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Econ 307 Ch7

question
1) Economists typically assume that the owners of firms wish to
A) produce efficiently. B) maximize profits.
C) maximize sales revenues. D) All of the above.
answer
B) maximize profits.
question
2) If a firm makes zero economic profit, then the firm
A) must have no fixed costs.
B) can be earning positive business profit.
C) has total revenues greater than its economic costs.
D) must shut down.
answer
B) can be earning positive business profit.
question
3) A firmʹs profit is
A) the difference between revenue and cost.
B) usually negative when opportunity costs are included.
C) the opportunity cost of the firmʹs shareholders.
D) the difference between marginal revenue and marginal cost
answer
A) the difference between revenue and cost.
question
4) A small business owner earns $75,000 in revenue annually. The explicit annual costs equal $40,000. The owner
could work for someone else and earn $20,000 annually. The ownerʹs accounting profit is ________ and ownerʹs
economic profit is ________.
A) $35,000, $55,000 B) $10,000, $10,000 C) $10,000, $55,000 D) $35,000, $10,000
answer
D) $35,000, $10,000
question
5) If a firm goes out of business because of negative economic profits, its books
A) might indicate that taxes are too high.
B) might indicate a positive accounting profit.
C) might suggest a mistaken value of explicit costs.
D) might indicate that opportunity costs were zero.
answer
B) might indicate a positive accounting profit.
question
6) A firm sets its output where
A) marginal revenue is maximized. B) marginal profit is zero.
C) marginal profit equals marginal revenue. D) marginal profit is maximized
answer
B) marginal profit is zero.
question
7) A firm sets its output where
A) marginal profit minus marginal cost equals zero (MP - MC = 0).
B) marginal revenue minus marginal cost equals zero (MR - MC = 0).
C) marginal revenue minus marginal profit equals zero (MR - MP = 0).
D) marginal revenue minus marginal cost is greater than zero (MR - MC > 0)
answer
B) marginal revenue minus marginal cost equals zero (MR - MC = 0).
question
8) If a firm is operating at an output level where losses are minimized the firm
A) will shut down B) is maximizing profits.
C) is better of exiting the industry. D) has no incentive to stay in the industry
answer
B) is maximizing profits.
question
9) If a profit-maximizing firm finds that, at its current level of production, MR > MC, it will
A) increase output. B) decrease output.
C) shut down. D) earn greater profits than if MR = MC
answer
A) increase output
question
10) If a manager is unsure what the entire profit function looks like, then she can
A) increase output slightly to see if profits increase.
B) decrease output slightly to see if profits increase.
C) Both A and B.
D) None of the above.
answer
C) Both A and B.
question
11) A firm should always shut down if its revenue is
A) less than its total costs. B) declining.
C) less than its avoidable costs. D) less than its average fixed costs.
answer
C) less than its avoidable costs.
question
12) A firm will shut down in the short run if
A) total revenue from operating would not cover all costs.
B) total fixed costs are too high.
C) total revenue from operating would not cover fixed costs.
D) total revenue from operating would not cover variable costs.
answer
D) total revenue from operating would not cover variable costs.
question
13) If a short-run fixed cost is sunk, then
A) losses can be minimized by shutting down.
B) the firm should keep producing to cover the sunk cost.
C) the cost cannot be avoided by shutting down.
D) Both B and C.
answer
C) the cost cannot be avoided by shutting down.
question
14) By shutting down, a firm
A) avoids its sunk costs as well as its variable costs.
B) can avoid paying taxes on its previously earned profits.
C) stops receiving revenue and is stuck with its fixed costs.
D) stops receiving revenue but continues to pay variable costs.
answer
C) stops receiving revenue and is stuck with its fixed costs.
question
15) A firm bought a pizza oven for $13,500 and if it shut down now, could sell the oven for $9,500. Which of the
following statements is TRUE?
A) The relevant cost of the oven when considering shutting down is $9,500.
B) The relevant cost of the oven when considering shutting down is $4,000.
C) The cost of the oven does not matter when deciding whether or not to shut down.
D) The relevant cost of the oven when considering shutting down is $13,500.
answer
B) The relevant cost of the oven when considering shutting down is $4,000.
question
16) If the present value of all future profit is positive, then
A) the firm should shut down if it cannot cover its fixed costs in the short run.
B) the firm should remain operating, even if it earns negative profit in the short run.
C) the firm should shut down if it is earning a negative profit in the short run.
D) None of the above.
answer
B) the firm should remain operating, even if it earns negative profit in the short run.
question
17) If the present value of all future revenue is positive, then
A) the firm should shut down if it is earning a negative profit in the short run.
