Principles of Microeconomics Exam 4

Gerald, a CPA, informs his client, Simon, a small business owner, that Simon's production expenses for the last year were $40,000. Revenues were $100,000. Simon gave up a job that paid $70,000 to open his business. What is Simon's opportunity cost of opening his business?

$110,000

Gloria uses $10,000 from her savings (earning 5% interest or $500) to open a business. After the first year, Gloria incurs a loss of $15,000, which includes the interest that was lost when she withdrew funds from savings. Her accounting loss is:

$14,500.

Teresita is hiring new workers for her dry cleaning business. Each worker is paid $600 per week. The seventh worker increases output from 2,700 units to 3,000 units. What is the marginal cost of hiring the seventh worker?

$2.00/unit.

Doreen's expenses for her landscaping business included rent of $1,000, payroll of $3,000, utilities of $600, and gas for the lawnmowers of $500. What are her monthly variable costs?

$3,500. Payroll + Gas. Utilities aren't included.

In Figure: Industry Adjustments to Economic Profits, when price is equal to $15, short-run economic profit is:

$32 (Intersection between MC and MR=P - ATC all multiplied by the quantity 4 x 8 = 32).

Figure 6.4 shows the cost structure of a firm in a perfectly competitive market. If the market price is $3 and the firm produces the output where MR = MC, its profit is:

-$1,200. Calculate the difference between ATC curve and MC curve (12) at the same quantity. Then multiply by the quantity (100).

In the Figure: MPPL, what is the total physical product of three workers?

225. Must add up all labor preceding it.

If price is ____, profit is positive.

Above average total cost.

A negative accounting profit means that:

Accounting costs are greater than revenue.

Which of these industries would NOT be considered an example of monopoly?

Aluminum.

In ____ cost industry, the entry of new firms increase average total costs.

An increasing.

Boeing and Airbus dominate the large jet airliner manufacturing business. This is an example of ____ market structure.

An oligopoly.

In the short run, businesses:

Are stuck on a chosen short-run average total cost curve.

In the long run, in perfect competition, the average total cost of producing a product is achieved ____ the minimum average total cost.

At.

To determine profitability, a firm looks to the ____ curve.

Average total costs.

In Figure: Maximum Profit in Perfect Competition 3, profit is maximized at point:

B (where Marginal revenue curve intersects with Marginal Cost curve).

____ are costs that require a monetary payment.

Explicit and accounting cost.

The optimal firm size for businesses in competitive industries is:

In the region of constant returns to scale.

In a decreasing cost industry, as prices rise due to an increase in demand, profits initially:

Increase.

Average total cost is ____ whenever marginal cost is greater than average total cost.

Increasing.

When the market price of an item is below average total cost and businesses ____, businesses will eventually ____ the market.

Incur losses; leave.

All of these are explicit costs EXCEPT:

Interest lost on accounts used to pay expenses.

In the Figure: Industry Adjustments to Economic Profits 2, when price is equal to $10, short-run economic profit:

Is negative (a loss).

The typical shape of the long-run average total cost curve is:

Like a U.

The lowest average total cost at which a business can produce various levels of output when all inputs are allowed to vary is known as the:

Long-run average total cost.

The ____ total cost curve is the lowest cost per unit at which a business can produce various levels of output when all inputs are allowed to vary.

Long-run average.

____ occurs when businesses in a competitive industry have zero economic profit.

Long-run equilibrium.

The ____ the profitable market of phone apps tend to put downward pressur eon profits and prices.

Low barriers to entry in.

____ is used to decide how much to produce.

Marginal cost.

A firm benefits from increasing production only as long as ____ is lower than ____.

Marginal cost; marginal revenue.

Because MPPL decreases as more workers are hired:

Marginal costs increase.

____ is defined as the business environment in which a firm operates.

Market structure.

Perfect competition automatically pushes firms to ____ productive efficiency and ____ allocative efficiency.

Maximize; maximize.

A market structure in which many firms are selling products that are similar but not perfect substitutes for each other is:

Monopolistic competition.

Nevena is a developer of smartphone apps. She makes similar apps to those of her numerous competitors, but each of her apps has unique qualities that her competitors don't have in theirs. Which market structure does Nevena's business fall under?

Monopolistic competition.

When does a firm's average variable cost exceed the average total cost?

Never.

Zero economic profit is a(n) ____ rate of return.

Normal.

Productive efficiency is:

Obtaining the maximum possible output with a given set of resources.

The marginal physical product of labor is the additional ____ of an additional unit of labor, holding everything else constant.

Output.

