test 3 review eco 2023
A monopolistically competitive firm in a long-run equilibrium produces where:
its demand curve is tangent to its average total cost curve
Which of the following are sometimes called accounting costs?
Which of the following are sometimes called accounting costs?
Which of the following best describes the additional revenue associated with selling an additional unit of output?
Marginal revenue
If the average total cost curve is above the demand curve, then this firm is:
having econmic loss A demand curve represents the number of units demanded at each price for that good. If the demand curve is below the average total cost curve, then that means the costs to produce are higher than every price point on the demand curve. For a firm to make an economic profit, the demand curve will need to be above the average total cost curve.
Monopolistically competitive firms have some control over price because:
the products they produce are differentiated
Which of these statements is correct?
Legally enforcing trademarks can be difficult. not: Brand names can be easily protected, especially as time goes by Establishing franchises is harmful to a firm's long-term success
When graphing a conventional short-run production function, we place __________ on the horizontal axis and __________ on the vertical axis.
the variable input, output
Any action the firm takes to maintain product differentiation over time is known as:
brand management
If a monopolistically competitive firm's demand curve is above its average total cost curve, then this firm is making:
positive economic profit
According to the graph, the firm in question is a monopolistically competitive firm:
in long-run equilibrium as indicated by the equality of price and average cost. When price equals long-run average cost the firm is in long-run equilibrium. Economic profits are zero at this point and no new firms should be attracted to enter the market
A monopolistically competitive firm produces where:
marginal revenue equals marginal cost
A firm may opt to pay millions of dollars for celebrity endorsements in order to:
signal to consumers that the advertised product is appealing and likely to be popular
What is the term given to a cost that has already been paid and cannot be recovered?
sunk costs
According to the data in the table, what is the marginal cost of producing the 640th pizza?
When you move from producing 625 pizzas to producing 640 pizzas, the total cost increases from $4,050 to $4,700, which is an increase of $650. Therefore, it costs $650 to produce another 15 pizzas (640 pizzas minus 625 pizzas = 15 pizzas). So, the marginal cost of producing that last pizza is equal to $650 / 15 = $43.33.
Which type of efficiency is achieved by a monopolistically competitive firm in the long run?
Neither allocative nor productive efficiency
In perfect competition, the marginal revenue is the same as:
price
According to the graph, what will be the firm's total revenue if it is maximizing profits?
$13,500 if it is maximizing profits. The firm will maximize profits by producing the level of output where marginal revenue and marginal cost are equal. This occurs at 900 units. When you extend a vertical line through 900 units until it intersects the demand curve, you see that the market price at that level will be $15 per unit. The total revenue is equal to price x quantity, so 900 x $15 = $13,500.
According to the graph, what price should the firm charge to maximize profits?
$15 per unit to maximize profits. The firm will maximize profits by producing the level of output where marginal revenue and marginal cost are equal. This occurs at 900 units. When you extend a vertical line through 900 units until it intersects the demand curve, you see that the market price at that level will be $15 per unit.
At which price in this graph is the perfectly competitive firm earning negative economic profit?
$250. At that price, the average total cost is higher than price which results in a loss represented by the shaded area. At a price of $495, the firm will opt to produce where MR = MC and it will earn an economic profit.
According to the graph, if the firm is maximizing profits what is the dollar value of the profit?
$5,The firm will maximize profit by producing the quantity where marginal revenue is equal to marginal cost. This occurs at five units that are sold at $3.50 per unit. The average total cost at this level of production is only $2.50 per unit so the profit is the $1.00 difference x 5 units = $5.00.
According to the graph, which level of output represents the minimum efficient scale in bookselling?
20,000 books represent the minimum efficient scale in bookselling. The minimum efficient scale occurs at the level of output where all economies of scale have been exhausted. In the graph, you can see that long-run average costs are falling until you reach 20,000 books and then constant returns to scale engage and long-run average costs are flat.
According to the graph, which level of output maximizes profit?
8 shirts per minute. Profit maximization occurs at the level of output that generates the largest vertical distance between the two curves.
According to the data in the table, what level of output maximizes profit?
8 units of output. The marginal principle tells us that the firm will maximize profit by choosing the quantity at which marginal revenue (the market price) equals marginal cost. As long as marginal revenue is greater than the marginal cost, the firm will benefit by increasing the output.
According to the data in the table, when the price is $4, the firm would produce:
According to the data in the table when the price is $4, the firm would produce four units of output, although it would suffer a loss from doing so. At this level of output, variable costs are $13 and the firm is selling the four units for a total of $16. This means the firm can apply the difference towards covering a portion of the fixed costs. So, in this case, the firm will be able to apply $3 toward the $17 fixed costs and only lose $14 in fixed costs. If the firm completely shut down, it would still lose the $17 in fixed costs.
