ECON 203 practice exam 2

question

the most desirable rate of output for a firm is the output that

answer

maximizes total profit

question

total profit is

answer

the difference between total revenue and total costs

question

economies of scale

answer

explain why average total costs decline as output increases in the long run

question

economies of scale (or increasing returns to scale) exist when

answer

all inputs double but output more than doubles, which implies that the average costs have decreased

question

in the long-run perfectly competitive equilibrium, marginal cost

answer

equals the minimum of the ATC

question

competition drives costs down to their bare minimum, this is illustrated by

answer

the tendency of perfectly competitive firms' prices to be driven down to the level of minimum average costs

question

an investment decision involves choosing

answer

the amount of plants and equipment and is a long-run decision

question

an investment decision is

answer

the long-run decision to build, buy, or lease plants and equipment, or to enter or exit an industry

question

which of the following does not affect marginal costs

answer

an increase in property taxes

question

fixed costs such as the cost of the basic plants and equipment and property taxes

answer

do not vary with the rate of output and therefore do not affect marginal costs

question

explain how the market supply curve is derived in a perfectly competitive market

answer

the market supply curve is the sum of marginal costs curves (above the AVC) of all the individual firms in the market

question

five factors that would cause the market supply curve to shift

answer

the price of factor inputs, technology, expectations, taxes and subsidies, and the number of firms in the industry

question

if long-run economic losses are being experienced in a competitive market

answer

equilibrium price will rise as firms exit

question

if economic losses exist in an industry...

answer

firms will want to exit, as they do the market supply curve will shift to the left and cause the market price to increase until profits are normal

question

accounting costs and economic costs differ because

answer

economic costs include implicit costs and accounting costs do not

question

accounting costs refer to

answer

the explicit dollar outlays made by a producer

question

economic costs refer to

answer

the value of all costs both explicit and implicit

question

in the long-run a firm would choose a plant that

answer

yielded the lowest average cost for any desired rate of output

question

when resources are earning zero economic profits for a firm, the resources could earn more in their next best alternative use

answer

false

question

when firms are earning zero economic profits they are

answer

making as much as they could using their resources in their next best alternative

question

explain why economic profits in all perfectly competitive markets will tend toward zero in the long run

answer

in markets experiencing economic profits, firms will enter, forcing prices and profits down. profits will be forced down to the zero level because as long as economic profits exist, firms will enter this market. in markets experiencing economic losses, firms will leave, pushing prices up and losses down. profits will reach the zero level because as long as economic losses exist, firms will leave this market

question

when an athletic shoe company is producing a level of output at which price is greater than MC, from society's standpoint the company is producing too

answer

little because society would be willing to give up more alternative goods in order to get additional shoes

question

high profits in a particular industry indicate

answer

that consumers want a different mix of output (more of that particular industry's goods)

question

firms will enter the market when

answer

economic profits attract new suppliers, and the market supply curve shifts to the right, price decreases, equilibrium quantity increases, and profits approaches zero

question

perfect competition is a market in which no buyer or seller has market power

answer

true

question

a perfectly competitive firm, facing numerous rivals, has difficulty

answer

maintaining prices or profits

question

the fact that a perfectly competitive firm's total revenue curve is an upward-sloping straight line implies that

answer

product price is constant at all levels of output

question

a competitive firms total revenue curve is linear because

answer

it can sell all its output at the prevailing price

question

which of the following is true about a competitive market supply

answer

it is the sum of the marginal cost curves of all firms

question

the market supply curve is the sum of marginal cost curves, which are usually-sloping due to diminishing marginal returns of all the firms, therefore

answer

market supply curve in a perfectly competitive firm is usually upward-sloping

question

in a perfectly competitive market economy, business failures can benefit society by causing

answer

a reallocation of resources to better uses

question

competition forces firms to improve products and reduce prices, firms that cannot keep up

answer

are forced to shut down and perhaps exit the industry

question

the difference between the accountant's and the economist's measurement of cost is equal to implicit costs

