Question 1

If price is less than average cost,:

Accepted Answer

A)  the firm may still make profits as long as marginal cost is low. 
B)  the firm's maximum profit is a loss. 
C)  there is no profit-maximizing rate of output. 
D)  marginal cost must be high. 
A)  the firm may still make profits as long as marginal cost is low. 
B)  the firm's maximum profit is a loss. 
C)  there is no profit-maximizing rate of output. 
D)  marginal cost must be high.

Question 2

Average cost equals total cost ______ quantity.

Accepted Answer

A)  minus 
B)  plus 
C)  times 
D)  divided by 
A)  minus 
B)  plus 
C)  times 
D)  divided by

Question 3

The short run is defined as:

Accepted Answer

A)  the period before any changes in a firm's output can be made. 
B)  less than six months. 
C)  less than one year. 
D)  the period before entry or exit can occur. 
A)  the period before any changes in a firm's output can be made. 
B)  less than six months. 
C)  less than one year. 
D)  the period before entry or exit can occur.

Question 4

The long run is the period after all exit and entry has occurred.

Accepted Answer

A) True 
 B)False

Question 5

A firm should exit the industry if which of the following conditions apply?

Accepted Answer

A) TR > TC B) P < AC C) Lifetime expected profit is positive. D) Prices are low now but expected to rise. A) TR > TC B) P < AC C) Lifetime expected profit is positive. D) Prices are low now but expected to rise.

Question 6

Industry clusters always cause part of the supply curve to be downward sloping.

Accepted Answer

A) True 
 B)False

Question 7

When there are many buyers and sellers of a good and the product sold is identical across firms,:

Accepted Answer

A)  the demand curve for each firm's output is perfectly elastic. 
B)  the industry demand curve is perfectly elastic. 
C)  the demand curve for each firm's output is perfectly inelastic. 
D)  the industry demand curve is perfectly inelastic. 
A)  the demand curve for each firm's output is perfectly elastic. 
B)  the industry demand curve is perfectly elastic. 
C)  the demand curve for each firm's output is perfectly inelastic. 
D)  the industry demand curve is perfectly inelastic.

Question 8

The marginal cost curve may intersect the average cost curve anywhere on the curve that is less than the minimum point.

Accepted Answer

A) True 
 B)False

Question 9

Mike takes $100,000 out of his bank account, which pays a 5% annual interest rate, to build an oil well. An implicit cost of producing the oil well is $5,000, the foregone interest income.

Accepted Answer

A) True 
 B)False

Question 10

Stock market investors should ultimately focus on a company's:

Accepted Answer

A)  economic profit. 
B)  accounting profit. 
C)  total revenue. 
D)  total costs. 
A)  economic profit. 
B)  accounting profit. 
C)  total revenue. 
D)  total costs.

Question 11

Firms should enter the industry if marginal revenue is greater than the total costs.

Accepted Answer

A) True 
 B)False

Question 12

A market becomes more competitive as there are ______ buyers and ______ sellers.

Accepted Answer

A)  fewer; fewer 
B)  fewer; more 
C)  more; fewer 
D)  more; more 
A)  fewer; fewer 
B)  fewer; more 
C)  more; fewer 
D)  more; more

Question 13

Figure: Supply and Demand   The figure depicts a constant cost industry. What happens if there is an increase in demand?

Accepted Answer

A)  The price of the product stays at $10, although there may be a temporary shortage in the short run. 
B)  The price initially increases above $10 in the short run, but the entry of new firms and expansion of existing firms will push the long run price back down to $10. 
C)  The price initially increases above $10 in the short run, but the increased demand for resources will drive the long run price up even higher. 
D)  The price of the product stays at $10 in the short run, and then decreases as new firms enter the industry. 
A)  The price of the product stays at $10, although there may be a temporary shortage in the short run. 
B)  The price initially increases above $10 in the short run, but the entry of new firms and expansion of existing firms will push the long run price back down to $10. 
C)  The price initially increases above $10 in the short run, but the increased demand for resources will drive the long run price up even higher. 
D)  The price of the product stays at $10 in the short run, and then decreases as new firms enter the industry.