A market structure with a very large number of sellers of a standardized product is known as:

Perfect competition.

Marginal revenue equals price in the ____ market structure.

Perfect competition.

In a constant cost industry, the long-run supply curve is:

Perfectly elastic.

Economies of scope occur because:

Physical capital can be utilized for multiple products.

You're hired by Jimbo's Potato Farm to determine when Jimbo should shut down and produce no potatoes in the short run. Jimbo sells his potatoes in a perfectly competitive market. You tell him to shut down if:

Price is less than average variable cost when marginal revenue equals marginal cost.

In perfect competition, as the average total cost of producing an item is minimized, ____ occurs.

Productive efficiency.

In the long run, if Britta's average total cost to produce cookies is $4, and she's able to sell them for $5, she should:

Remain in the market.

In the Figure: Business Decision to Shut Down 2, this firm should:

Remain open in the short run and minimize losses. The graph depicts MR = P in the lower part of the graph, ATC finishes in the middle, MC finishes on top and to the left, and AVC finishes below ATC but above MR = P to the right.

When a firm sells an additional product, it will generally see its:

Revenue increase.

A perfectly competitive firm can:

Sell as much as it can produce at the market price.

Suppose Tim's Cowboy boot factory produces in a perfectly competitive market. Suppose the average total cost of cowboy boots is $65, the average variable cost of cowboy boots is $60, and the price of cowboy boots is $62. If the firm is producing the level of output where marginal cost equals price, then in the short run the firm:

Should continue to produce since total revenue exceeds total variable cost.

To an economist, zero economic profit is the dividing line between:

Success and failure.

The upward-sloping portion of the marginal cost curve that lies above the average variable cost curve is a firm's:

Supply curve.

A firm that is unable to impact the market price is a price:

Taker.

Marginal revenue is:

The additional revenue a business receives from one additional unit of output.

____ occurs when economic profit equals zero.

The breakeven point.

Marginal Cost is defined as:

The change in total variable cost resulting from a one-unit increase in the change in quantity.

Some food stores and general retail stores like Walmart and Target stay open different hours. In evaluating whether it makes sense to stay open from 1 AM to 2 AM, such a store will want to know its marginal costs which include:

The costs of labor that would otherwise not be used that hour.

To find the average fixed cost at a specific level of output, find:

The distance between the average variable cost and average total cost curves at that output level.

The marginal physical product of labor is equal to:

The increase in production that results from an increase in labor.

If a stock market analyst says, "Computer memory chips are becoming a commodity," what is meant by this?

The market is becoming so competitive that firms have no pricing power, and profits are low.

____ is a source of diseconomies of scale.

The principal-agent problem.

What is the average fixed cost when given a graph with 3 curves?

The vertical distance between the average total cost and average variable cost at a given point. Both curves should be slightly U-shaped.

Which statement BEST explains how decision making is simplified for most firms in perfectly competitive industries?

They do not need to decide how much to charge for their product.

Marginal product is defined as the change in ____ resulting form a one-unit increase in ____.

Total product; input.

You sell your good in a perfectly competitive market where the market price is $7.00. When you sell 100 units your total revenue is $700. When you sell 101 units:

Total revenue increases by exactly $7.

Marginal revenue is equal to price for a perfectly competitive firm because:

Total revenue increases by the price of the good when an additional unit is sold.

Economic profit is ____ accounting profit.

Usually less than.

When should an automaker make the decision to permanently shut down one of its factories?

When the factory is persistently operating at a loss.

In a market structure with low entry barriers, firms generally earn ____ economic profit in the long run.

Zero.

When long-run average total cost increases as output increases, a firm is said to be experiencing a(n):

Diseconomy of scale.

Which of these occurs when firms leave a competitive industry because the market price of an item is below average total cost?

Economic profits move toward zero.

When a market has low barriers to entry, positive economic profit:

Encourages rival firms to enter the market.

Calculating Average Total Cost for X amount units:

(Fixed Cost + Variable Cost) / Quantity Note: (Total Cost = FC + VC).

An example of an increasing cost industry is:

Commodities such as gold.

Because of the intensity of competition, the budget tablet market is viewed as a(n):

Commodity.

Economies of scale occur for all of these reasons EXCEPT:

Continued investment in physical capital.

In Figure: Costs, which represents AVC? (Average Variable Costs)

D (the middle curve).

Kevin's Golf-a-Rama sells golf balls in a perfectly competitive market. At its ucrrent level of golf ball production, Kevin has marginal costs equal to $2. If the market price of golf balls is $1, Kevin should:

Decrease the level of golf ball production.