Mirco Econ Exam #4

Perfectly competitive industries are characterized by:

goods that are standardized.

(Table: Variable Costs for Lots) Look at the table Variable Costs for Lots. During the winter, Alexa runs a snow-clearing service, and snow clearing is a perfectly competitive industry. The table provided shows her variable costs for snow clearing and number of lots cleared. Her only fixed cost is $1,000 for a snowplow. Her variable costs include fuel, her time, and hot coffee. At what price does Alexa' s short-run supply curve start?

$15

Darren runs a barbershop with average fixed costs equal to $60 per day and a total output of 50 haircuts per day. What is his weekly total fixed cost if he is open six days per week?

$18,000

In the long run:

all inputs are variable.

If all firms in an industry are price-takers, then:

an individual firm cannot alter the market price even if it doubles its output.

Cindy operates Birds-R-Us, a small store manufacturing and selling 100 bird feeders per month. Cindy's monthly total fixed costs are $500, and her monthly total variable costs are $2,500. If for some reason Cindy's fixed cost fell to $400, then her:

average total costs would decrease.

If a perfectly competitive firm is producing a quantity where P > MC, then profit:

can be increased by increasing production.

The idea of diminishing returns to an input in production suggests that if a local college adds more custodians, the marginal product of labor for the custodial staff will ________.

decrease

Marginal cost ________ over the range of increasing marginal returns and ________ over the range of diminishing marginal returns.

decreases, increases

The total cost curve gets steeper as output increases because of

decreasing returns to the variable input.

Economic profits in a perfectly competitive industry encourage firms to ________ the industry, and losses encourage firms to ________the industry.

Enter, exit

A perfectly competitive industry is in a state of long-run equilibrium. Which of the following must be true?

P = MR = MC = ATC.

A perfectly competitive firm is definitely earning an economic profit when:

P > ATC.

In the short run, a perfectly competitive firm produces output and earns an economic profit if:

P > ATC.

Provided that there are no external benefits or costs, resources are efficiently allocated when:

P=MC

The total cost curve is:

Positively sloped

A perfectly competitive firm is a:

Price-taker

In the short run, if P = ATC, a perfectly competitive firm:

Produces output and earns zero economic profit.

When marginal cost is above average variable cost, average variable cost must be:

Rising

If the price is less than the average variable cost at the profit-maximizing quantity of output in the short run, a perfectly competitive firm will:

Shut down production

With one input fixed, a firm will find that as it attempts to produce more, the total product curve will increase at a decreasing rate and its marginal product curve will be:

downward sloping.

A firm that is able to utilize more efficiently its inputs as it increases production in the long run is an example of:

economies of scale

A perfectly competitive firm will earn a profit and will continue producing the profit-maximizing quantity of output in the short run if the price is:

greater than average total cost.

In the short run, as output gets larger and larger:

the average variable cost curve gets closer and closer to the average total cost curve.

Marginal revenue is a firm's:

increase in total revenue when it sells an additional unit of output.

Krista operates a dry-cleaning business in Tampa that incurs $900 per month in fixed costs. Last month her total output equaled 3,000 pounds of clothes. This month her total output fell to 2,700 pounds. This means her average fixed cost ________ by a little more than ________.

increased; 3.33 cents

Average variable cost is:

total variable cost divided by output.

Assuming that all other factors of production are held constant, marginal product is the change in ________ output resulting from a one-unit change in ________ .

total; a variable input

Average variable cost is the ratio of:

variable cost to the quantity of output.

The total product curve:

will become flatter as output increases if there are diminishing returns to the variable input.

In perfect competition, a change in fixed cost:

will encourage entry or exit in the long run so that price will change enough to leave firms earning zero profits.

A perfectly competitive firm will produce:

with a loss in the short run if its price is greater than AVC but less than ATC.

Suppose that the market for haircuts in a community is a perfectly competitive constant-cost industry and that the market is initially in long-run equilibrium. Subsequently, an increase in population increases the demand for haircuts. In the long run, we expect that:

more firms will enter the market, driving the price of haircuts down and the profits of individual firms back down to zero.