answer

true

question

profit is

answer

the difference between total revenue and total cost

question

if catfish farmers expect catfish prices to fall in the future, then right now

answer

the market supply curve for catfish will shift to the right

question

expectations of lower prices in the future will

answer

entice producers to produce more now, at higher price levels that increase supply

question

when economic profits exist in the market for a particular product, this is a single to producers that

answer

consumers would like more scarce resources devoted to the product of this product

question

profit per unit is equal to

answer

price minus average total cost

question

which of the following is most likely a fixed cost

answer

equipment loan payments

question

suppose a firm has a budget of $360,000 for expenses. the owner does not pay himself but could receive income of $90,000 by working elsewhere. the firm earns revenues of $360,000 per year. to receive a normal profit the firm would have to

answer

earn $90,000 more in revenue; since the firm is losing $90,000 to get the economic profit or normal profit, the firm would need additional revenue of $90,000

question

in the short run, which of the following is most likely a variable cost

answer

electricity costs

question

variable costs are the costs of

answer

production that change when the rate of output is altered

question

which of the following is a factor of production for the little biscuit bread company

answer

flour

question

factors of production are

answer

resources used to produce goods and services

question

productivity is

answer

a measure of how much output we get from an input such as labor

question

the total cost at a zero level of output is always equal to the variable cost

answer

false; the total cost at a zero level of output is always equal to the fixed cost

question

if a firm will not incur economic losses or economic profits there are

answer

no incentives for entry or exit

question

a firms costs are $3,075 and revenues are $4,000. the entrepreneur could earn $1,000 as an employee elsewhere, this means the economic profit is

answer

-$75; economic profit is the accounting profit ($925) minus implicit costs ($1,000) to get -$75

question

the rule established for short-run profit maximization guarantees that a firm that follows it will earn economic profits

answer

false; the profit maximization rule will lead a firm to the profit-maximizing point or the loss-minimizing point; there is no guarantee of profits

question

sellers in a perfectly competitive market are powerless to affect the market price of their product

answer

true; a perfectly competitive firm is very small relative to the size of the market, so it does not have any market power

question

when P<ATC in the long run, a perfectly competitive firm experiences economic profit and new firms will enter the market

answer

false; if P<ATC in the long run, a perfectly competitive firm is experiencing economic losses and will exit the market

question

the period in which at least one input is fixed in quantity is the

answer

short run

question

the primary objective of the producer is to find the rate of output that maximizes profit

answer

true; profit is not the only thing that motivates producers, they also worry about social status and crave recognition, however the principal incentive for producing goods and services is the expectation of profit

question

if the demand curve for each firm in industry X is horizontal, then the demand curve for industry X must also be horizontal

answer

false; the market demand curve for a product is always downward-sloping. the demand curve confronting a perfectly competitive firm is horizontal (perfectly elastic demand)

question

high profits in a particular industry indicate that consumers want more of that industry's goods

answer

true

question

short-run profits are maximized at the rate of output where the

answer

marginal revenue is equal to the marginal cost

question

a competitive firm maximizes total profit at the

answer

output rate where MC is equal to MR. if MC is less than MR the firm can increase its profits by producing more. if MC exceeds MR, the firm should reduce its output

question

when a firm is able to achieve the output indicated by a production function, it is producing with technical efficiency

answer

true; technical efficiency is getting the most output attainable from any given level of factor inputs, the points on the production function represents the output using the inputs efficiently

question

a short-run supply determinant includes

answer

technology

question

the determinants of a firm's supply include

answer

the price of factor inputs, technology, and expectations (for costs, sales, technology, taxes, and subsidies)

question

in the short run, when a firm produces zero output, the variable cost equals

answer

zero; variable costs start at zero when a firm produces zero

question

which of the following is characteristic of a perfectly competitive market

answer

zero economic profits in the long run

question

a perfectly competitive industry has several distinguishing characteristics, including

answer

many firms, identical products, and low entry barriers, because of the low entry barriers, perfectly competitive firms will earn zero economic profit in the long run

question

a competitive firm maximizes total profit at the output rate where

answer

MR is equal to MC. if at this output economic profits (P>ATC) exist, these profits attract new firms. as they do, the market supply curve will shift to the right and cause the market price to drop until the profits are normal

