ECON micro- ch.8 – Flashcards
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Which of the following is the best explanation for why individuals own small businesses? A. Because they cannot earn a living working for corporate America. B. To provide a product consumers want. C. The expectation of profit. D. To gain experience for their next job.
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The expectation of profit.
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Economists assume the principal motivation of producers is A. Psychological gratification. B. Social status. C. Profit. D. Their preference for being "their own person."
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Profit.
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Profit A. Is the difference between total revenue and total cost. B. Is the difference between variable costs and fixed costs. C. Is always a number greater than zero. D. Must be reported to Wall Street quarterly
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Is the difference between total revenue and total cost.
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The profit motive can encourage businesses to do all of the following except A. Pollute the environment. B. Restrict competition. C. Provide unsafe working conditions. D. Maximize social welfare.
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Maximize social welfare.
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The best measure of the economic cost of doing your homework is A. The most valuable opportunity you give up when you do your homework. B. The amount you would have to pay to get someone else to do it. C. The economic cost plus the accounting cost of doing the homework. D. The tuition paid for your education plus the cost of any required textbooks.
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The most valuable opportunity you give up when you do your homework.
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All of the following are ways a business can earn economic profits except A. Discover new products. B. Maximize implicit costs but not explicit costs. C. Take above-average risks. D. Find new and better methods of production.
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Maximize implicit costs but not explicit costs.
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In defining economic costs, economists emphasize A. Explicit and implicit costs while accountants recognize only implicit costs. B. Explicit and implicit costs while accountants recognize only explicit costs. C. Only explicit costs while accountants recognize only implicit costs. D. Only explicit costs while accountants recognize explicit and implicit costs.
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Explicit and implicit costs while accountants recognize only explicit costs.
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Explicit costs A. Include only payments to entrepreneurship. B. Are the sum of actual monetary payments made for resources used to produce a good. C. Include the market value of all resources used to produce a good. D. Are the total opportunity costs of resources used to produce a good.
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Are the sum of actual monetary payments made for resources used to produce a good.
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Implicit costs A. Include only payments to workers and lenders. B. Represent actual monetary payments made for resources used to produce a good such as oil. C. Are the costs to produce a good or service for which no direct payment is made. D. Are the total opportunity costs of resources and inputs used to produce a good.
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Are the costs to produce a good or service for which no direct payment is made.
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Accounting costs and economic costs differ because A. Accounting costs exceed economic costs whenever any factor is not paid an explicit wage. B. Accounting costs include implicit costs, and economic costs do not. C.Economic costs include the opportunity costs of all resources used, while accounting costs include actual dollar outlays. D. Accounting costs include explicit costs, and economic costs do not
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Economic costs include the opportunity costs of all resources used, while accounting costs include actual dollar outlays.
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Economic profit is A. Greater than accounting profit by the amount of implicit cost. B. Greater than accounting profit by the amount of explicit cost. C. Less than accounting profit by the amount of implicit cost. D. Less than accounting profit by the amount of explicit cost.
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Less than accounting profit by the amount of implicit cost.
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Economic profit is the difference between A. Accounting profits and external costs. B. Total costs and total economic costs. C. Accounting profit and explicit costs. D. Total revenues and total economic costs.
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Total revenues and total economic costs.
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A firm that makes zero economic profits A. Must eventually go bankrupt and exit the industry. B. Does not cover its variable costs and should shut down in the short run. C. Incurs an accounting loss if fixed costs are greater than variable costs. D. Covers all its costs, including a provision for normal profit.
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Covers all its costs, including a provision for normal profit.
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Normal profit A. Covers the full opportunity cost of the resources used by the firm. B. Is an above-average rate of return. C. Is the accounting profit earned when economic profits are greater than zero. D. Is sufficient to induce entry into the industry
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Covers the full opportunity cost of the resources used by the firm.