For a firm producing at any level of output lower than the most profitable one, an increase in output adds:

more to total revenue than to total cost.

When a firm produces at an output level at which MR = MC, it is operating at the:

optimal output level.

In perfect competition:

price and marginal revenue are the same.

The market for beef is in long-run equilibrium at a price of $3.25 per pound. The announcement that mad cow disease has been discovered in the United States reduces the demand for beef sharply, and the price falls to $2.00 per pound. If the long-run supply curve is horizontal, then when the long-run equilibrium is reestablished, the price will be:

$3.25 per pound.

(Table: Total Cost and Output) The table describes Sergei's total costs for his perfectly competitive all-natural ice cream firm. What is the minimum price that Sergei needs to receive for a tub of ice cream in order to stay in business in the short run?

$33.33

Mikail's perfectly competitive camera memory card-producing factory is making positive economic profits. If the price of memory cards is $9, Mikail's output is 3,000 cards a month, and his monthly average total cost is $7, what are his monthly profits?

$6,000.

(Table: Variable Costs for Lots) Look at the table Variable Costs for Lots. During the winter, Alexa runs a snow-clearing service, and snow clearing is a perfectly competitive industry. The table provided shows her variable costs for snow clearing and number of lots cleared. Her only fixed cost is $1,000 for a snowplow. Her variable costs include fuel, her time, and hot coffee. If the price to clear a lot is $30, what is Alexa's profit or loss per unit at the optimal output?

-13.75$

(Table: Variable Costs for Lawns) Look at the table Variable Costs for Lawns. During the summer Alex runs a lawn-mowing service, and lawn-mowing is a perfectly competitive industry made up of 100 identical firms. The table shows his variable costs for lawn-mowing and the number of lawns mowed. Alex's fixed cost is $1,000 for the mower. His variable costs include fuel, his time, and mower parts. If the price for mowing a lawn is $40, how much is Alex's total revenue at the profit-maximizing output?

1,200$

(Table: Total Cost and Output) The table describes Sergei's total costs for his perfectly competitive all-natural ice cream firm. If the market price of a tub of ice cream is $67.50, how much is Sergei's profit at the profit-maximizing output?

100$

(Table: Variable Costs for Lawns) Look at the table Variable Costs for Lawns. During the summer Alex runs a lawn-mowing service, and lawn-mowing is a perfectly competitive industry made up of 100 identical firms. The table shows his variable costs for lawn-mowing and the number of lawns mowed. Alex's fixed cost is $1,000 for the mower. His variable costs include fuel, his time, and mower parts. If the price for mowing a lawn is $60, how much is Alex's total revenue at the profit-maximizing output?

2,400$

A farm can produce 1,000 bushels of wheat per year with two workers and 1,300 bushels of wheat per year with three workers. The marginal product of the third worker is:

300 bushels

Which of the following cost concepts is correctly defined?

ATC = AVC + AFC

The long run refers to the period for which:

All inputs are variable

The ________ curve continually declines as more output is produced in the short run.

Annual fixed cost

If the long-run market supply curve for a perfectly competitive market is horizontal, then this industry is one that exhibits:

Constant costs

Explain how the long-run perfectly competitive equilibrium is efficient.

Consumers and producers are price-takers in the market. The price in the market is equal to the marginal cost of producing the good. This tells us that all consumers whose willingness to pay is greater than or equal to the price are able to purchase the good. All sellers who have a marginal cost less than or equal to the price are able to sell the good. Because P = MC, all possible transactions are made.

Ashley Bakery expects its marginal cost curve will eventually slope upward, because as with most production processes, baking has:

Diminishing marginal returns

In a perfectly competitive industry, the market demand curve is usually:

Downward sloping

If a perfectly competitive firm reduces its output, the market price will increase. True or false?

False

If the average total cost curve and the average variable cost curve are both U-shaped, then the minimum point of the average total cost curve must lie above the minimum point of the average variable cost curve. True or False?

False

Why are perfectly competitive firms described as "price-takers"?