question

if the marginal cost curve is rising, which of the following must be true

answer

total costs must be rising

question

marginal cost is the

answer

increase in total cost associated with a one-unit increase in production. so as long as MC is positive, the total costs must be rising. ATC can be decreasing and can be either above or below the marginal cost curve when the marginal cost curve is upward-sloping

question

the decision by firms to enter a market shifts the market supply curve to the right

answer

true; if the number of producers increases, the supply curve will increase

1 of 67

question

the most desirable rate of output for a firm is the output that

answer

maximizes total profit

question

total profit is

answer

the difference between total revenue and total costs

question

economies of scale

answer

explain why average total costs decline as output increases in the long run

question

economies of scale (or increasing returns to scale) exist when

answer

all inputs double but output more than doubles, which implies that the average costs have decreased

question

in the long-run perfectly competitive equilibrium, marginal cost

answer

equals the minimum of the ATC

question

competition drives costs down to their bare minimum, this is illustrated by

answer

the tendency of perfectly competitive firms' prices to be driven down to the level of minimum average costs

question

an investment decision involves choosing

answer

the amount of plants and equipment and is a long-run decision

question

an investment decision is

answer

the long-run decision to build, buy, or lease plants and equipment, or to enter or exit an industry

question

which of the following does not affect marginal costs

answer

an increase in property taxes

question

fixed costs such as the cost of the basic plants and equipment and property taxes

answer

do not vary with the rate of output and therefore do not affect marginal costs

question

explain how the market supply curve is derived in a perfectly competitive market

answer

the market supply curve is the sum of marginal costs curves (above the AVC) of all the individual firms in the market

question

five factors that would cause the market supply curve to shift

answer

the price of factor inputs, technology, expectations, taxes and subsidies, and the number of firms in the industry

question

if long-run economic losses are being experienced in a competitive market

answer

equilibrium price will rise as firms exit

question

if economic losses exist in an industry...

answer

firms will want to exit, as they do the market supply curve will shift to the left and cause the market price to increase until profits are normal

question

accounting costs and economic costs differ because

answer

economic costs include implicit costs and accounting costs do not

question

accounting costs refer to

answer

the explicit dollar outlays made by a producer

question

economic costs refer to

answer

the value of all costs both explicit and implicit

question

in the long-run a firm would choose a plant that

answer

yielded the lowest average cost for any desired rate of output

question

when resources are earning zero economic profits for a firm, the resources could earn more in their next best alternative use

answer

false

question

when firms are earning zero economic profits they are

answer

making as much as they could using their resources in their next best alternative

question

explain why economic profits in all perfectly competitive markets will tend toward zero in the long run

answer

question

when an athletic shoe company is producing a level of output at which price is greater than MC, from society's standpoint the company is producing too

answer

little because society would be willing to give up more alternative goods in order to get additional shoes

question

high profits in a particular industry indicate

answer

that consumers want a different mix of output (more of that particular industry's goods)

question

firms will enter the market when

answer

economic profits attract new suppliers, and the market supply curve shifts to the right, price decreases, equilibrium quantity increases, and profits approaches zero

question

perfect competition is a market in which no buyer or seller has market power

answer

true

question

a perfectly competitive firm, facing numerous rivals, has difficulty

answer

maintaining prices or profits

question

the fact that a perfectly competitive firm's total revenue curve is an upward-sloping straight line implies that

answer

product price is constant at all levels of output

question

a competitive firms total revenue curve is linear because

answer

it can sell all its output at the prevailing price

question

which of the following is true about a competitive market supply

answer

it is the sum of the marginal cost curves of all firms

question

the market supply curve is the sum of marginal cost curves, which are usually-sloping due to diminishing marginal returns of all the firms, therefore

answer

market supply curve in a perfectly competitive firm is usually upward-sloping

question

in a perfectly competitive market economy, business failures can benefit society by causing

answer

a reallocation of resources to better uses

question

competition forces firms to improve products and reduce prices, firms that cannot keep up

