFC curve is a horizontal line at $10,000.
What is the relationship between average total cost (ATC) and marginal cost (MC)?
The ATC curve follows the MC curve but lags behind because it is an average over all units of output. B. It is exactly the same as the relationship between the AVC curve and the MC curve. C. The MC curve intersects the ATC curve at its minimum point. D. The ATC curve lags behind the MC curve even more than the AVC curve does. E. All of the above. ALL OF THE ABOVE IS THE ANSWER
The data in the table represents annual costs and revenue for Ted's Vintage Threads, a used clothing store in Key West, Florida. Ted works 72 hours a week at the store. He also owns the building that houses his business, and if he closed the store, he could rent out the building for $40,000 per year and go to work for his cross-town rival, Cassie's Classic Couture, and earn a salary of $40,000 per year. Wages Paid $22,000 Interest Paid on Loans 8,000 Other Expenditures for Factors of Production 26,000 Total Revenue 125,000 Are these figures the same as the accounting cost and accounting profit? Explain.
The economic cost for Ted's Vintage Threads is $136000. (Enter your response as a whole number.) The economic profit for Ted's Vintage Threads is $−11000. No, the accounting profit would be higher since the opportunity cost is not included in the accounting profit.
Consider a firm that uses capital and labor as inputs and sells 20,000 units of output per year at the going market price of $15. Also assume that total labor costs to the firm are $243,500 annually. Assume further that the total capital stock of the firm is currently worth $400,000, that the return available to investors with comparable risks is 10 percent annually, and that there is no depreciation. Is this a profitable firm? Explain your answer.
The firm is profitable because profit equals $16,500
Consider a firm that uses capital and labor as inputs and sells 20,000 units of output per year at the going market price of $15. Also assume that total labor costs to the firm are $246,500 annually. Assume further that the total capital stock of the firm is currently worth $400,000, that the return available to investors with comparable risks is 6 percent annually, and that there is no depreciation. Is this a profitable firm? Explain your answer.
The firm is profitable because profit equals $29,500.
Ben Cartwright runs the Wild West Wax Museum in Carson City, Nevada. The museum has been in business for 40 years and is a major tourist attraction. The total value of the museum's capital stock is $3.5 million, which Ben owns outright. This year, the museum earned a total of $1.4 million after out-of-pocket expenses. Without taking the opportunity cost of capital into account, this means that Ben is earning a 40 percent return on his capital. Suppose that risk-free bonds are currently paying a rate of 10 percent to those who buy them. What is meant by the "opportunity cost of capital"? Explain why opportunity costs are "real" costs even though they do not necessarily involve out-of-pocket expenses.
The implicit cost of capital The capital could have instead earned a normal rate of return invested in bank certificates of deposit. The opportunity cost of Ben's capital is $350000. (Enter your response as a whole number.) Ben is earning an excess profit of $1050000. (Enter your response as a whole number.)
Which of the following is true regarding the relationship between total variable cost (TVC) and marginal cost (MC)?
The marginal cost curve is equal to the slope of the total variable cost curve.
he following are the points on a production function. Units of Labor (L) Total Output (Q) 0 0 100 15000 300 25000 Consider the graph of the marginal product as a function of labor based on the table above. Does this graph exhibit diminishing returns? Explain your answer.
The marginal product from 0 to 100 units of labor would equal 150.00 and would be drawn as a horizontal line between 0 units of labor and 100 units of labor. The marginal product from 100 to 300 units of labor would equal 50.00 and would be drawn as a horizontal line between 100 units of labor and 300 units of labor. Yes, it does exhibit diminishing returns, because the marginal product of labor decreases.
Assume a competitive market is initially in equilibrium where firms are earning a normal rate of return. Suppose there is a demand shock in this market that causes the demand curve to shift to the left, resulting in a lower market price. What adjustments would occur in the long run?
There would be an exit of firms from the market, causing the supply curve to shift to the left, raising the price until firms earn zero profit.
After working for 25 years as personal fitness trainers while raising their kids, three sisters cashed in a total of $120,000 in bonds and decided to open a small, neighborhood fitness center. They spent the $120,000 on exercise equipment, advertising, computer equipment, and other furnishings for the business. For the next 3 years, they took in $150,000 in revenue each year, paid themselves $30,000 annually each, and rented a space in a strip mall for $20,000 per year. Before the investment, their $120,000 in bonds were earning interest at a rate of 12 percent. Are they now earning economic profits? Explain your answer.
They are earning profits of $25,600, which takes into account the $14,400 opportunity cost of their capital and the $90,000 combined opportunity cost of their own labor.