According to the graph, which demand curve is associated with the shutdown point for this perfectly competitive firm?
According to the graph, Demand curve 2 is associated with the shutdown point for this perfectly competitive firm. At Demand 2, the firm is at the point where marginal revenue exactly equals average variable cost so there is no reason to continue production.
For what type of market structure is the demand curve the same as marginal revenue?
Perfect competition
According to the graph, a decrease in price from $3.50 to $3.00 per cup results in a gain and a loss of revenue. Which area represents the loss of revenue?
According to the graph, a decrease in price from $3.50 to $3.00 per cup results in a gain and a loss of revenue. Area A represents the loss of revenue. The firm is now selling those same five cups of latte for $3.00 each instead of $3.50 so it is losing $0.50 per cup on those five cups for a total of $2.50 loss.
According to the graph, which change in output represents economies of scale in bookselling?
According to the graph, the change in output from 1,000 to 20,000 books sold per month represents economies of scale in bookselling *decreasing
According to the graph, what is the value of total fixed cost for this perfectly competitive firm
According to the graph, the value of total fixed cost for this perfectly competitive firm is $2,400. At 100 units of output, the firm is generating $5,800 in total costs, of which $3,400 is variable cost. Therefore, the fixed cost is the difference of $5,800 - $3,400 = $2,400.
According to the table of data, when do diminishing returns in the production of pizzas begin?
According to the table of data, diminishing returns in the production of pizzas begin when the third worker is hired. The marginal product of labor goes from 250 when the second worker is hired to 100 when the third worker is hired. This decline illustrates the law of diminishing returns.
According to the table, what is the average total cost of producing 550 pizzas?
According to the table, the average total cost of producing 550 pizzas $5.00 per pizza. The average total cost is equal to the total cost divided by the output produced. Therefore the average cost is equal to $2,750 / 550 = $5.00.
According to the graph, a decrease in price from $3.50 to $3.00 per cup results in a gain and a loss of revenue. Which area represents the gain of revenue?
Area B represents the gain of revenue. The firm will sell one additional latte for $3.00 so area B shows that amount. The net increase (or decrease) in total revenue can be determined by subtracting Area A from Area B. In this case, it results in a $0.50 increase in total revenue since the firm gained $3.00 but also lost $2.50 on the first five cups.
If the number of people in a publishing company does not go up or down with the quantity of books it publishes, then how should we categorize the salaries and benefits paid to these employees?
As a part of fixed cost If the number of people in a publishing company does not go up or down with the quantity of books it publishes, then the salaries and benefits paid to these employees should be considered as a part of fixed cost. Fixed costs remain the same regardless of the level of output. The cost of raw materials and components used to manufacture a product are good examples of variable costs. Variable costs are affected by the level of output produced. Variable costs, specifically defined, are those costs that vary with the number of units produced. Implicit costs are nonmonetary opportunity costs. The salaries of these individuals are explicit out-of-pocket fixed costs that do not vary with production.
Which of the following types of firms use the marginal revenue equals marginal cost approach to maximize profits?
Both perfectly competitive and monopolistically competitive
What trade-offs do consumers face when buying a product from a monopolistically competitive firm?
Consumers pay a price greater than marginal cost but also have a wider array of choices.
Based on the relationship between average total cost and marginal cost, which of the curves appears to be average total cost?
Curve 2 appears to be average total cost. When marginal cost is greater than average cost, the average cost curve will be rising, and when marginal cost is lower than the average cost the average cost will be falling. For this reason, Curve 1 has to be the marginal cost curve and Curve 2 is the average cost curve.
Based on the relationship between marginal and average product, which curve appears to be the average product curve?
Curve 2 appears to be the average product curve. When marginal product is greater than average product, the average product curve will be rising and when marginal product is lower than the average product the average product will be falling. For this reason, Curve 1 has to be the marginal product curve and Curve 2 is the average product curve.
In the short-run, the cost that is independent of the amount of output produced is called __________.
Fixed cost In the short-run, the cost that is independent of the amount of output produced is called fixed cost. Fixed cost does not change with the level of output. An example of a fixed cost would be the cost of the equipment used to manufacture a product. Variable costs vary directly with the level of output. As output increases so do variable costs. Examples include the cost of raw materials used to produce a product. Explicit costs include any out-of-pocket cost that you pay such as supplies, utilities, labor, etc.
What is occurring from the origin up until point A in this graph?
From the origin up until point A in this graph output increases at an increasing rate. Because of the benefits of specialization and the division of labor output will first increase at an increasing rate. During this phase of production each additional worker hired causes production to increase by more than the hiring of the previous worker.
