question

Explicit costs are payments the firm makes for

answer

inputs such as wages and salaries to its employees, whereas implicit costs are non-expenditure costs that occur through the use of self owned resources such as foregone income.

question

The explicit costs of going to college include

answer

tuition costs and the cost of books, whereas the implicit costs include foregone income

question

T or F: Accounting profit equals sales revenue minus explicit costs.

answer

True

question

A normal profit is considered a cost because

answer

this is the amount required to ensure continued supply of the product.

question

Advertising expenditures, fuel, shipping charges, and wage payments are examples of what type of cost?

answer

variable cost

question

Interest on company-issued bonds, real estate taxes, executive salaries, and insurance premiums are examples of what type of cost?

answer

fixed cost

question

You are considering whether to drive your car or fly 1,000 miles to Florida for spring break. In making your decision you should consider

answer

the variable cost of the trip, the opportunity cost of time, and the need for transportation in Florida.

question

Linda sells 100 bottles of homemade ketchup for $10 each. The cost of the ingredients, the bottles, and the labels was $700. In addition, it took her 20 hours to make the ketchup and to do so she took time off from a job that paid her $20 per hour. Linda's accounting profit is _____________ while her economic profit is ______________.

answer

$300; negative $100

question

Is this example a short-run or long-run adjustment: Wendy's builds a new restaurant

answer

Long-run adjustment

question

Is this example a short-run or long-run adjustment: Harley-Davidson Corporation hires 200 more production workers

answer

Short-run adjustment

question

Is this example a short-run or long-run adjustment: A farmer increases the amount of fertilizer used on his corn crop:

answer

Short-run adjustment

question

Is this example a short-run or long-run adjustment: An Alcoa aluminum plant adds a third shift of workers

answer

Short-run adjustment

question

True or false. The U shape of the long-run ATC curve is the result of diminishing returns.

answer

false

question

Characteristics of Pure competition

answer

-Very large number of firms -No control over price -No nonprice competition

question

Characteristics of Pure monopoly

answer

-Differentiated products -Many firms -Some price control

question

Characteristics of oligopoly

answer

-Few firms -Standardized products -Many obstacles to entry

question

We study pure competition because it

answer

produces ideal results in terms of low-cost production and allocative efficiency, and can be used as a basis of comparison.

question

Consider the statement: "Even if a firm is losing money, it may be better to stay in business in the short run." This statement is

answer

true if the loss is less than the fixed cost.

question

The firm should produce in the short run so long as the price

answer

exceeds the average variable cost.

question

Consider a firm that has no fixed costs and which is currently losing money. Are there any situations in which it would want to stay open for business in the short run?

answer

No, the firm will want to shut down.

question

A firm with no fixed cost

answer

is really in the long run.

question

The equality of marginal revenue and marginal cost is essential for profit maximization in all market structures because when this is true the

answer

last unit produced adds more to revenue than to costs, and its production must necessarily increase profits or reduce losses.

question

When an industry is purely competitive, price can be substituted for marginal revenue in the MR = MC rule because

answer

the demand curve is perfectly elastic and the price is constant regardless of the quantity demanded, so the MR is constant and equal to the price.

question

If a firm's current revenues are less than its current variable costs, it should shut down

answer

immediately.

question

If a firm's current revenues are less than its current variable costs and it decides to shut down, this decision

answer

may be temporary until the price of the product increases.

question

Suppose that the paper clip industry is perfectly competitive. Also assume that the market price for paper clips is 2 cents per paper clip. The demand curve faced by each firm in the industry is:

answer

A horizontal line at 2 cents per paper clip.

question

A purely competitive firm whose goal is to maximize profit will choose to produce the amount of output at which:

answer

TR exceeds TC by as much as possible.

question

If it is possible for a perfectly competitive firm to do better financially by producing rather than shutting down, then it should produce the amount of output at which:

answer

MR = MC

question

A perfectly competitive firm that makes car batteries has a fixed cost of $10,000 per month. The market price at which it can sell its output is $100 per battery. The firm's minimum AVC is $105 per battery. The firm is currently producing 500 batteries a month (the output level at which MR = MC). This firm is making a _____________ and should _______________ production.

answer

loss; shut down

question

In the long run in a purely competitive industry,

answer

entry and exit of firms can occur.

question

Profits encourage entry into purely competitive industries and losses encourage exit from purely competitive industries because

answer

when profits are zero, the firm is earning sufficient revenue to cover the opportunity cost.