B) the firm should shut down if it cannot cover its fixed costs in the short run.
C) the firm should remain operating, even if it earns negative profit in the short run.
D) Unable to determine with the information given.
answer
D) Unable to determine with the information given.
question
18) A conflict between an owner and a manager may occur when
A) the manager is seeking to maximize leisure time.
B) the firm is very small and the manager must perform multiple tasks.
C) the manager earns more when the firm has higher profits.
D) the owner can easily observe the manager slacking off and punish him accordingly.
answer
A) the manager is seeking to maximize leisure time.
question
19) A common incentive owners offer managers is
A) profit sharing. B) stock options.
C) the year-end bonus. D) All of the above.
answer
D) All of the above.
question
20) Stock options
A) allow you to pay people only $1 in salary.
B) are a type of contingent reward.
C) force CEOs to try and maximize the share price in the short run.
D) All of the above
answer
B) are a type of contingent reward
question
21) The agency problem can be avoided if
A) the goals of the owner and manager are aligned.
B) the manager and owner can manipulate reported profit.
C) the firm has positive profits.
D) the firm is not subject to regulation by a government agency
answer
A) the goals of the owner and manager are aligned.
question
22) One problem with compensation systems is that
A) owners sometimes want to pursue social objectives.
B) sometimes a manager is rewarded for an objective other than maximizing profits.
C) managers are often paid too much.
D) the Dodd-Frank Act of 2010 requires shareholder votes on compensation that are non-binding.
answer
B) sometimes a manager is rewarded for an objective other than maximizing profits.
question
23) Market structure depends upon
A) the number of firms in the market.
B) the ease of entry and exit.
C) the ability of firms to differentiate their goods and services.
D) All of the above.
answer
D) All of the above.
question
24) According to economists, competitive firms
A) are able to change output and affect the market price.
B) differentiate their products.
C) compete for the same customers.
D) are price takers.
answer
D) are price takers.
question
25) Under perfect competition
A) information about prices is hard to obtain.
B) if a firm exits the market, price will rise.
C) transaction costs are low.
D) there is a maximum number of firms that can enter the market
answer
C) transaction costs are low.
question
26) A monopoly
A) must have a patent to protect its products.
B) produces the market output.
C) doesnʹt lose any sales when it raises its price.
D) is a price taker.
answer
B) produces the market output.B
question
27) All of the following are characteristics of an oligopolistic market EXCEPT
A) firms earn lower profits than a monopoly.
B) cartels eventually form to keep prices high.
C) firms must consider the actions of their rivals.
D) firms have the ability to influence prices.
answer
B) cartels eventually form to keep prices high.B
question
28) An oligopoly
A) requires government licensing.
B) always collude to keep prices high.
C) has relatively few firms, but they are still price takers.
D) has barriers to entry.
answer
D) has barriers to entry.
question
29) In a monopolistically competitive market
A) firms earn positive economic profit in the long run.
B) firms are price setters.
C) products are undifferentiated.
D) barriers to entry are high.
answer
B) firms are price setters.
question
Shutdown Rule 2
answer
In the short run, variable costs are avoidable but fixed costs are unavoidable (sunk costs). As long as revenue covers variable costs (avoidable) costs and some fixed costs, no shut down occurs. In the long run all costs are avoidable; shutting down eliminated all costs.
question
Shutdown Rule 1
answer
Shut down only if a firm can reduce its loss by doing so. This rule applies to the short run and long run alike.
question
Monopoly
answer
Ability to set price: Price Setter
Market Price: Very High
Entry Conditions: No entry
# of Firms: 1
LR Profit: ≥ 0
Strategy dependent on rival firms: None
Products: Single
Ex: BC Hydro, patented drug
question
Oligopoly
answer
Ability to set price: Price Setter
Market Price: High
Entry Conditions: limited entry
# of Firms: few
LR Profit: ≥ 0
Strategy dependent on rival firms: Yes
Products: Differentiated
Ex: Airline (West jet & Air Canada, Network provider(Shaw & Telus)
question
Monopolistic Competition
answer
Ability to set price: Price Setter
Market Price: High
Entry Conditions: Free entry
# of Firms: few or many
LR Profit: 0
Strategy dependent on rival firms: Yes
Products: Differentiated
Ex: Local restaurants or Retail stores
question
Perfect Competition
answer
Ability to set price: Price Taker
Market Price: Low
Entry Conditions: Free entry
# of Firms: Many
LR Profit: 0
Strategy dependent on rival firms: No, too small to influence market P&Q
Products: Identical product
Ex: Agriculture produce
1 of 35
question
1) Economists typically assume that the owners of firms wish to
A) produce efficiently. B) maximize profits.