[Related to the Economics in PracticeLOADING... in this section] Danny has entered a competition in which he must drive from his home town of Charlotte, North Carolina to Washington, D.C., a distance of approximately 420 miles. If he arrives in 6 hours (an average speed of 70 mph), he will receive a prize of $300. If he arrives in 7 hours (an average speed of 60 mph), he receives $280. One of the competition rules is he must pay for his own gasoline, and Danny has calculated that he will average 24 miles per gallon at 70 mph and 30 miles per gallon at 60 mph.
To maximize his winnings (prize money minus the cost of gasoline), at what speed should Danny drive if the price of gasoline is $4.00 per gallon? Danny should drive at 70miles per hour. Alternatively, if the price of gasoline is $5.00 per gallon, then Danny should drive at 70 miles per hour. At what gasoline price would Danny be indifferent to arriving in either 6 hours or 7 hours if he wants to maximize his winnings? He would be indifferent if the price was $5.71 per gallon.
[Related to the Economics in PracticeLOADING... in this section] Danny has entered a competition in which he must drive from his home town of Charlotte, North Carolina to Washington, D.C., a distance of approximately 420 miles. If he arrives in 6 hours (an average speed of 70 mph), he will receive a prize of $250. If he arrives in 7 hours (an average speed of 60 mph), he receives $225. One of the competition rules is he must pay for his own gasoline, and Danny has calculated that he will average 24 miles per gallon at 70 mph and 30 miles per gallon at 60 mph.
To maximize his winnings (prize money minus the cost of gasoline), at what speed should Danny drive if the price of gasoline is $4.25 per gallon? Danny should drive at 70 miles per hour. Alternatively, if the price of gasoline is $6.90 per gallon, then Danny should drive at 70 miles per hour. At what gasoline price would Danny be indifferent to arriving in either 6 hours or 7 hours if he wants to maximize his winnings? He would be indifferent if the price was $7.14per gallon. (Round your answer to two decimal places.)
A firm in a perfectly competitive industry in long-run equilibrium will earn normal returns and zero economic profit.
True
As factors of production, capital and labor can complement each other as well as substitute for each other.
True
If total revenue is less than total variable cost in a perfectly competitive industry in the short run, firms will tend to exit that industry in the long run.
True
The short-run industry supply curve for a perfectly competitive industry is the sum of the marginal cost curves above average variable cost for all firms in the industry.
True
As output increases, total fixed cost ________ and average fixed cost ________. As output increases, average fixed cost will eventually reach zero.
does not change; decreases false
During the early phases of industrialization, the number of people engaged in agriculture usually drops sharply, even as agricultural output is growing. Given what you know about production technology and production functions, explain this seeming inconsistency. Output increases with less labor because:
added capital increases the productivity of labor.
Marginal cost (MC) intersects the average variable cost (AVC) and the average total cost (ATC):
at their lowest, or minimum, points.
Explain how the following event would affect the cost curves. A company signs a new 3 year contract with its landlord, which lowers the monthly rent by 10 percent.
average fixed cost and average total cost will decrease. average variable cost and marginal cost will not change.
In a competitive industry, a firm's short-run supply curve is represented by its marginal cost curve. The short-run supply curve of a competitive firm does not include the part of the marginal cost curve that is ________
below the average variable cost curve, since the firm would be losing too much money, shut down, and produce zero output
In a competitive industry, a firm's short-run supply curve is represented by its marginal cost curve. The short-run supply curve of a competitive firm does not include the part of the marginal cost curve that is __________.
below the average variable cost curve, since the firm would be losing too much money, shut down, and produce zero output
A perfectly competitive firm can sell pineapples for $3 each. MR = MC at a quantity of 600 units. Average total cost at the profit-maximizing quantity is $3.75, and average variable cost at the profit maximizing quantity is $2.75. In the short run, this firm should If a firm is suffering a loss in the short run and total revenue is less than total variable cost, the firm will minimize its losses by shutting down and immediately exiting the industry.
continue to produce, minimizing its losses at $450. False
As of June 2014, John Green's international bestselling novel, The Fault in Our Stars, had sold more than 10.7 million copies. In book publishing, fixed costs are high and marginal costs are low and fairly constant. Suppose that the marginal cost of the print version of The Fault in Our Stars is $1.00 per book and is the same for each book up to 20 million copies. Assume that this includes all variable costs. Explain why in this case marginal cost (MC) is a horizontal line, as is average variable cost (AVC). Marginal cost and variable cost are horizontal lines because these costs are unchanging with output. Suppose that the fixed cost of producing The Fault in Our Stars is $20 million. The average total cost (ATC) of the book if the publisher produces 5 million copies is $5. (Round your response to two decimal places.) The average total cost of the book if the publisher produces 10 million copies is $3. (Round your response to two decimal places.) The average total cost of the book if the publisher produces 20 million copies is $2. (Round your response to two decimal places.) The average fixed cost (AFC) of the book if the publisher produces 5 million copies is $4. (Round your response to two decimal places.) The average fixed cost of the book if the publisher produces 10 million copies is $2. (Round your response to two decimal places.) The average fixed cost of the book if the publisher produces 20 million copies is $1. (Round your response to two decimal places.) As units of output increase, both ATC and AFC decreaseboth ATC and AFC decrease at a decreasing rate.