question

Entry and exit help to improve resource allocation because

answer

losses result in exit and release resources to flow to markets where there are profits.

question

The equality of marginal revenue and marginal cost is essential for profit maximization in all market structures because if

answer

marginal revenue and marginal cost are equal, any other output level will result in reduced profit.

question

Price can be substituted for marginal revenue in the MR = MC rule when an industry is purely competitive because price

answer

is constant regardless of the quantity demanded.

question

In long-run equilibrium, P = minimum ATC = MC. The equality of P and minimum ATC means the firm is achieving

answer

productive efficiency.

question

The equality of P and MC means the firm is achieving

answer

allocative efficiency since the industry is producing the amount of product that equates society's valuation of that product and the price of the product.

question

If all firms only earn a normal profit in the long run, firms will develop new products or lower-cost production methods because they can

answer

innovate and possibly earn an economic profit in the short run.

question

Consider the following statement: "Ninety percent of new products fail within two years—so you shouldn't be so eager to innovate." This statement is

answer

false because a firm could capture enough expected economic profit in the short run to cover the initial investment.

question

When discussing pure competition, the term long run refers to a period of time long enough to allow:

answer

-Firms already in an industry to either expand or contract their capacities. -New firms to enter or existing firms to leave.

question

Suppose that as the output of mobile phones increases, the cost of touch screens and other component parts decreases. If the mobile phone industry features pure competition, we would expect the long-run supply curve for mobile phones to be:

answer

Downward sloping.

question

"No firm is completely sheltered from rivals; all firms compete for consumer dollars. If that is so, then pure monopoly does not exist." A monopoly is more likely to persist if the cross price elasticity of demand is

answer

positive and less than 1.

question

Which of the following is not a major barrier to entry into an industry?

answer

Diminishing marginal returns

question

T or F: Unfair competition is a barrier with no social justification

answer

True

question

The demand curve faced by a purely monopolistic seller

answer

is downward sloping, whereas that facing the purely competitive firm is perfectly elastic.

question

The pure monopolist's demand curve is not

answer

perfectly inelastic because MR is negative when demand is inelastic, so MR = MC < 0.

question

Assume that a pure monopolist and a purely competitive firm have the same unit costs. In this case, resources will be allocated

answer

inefficiently because the monopolist does not produce at the point of minimum ATC and does not equate price and MC.

question

Even though both monopolists and competitive firms follow the MC = MR rule in maximizing profits, there are differences in the economic outcomes because the

answer

pure competitor is small with no market power.

question

The costs of a purely competitive firm and a monopoly could be different because

answer

the monopoly might experience economies of scale not available to the competitive firm.

question

If a monopoly can experience economies of scale,

answer

the monopolist can reduce the price below a pure competitor and improve resource allocation.

question

T or F: Because they can control product price, monopolists are always assured of profitable production by simply charging the highest price consumers will pay.

answer

False

question

T or F: The pure monopolist seeks the output that will yield the greatest per-unit profit.

answer

False

question

T or F: An excess of price over marginal cost is the market's way of signaling the need for more production of a good.

answer

True

question

T or F: The more profitable a firm, the greater its monopoly power.

answer

cannot be determined

question

T or F: The monopolist has a pricing policy; the competitive producer does not.

answer

True

question

T or F: With respect to resource allocation, the interests of the seller and of society coincide in a purely competitive market but conflict in a monopolized market.

answer

True

question

Assume a monopolistic publisher agrees to pay an author 15 percent of the total revenue from text sales. Which of the following statements is true?

answer

The author would prefer a lower price than the publisher.

question

The MR curve of a perfectly competitive firm is horizontal. The MR curve of a monopoly firm is:

answer

downsloping

question

How often do perfectly competitive firms engage in price discrimination?

answer

never

question

Suppose that a monopolist can segregate his buyers into two different groups to which he can charge two different prices. In order to maximize profit, the monopolist should charge a higher price to the group that has:

answer

The lower elasticity of demand.

question

The socially optimal price (P = MC) is socially optimal because:

answer

It achieves allocative efficiency.

question

The main problem with imposing the socially optimal price (P = MC) on a monopoly is that the socially optimal price:

answer

May be so low that the regulated monopoly can't break even.

ECN Exam 3 – Flashcards

Unlock all answers in this set

Haven't found what you were looking for?

Search for samples, answers to your questions and flashcards