C) maximize sales revenues. D) All of the above.
answer
B) maximize profits.
question
2) If a firm makes zero economic profit, then the firm
A) must have no fixed costs.
B) can be earning positive business profit.
C) has total revenues greater than its economic costs.
D) must shut down.
answer
B) can be earning positive business profit.
question
3) A firmʹs profit is
A) the difference between revenue and cost.
B) usually negative when opportunity costs are included.
C) the opportunity cost of the firmʹs shareholders.
D) the difference between marginal revenue and marginal cost
answer
A) the difference between revenue and cost.
question
4) A small business owner earns $75,000 in revenue annually. The explicit annual costs equal $40,000. The owner
could work for someone else and earn $20,000 annually. The ownerʹs accounting profit is ________ and ownerʹs
economic profit is ________.
A) $35,000, $55,000 B) $10,000, $10,000 C) $10,000, $55,000 D) $35,000, $10,000
answer
D) $35,000, $10,000
question
5) If a firm goes out of business because of negative economic profits, its books
A) might indicate that taxes are too high.
B) might indicate a positive accounting profit.
C) might suggest a mistaken value of explicit costs.
D) might indicate that opportunity costs were zero.
answer
B) might indicate a positive accounting profit.
question
6) A firm sets its output where
A) marginal revenue is maximized. B) marginal profit is zero.
C) marginal profit equals marginal revenue. D) marginal profit is maximized
answer
B) marginal profit is zero.
question
7) A firm sets its output where
A) marginal profit minus marginal cost equals zero (MP - MC = 0).
B) marginal revenue minus marginal cost equals zero (MR - MC = 0).
C) marginal revenue minus marginal profit equals zero (MR - MP = 0).
D) marginal revenue minus marginal cost is greater than zero (MR - MC > 0)
answer
B) marginal revenue minus marginal cost equals zero (MR - MC = 0).
question
8) If a firm is operating at an output level where losses are minimized the firm
A) will shut down B) is maximizing profits.
C) is better of exiting the industry. D) has no incentive to stay in the industry
answer
B) is maximizing profits.
question
9) If a profit-maximizing firm finds that, at its current level of production, MR > MC, it will
A) increase output. B) decrease output.
C) shut down. D) earn greater profits than if MR = MC
answer
A) increase output
question
10) If a manager is unsure what the entire profit function looks like, then she can
A) increase output slightly to see if profits increase.
B) decrease output slightly to see if profits increase.
C) Both A and B.
D) None of the above.
answer
C) Both A and B.
question
11) A firm should always shut down if its revenue is
A) less than its total costs. B) declining.
C) less than its avoidable costs. D) less than its average fixed costs.
answer
C) less than its avoidable costs.
question
12) A firm will shut down in the short run if
A) total revenue from operating would not cover all costs.
B) total fixed costs are too high.
C) total revenue from operating would not cover fixed costs.
D) total revenue from operating would not cover variable costs.
answer
D) total revenue from operating would not cover variable costs.
question
13) If a short-run fixed cost is sunk, then
A) losses can be minimized by shutting down.
B) the firm should keep producing to cover the sunk cost.
C) the cost cannot be avoided by shutting down.
D) Both B and C.
answer
C) the cost cannot be avoided by shutting down.
question
14) By shutting down, a firm
A) avoids its sunk costs as well as its variable costs.
B) can avoid paying taxes on its previously earned profits.
C) stops receiving revenue and is stuck with its fixed costs.
D) stops receiving revenue but continues to pay variable costs.
answer
C) stops receiving revenue and is stuck with its fixed costs.
question
15) A firm bought a pizza oven for $13,500 and if it shut down now, could sell the oven for $9,500. Which of the
following statements is TRUE?
A) The relevant cost of the oven when considering shutting down is $9,500.
B) The relevant cost of the oven when considering shutting down is $4,000.
C) The cost of the oven does not matter when deciding whether or not to shut down.
D) The relevant cost of the oven when considering shutting down is $13,500.
answer
B) The relevant cost of the oven when considering shutting down is $4,000.
question
16) If the present value of all future profit is positive, then
A) the firm should shut down if it cannot cover its fixed costs in the short run.
B) the firm should remain operating, even if it earns negative profit in the short run.
C) the firm should shut down if it is earning a negative profit in the short run.
D) None of the above.
answer
B) the firm should remain operating, even if it earns negative profit in the short run.
question
17) If the present value of all future revenue is positive, then
A) the firm should shut down if it is earning a negative profit in the short run.