correct
A resource's marginal product is the additional output that can be produced by adding one more unit of a specific input, ceteris paribus, while average product is the average amount produced by each unit of a variable factor of production.
correct
The long run is that period of time for which there are no fixed factors of production: Firms can increase or decrease the scale of operation, and new firms can enter the industry and/or existing firms can exit the industry.
correct
The short run is the period of time for which two conditions hold: The firm is operating under a fixed scale (fixed factor) of production, and firms can neither enter nor exit an industry.
correct
Determine whether each of the following fundamental decisions that firms make is a determinant of total revenue or total cost. Activity: Total Revenue or Total Cost? Setting the price of output (Total revenue) Determining the best production technique (Total cost) Evaluating the price of all needed inputs (Total cost)
correct- table
Two college students share an apartment and split the cost of heating, electricity, and rent. They decide to include one more roommate and divide heat, electricity, and rent costs three ways instead of two ways. If the third roommate increases the utility bill by more than one-third and it increases the amount of money each roommate pays for utilities each month, this can be described as:
diseconomies of scale.
Consider a firm with standard cost curves: U-shaped average total cost (ATC) and average variable cost (AVC) curves and a marginal cost (MC) curve that intersects ATC and AVC at their minimums. If the market price is at point C, which is above ATC and the firm is producing at point C, it is:
earning an economic profit. The rectangle that shows the firm's profit or loss has a height equal to the difference between the price and the ATC curve at the profit maximizing output level, and has a width equal to the difference between the profit maximizing output level and the y-axis
A firm that is breaking even is:
earning zero economic profit. B. in an industry that is not attracting new firms. C. earning a normal rate of return. D. All of the above. ALL OF THE ABOVE is correct
When an increase in a firm's scale of production leads to lower average costs, we say that there are:
economies of scale.
Evaluate the following statement: If the total variable cost of production is the sum of the marginal cost of each additional unit of output, we can calculate the marginal cost by taking the total variable cost of production and dividing it by the quantity of output produced. This statement is:
false; it is confusing marginal cost with average variable cost.
A firm in a perfectly competitive industry is currently producing 5,000 units of output and the market equilibrium price for the good is $3.00. If the firm chooses to increase its output by one additional unit, total revenue (TR) is $15,00315,003. (Enter your response as an integer.) Marginal revenue (MR) is $33. (Enter your response rounded to two decimal places.)
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Assume that firms in a competitive market are initially earning a normal rate of return. If there is an increase in market demand, the marginal revenue curve for each firm will increase, resulting in profits. If there is a decrease in market demand, the marginal revenue curve for each firm will decrease, resulting in losses
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A firm's profit is determined by the equation: profit = total revenue−total cost Graphically, this is represented by the area between the marginal revenue and average total cost curves up to the profit-maximizing quantity
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Indicate whether you agree or disagree with the following statements. Briefly explain your answers. Increasing returns to scale refers to a situation where an increase in a firm's scale of production leads to higher costs per unit produced. The above statement is incorrect. Increasing returns to scale refers to a situation where a firm's long-run average cost curve slopes downward. Therefore, an increase in the firm's scale of production leads to lower average costs. Constant returns to scale refers to a situation where an increase in a firm's scale of production has no effect on costs per unit produced. The above statement is correct. Decreasing returns to scale refers to a situation where an increase in a firm's scale of production leads to lower costs per unit produced. The above statement is incorrect. Decreasing returns to scale refers to a situation where a firm's long-run average cost curve slopes upward. Therefore, an increase in the firm's scale of production leads to higher average costs.
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Suppose a firm pays $2,750 per month to operate in the short run. From this amount, $2,000 is spent on costs that do not change regardless of the level of the firm's output. What are total variable costs for this firm? Total variable costs are $750. (Enter your response as an integer.)
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The industry supply curve in a competitive industry is made up of the horizontal sum of each individual firm's marginal cost curve. However, it only includes points on the marginal cost curve that are above the average variable cost curve.
