Ch. 9

question

Explain why it is possible that a firm with a production function that exhibits increasing returns to scale can run into diminishing returns at the same time.
Increasing returns is a reduction in _______ costs in the ______, while diminishing returns is an increase in _______ costs in the _____.

answer

average; long run;marginal; short run

question

Suppose demand for wheat is initially D2. If consumer incomes increase, then demand for wheat will shift to _____. This will _____ the equilibrium price of wheat and individual profit maximizing firms will produce _____ bushels of wheat.

answer

d3; increase; 15

question

For this farmer to maximize profits he should produce _____ bushels of wheat.

answer

question

In the short run, a firm in a perfectly competitive industry will minimize its losses by shutting down if:

answer

A and B only.

question

Refer to the scenario below to answer the following question.
Tom borrowed $40,000 from his parents to open a donut stand. He agrees to pay his parents a 5% yearly return on the money they lent him. His other yearly fixed costs equal $10,000. His variable costs equal $25,000. He sold 40,000 dozen donuts during the year at a price of $2.00 per dozen.
Tom's profit is

answer

$43,000

question

When P = SRMC = SRAC = LRAC, an industry is considered to be:

answer

A and D only

question

Two college students share an apartment and split the cost of heating, electricity, and rent. They decide to include one more roommate and divide heat, electricity, and rent costs three ways instead of two ways.
If adding the third roommate reduces the amount of money they each pay for utilities and rent each month, this can be described as:

answer

increasing returns to scale.

question

Tom borrowed $40,000 from his parents to open a donut stand. He agrees to pay his parents a 5% yearly return on the money they lent him. His other yearly fixed costs equal $10,000. His variable costs equal $25,000. He sold 40,000 dozen donuts during the year at a price of $2.00 per dozen.
Tom's total fixed costs equal

answer

$12,000.

question

A perfectly competitive firm sells pineapples for $4 each. MR = MC at a quantity of 600 units. Average total cost at the profit-maximizing quantity is $2.75. This firm is earning a profit of

answer

$750

question

A firm that is earning a positive profit in the short run and expects to continue doing so has an incentive to expand its scale of operation in the long run.

answer

True

question

Suppose a competitive industry experiences external economies. If so, then:

answer

a firm's long-run average cost curve shifts down when industry output expands.

question

Furthermore, with external economies, the long-run industry supply curve _____________ with output.

answer

decreases

question

In a perfectly competitive market in the long run, profits are driven to zero due to which of the following relationships?

answer

P* = SRMC = SRAC = LRAC.

question

This farmer's fixed costs are

answer

$24

question

If this farmer is maximizing profits, his total costs will be

answer

$132

question

When an increase in a firm's scale of production leads to lower average costs, we say that there are:

answer

economies of scale.

question

For each of the following, decide whether you agree or disagree and explain your answer:
A firm earning positive profits in the short run always has an incentive to increase its scale of operation in the long run.

answer

Disagree. It has an incentive to expand its scale of operation only if it expects to continue to earn profits.

question

A firm suffering losses in the short run will continue to operate as long as total revenue at least covers fixed cost.

answer

Disagree: It should continue to operate as long as price is greater than average variable cost.

question

Observe the firm's long-run average cost curve shown to the right. Between points B and C, there are:

answer

constant returns to scale.

question

A firm in a perfectly competitive industry in long-run equilibrium will earn normal returns and zero economic profit.

answer

True

question

The firm's shut down point is at a price of

answer

question

This farmer would earn a zero economic profit if price was

answer

$10

question

If total revenue is less than total variable cost in a perfectly competitive industry in the short run, firms will tend to exit that industry in the long run.

answer

True

question

If this farmer is maximizing his profits, his TVC is

answer

$108

question

answer

$37,000

question

A firm that is breaking even is:

answer

All of the above.

question

If this farmer is maximizing profits, his total revenue will be

answer

$180

question

A perfectly competitive market is in long-run equilibrium. If demand in this market suddenly increases, price will ________ and firms will ________.