It is a result of the necessary conditions of perfect competition. Because each firm produces such a small share of the total industry output and because the firm's product is no better than the products of rival firms, these firms have no ability to set the price. Under these conditions, the firm can take no action that affects the market price.

Consider the statement, "When the marginal cost is rising, the average total cost must also be rising." Is this statement true or false? Explain your reasoning.

This statement is sometimes true and sometimes untrue. When marginal cost is rising and above average total cost, average total cost is definitely rising. But when marginal cost is rising and still below average total cost, average total cost is falling.

The sum of fixed and variable costs is:

Total Cost

In the short run, if a perfectly competitive firm chooses to produce, then its profits are maximized by producing the quantity of output where marginal cost equals marginal revenue. True or false?

True

A perfectly competitive firm will continue producing in the short run as long as it can cover its:

Variable cost

If a perfectly competitive firm is producing a quantity where P < MC, then profit:

can be increased by decreasing production.

When economic profits in an industry are zero:

firms are doing as well as they could do in other markets.

Perfect competition is a model of the market that assumes all of the following except:

firms face downward-sloping demand curves.

One characteristic of a perfectly competitive market is that there are ________ sellers of the good or service.

many

An assumption of the model of perfect competition is:

many buyers and sellers

The slope of the total cost curve is:

marginal cost

The short-run supply curve for a perfectly competitive firm has its:

marginal cost curve above its average variable cost curve.

Janet's poodle grooming salon has a total cost curve expressed by the equation TC = 100 + 3Q2, where Q is the quantity of dogs groomed. Given this expression, Janet is operating in the:

short run, and her fixed costs are equal to $100.

The short-run industry supply curve:

shows the total quantity supplied by all firms in an industry for each possible price when the number of producers is given.

The average total cost curve has a U-shape because the ___________ effect is dominant at low levels of output, and the __________ effect is dominant at high levels of output.

spreading; diminishing returns

The short-run supply curve for a perfectly competitive firm is:

the marginal cost curve above the shut-down price.

The marginal product of labor is:

the slope of the total product of labor curve.

The production function provides information about:

the transformation of inputs into output.

Suppose that the first four workers generate corresponding total outputs of baby diapers of 200, 350, 450, and 500, respectively. The marginal product of the second worker is:

150

A farm can produce 1,000 bushels of wheat per year with two workers and 1,300 bushels of wheat per year with four workers. The marginal product of the fourth worker is:

150 bushels

If an eyeglass business produces 10 pairs of eyeglasses and incurs $30 in average variable cost and $5 in average fixed cost, then average total cost is:

35 dollars

Suppose that when a coal-production firm hires one, two, three, four, and five workers, the corresponding total outputs are 10, 15, 19, 22, and 24 tons, respectively. The marginal product of the third worker is ________ tons.

4

(Table: Variable Costs for Lawns) Look at the table Variable Costs for Lawns. During the summer Alex runs a lawn-mowing service, and lawn-mowing is a perfectly competitive industry made up of 100 identical firms. The table shows his variable costs for lawn-mowing and the number of lawns mowed. Alex's fixed cost is $1,000 for the mower. His variable costs include fuel, his time, and mower parts. If the price for mowing a lawn is $60, how many lawns will Alex mow?

40

(Table: Variable Costs for Lots) Look at the table Variable Costs for Lots. During the winter, Alexa runs a snow-clearing service, and snow clearing is a perfectly competitive industry. The table provided shows her variable costs for snow clearing and number of lots cleared. Her only fixed cost is $1,000 for a snowplow. Her variable costs include fuel, her time, and hot coffee. If the price to clear a lot is $30, how many lots should Alexa clear?

40

(Table: Total Cost and Output) The table describes Sergei's total costs for his perfectly competitive all-natural ice cream firm. If the market price of a tub of ice cream is $50, how much is Sergei's profit at the profit-maximizing output?

40$

If a firm in perfect competition sells 10 units of output at a market price of $5 per unit, its marginal revenue is:

5$

In the short run, the average total cost curve reaches its minimum point at a smaller level of output than the short-run marginal cost curve reaches its minimum. True or False?