answer

are forced to shut down and perhaps exit the industry

question

the difference between the accountant's and the economist's measurement of cost is equal to implicit costs

answer

true

question

profit is

answer

the difference between total revenue and total cost

question

if catfish farmers expect catfish prices to fall in the future, then right now

answer

the market supply curve for catfish will shift to the right

question

expectations of lower prices in the future will

answer

entice producers to produce more now, at higher price levels that increase supply

question

when economic profits exist in the market for a particular product, this is a single to producers that

answer

consumers would like more scarce resources devoted to the product of this product

question

profit per unit is equal to

answer

price minus average total cost

question

which of the following is most likely a fixed cost

answer

equipment loan payments

question

answer

earn $90,000 more in revenue; since the firm is losing $90,000 to get the economic profit or normal profit, the firm would need additional revenue of $90,000

question

in the short run, which of the following is most likely a variable cost

answer

electricity costs

question

variable costs are the costs of

answer

production that change when the rate of output is altered

question

which of the following is a factor of production for the little biscuit bread company

answer

flour

question

factors of production are

answer

resources used to produce goods and services

question

productivity is

answer

a measure of how much output we get from an input such as labor

question

the total cost at a zero level of output is always equal to the variable cost

answer

false; the total cost at a zero level of output is always equal to the fixed cost

question

if a firm will not incur economic losses or economic profits there are

answer

no incentives for entry or exit

question

a firms costs are $3,075 and revenues are $4,000. the entrepreneur could earn $1,000 as an employee elsewhere, this means the economic profit is

answer

-$75; economic profit is the accounting profit ($925) minus implicit costs ($1,000) to get -$75

question

the rule established for short-run profit maximization guarantees that a firm that follows it will earn economic profits

answer

false; the profit maximization rule will lead a firm to the profit-maximizing point or the loss-minimizing point; there is no guarantee of profits

question

sellers in a perfectly competitive market are powerless to affect the market price of their product

answer

true; a perfectly competitive firm is very small relative to the size of the market, so it does not have any market power

question

when P<ATC in the long run, a perfectly competitive firm experiences economic profit and new firms will enter the market

answer

false; if P<ATC in the long run, a perfectly competitive firm is experiencing economic losses and will exit the market

question

the period in which at least one input is fixed in quantity is the

answer

short run

question

the primary objective of the producer is to find the rate of output that maximizes profit

answer

question

if the demand curve for each firm in industry X is horizontal, then the demand curve for industry X must also be horizontal

answer

false; the market demand curve for a product is always downward-sloping. the demand curve confronting a perfectly competitive firm is horizontal (perfectly elastic demand)

question

high profits in a particular industry indicate that consumers want more of that industry's goods

answer

true

question

short-run profits are maximized at the rate of output where the

answer

marginal revenue is equal to the marginal cost

question

a competitive firm maximizes total profit at the

answer

output rate where MC is equal to MR. if MC is less than MR the firm can increase its profits by producing more. if MC exceeds MR, the firm should reduce its output

question

when a firm is able to achieve the output indicated by a production function, it is producing with technical efficiency

answer

true; technical efficiency is getting the most output attainable from any given level of factor inputs, the points on the production function represents the output using the inputs efficiently

question

a short-run supply determinant includes

answer

technology

question

the determinants of a firm's supply include

answer

the price of factor inputs, technology, and expectations (for costs, sales, technology, taxes, and subsidies)

question

in the short run, when a firm produces zero output, the variable cost equals

answer

zero; variable costs start at zero when a firm produces zero

question

which of the following is characteristic of a perfectly competitive market

answer

zero economic profits in the long run

question

a perfectly competitive industry has several distinguishing characteristics, including

answer

many firms, identical products, and low entry barriers, because of the low entry barriers, perfectly competitive firms will earn zero economic profit in the long run

question

a competitive firm maximizes total profit at the output rate where

answer

question

if the marginal cost curve is rising, which of the following must be true

answer

total costs must be rising

question

marginal cost is the

answer

question

the decision by firms to enter a market shifts the market supply curve to the right

answer

true; if the number of producers increases, the supply curve will increase

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ECON 203 practice exam 2

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