POLS 207

Assume a factory that currently employs 25 workers and owns a factory with 10,000 square feet of floor space is considering doubling the size of its factory. Economists would classify this as: a short-run decision. a long-run decision. neither a short-run nor a long-run decision. both a short-run and a long-run decision.

a long-run decision.

Which of the following is not a characteristic of perfect competition?

Large number of firms in the industry. Outputs of the firms are perfect substitutes for one another. No barriers to entry or exit. Firms face downward-sloping demand functions.

Average fixed costs will

rise then fall as output rises. fall then rise as output rises. rise as output rises. fall as output rises.

If your business earns $20,000 in revenues, has explicit costs of $7,000, and implicit costs of $5,000, your accounting profit is $13,000. $8,000. $32,000. -$8,000.

$13,000

If your business earns $10,000 in revenues, has explicit costs of $8,000, and implicit costs of $5,000, your economic profit is -$3,000. $5,000. $3,000. $2,000.

-$3,000.

Suppose a perfectly competitive firm, which is initially in long-run equilibrium experiences a decrease in the wages it must pay its employees. In the short run, which of the following will occur? ATC will shift up and MC will shift down, causing the firm to incur a loss. ATC and MC will shift down, causing the firm to earn a positive economic profit. ATC and MC will shift up, causing the firm to incur a loss. ATC will shift down and MC will shift up, causing the firm to earn a positive economic profit.

ATC will shift down and MC will shift up, causing the firm to earn a positive economic profit.

Which of the following statements is NOT true for a perfectly competitive firm? The firm can influence its demand curve by advertising its product. The market demand and supply curves determine the market price. The firm's demand curve is perfectly elastic. A firm's demand curve is horizontal.

The firm can influence its demand curve by advertising its product

Which of the following is NOT a characteristic of a perfectly competitive industry?

The firms in the industry produce a homogeneous product. Sellers have better information about the product than consumers. Any firm can enter or leave the industry without serious impediments. There are large numbers of buyers and sellers.

Which of the following statements regarding the relationship between average and marginal costs is INCORRECT?

There is no way for average variable costs to fall when marginal costs are falling. When marginal costs are greater than average costs, the latter must rise. When marginal costs are less than average costs, the latter must fall. There is always a definite relationship between average and marginal cost.

If a firm shuts down in the short run, it avoids its variable cost but not its fixed cost. true false

True

Which of the following statements is false?

When marginal cost equals average total cost, average total cost is at its highest value. Firms often refer to the process of lowering average fixed cost as "spreading the overhead." The difference between average total cost and average fixed cost is average variable cost. The marginal cost curve intersects the average variable cost curve and the average total cost curve at their minimum points.

Being a price taker essentially means a firm can influence the market price. the firm cannot legally set its price above the market price. a firm cannot influence the market price. the firm cannot legally set its price below the market price.

a firm cannot influence the market price.

Marginal cost is the

additional output when total cost is increased by one dollar. change in the price of inputs if a firm buys more inputs to produce an additional unit of output. change in average cost when an additional unit of output is produced. additional cost of producing an additional unit of output

If total costs are $50,000 when 1000 units are produced, and total costs are $50,100 when 1001 units are produced, we can conclude that

average fixed costs are $100. average variable costs are $100. marginal costs are $100. average total costs are $100.

A firm encounters its "shutdown point" when: average total cost equals price at the profit-maximizing level of output. average fixed cost equals price at the profit-maximizing level of output. average variable cost equals price at the profit-maximizing level of output. marginal cost equals price at the profit-maximizing level of output.

average variable cost equals price at the profit-maximizing level of output.

Fixed costs are not actually costs since they do not affect the decisions of a firm. costs that never change. costs that a firm incurs even when output is zero. costs that increase at a constant rate when output increases.

costs that a firm incurs even when output is zero.

Suppose that a perfectly competitive firm's marginal revenue equals $12 when it sells 10 units of output. If the marginal cost of producing the 10th unit is $14, to maximize its profit the firm should shut down. decrease its production. increase the price it charges for its product. do nothing because it is already maximizing its profit. increase its production.

decrease its production

A perfectly competitive firm will maximize profits (or minimize losses) so long as price (marginal revenue) is: greater than marginal cost. greater than average total cost. greater than average fixed cost. greater than average variable cost.

greater than average variable cost

The main difference between the short run and the long run is that in the long run, the firm is making a constrained decision about how to use existing plant and equipment efficiently. in the short run, at least one of the firm's input levels is fixed. in the short run all inputs are fixed, while in the long run all inputs are variable. in the short run the firm varies all of its inputs to find the least-cost combination of inputs.

in the short run, at least one of the firm's input levels is fixed.