Which graph is representative of a typical average total cost curve?
Graph B is representative of a typical average total cost curve. The average total cost curve is typically U-shaped because costs fall initially as production increases, then flatten out for a period of time, and then begin to rise as the law of diminishing returns kicks in and the marginal product of the variable input begins to fall.
What is the name for the additional output that a firm produces as a result of hiring one more worker?
Marginal product of labor
What is the term given to all the activities necessary for a firm to sell a product to a consumer?
Marketing
Which of the following is known as the highest-valued alternative that must be given up in order to engage in an activity?
Opportunity cost
According to the graph the shut-down point corresponds to:
Point d. At point d the price only covers the variable cost and does not contribute any money towards fixed costs. Therefore, at this point the firm would be indifferent to shutting down or continuing operations. Either option would have the same result.
Which of the following best describes how the product differentiation of monopolistically competitive firms may benefit consumers?
Product differentiation can locate firms more conveniently to consumers and offer versions of a product or service that better fits their needs.
In reference to the graph, at what level of output does this perfectly competitive firm maximize profit?
Q3. Profit is maximized at the point where marginal revenue is equal to marginal cost. As long as marginal revenue exceeds marginal cost, the firm can make additional profit by producing that next unit. However, at some point diminishing marginal returns will increase marginal cost to the point where it will eventually be equal to marginal revenue. At this point, the profit is maximized.
Which graph best depicts an industry in which the firm's average costs decrease as the industry expands production?
The graph on the left best depicts an industry in which the firm's average costs decrease as the industry expands production. In the long run, competition will force the price of the product to fall to the level of the new lower average cost of the typical firm. In this case, the long-run supply curve will slope downward. Industries with downward-sloping long-run supply curves are called decreasing cost industries.
The perfectly competitive firm represented in the graph on the right is experiencing a __________.
The perfectly competitive firm represented in the graph on the right is experiencing a profit in the short run. The firm will produce where marginal cost intersects marginal revenue. At that point, the marginal revenue is higher than average total cost which means the firm is making an economic profit. In the long run, these profits will attract other producers to this market and the price will fall until it equals the average total cost.
Which of the following is a characteristic of a perfectly competitive market?
There are large numbers of buyers and sellers. There are large numbers of buyers and sellers in a perfectly competitive market. For a market to be competitive, the number of market participants must be large enough so that no one buyer or seller can influence the market price. The other three features of a competitive market are: (1) a standardized product, (2) firms can freely enter or exit the market, (3) price is determined by the interaction of supply and demand with no intervention
Using the table data provided, what is the average revenue associated with the sixth unit of output produced and sold?
To compute average revenue you divide total revenue by the number of units produced. So, total revenue of $18 divided by 6 units = $3.00 per unit.
Which of these costs are affected by the level of output produced?
Variable costs
When the marginal product of labor is greater than the average product of labor, then the average product of labor must be:
When the marginal product of labor is greater than the average product of labor, then the average product of labor must be increasing. The additional output that a firm produces as a result of hiring one more worker is known as the marginal product of labor. The term "marginal" always refers to the next unit of something. In this case, we are referring to the change in output due to hiring another worker. If the marginal product of labor is increasing, then that means it will pull the average product of labor higher since the average product of labor is merely the total output divided by the number of units of labor.
Minimum efficient scale is the level of output at which:
all economies of scale have been exhausted
The short run is a period of time where __________ while the long run is a period of time where __________.
at least one input is fixed, all inputs are variable
According to the graph, over what range of output do we find constant returns to scale in bookselling?
between 20,000 and 40,000 books. * straight line Constant returns to scale occur where the firm's long-run average costs are flat. At some point, these costs will begin to increase and the firm will begin to experience diseconomies of scale. In this graph, the point of increasing long-run average costs begins at 40,000 books and continues thereafter.
According to the graph, what size bookstore is more likely to experience diseconomies of scale?
bookstores that sell more than 80,000 books per month are more likely to experience diseconomies of scale. As you can see, in the graph, when bookstore sales exceed 80,000 books per month the long-run average cost curve begins to slope steeply upward. This indicates long-run average costs are increasing rapidly beyond this poin
Long-run equilibrium in perfect competition results in:
both productive and allocative efficiency. Allocative efficiency is a state in which the economy produces the best combination of consumer preferences. Prices adjusting to equilibrium provide a signal to producers to produce more or less units until the economy is allocatively efficient. In addition, goods are produced at the lowest possible cost which is productive efficiency. If a firm was not efficient, it would not survive in the long-run as other firms produced and sold product at lower cost. Competition ensures that both productive and allocative efficiency hold.
