MICRO Unit 3 Practice Questions
Kieran owns and operates his own bike shop. In the past week, a competitor offered to buy Kieran's bike shop for $100,000 and hire Kieran for $50,000 per year. Assume the annual interest rate is 6 percent, and Kieran's accounting profit from his bike shop is $60,000. Kieran's economic profit is
$4,000. The $4,000 equals the total revenues minus the total explicit and implicit costs. The total opportunity cost is the sum of the $50,000 salary offer plus the $6,000 interest forgone. Subtracting $56,000 from the accounting profit of $60,000 gives an economic profit of $4,000.
Habib withdrew $100,000 from his bank account paying 5% interest to purchase equipment for his construction company. If Habib earns an accounting profit of $10,000 and he has no other opportunity costs, his economic profit will be equal to
$5,000; Habib earns an accounting profit of $10,000. Subtracting the $5,000 implicit cost associated with the forgone interest income, Habib earns a positive economic profit of $5,000
Given the price P4P4, what is a firm's profit-maximizing quantity of output?
At Q3Q3 profit is maximized because price (marginal revenue) is equal to marginal cost. Producing more output beyond that will reduce total profit.
At a firm's current output level, average fixed cost is $10, average variable cost is $30, average total cost is $40, and marginal cost is $55. Which of the following must be true?
Average fixed cost is decreasing, and both average variable cost and average total cost are increasing; Marginal cost is above average variable cost and average total cost, causing both to increase. Average fixed cost always decreases.
Which of the following is true about economies of scale and increasing returns to scale?
Economies of scale refers to the relationship between long-run average total cost and the size of the firm. Increasing returns to scale refers to the relationship between inputs and output.
If a typical firm in a perfectly competitive market earns positive economic profit in the short run, what will most likely happen in the long run?
Firms will enter the market and cause the price to fall; The positive economic profit attracts new firms to enter the market, increasing supply and putting a downward pressure on price. This will eliminate economic profits in the long run.
Which of the following ranges of output illustrates diseconomies of scale?
From Q3 to Q5 the LRATCLRATC is increasing as output increases, so this range of output illustrates diseconomies of scale.
Which of the following is ignored when calculating accounting profit?
Implicit costs are part of opportunity costs, reflecting the values of the resources — such as time, financial capital, and property — contributed by the owners of the firm. Implicit costs do not constitute out-of-pocket payments. They are not included in calculating accounting profit.
Which of the following is true when total product is at its maximum?
Marginal product is equal to zero; When marginal product equals zero, total product is maximized because the change in total product is zero. Because marginal product is diminishing, adding additional units of variable input beyond this point will result in negative marginal product and a decline in total product.
Given a short-run production function, which of the following is true when total product is increasing at a decreasing rate?
Marginal product must be positive and decreasing; Marginal product is the rate of change in total product, so if marginal product is positive and decreasing, each additional worker adds fewer output than the worker before and total product will increase but by smaller and smaller amounts. Therefore, total product will be increasing at a decreasing rate.
In a comparison of a profit-maximizing perfectly competitive firm's short-run equilibrium to its long-run equilibrium, which of the following is true?
Price equals average total cost in the long run, but not necessarily in the short run; Perfectly competitive firms must earn zero profit in the long run, meaning price must equal marginal cost and average total cost. Profit can be positive, negative, or zero in the short run.
The graph above shows per unit cost information for firm X. At what quantity of output do diminishing returns begin for firm X?
Q2; Diminishing returns begin at the point where marginal cost is minimized because the next unit of output will be produced at a higher cost, which results from diminishing returns.
A profit-maximizing firm is currently producing a quantity at which price is less than average variable cost. To maximize profit, the firm will do which of the following in the short run and the long run?
Shut down in the short run and exit the market in the long run; The firm is profit-maximizing, therefore it is producing the quantity at which MRMR equals MCMC. However, when price is less than average variable cost, the firm is better off shutting down to minimize its costs to fixed costs only in the short run and exit the market in the long run. By continuing to produce in the short run, the firm is unable to cover its variable costs and part of its fixed costs because price is less than average variable cost.
The firm's minimum efficient scale occurs on
The minimum efficient scale occurs on SRATC3SRATC3, which contains the lowest point of all five short-run cost curves, and it occurs at the minimum point on the LRATCLRATC curve.
Firms will have no incentive to exit or enter this market if the price in this market is
equal to average total cost. If the price is above P4P4, a firm will not exit the market, but new firms will enter the market because the firm is earning positive economic profit. There will be no incentive to enter OR exit if the price is equal to average total cost.
A competitive profit-maximizing firm is currently producing at an output level at which the marginal revenue is equal to marginal cost. Which of the following changes will NOT affect the profit-maximizing quantity?
increase fixed costs will increase the firm's total cost but not marginal cost. Marginal cost only changes with changes in variable cost. Therefore, marginal revenue will continue to be equal to marginal cost and the firm will not change its quantity to maximize its profit.
The graph above shows the short-run cost curves for a perfectly competitive firm. Assume that the market price is P0 and the firm is producing at quantity Q0. To maximize profit, the firm should
increase production to quantityQ2, where price is equal to marginal cost; The profit-maximizing perfectly competitive firm should produce where P (or MR)= MC, at Q2. The firm will have a loss, since P is less than ATC. The firm should continue to produce, since P >AVC and the loss will be less than fixed costs.
A graph shows quantity of output produced on the horizontal axis and shows total variable cost and total cost on the vertical axis. Which of the following is true about the vertical distance between total variable cost and total cost as output increases?
it remains constant; The vertical distance between total variable cost and total cost at each output level is total fixed cost, which is constant. Average fixed cost, the distance between average total cost and average variable cost, decreases as output increases.
Marginal Product
the change in total product that occurs as a result of an additional unit of labor. As the table indicates, output increases from 20 to 27 as a result of adding the third worker. Therefore, the marginal product for the third worker is 7 units.
Marginal Revenue
the change in total revenue divided by the change in total output.