Question 1

Profit is positive whenever price is greater than:

Accepted Answer

A)  total cost. 
B)  average cost. 
C)  fixed cost. 
D)  marginal cost. 
A)  total cost. 
B)  average cost. 
C)  fixed cost. 
D)  marginal cost.

Question 2

Use the following to answer questions:
Figure: Profits and Competitive Firms  
-(Figure: Profits and Competitive Firms) Refer to the four panels in the figure. Which panel shows a competitive firm making positive economic profits?

Accepted Answer

A)  Panel A 
B)  Panel B 
C)  Panel C 
D)  Panel D 
A)  Panel A 
B)  Panel B 
C)  Panel C 
D)  Panel D

Question 3

Firms in competitive industries should adhere to: 1) expanding output if MR > MC, and 2) reducing output if MC > MR.

Accepted Answer

A) True 
 B)False

Question 4

Table: Constant Cost Industries   As of July 2011, oil companies had a 6.5 percent profit margin (for each dollar of sales, 6.5 cents was profit), ranking 131 (profit margin is the far right column). Other industries making the same profit margin include packaging and containers, office supplies, farm and construction, and newspapers. If these profits are typical, what does this similar profit margin across very different industries suggest about oil companies' profits?

Accepted Answer

A)  They are making zero profits. 
B)  They are making above-average profits and should expect entry. 
C)  They are making above-average profits and should expect no entry or exit. 
D)  Nothing because it is the total profits that matter, not profits per dollar of sales. 
A)  They are making zero profits. 
B)  They are making above-average profits and should expect entry. 
C)  They are making above-average profits and should expect no entry or exit. 
D)  Nothing because it is the total profits that matter, not profits per dollar of sales.

Question 5

Graphically illustrate how a constant cost industry responds to an increase in demand in the short run and in the long run.

Accepted Answer

@#IMG-DLM& An increase in demand increases price.

Question 6

Profit is defined as:

Accepted Answer

A)  net revenue minus depreciation. 
B)  average revenue minus average total cost. 
C)  marginal revenue minus marginal cost. 
D)  total revenue minus total cost. 
A)  net revenue minus depreciation. 
B)  average revenue minus average total cost. 
C)  marginal revenue minus marginal cost. 
D)  total revenue minus total cost.

Question 7

Figure: Calculating Profits   
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 loss o

Question 8

Figure: Profit Maximization 4   At the profit-maximizing level of output in this diagram, the firm's total revenue and total cost are ______ and ______, respectively.

Accepted Answer

A)  $54; $99 
B)  $12; $4 
C)  $117; $100 
D)  $36; $44 
A)  $54; $99 
B)  $12; $4 
C)  $117; $100 
D)  $36; $44

Question 9

Based on the premise that dogs are carnivores and thus should not eat grains, Natura Pet Products introduced the first brand of grain-free dog food called EVO in 2005. There were over 12 different manufacturers of grain-free dog food by 2009. Was Natura's EVO a profitable line of dog food in 2005? Since 2005, what has happened to the profitability of producing grain-free dog food?

Accepted Answer

The self-interest of firms is to enter p

Question 10

Suppose that Jennifer and Megan are both buying a beach vacation home, each with the same selling price. Megan is paying for the home by taking out a 30-year mortgage at an annual interest rate of 5%. Over the course of her mortgage, Megan will have paid $300,000 in interest alone. Jennifer is considering using an inheritance received and paying cash for the home. If the current annual market interest rate paid on investments is 6% (i.e., market annual rate of return is equal to 6%), then is Jennifer better off paying cash for her vacation home or taking out the same mortgage as Megan? Explain.

Accepted Answer

If Jennifer pays cash for her home, she

Question 11

Explicit costs incurred by firms include the firm's opportunity costs.