A firm in perfect competition earns profit if:
price is greater than average total cost A firm must cover all costs in order to make a profit. This only occurs if the price per unit is higher than average total cost to produce the product.
A buyer or seller that is unable to affect the market price is called a __________.
price taker
The monopolistically competitive firm sells a __________ product and faces a __________ demand curve.
differentiated, downward-sloping
According to the graph, which of the following is more likely to occur when moving from point A to point B?
diminishing returns are more likely to occur when moving from point A to point B. As you can see, the slope begins to flatten indicating that marginal product of labor is falling. Each additional worker beyond this point will have a smaller marginal product.
he downward sloping part of the long run average total cost curve is where the firm is achieving:
economies of scale The downward sloping part of the long-run average cost curve is where the firm is achieving economies of scale. Economies of scale happen when the long run average cost decreases as output increases. This is represented by the downward-sloping part of the long-run average cost curve. Diseconomies of scale occur when long-run average cost is increasing as output increases. This is represented by the upward-sloping part of the long-run average cost curve. Constant returns to scale occur over the range of output where the long-run average cost is not changing. This is represented by the flat part of the long-run average cost curve.
The relationship between the inputs used by the firm and the maximum output it can produce is known as the:
he relationship between the inputs used by the firm and the maximum output it can produce is known as the production function. The production function is directly related to the level of technology a firm uses. Firms can opt to use more labor and less technology, or vice versa. For this reason, a production function can differ from firm to firm, even if they are in the same industry.
According to the graph, what will happen if Starbucks increases the price of caffe lattes?
it will lose some, but not all, of its customers. If Starbucks increases the price from $3.00 to $3.25 per cup, the quantity demanded will fall from 3,000 to 2,400 per week. As you can see, monopolistic competitors do have some ability to change price. However, they still have to consider the impact on sales since by definition there are multiple substitute products in this market structure.
A monopolistically competitive firm is characterized by the existence of many firms in the market, differentiated products and:
low barriers to entry
What does the shaded area in the graph represent for a perfectly competitive firm that produces at output level Q?
negative economic profit for a perfectly competitive firm that produces at output level Q. At that level of output, the average total cost is higher than the price the firm receives for the product. Therefore, the distance between price and average total cost multiplied by the number of units sold (the shaded area) is the total loss for this firm. The total cost of producing Q is equal to ATC x Q. Positive economic profits will only occur if price is higher than ATC.
According to the graphs, which of the following is likely to happen in this market in the long run?
no other firms will enter this market in the long run. Firms will enter a market only if they expect to make an economic profit. Firms will leave a market if they are suffering losses. In this case, the price is equal to the average cost at the chosen quantity, so there is zero economic profit, and therefore, no incentive to enter or exit the market.
In the short run, the firm should:
operate if price > average variable cost
In this graph, the market is initially in long-run equilibrium at point A. If this is a constant-cost industry, after the decrease in demand, which point is likely to be a short-run equilibrium and which point is likely to be the next long-run equilibrium?
point D is a short-run equilibrium and point C is the new long-run equilibrium. When demand shifts to the left, the new equilibrium price will be $7 at point D. As time passes, firms will begin to exit this market since they are experiencing economic loss. The exit of these firms will shift the supply curve to the left and push prices back up to $10 at the long-run equilibrium point C.
In perfect competition, when a firm is making positive economic profit in the short run, then new firms enter the market causing the market supply curve to __________ and the market price to __________.
shift rightward, decrease In perfect competition, when a firm is making positive economic profit in the short run, then new firms enter the market causing the market supply curve to shift rightward and the market price to decrease.
According to the graph, if a perfectly competitive firm is producing at point A, which of the following is true?
the firm earns zero economic profit. The firm is producing where price is equal to the average total cost, so economic profit is equal to zero. A loss would occur if the marginal revenue was below average total cost and a positive economic profit occurs when marginal revenue is higher than average total cost. In all cases, the firm will maximize profits or minimize losses at the point where marginal revenue equals marginal cost.
As the market demand shifts to the left, how will the firm's level of output change?
the firm will decrease its output and suffer losses. Price will fall and the firm will reduce output to the point where marginal revenue is equal to marginal cost. However, as long as this point is higher than average variable cost the firm will continue to produce at a loss. Any revenues that exceed average variable cost can at least be applied to cover a portion of the fixed costs.
According to the table, which of the following are implicit costs?
the foregone salary and foregone interest are the only implicit costs listed. These are the costs associated with giving up one alternative to pursue another. They are also implicit costs since they are not costs you actually pay out-of-pocket, but instead represent monies you could have received had you selected another option.