Microeconomics

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

c. how a firm turns inputs into output.

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

c. there are opportunities to increase profit by increasing production.

Which of the below shows the correct relationship between demand and marginal revenue? A B C D

B

Refer to the below diagram. If price falls from P1 to P2, total revenue will become area(s):

B + D

Refer to the below diagram. At output level Q total fixed cost is: 0BEQ. BCDE. 0BEQ - 0AFQ. 0CDQ.

BCDE.

Refer to the below diagram. At the profit-maximizing output, total fixed cost is equal to: 0AHE. 0BGE. 0CFE. BCFG

BCFG

Refer to the below figure. Which demand curve is perfectly elastic?

D

A monopoly is an inefficient way to produce a product because a. the cost to the monopolist of producing one more unit exceeds the value of that unit to potential buyers. b. it faces a downward-sloping demand curve. c. it can earn both short-run and long-run profits. d. it produces a smaller level of output than would be produced in a competitive market.

d. it produces a smaller level of output than would be produced in a competitive market.

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

a. able to adjust to market conditions.

As Bubba's Bubble Gum Company adds workers while using the same amount of machinery, some workers may be underutilized because they have little work to do while waiting in line to use the machinery. When this occurs, Bubba's Bubble Gum Company encounters a. diminishing marginal product. b. diseconomies of scale. c. economies of scale. d. increasing marginal product.

a. diminishing marginal product.

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 to answer the question.

a. make more than 20 wedding cakes per month.

In the market for oil in the short run, demand and supply are both elastic. and supply are both inelastic. is elastic and supply is inelastic. is inelastic and supply is elastic.

and supply are both inelastic.

Fixed cost is: the cost of producing one more unit of capital, say, machinery. any cost which does not change when the firm changes its output. average cost multiplied by the firm's output. usually zero in the short run.

any cost which does not change when the firm changes its output.

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

average fixed cost is high.

Assume a certain firm regards the number of workers it employs as variable but regards the size of its factory as fixed. This assumption is often realistic a. in the short run but not in the long run. b. neither in the short run nor in the long run. c. both in the short run and in the long run. d. in the long run but not in the short run.

a. in the short run but not in the long run.

Mr. Rogers sells colored pencils. The colored-pencil industry is competitive. Mr. Rogers hires a business consultant to analyze his company's financial records. The consultant recommends that Mr. Rogers increase his production. The consultant must have concluded that Mr. Roger's a. marginal revenue exceeds his marginal cost. b. marginal cost exceeds his marginal revenue. c. marginal revenue exceeds his total cost. d. total revenues equal his total economic costs.

a. marginal revenue exceeds his marginal cost.

Because a monopolist must lower its price in order to sell another unit of output, a. marginal revenue is less than price. b. total revenue increases as price increases. c. average revenue is less than price. d. long-term economic profits will be zero.

a. marginal revenue is less than pr

ED <1

inelastic, price and revenue move together

In the above figure, curves 1, 2, 3, and 4 represent the: ATC, MC, AFC, and AVC curves respectively. MC, AFC, AVC, and ATC curves respectively. MC, ATC, AVC, and AFC curves respectively. ATC, AVC, AFC, and MC curves respectively.

MC, ATC, AVC, and AFC curves respectively.

If firms are losing money in a purely competitive industry, then in the long run this situation will shift the industry: Demand curve to the right, and the market price will increase Supply curve to the left, and the market price will increase Supply curve to the right, and the market price will decrease Demand curve to the left, and the market price will decrease

Supply curve to the left, and the market price will increase

If firms enter a purely competitive industry, then in the long run this change will shift the industry: Demand curve to the left, and the market price will decrease Demand curve to the right, and the market price will increase Supply curve to the right, and the market price will decrease Supply curve to the left, and the market price will increase

Supply curve to the right, and the market price will decrease

The above diagram shows the short-run average total cost curves for five different plant sizes of a firm. The shape of each individual curve reflects: increasing marginal product, followed by diminishing marginal product. economies of scale, followed by diseconomies of scale. constant costs. increasing costs, followed by decreasing costs.

increasing marginal product, followed by diminishing marginal product.

Refer to the above diagram. At output level Q average fixed cost: is equal to EF. is equal to QE. is measured by both QF and ED. cannot be determined from the information given.

is measured by both QF and ED.