Question 14

A firm should always shut down if it is earning negative profits.

Accepted Answer

A) True 
 B)False

Question 15

In late November of 2010, a share of Microsoft sold for about $25 and a share of McDonald's sold for about $80. In late June of 2011, Microsoft shares were about $26 and McDonald's shares were about $85. If these two companies were the only choices available, what is your economic profit if you invest $400 in Microsoft?

Accepted Answer

A)  -$25 
B)  -$9 
C)  $9 
D)  $16 
A)  -$25 
B)  -$9 
C)  $9 
D)  $16

Question 16

Figure: Representative Firm   
Refer to the figure that shows a representative firm in a perfectly competitive industry. Using the information provided in the figure answer the following questions.
a.
What is the total profit or loss that this firm is making? Show all your calculations.
b.
Will firms enter or exit the industry?

Accepted Answer

a. The firm is making a profit of $700 =

Question 17

In an increasing cost industry,:

Accepted Answer

A)  costs rise as industry output increases. 
B)  costs rise as industry output decreases. 
C)  the long-run supply curve is flat. 
D)  all firms will earn normal profits in the long run. 
A)  costs rise as industry output increases. 
B)  costs rise as industry output decreases. 
C)  the long-run supply curve is flat. 
D)  all firms will earn normal profits in the long run.

Question 18

If your opportunity cost is a positive profit, accounting profit is always greater than economic profit.

Accepted Answer

A) True 
 B)False

Question 19

A firm's total profit is equal to the marginal cost of production multiplied by the quantity produced.

Accepted Answer

A) True 
 B)False

Question 20

Tom opens a sandwich shop; which of the following is NOT an economic cost (total cost) of running his business?

Accepted Answer

A)  his forgone earnings as a book editor, his next best opportunity for employment 
B)  the interest income he could have earned on the money he invested in his business from savings 
C)  the wages that he pays his workers 
D)  the expenses for his own lunch every day 
A)  his forgone earnings as a book editor, his next best opportunity for employment 
B)  the interest income he could have earned on the money he invested in his business from savings 
C)  the wages that he pays his workers 
D)  the expenses for his own lunch every day

Exam 11: Costs and Profit Maximization Under Competition

If price is less than average cost,:

Average cost equals total cost ______ quantity.

The short run is defined as:

The long run is the period after all exit and entry has occurred.

A firm should exit the industry if which of the following conditions apply?

Industry clusters always cause part of the supply curve to be downward sloping.

When there are many buyers and sellers of a good and the product sold is identical across firms,:

The marginal cost curve may intersect the average cost curve anywhere on the curve that is less than the minimum point.

Mike takes $100,000 out of his bank account, which pays a 5% annual interest rate, to build an oil well. An implicit cost of producing the oil well is $5,000, the foregone interest income.

Stock market investors should ultimately focus on a company's:

Firms should enter the industry if marginal revenue is greater than the total costs.

A market becomes more competitive as there are ______ buyers and ______ sellers.

Figure: Supply and Demand The figure depicts a constant cost industry. What happens if there is an increase in demand?

A firm should always shut down if it is earning negative profits.

In an increasing cost industry,:

If your opportunity cost is a positive profit, accounting profit is always greater than economic profit.

A firm's total profit is equal to the marginal cost of production multiplied by the quantity produced.

Tom opens a sandwich shop; which of the following is NOT an economic cost (total cost) of running his business?

The Big Ideas

The Power of Trade and Comparative

Supply and Demand

Equilibrium

Elasticity and Its Applications

Taxes and Subsidies

The Price System

Price Ceilings and Floors

International Trade

Externalities- When the Price Is Not Right

Competition and the Invisible Hand

Monopoly

Price Discrimination

Oligopoly and Game Theory

Competing for Monopoly

Monopolistic Competition and Advertising

Labor Markets

Public Goods and the Tragedy of the Commons

Political Economy and Public Choice

Economics, Ethics, and Public Policy

Managing Incentives

Stock Markets and Personal Finance

Price Discrimination

Consumer Choice

Filters

A market becomes more competitive as there are buyers and sellers.