B) the firm should shut down if it cannot cover its fixed costs in the short run.
C) the firm should remain operating, even if it earns negative profit in the short run.
D) Unable to determine with the information given.
answer
D) Unable to determine with the information given.
question
18) A conflict between an owner and a manager may occur when
A) the manager is seeking to maximize leisure time.
B) the firm is very small and the manager must perform multiple tasks.
C) the manager earns more when the firm has higher profits.
D) the owner can easily observe the manager slacking off and punish him accordingly.
answer
A) the manager is seeking to maximize leisure time.
question
19) A common incentive owners offer managers is
A) profit sharing. B) stock options.
C) the year-end bonus. D) All of the above.
answer
D) All of the above.
question
20) Stock options
A) allow you to pay people only $1 in salary.
B) are a type of contingent reward.
C) force CEOs to try and maximize the share price in the short run.
D) All of the above
answer
B) are a type of contingent reward
question
21) The agency problem can be avoided if
A) the goals of the owner and manager are aligned.
B) the manager and owner can manipulate reported profit.
C) the firm has positive profits.
D) the firm is not subject to regulation by a government agency
answer
A) the goals of the owner and manager are aligned.
question
22) One problem with compensation systems is that
A) owners sometimes want to pursue social objectives.
B) sometimes a manager is rewarded for an objective other than maximizing profits.
C) managers are often paid too much.
D) the Dodd-Frank Act of 2010 requires shareholder votes on compensation that are non-binding.
answer
B) sometimes a manager is rewarded for an objective other than maximizing profits.
question
23) Market structure depends upon
A) the number of firms in the market.
B) the ease of entry and exit.
C) the ability of firms to differentiate their goods and services.
D) All of the above.
answer
D) All of the above.
question
24) According to economists, competitive firms
A) are able to change output and affect the market price.
B) differentiate their products.
C) compete for the same customers.
D) are price takers.
answer
D) are price takers.
question
25) Under perfect competition
A) information about prices is hard to obtain.
B) if a firm exits the market, price will rise.
C) transaction costs are low.
D) there is a maximum number of firms that can enter the market
answer
C) transaction costs are low.
question
26) A monopoly
A) must have a patent to protect its products.
B) produces the market output.
C) doesnʹt lose any sales when it raises its price.
D) is a price taker.
answer
B) produces the market output.B
question
27) All of the following are characteristics of an oligopolistic market EXCEPT
A) firms earn lower profits than a monopoly.
B) cartels eventually form to keep prices high.
C) firms must consider the actions of their rivals.
D) firms have the ability to influence prices.
answer
B) cartels eventually form to keep prices high.B
question
28) An oligopoly
A) requires government licensing.
B) always collude to keep prices high.
C) has relatively few firms, but they are still price takers.
D) has barriers to entry.
answer
D) has barriers to entry.
question
29) In a monopolistically competitive market
A) firms earn positive economic profit in the long run.
B) firms are price setters.
C) products are undifferentiated.
D) barriers to entry are high.
answer
B) firms are price setters.
question
Shutdown Rule 2
answer
In the short run, variable costs are avoidable but fixed costs are unavoidable (sunk costs). As long as revenue covers variable costs (avoidable) costs and some fixed costs, no shut down occurs. In the long run all costs are avoidable; shutting down eliminated all costs.
question
Shutdown Rule 1
answer
Shut down only if a firm can reduce its loss by doing so. This rule applies to the short run and long run alike.
question
Monopoly
answer
Ability to set price: Price Setter
Market Price: Very High
Entry Conditions: No entry
# of Firms: 1
LR Profit: ≥ 0
Strategy dependent on rival firms: None
Products: Single
Ex: BC Hydro, patented drug
question
Oligopoly
answer
Ability to set price: Price Setter
Market Price: High
Entry Conditions: limited entry
# of Firms: few
LR Profit: ≥ 0
Strategy dependent on rival firms: Yes
Products: Differentiated
Ex: Airline (West jet & Air Canada, Network provider(Shaw & Telus)
question
Monopolistic Competition
answer
Ability to set price: Price Setter
Market Price: High
Entry Conditions: Free entry
# of Firms: few or many
LR Profit: 0
Strategy dependent on rival firms: Yes
Products: Differentiated
Ex: Local restaurants or Retail stores
question
Perfect Competition
answer
Ability to set price: Price Taker
Market Price: Low
Entry Conditions: Free entry
# of Firms: Many
LR Profit: 0
Strategy dependent on rival firms: No, too small to influence market P&Q
Products: Identical product
Ex: Agriculture produce
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