YED formula

% change in quantity demanded / % change in income

XED formula

% change in quantity demanded of good A / % change in price of good B

Refer to the below diagram. At the profit-maximizing output, total revenue will be: 0AHE. 0BGE. 0CFE. ABGE.

0AHE.

The price elasticity of demand for widgets is 0.80. Assuming no change in the demand curve for widgets, a 16 percent increase in sales implies a 1 percent reduction in price. 12 percent reduction in price. 40 percent reduction in price. 20 percent reduction in price.

20 percent reduction in price

Suppose the price elasticity of supply for soccer balls is 0.3 in the short run and 1.2 in the long run. If an increase in the demand for soccer balls causes the price of soccer balls to increase by 20%, then the quantity supplied of soccer balls will increase by about 0.67% in the short run and 0.17% in the long run. 3% in the short run and 1.2% in the long run. 6% in the short run and 24% in the long run. 66.7% in the short run and 16.7% in the long run.

6% in the short run and 24% in the long run

Refer to the below diagram. Total revenue at price P1 is indicated by area(s):

A + B

Which of the following curves is not U-shaped? MC AFC AVC ATC

AFC

ATC > MC

ATC Decreases

MC > ATC

ATC increases

fixed costs

Costs that do not vary with the quantity of output produced, land, fixed inputs

Suppose that a monopolist calculates that at present output and sales, marginal cost is $1.00 and marginal revenue is $2.00. He or she could maximize profits by: Decreasing price and increasing output Increasing price and decreasing output Decreasing price and leaving output unchanged Decreasing output and leaving prices unchanged

Decreasing price and increasing output

The profit-maximizing monopolist will usually set a price: Equal to marginal revenue Where demand is unitary-elastic In the elastic portion of the demand curve In the inelastic portion of the demand curve

In the elastic portion of the demand curve

Compared to the perfectly competitive firm, a pure monopoly: Is able to use barriers to entry and maintain positive economic profits in the long run Produces an equal amount of output, but charges higher prices to cover all costs in the market Is efficient from society's perspective because it has big plants and it uses the newest possible production technology Will always become competitive in the long run because positive economic profits will induce competitors into the market

Is able to use barriers to entry and maintain positive economic profits in the long run

Suppose the market for wheat is perfectly competitive. Fed up with low prices, a wheat grower in Texas decides he won't take his output to market and, instead, dumps all his wheat into the Red River. What happens to the market price of wheat? It decreases by a large amount. It doesn't change. It decreases by a small amount. It increases by a large amount.

It doesn't change.

Many people believe that monopolies charge any price they want to without affecting sales. Instead, the output level for a profit-maximizing monopoly is determined by: Marginal cost = demand Marginal revenue = demand Average total cost = demand Marginal cost = marginal revenue

Marginal cost = marginal revenue

Which is true with respect to the demand of a monopolist? Demand is perfectly inelastic Price increases as the output of the firm increases Marginal revenue increases as price decreases Marginal revenue is less than price

Marginal revenue is less than price

ED>1

P and R move opposite

ED=1

P moves but R stays the same

Refer to the below diagram for a purely competitive producer. The lowest price at which the firm should produce (as opposed to shutting down) is: P1. P2. P3. P4.

P2.

Total Cost (TC) Formula

TC = FC + VC

Average total cost (ATC) formula

TC/Q or AFC + AVC

Average variable cost (AFC) formula

VC/Q

Which of the following is correct? There is no relationship between MP and MC. When AP is rising MC is falling, and when AP is falling MC is rising. When MP is rising MC is rising, and when MP is falling MC is falling. When MP is rising MC is falling, and when MP is falling MC is rising.

When MP is rising MC is falling, and when MP is falling MC is rising.

A perfectly inelastic demand schedule rises upward and to the right, but has a constant slope. can be represented by a line parallel to the vertical axis. cannot be shown on a two-dimensional graph. can be represented by a line parallel to the horizontal axis.

can be represented by a line parallel to the vertical axis.

An individual firm in a perfectly competitive market: cannot affect market price. is very concerned with its competitors' marketing decisions. may be able to increase its price without losing sales. will decrease the price of its output if it produces too much.

cannot affect market price.

marginal cost (MC) formula

change in TC/change in Q

variable costs

costs that vary with the quantity of output produced, labor, variable inputs

When a profit-maximizing firm is earning profits, those profits can be identified by a. (MC - AVC) × Q. b. (P - AVC) × Q. c. P × Q. d. (P - ATC) × Q.

d. (P - ATC) × Q.

