Sample Questions Chapter 6 & 7

Suppose Aiko is a potter who makes mugs. Her total costs depend on the number of mugs she makes each day, as shown in the accompanying table. Aiko's fixed cost is ______ per day.

$10

Assume that all firms in this industry have identical cost curves and that the market is perfectly competitive. In the long run, the equilibrium price will be _____ per gallon, and each firm's profit-maximizing quantity will be ______ gallons per week.

$15; 300

The accompanying table describes the relationship between the number of workers hired by a call center each hour and the number of calls the call center can make each hour. The call center has only 1 telephone. The telephone costs the firm $5/hour (regardless of how many calls are made), and each worker is paid $10 per hour. Given the information in the table above, what is the call center's marginal cost when it goes from making 6 calls an hour to making 16 calls an hour?

$20

The accompanying table shows a pizzeria's fixed cost and variable cost at different levels of output. Pizzas sell for $20 each. When the pizzeria makes 25 pizzas, its average fixed cost is ______.

$20

If a firm spends $300 to produce 10 units of output and spends $720 to produce 20 units, then between 10 and 20 units of output, the marginal cost of production is:

$420

Last year Christine worked as a consultant. She hired an administrative assistant for $15,000 per year and rented office space (utilities included) for $3,000 per month. Her total revenue for the year was $100,000. If Christine hadn't worked as a consultant, she would have worked at a real estate firm earning $40,000 a year. Last year, Christine's accounting profit was ______ and her economic profit was ______.

$49,000; $9,000

The accompanying table describes the relationship between the number of workers hired by a call center each hour and the number of calls the call center can make each hour. The call center has only 1 telephone. The telephone costs the firm $5/hour (regardless of how many calls are made), and each worker is paid $10 per hour. What is the total cost of making 6 calls an hour?

$65

When Acme Dynamite produces 350 units of output, its variable cost is $1,000, and its fixed cost is $600. It sells each unit of output for $25. When Acme Dynamite produces 350 units of output, its profit is

$7,150.

Refer to the accompanying graph. If this firm is a price taker, then when the price of each unit of output is $30, how much profit does this firm earn at its profit-maximizing level of output?

$800

a firms total profit equals

(P − ATC) × Q

The accompanying table describes the relationship between the number of workers hired by a call center each hour and the number of calls the call center can make each hour. The call center has only 1 telephone. The telephone costs the firm $5/hour (regardless of how many calls are made), and each worker is paid $10 per hour. Average variable cost is minimized when output is approximately

22 units average variable cost = variable cost/ level of output

Refer to the accompanying table. To increase output from 99 to 132 units per day requires ______ extra employees; to increase output from 132 to 165 units per day requires ______ extra employees.

3; 4 why? going from 4 to 7 employees per day increases outputs from 99 to 132 units of output per day. Going from 7 to 11 employees per day increases output from 132 to 165 units per day.

Refer to the accompanying table. It is clear that diminishing returns sets in after ______ workers per day.

4

Suppose Sarah owns a small company that makes wedding cakes. The accompanying table shows how Sarah's total cost varies depending on the number of wedding cakes she makes each day. If the market for wedding cakes is perfectly competitive, and wedding cakes sell for $125 each, then Sarah should produce ______ cakes per day.

5

Refer to the accompanying graph. If this firm is a price taker, then when the price of each unit of output is $30, this firm's profit-maximizing level of output is ______.

80

Which of the following is a defining characteristic of all perfectly competitive markets?

All firms sell the same standardized product.

The accompanying graph shows the cost curves for Mei's mushroom gathering business, which is perfectly competitive. In the graph above, the average variable cost curve is labeled _____, the average total cost curve is labeled _____, and the marginal cost curve is labeled ______.

C; B; A

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

Each firm in the market sells a somewhat different variant of the good.

Which of the following is NOT true of a perfectly competitive firm?

It seeks to maximize revenue.

Assume that all firms in this industry have identical cost curves and that the market is perfectly competitive. If the market supply curve is given by S3, then what will happen to the market supply curve in the long run?

It will shift to S2.

Which of the following is NOT an example of an explicit cost?

The income the owner could have earned in his or her next best employment opportunity

Which of the following is the most likely to be a fixed factor of production at a farm?

The land on which the farm is located

The figure below depicts the short-run market equilibrium in a perfectly competitive market and the cost curves for a representative firm in that market. Assume that all firms in this market have identical cost curves. Given that the current equilibrium price is $8, what will happen to the number of firms in this market in the long run?

The number of firms in the market will rise as firms enter the market in response to positive economic profit.

Which of the following is the most likely to be a variable factor of production at a university?

The number of librarians

Which of the following would not be included in the calculation of accounting profit?

The salary the owner could have earned working elsewhere

Which of the following statements about implicit costs is true?

They measure the forgone opportunities of the firm's owners.

When Acme Dynamite produces 250 units of output, its variable cost is $2,000, and its fixed cost is $500. It sells each unit of output for $25. If the price of dynamite drops to $10, should Acme Dynamite continue to operate in the short run?

Yes, because price is greater than average variable cost

Which of the following best describes how a perfectly competitive industry would respond to a sudden increase in popularity of the product? The market demand curve would shift to the right, leading to

a higher equilibrium price in the short run and entry into the market in the long run.

The long run is best defined as

a period of time sufficiently long that all factors of production are variable

The short run is best defined as

a period of time sufficiently short that at least one factor of production is fixed.

Refer to the accompanying figure. At quantities less than 50 doughnuts per day

average cost is declining because marginal cost is less than average cost.