Industry Y is a perfectly competitive industry. Assume that as a result of changes in other markets there is a twenty percent increase in the price of variable inputs used by firms in industry Y. After all adjustments have taken place, we would expect the equilibrium price in industry Y to: increase and the number of firms to decrease. decrease and the number of firms to increase. decrease and the number of firms to decrease. increase and the number of firms to increase.

increase and the number of firms to decrease.

If, for a perfectly competitive firm, price exceeds the marginal cost of production, the firm should increase its output keep output constant and enjoy the above normal profit. lower the price. increase its output. reduce its output.

increase its output

If a perfectly competitive firm's price is above its average total cost, the firm is incurring a loss. should shut down. is breaking even. is earning a profit.

is earning a profit.

A perfectly competitive firm's marginal revenue may be either greater or less than its price, depending on the quantity sold. is less than price because a firm must lower its price to sell more. is equal to its price. is greater than its price.

is equal to its price

If a perfectly competitive firm's price is less than its average total cost but greater than its average variable cost, the firm is earning a profit. should shut down. is breaking even. is incurring a loss.

is incurring a loss.

From the managers perspective, only explicit costs matter because accounting profit is based on explicit costs. there is no difference between implicit and explicit costs. As such, treating implicit costs as explicit would result in double counting and an overstatement of total costs. implicit costs are simply a theoretical construct and should be ignored in the decision-making process. it is important to treat implicit costs as explicit in order to make sound strategic decisions.

it is important to treat implicit costs as explicit in order to make sound strategic decisions.

Jennifer's Bakery Shop produces baked goods in a perfectly competitive market. If Jennifer decides to produce her 100th batch of cookies, the marginal cost is $120. She can sell this batch of cookies at a market price of $110. To maximize her profit, Jennifer should not produce this additional batch. charge $120 for this batch. shut down. produce this batch of cookies because their MR exceeds their MC. produce this batch of cookies because they will help lower her average fixed cost.

not produce this additional batch.

When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell nothing at all; the firm shuts down. any positive output the entrepreneur decides upon because all of it can be sold. the output where marginal revenue equals marginal cost. the output where average total cost equals price.

nothing at all; the firm shuts down.

McDonald's is a fast-food restaurant chain. Which of the following would be a long-run decision for McDonald's? supply more hamburgers in one restaurant replace the manager of a restaurant open a new restaurant in a city hire one more worker in a restaurant location

open a new restaurant in a city

The demand curve faced by the individual perfectly competitive firm is: perfectly elastic. unit elastic. elastic or inelastic depending on price. perfectly inelastic.

perfectly elastic.

The change in total variable cost which accompanies one extra unit of output is

the average total cost. the average fixed cost. marginal cost. the average variable cost.

By continuing to operate when price is greater than average variable cost but less than average total cost, a firm limits its losses to: the difference between its total fixed cost and the amount by which total revenue exceeds total variable costs. $0. its total fixed costs. its total variable costs.

the difference between its total fixed cost and the amount by which total revenue exceeds total variable costs.

In the long run

the firm is more profitable than it is in the short run. all of the firm's costs are variable costs. all of the firm's costs are explicit costs; there are no implicit costs of production. the firm's fixed costs are greater than its fixed costs in the short run.

The price of a seller's product in perfect competition is determined by

the individual seller. the individual demander. a few of the sellers. market demand and market supply.

Which is the best example of a firm's implicit costs? taxes wages the opportunity cost of owner-provided labor rent

the opportunity cost of owner-provided labor rent

An implicit cost is defined as: the opportunity cost of using a resource that is not explicitly paid out by the firm. the difference between an input's explicit cost and its actual cost. the amount by which the money spent on an input to production exceeds its opportunity cost. the amount by which economic profit exceeds accounting profit.

the opportunity cost of using a resource that is not explicitly paid out by the firm.

Average total cost is equal to

total cost divided by the level of output. marginal cost plus variable cost. average fixed cost minus average variable cost. total cost divided by the number of workers.

Which of the following costs will not change as output changes?

total fixed cost total variable cost average fixed cost marginal cost average variable cost

For a hotdog vendor, the hotdog buns represents his variable input. fixed input. sunk cost. none of the above.

variable input

Marginal cost is defined as the change in ________ cost when output changes by one unit. In the short run, marginal cost can also be measured by the change in ________ cost when output changes by one unit.

variable; fixed total; variable fixed; variable total; fixed

The demand curve faced by the individual perfectly competitive firm is:

vertical. downward sloping. upward sloping. horizontal.