As new firms enter a monopolistically competitive market, profits of existing firms a. rise, and product diversity in the market increases. b. decline, and product diversity in the market decreases. c. rise, and product diversity in the market decreases. d. decline, and product diversity in the market increases.

d. decline, and product diversity in the market increases.

The demand curve in a purely competitive industry is ______, while the demand curve to a single firm in that industry is ______. perfectly inelastic, perfectly elastic downsloping, perfectly elastic downsloping, perfectly inelastic perfectly elastic, downsloping

downsloping, perfectly elastic

As the firm in the above diagram expands from plant size #1 to plant size #3, it experiences: diminishing returns. economies of scale. diseconomies of scale. constant costs.

economies of scale.

Accounting profits are typically: greater than economic profits because the former do not take explicit costs into account. equal to economic profits because accounting costs include all opportunity costs. smaller than economic profits because the former do not take implicit costs into account. greater than economic profits because the former do not take implicit costs into account

greater than economic profits because the former do not take implicit costs into account

To economists, the main difference between the short run and the long run is that: the law of diminishing returns applies in the long run, but not in the short run. in the long run all resources are variable, while in the short run at least one resource is fixed. fixed costs are more important to decision making in the long run than they are in the short run. in the short run all resources are fixed, while in the long run all resources are variable.

in the long run all resources are variable, while in the short run at least one resource is fixed.

Refer to the below diagram. The decline in price from P1 to P2will: ncrease total revenue by D. increase total revenue by B + D. decrease total revenue by A. increase total revenue by D - A.

increase total revenue by D - A

If a firm decides to produce no output in the short run, its costs will be: its marginal costs. its fixed plus its variable costs. its fixed costs. zero.

its fixed costs.

If average total cost is declining, then: a. marginal cost must be greater than average total cost. b. the average fixed cost curve must lie above the average variable cost curve. c. marginal cost must be less than average total cost. d. total cost must also be declining.

marginal cost must be less than average total cost.

Refer to the above diagram. At output level Q: marginal product is falling. marginal product is rising. marginal product is negative. one cannot determine whether marginal product is falling or rising.

marginal product is falling.

elasticity of supply formula

percentage change in quantity supplied/percentage change in price

normal goods

positive income elasticity

Refer to the below diagram. At P3, this firm will: produce 14 units and earn a profit. produce 62 units and earn a profit. produce 40 units and incur a loss. shut down in the short run.

produce 40 units and incur a loss.

Refer to the below diagram. At P4, this firm will: shut down in the short run. produce 30 units and incur a loss. produce 30 units and earn only a profit. produce 10 units and earn only a profit.

shut down in the short run.

The larger the coefficient of price elasticity of demand for a product, the: larger the resulting price change for an increase in supply. more rapid the rate at which the marginal utility of that product diminishes. less competitive will be the industry supplying that product. smaller the resulting price change for an increase in supply.

smaller the resulting price change for an increase in supply.

Refer to the above diagram. The vertical distance between ATC and AVC reflects: the law of diminishing returns. the average fixed cost at each level of output. marginal cost at each level of output. the presence of economies of scale.

the average fixed cost at each level of output.

Refer to the below diagram for a purely competitive producer. The firm's short-run supply curve is: the abcd segment and above on the MC curve. the bcd segment and above on the MC curve. the cd segment and above on the MC curve. not shown.

the bcd segment and above on the MC curve.

The basic characteristic of the short run is that: barriers to entry prevent new firms from entering the industry. the firm does not have sufficient time to change the size of its plant. the firm does not have sufficient time to cut its rate of output to zero. a firm does not have sufficient time to change the amounts of any of the resources it employs.

the firm does not have sufficient time to change the size of its plant.

If a variable input is added to some fixed input, beyond some point the resulting extra output will decline. This statement describes: a. economies and diseconomies of scale. b. X-inefficiency. c. the law of diminishing product of labor. d. the law of diminishing marginal utility.

the law of diminishing product of labor.

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

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

Refer to the below diagram. At the profit-maximizing output, total variable cost is equal to: 0AHE. 0CFE. 0BGE. ABGH.

0CFE.