answer

increase, earn a profit

question

A perfectly competitive market is in long-run equilibrium and demand in this market suddenly increases. In this situation, firms will eventually ________ the industry and will ultimately earn ________ economic profits.

answer

enter; zero

question

When an industry enjoys external economies, its long-run supply curve slopes ________ and the industry is called a(n) ________ industry.

answer

down; decreasing-cost

question

Constant-cost industries are industries in which there are no external economies or diseconomies of scale.

answer

True

question

In the short run,

answer

firms act to minimize losses or maximize profits

question

answer

$80,000

question

This farmer's shutdown point is at a price of

answer

question

Firms that are "breaking even" are

answer

earning zero economic profits

question

If this farmer is maximizing profits, his profit will be

answer

$48

question

If a firm's economic profit is $0, then it must be true that

answer

TR equals TC.

question

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

answer

The portion of the marginal cost curve that lies above minimum average variable cost.

1 of 38

question

answer

average; long run;marginal; short run

question

answer

d3; increase; 15

question

For this farmer to maximize profits he should produce _____ bushels of wheat.

answer

question

In the short run, a firm in a perfectly competitive industry will minimize its losses by shutting down if:

answer

A and B only.

question

answer

$43,000

question

When P = SRMC = SRAC = LRAC, an industry is considered to be:

answer

A and D only

question

answer

increasing returns to scale.

question

answer

$12,000.

question

A perfectly competitive firm sells pineapples for $4 each. MR = MC at a quantity of 600 units. Average total cost at the profit-maximizing quantity is $2.75. This firm is earning a profit of

answer

$750

question

A firm that is earning a positive profit in the short run and expects to continue doing so has an incentive to expand its scale of operation in the long run.

answer

True

question

Suppose a competitive industry experiences external economies. If so, then:

answer

a firm's long-run average cost curve shifts down when industry output expands.

question

Furthermore, with external economies, the long-run industry supply curve _____________ with output.

answer

decreases

question

In a perfectly competitive market in the long run, profits are driven to zero due to which of the following relationships?

answer

P* = SRMC = SRAC = LRAC.

question

This farmer's fixed costs are

answer

$24

question

If this farmer is maximizing profits, his total costs will be

answer

$132

question

When an increase in a firm's scale of production leads to lower average costs, we say that there are:

answer

economies of scale.

question

answer

Disagree. It has an incentive to expand its scale of operation only if it expects to continue to earn profits.

question

A firm suffering losses in the short run will continue to operate as long as total revenue at least covers fixed cost.

answer

Disagree: It should continue to operate as long as price is greater than average variable cost.

question

Observe the firm's long-run average cost curve shown to the right. Between points B and C, there are:

answer

constant returns to scale.

question

A firm in a perfectly competitive industry in long-run equilibrium will earn normal returns and zero economic profit.

answer

True

question

The firm's shut down point is at a price of

answer

question

This farmer would earn a zero economic profit if price was

answer

$10

question

If total revenue is less than total variable cost in a perfectly competitive industry in the short run, firms will tend to exit that industry in the long run.

answer

True

question

If this farmer is maximizing his profits, his TVC is

answer

$108

question

answer

$37,000

question

A firm that is breaking even is:

answer

All of the above.

question

If this farmer is maximizing profits, his total revenue will be

answer

$180

question

A perfectly competitive market is in long-run equilibrium. If demand in this market suddenly increases, price will ________ and firms will ________.

answer

increase, earn a profit

question

answer

enter; zero

question

When an industry enjoys external economies, its long-run supply curve slopes ________ and the industry is called a(n) ________ industry.

answer

down; decreasing-cost

question

Constant-cost industries are industries in which there are no external economies or diseconomies of scale.

answer

True

question

In the short run,

answer

firms act to minimize losses or maximize profits

question

answer

$80,000

question

This farmer's shutdown point is at a price of

answer

question

Firms that are "breaking even" are

answer

earning zero economic profits

question

If this farmer is maximizing profits, his profit will be

answer

$48

question

If a firm's economic profit is $0, then it must be true that

answer

TR equals TC.

question

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

answer

The portion of the marginal cost curve that lies above minimum average variable cost.

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Ch. 9

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