If a firm is earning zero economic profit, then its accounting profit will

be positive

If all firms in a perfectly competitive industry are experiencing economic losses, then

can be sustained indefinitely.

Suppose a perfectly competitive firm is producing 77 units of output, and the marginal cost of the 77th unit is 11. If the firm can sell each unit of output for $8 and the firm's revenue is sufficient to cover its variable cost, the firm should

decrease production.

If a firm shuts down in the short run, then its

economic loss will equal its fixed costs.

Accounting profit minus implicit costs equals

economic profit

A firm earns a normal profit when its

economic profit is zero.

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. If the market supply curve is given by S3, then in the long run firms will

enter the market, leading the market supply curve to shift back to S2

Assume that all firms in this industry have identical cost curves and that the market is perfectly competitive.If the market supply curve is given by S1, then in the long run firms will

enter the market, leading the market supply curve to shift out to S3.

One difference between the long run and the short run in a perfectly competitive industry is that

firms necessarily earn zero economic profit in the long run but may earn positive or negative economic profit in the short run.

The most important challenge facing a firm in a perfectly competitive market is deciding

how much to produce

One implication of the shape of the demand curve facing a perfectly competitive firm is that

if the firm increases its price above the market price, it will earn zero revenue.

A fixed factor of production

is fixed only in the short run

Denise sells lemonade in front of her house in the summer. Several other kids in Denise's neighborhood also run lemonade stands in the summer. If the lemonade market is perfectly competitive, and Denise is charging the equilibrium price, then Denise can increase her revenue if she

keeps the price of her lemonade the same and increases the output.

Refer to the accompanying graph. If this firm is a price taker and the price of each unit of output is $15, then at this firm's profit-maximizing level of output, it will earn a ______ of ______.

loss; $60

If a production process exhibits diminishing returns, then as output rises

marginal cost will eventually increase.

When plotting marginal and average cost curves, the ______ cost curve always crosses the ______ cost curve at its ______.

marginal; average total; minimum

Explicit costs

measure the payments made to the firm's factors of production

Abdul runs a fishing lodge and has a very profitable business during the summer. In the fall, the number of guests at the lodge starts to decline. Abdul should keep the lodge open

only during those months in which his total revenue exceeds his variable cost

A profit-maximizing perfectly competitive firm must decide

only how much to produce, taking price as fixed.

If you were to start your own business, your implicit costs would include the

opportunity cost of the time you spend working at the business

If the market for butter is perfectly competitive, then the demand curve facing a firm that produces butter will be:

perfectly elastic

Total revenue minus both explicit and implicit costs defines a firm's

profit

Assume that each day a firm uses 13 employee-hours per day and an office to produce 100 units of output. The price of each unit output is $5, the hourly wage rate is $10, and rent on the office is $200 per day. Each day the firm earns a ______ of ______.

profit; $170

Suppose a firm uses workers and office space to produce output. The firm is locked into a year-long lease on its office space, but it can easily vary the number of employee-hours it uses each day. The accompanying table describes the relationship between the number of employee-hours the firm uses each day and the firm's daily output. Each unit of output sells for $2, the hourly wage rate is $14, and the rent on the office space is $50 per day. When the firm uses 9 employee-hours per day, it earns a daily ______ of ______.

profit; $64

Refer to the accompanying figure. If the market for doughnuts is perfectly competitive, and the price of a doughnut is 25 cents, then at this firm's profit maximizing level of output, the firm will earn an economic ______ of ______ per day.

profit; $8

Suppose all firms in a perfectly competitive industry are earning an economic profit. One would expect that, over time, the number of firms in the industry will ______ and the market price will ______.

rise; fall

Suppose that when a perfectly competitive firm produces 500 units of output a day, it earns an economic loss. If the price of each unit of output is $1.50, then, in the short run, it is clear that this firm

should not shut down if its total variable cost is less than $750.

Refer to the accompanying figure. If the market for doughnuts is perfectly competitive, and the price of a doughnut is 10 cents, then this firm

should produce 50 doughnuts.

Suppose that when a perfectly competitive firm produces 1,000 units of output, its total variable cost is $1,900. If the marginal cost of producing the 1,000th unit is $1.70, and if the market price of each unit of output is $1.70, then the firm should

shut down

Suppose that when a firm produces the level of output at which price equals marginal cost, the firm's total revenue is less than its variable cost. In this case, the firm should

shut down.

If the firms in a market are earning an economic profit, then, in the long run, the market ______ curve will shift to the ______.

supply; right

If a firm is earning zero economic profit, then

the firm's accounting profit is equal to the firm's implicit costs

If all firms in a perfectly competitive industry are earning a normal profit, then

there is no incentive for firms to enter or exit the industry.

One reason that variable factors of production tend to show diminishing returns in the short run is that

there is only so much that can be produced using additional variable inputs when some factors of production are fixed.

Accounting profit is equal to

total revenue minus explicit costs.

Economic profit is equal to

total revenue minus the sum of explicit and implicit costs

Suppose you own a small business. Last month, your total revenue was $6,000. In addition, you paid $1,000 in monthly rent for office space, $200 in monthly rent for equipment, $3,000 to your workers in wages for the month, and $1,000 for the supplies you used that month.If you correctly determine that your economic profit last month was −$200, then it must be true that

your implicit costs are $1,000 per month

The accompanying graph shows the cost curves for Mei's mushroom gathering business, which is perfectly competitive.If mushrooms sell for $10 per bushel, and Mei chooses the profit-maximizing quantity, she will gather

zero bushels