Refer to the below graph. The profit-maximizing monopolist in it will set its output at: 0V 0Y 0T 0X

0V

Suppose that the supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10%.Refer to the Scenario above. The price elasticity of supply for bread could be

1.5

A competitive market is in long-run equilibrium. If demand increases, we can be certain that price will a. 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. b. rise in the short run. Some firms will enter the industry. Price will then rise to reach the new long-run equilibrium. c. not rise in the short run because firms will enter to maintain the price. d. rise in the short run. Some firms will enter the industry. Price will then fall to reach the new long-run equilibrium.

d. rise in the short run. Some firms will enter the industry. Price will then fall to reach the new long-run equilibrium.

An oligopoly is a market in which a. the actions of one seller in the market have no impact on the other sellers' profits. b. firms are price takers. c. there are many price-taking firms, each offering a product similar or identical to the products offered by other firms in the market. d. there are only a few sellers, each offering a product similar or identical to the products offered by other firms in the market.

d. there are only a few sellers, each offering a product similar or identical to the products offered by other firms in the market.

Suppose that a business incurred implicit costs of $500,000 and explicit costs of $5 million in a specific year. If the firm sold 100,000 units of its output at $50 per unit, its accounting: a. profits were $100,000 and its economic profits were zero. b. losses were $500,000 and its economic losses were zero. c. profits were $500,000 and its economic profits were $1 million. d. profits were zero and its economic losses were $500,000.

d. profits were zero and its economic losses were $500,000.

Refer to the below graphs. What will happen in the long run to industry supply and the equilibrium price of the product S will decrease, P will decrease S will increase, P will decrease S will decrease, P will increase S will increase, P will increase

S will decrease, P will increase

If a 30 percent change in price causes a 15 percent change in quantity supplied, then the price elasticity of supply is about 0.5, and supply is elastic. 0.5, and supply is inelastic. 2, and supply is inelastic. 2, and supply is elastic.

0.5, and supply is inelastic

Refer to the above diagram. At output level Q total cost is: 0BEQ. BCDE. 0BEQ plus BCDE. 0AFQ plus BCDE.

0BEQ plus BCDE.

Which of the following definitions is correct? Accounting profit + economic profit = normal profit. Economic profit - accounting profit = explicit costs. Economic profit = accounting profit - implicit costs. Economic profit - implicit costs = accounting profits.

Economic profit = accounting profit - implicit costs.

Average fixed cost (AFC) formula

FC/Q

Inferiour goods

Goods with a negative income effect

Refer to the below graph. This monopolist: Has a loss per unit equal to DE Has total fixed costs equal to area BEFC Earns economic profit equal to the area of ABED should set the price at 0C.

Has a loss per unit equal to DE

Refer to the below graphs. Which statement is true? The firm will increase production The firm is experiencing economic losses The firm is breaking even The firm is making economic profit

The firm is experiencing economic losses

Suppose a firm in a competitive industry has the following cost curves: Refer to Figure 14-13. If the price is $3.50 in the short run, what will happen in the long run? a. Nothing. The price is consistent with zero economic profits, so there is no incentive for firms to enter or exit the industry. b. Individual firms will earn negative economic profits in the short run, which will cause some firms to exit the industry. c. Individual firms will earn positive economic profits in the short run, which will entice other firms to enter the industry. d. Because the price is below the firm's average variable costs, the firms will shut down.

b. Individual firms will earn negative economic profits in the short run, which will cause some firms to exit the industry.

ntry and exit drive each firm in a monopolistically competitive market to a point of tangency between its a. marginal revenue curve and its average total cost curve. b. demand curve and its average total cost curve. c. demand curve and its total cost curve. d. marginal revenue curve and its total cost curve.

b. demand curve and its average total cost curve.

An oligopoly a. has a concentration ratio of less than 50 percent. b. is a type of imperfectly competitive market. c. is a price taker. d. has many firms rather than just one firm or a few firms.

b. is a type of imperfectly competitive market.

A local playground equipment company plans to operate out of its current factory, which is estimated to last 30 years. All cost decisions it makes during the 30-year period a. are short-run decisions. b. are long-run decisions. c. involve only maintenance of the factory. d. are zero because the cost decisions were made at the beginning of the business.

b. are long-run decisions

Economic welfare is generally measured by (i) profit. (ii) total surplus. (iii) the price consumers pay for the product. a. (i) and (ii) only b. (ii) and (iii) only c. (ii) only d. (i), (ii), and (iii)

c. (ii) only

A benefit of a monopoly is a. a wide variety of similar products. b. decreasing long-run average total costs. c. greater creativity by authors who can copyright their novels. d. lower prices.

c. greater creativity by authors who can copyright their novels.