Accepted Answer

A) True 
 B)False

Question 12

In an increasing cost industry:

Accepted Answer

A)  above-normal profits are eliminated for all firms in the long run. 
B)  above-normal profits are eliminated for only some firms in the long run. 
C)  costs rise as output decreases. 
D)  profits rise as output decreases. 
A)  above-normal profits are eliminated for all firms in the long run. 
B)  above-normal profits are eliminated for only some firms in the long run. 
C)  costs rise as output decreases. 
D)  profits rise as output decreases.

Question 13

When price is less than a firm's average cost,:

Accepted Answer

A)  the firm will shut down immediately. 
B)  additional firms will enter the market to steal profits from the struggling firm. 
C)  the firm may continue to operate in the short run if it can at least cover its fixed costs. 
D)  it may be more profitable to continue to operate if revenues at least cover the firm's variable costs. 
A)  the firm will shut down immediately. 
B)  additional firms will enter the market to steal profits from the struggling firm. 
C)  the firm may continue to operate in the short run if it can at least cover its fixed costs. 
D)  it may be more profitable to continue to operate if revenues at least cover the firm's variable costs.

Question 14

Total profit for a given quantity of output can be calculated as:

Accepted Answer

A)  Total Revenue - Total Costs. 
B)  Marginal Revenue - Marginal Cost. 
C)  Total Revenue - Marginal Revenue. 
D)  Marginal Profit + Marginal Revenue. 
A)  Total Revenue - Total Costs. 
B)  Marginal Revenue - Marginal Cost. 
C)  Total Revenue - Marginal Revenue. 
D)  Marginal Profit + Marginal Revenue.

Question 15

The competitive firm's demand curve is horizontal at the market price.

Accepted Answer

A) True 
 B)False

Question 16

Firms should exit the industry if average costs are greater than marginal costs.

Accepted Answer

A) True 
 B)False

Question 17

Draw a competitive firm in each of the following situations.
a. earning abnormal profits
b. making losses
c. Are either of the situations in (a) and (b) sustainable into the long run? If not, explain why and graphically demonstrate how the competitive firm is expected to behave in the long run.

Accepted Answer

a. See the following

Question 18

A firm's short-run supply curve is its marginal cost curve.

Accepted Answer

A) True 
 B)False

Question 19

If P = $20, AC = $16, and Q = 100, then profit = $3,600.

Accepted Answer

A) True 
 B)False

Question 20

In their calculation of profit, accountants typically do not take into account:

Accepted Answer

A)  variable costs. 
B)  fixed costs. 
C)  opportunity costs. 
D)  explicit costs. 
A)  variable costs. 
B)  fixed costs. 
C)  opportunity costs. 
D)  explicit costs.

Exam 11: Costs and Profit Maximization Under Competition

Profit is positive whenever price is greater than:

Use the following to answer questions: Figure: Profits and Competitive Firms -(Figure: Profits and Competitive Firms) Refer to the four panels in the figure. Which panel shows a competitive firm making positive economic profits?

Firms in competitive industries should adhere to: 1) expanding output if MR > MC, and 2) reducing output if MC > MR.

Graphically illustrate how a constant cost industry responds to an increase in demand in the short run and in the long run.

Profit is defined as:

Figure: Profit Maximization 4 At the profit-maximizing level of output in this diagram, the firm's total revenue and total cost are ______ and ______, respectively.

Explicit costs incurred by firms include the firm's opportunity costs.

In an increasing cost industry:

When price is less than a firm's average cost,:

Total profit for a given quantity of output can be calculated as:

The competitive firm's demand curve is horizontal at the market price.

Firms should exit the industry if average costs are greater than marginal costs.

Draw a competitive firm in each of the following situations. a. earning abnormal profits b. making losses c. Are either of the situations in (a) and (b) sustainable into the long run? If not, explain why and graphically demonstrate how the competitive firm is expected to behave in the long run.

A firm's short-run supply curve is its marginal cost curve.

If P = $20, AC = $16, and Q = 100, then profit = $3,600.

In their calculation of profit, accountants typically do not take into account:

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

Figure: Profit Maximization 4 At the profit-maximizing level of output in this diagram, the firm's total revenue and total cost are and , respectively.