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The short-run supply curve for a perfectly competitive firm is represented by its marginal cost curve. This is true since firms maximize profits by producing where marginal revenue equals marginal cost. For any given price above the shutdown price, the firm's output will be found along the marginal cost curve.
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dentify whether the following is a fixed cost or a variable cost for General Motors. The yearly payments for the naming rights for the General Motors Centre sports arena in Oshawa, Ontario, Canada. This is an example of a fixed cost.
fixed cost
When a firm experiences economies of scale, All economies of scale are a result of technological advances.
increasing output will lead to lower average costs. False
Two college students share an apartment and split the cost of heating, electricity, and rent. They decide to include one more roommate and divide heat, electricity, and rent costs three ways instead of two ways. If adding the third roommate reduces the amount of money they each pay for utilities and rent each month, this can be described as:
increasing returns to scale.
When total product reaches its highest level, marginal product f one worker can produce 30 units of output and two workers can produce a total of 50 units of output, the average product for the two workers is ________ units of output and the marginal product of the second worker is ________ units of output.
is zero 25;20
Toyota announced in 2014 that it is moving its North American headquarters from Torrance, California, to Plano, Texas. This is a long-run decision.
long run
In the short run, a firm in a perfectly competitive industry will minimize its losses by shutting down if:
market price falls below the minimum point on the average variable cost (AVC) curve. B. total revenue is less than total variable cost. C. operating profit is negative. D. A and B only. A AND B ONLY IS CORRECT
A firm earning zero economic profits is probably suffering losses from the standpoint of general accounting principles. Do you agree or disagree with this argument? It is actually earning a ________ given the extent of the risks involved. The full economic cost, including opportunity costs, is included in _______ cost but not in _______ cost.
normal rate of return (or profit); economic; accounting
In perfect competition,
price always equals marginal revenue.
An article on zdnet.com reported on the findings of engineers at IHS Markit in an investigation of the cost of the components used to produce the A1865 version of the iPhone X with 64GB of internal storage. The engineers found that this iPhone model costs $370 to produce, 63 percent less than its retail price of $999. Given this information what do we know about the profit Apple is making? Source: Steve Ranger, "iPhone X: This is how much it costs to make one, in components," zdnet.com, November 9, 2017. Which of the following best represents the equation for profit? Does this mean that Apple is making a profit of $629 on each of the iPhone X models?
profit = total revenue - total cost Does this mean that Apple is making a profit of $629 on each of the iPhone X models? The $370 cost described above represents the explicit costs and is not taking implicit costs into account. This means the profit that Apple is making on each of the iPhone X models is less than $629.
Suppose a firm pays $3,250 per month to operate in the short run. From this amount, $2,000 is spent on costs that do not change regardless of the level of the firm's output. What are total variable costs for this firm? Total variable costs are $1250. (Enter your response as an integer.)
right
The data in the table represents annual costs and revenue for Ted's Vintage Threads, a used clothing store in Key West, Florida. Ted works 72 hours a week at the store. He also owns the building that houses his business, and if he closed the store, he could rent out the building for $35,000 per year and go to work for his cross-town rival, Cassie's Classic Couture, and earn a salary of $30,000 per year. Wages Paid $25,000 Interest Paid on Loans 8,000 Other Expenditures for Factors of Production 30,000 Total Revenue 120,000 The economic cost for Ted's Vintage Threads is $128,000. (Enter your response as a whole number.) The economic profit for Ted's Vintage Threads is $−8,000. (Enter your response as a whole number and include a negative sign if necessary.) Are these figures the same as the accounting cost and accounting profit? Explain. Are these figures the same as the accounting cost and accounting profit? Explain.
No, the accounting profit would be higher since the opportunity cost is not included in the accounting profit.
In a perfectly competitive market in the long run, profits are driven to zero due to which of the following relationships?
P* = SRMC = SRAC = LRAC.
Explain why it is possible that a firm with a production function that exhibits increasing returns to scale can run into diminishing returns at the same time. Increasing returns is a reduction in _______ costs in the ______, while diminishing returns is an increase in _______ costs in the _____.
average; long run; marginal; short run
A perfectly competitive market is in long-run equilibrium. If demand in this market suddenly increases, price will ________ and firms will ________. A perfectly competitive market is in long-run equilibrium and demand in this market suddenly increases. In this situation, firms will eventually ________ the industry and will ultimately earn ________ economic profits.
increase; earn a profit enter; zero
As output increases, total variable cost ________ and average variable cost ________. The slope of the total variable cost curve is
increases; decreases and then increases marginal cost.
If a firm is facing diseconomies of scale, average cost ________ with scale of production and its long-run average cost curve ________.
increases; slopes up