False

Joan adds one more employee to her construction company. The additional output produced by this employee represents the average product of this employee. True or false?

False

Microsoft's Windows operating system is a standardized product, since everyone who buys a particular version of the product gets exactly the same thing. This means that Microsoft is a perfectly competitive firm. True or false?

False

You have rented a one-room apartment and it is time to pay the bills. You pay the rent, the basic cable bill, the electricity bill, and your grocery bill. Which of these are good examples of fixed costs and which are variable costs? Explain your reasoning.

Fixed costs are the rent and the basic cable bill, because they are the same payment every month, no matter how much television you watch or how many hours you are actually in the apartment. The electricity and grocery bills are variable costs. These two bills are different every month because your consumption of electricity and food differs every month. If you are always in the apartment, these payments will be higher. If you are never in the apartment, these two payments will be lower.

Which of the following is true?

If price falls below average variable cost, the firm will shut down in the short run.

Many furniture stores run "going out of business" sales but never go out of business. In order for the shut-down decision to be the appropriate one, the price of furniture must be ________ than the ________ average variable cost.

Lower, minimum

The curve that shows the additional cost of producing each additional unit of output is called the:

Marginal cost curve

The addition to the total revenue from selling one more unit of the good is:

Marginal revenue

If a perfectly competitive firm is producing a quantity where MC = MR, then profit:

Maximized

If a perfectly competitive firm is producing a quantity where P = MC, then profit:

Maximized

Sam is one of many potato growers who sell potatoes to a large food-processing plant. The price of a bushel of potatoes is $4, and Sam sells 100 bushels at that price. He has $250 of fixed cost. Sam figures if he produces one more bushel of potatoes, his total variable costs will increase from $175 to $180. Should Sam produce any more potatoes at $4? Explain. Will he earn a positive economic profit? Show how you came to your answer.

Since Sam's variable cost is $175 at 100 bushels, his average variable cost is $1.75 per bushel. He earns $4 from the sale of the last bushel, so he should continue to produce 100 bushels. The next bushel has a marginal cost of $5, so he should not produce 101 bushels. His economic profit is equal to $4 × 100 - $175 - $250 = a loss of $25.

If Jakob, who runs a sports jersey assembly factory, knows the marginal cost of producing the seventh sports jersey is $21, then the total cost of seven sports jerseys is:

The answer cannot be determined from the information provided.

Why is the market for soybeans a better example of perfect competition than the market for cars?

The market for soybeans is likely a better match to the necessary conditions for perfect competition. First, the soybean market includes many producers (farmers), each of whom has a small fraction of the total market supply. The auto industry has only a handful of producers, and each of those few producers has a large fraction of the total market. Second, soybeans are a standardized product. One farmer's crop of soybeans is essentially a perfect substitute for the next farmer's crop. The car industry certainly does not have standardized products. In fact, car producers make every effort to differentiate their products from those of the other producers.

In the short run, why is it believed that the total product curve increases at a decreasing rate when more labor is added to the production function?

The principle of diminishing marginal returns is at work. In the short run there is at least one fixed input. Total product rises when more of a variable input is added to the fixed input, but at a slower and slower rate. Each additional worker is working with a smaller and smaller share of the fixed input, so the marginal product of that additional worker falls.

In the short run, if marginal cost is higher than average total cost, producing an extra unit of output must raise average total cost.

True

Which of the following statements is false?

When the marginal product of labor is upward sloping, the marginal cost curve is upward sloping.

A firm finds that its long-run average total costs increase as it produces more output. This firm is experiencing:

diseconomies of scale.

If Marie Marionettes is operating under conditions of diminishing marginal product, the marginal costs will be:

increasing

When an increase in the firm's output reduces its long-run average total cost, it undergoes:

increasing returns to scale.

Suppose Sarah's pottery studio is charging the market price, which is just higher than her minimum average total cost. This means that Sarah:

is earning a small economic profit.

When diseconomies of scale occur, the:

long-run average cost curve rises.

If two firms are identical in all respects except that one has more capital than another, the total product curve for the firm with more capital:

will lie above the total product curve for the firm with less capital.