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Normal profit implies that A. Economic profit must be positive. B. Economic profit must be negative. C. The factors employed are earning as much as they could in the best alternative employment. D. Firms will expand their scale of production
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The factors employed are earning as much as they could in the best alternative employment.
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Which of the following should not be included when calculating accounting profit? A. The cost of taxes. B. The return on inventory investment. C. The cost of rent. D. The cost of utilities.
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The return on inventory investment.
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Greater-than-normal profit represents A. Explicit costs minus implicit costs. B. Payment for entrepreneurship. C. Below-average returns to capital. D. Exploitation of workers.
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Payment for entrepreneurship.
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Assuming the entrepreneur does not pay herself, the $1,000 she could earn as an employee elsewhere is considered A. An implicit cost. B. An explicit cost. C. A fixed cost. D. A variable cost.
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An implicit cost.
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Adam Weed is the owner/operator of a flower shop. Last year he earned $250,000 in total revenue. His explicit costs were $175,000 paid to his employees and suppliers (assume that this amount represents the total opportunity cost of these resources). During the year he received three offers to work for other flower shops with the highest offer being $75,000 per year. Which of the following is true about Adam's accounting and economic profit? A. Accounting profit = $75,000; economic profit = $0. B. Accounting profit = $175,000; economic profit = $75,000. C. Accounting profit = $75,000; economic profit = negative $100,000. D. Accounting profit = $0; economic profit = negative $75,000.
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Accounting profit = $75,000; economic profit = $0.
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Lashondra is the owner/operator of an interior design firm. Last year she earned $400,000 in total revenue. Her explicit costs were $200,000 (assume that this amount represents the total opportunity cost of these resources). During the year she received offers to work for other design firms. One offer would have paid her $120,000 per year and the other would have paid her $130,000 per year. Lashondra's economic profit is equal to A. -$50,000. B. $70,000. C. $0. D. $200,000.
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$70,000.
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Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What are the annual explicit costs for the firm described above? A. $450,000. B. $160,000. C. $90,000. D. $360,000.
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$360,000.
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Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What are the annual implicit costs for the firm described above? A. $450,000. B. $160,000. C. $90,000. D. $360,000.
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$90,000.
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Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What are the annual economic costs for the firm described above? A. $450,000. B. $120,000. C. $90,000. D. $360,000.
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$450,000.
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Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What is the accounting profit for the firm described above? A. -$90,000. B. $0. C. $90,000. D. $200,000.
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$0.
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Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What is the economic profit for the firm described above? A. -$90,000. B. $0. C. $90,000. D. $200,000.
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-$90,000.
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Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he 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 described above would have to A. Experience $10,000 less in cost. B. Receive $90,000 more in revenue. C. Receive $10,000 more in revenue. D. Do nothing since it already earns a normal profit.
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Receive $90,000 more in revenue.
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Entrepreneurship A. Always involves greater rewards than risks. B. Can result in economic losses. C. Cannot earn an economic profit. D. Occurs in small businesses, but not large corporations.
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Can result in economic losses.
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Megan used to work at the local pizzeria for $15,000 per year but quit to start her own deli. To buy the necessary equipment, she withdrew $20,000 from her inheritance (which paid 8 percent interest). Last year she paid $25,000 for ingredients and $500 per month rent but had revenue of $50,000. She asked her dad the accountant and her mom the economist to calculate her profit for her. A. Dad says she lost $11,000 and Mom says she lost $26,000. B. Dad says her profit is $31,000 and Mom says her profit is $16,600. C. Dad says her profit is $9,000 and Mom says she lost $6,000. D. Dad says her profit is $9,000 and Mom says her profit is $2,400.
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Dad says her profit is $9,000 and Mom says her profit is $2,400.
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A monopoly occurs when A. There is only one producer of a good or service. B. There is only one buyer of a good or service. C. Owners take on additional risk and earn huge profits. D. Companies become greedy and raise the price of a good or service.
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There is only one producer of a good or service.
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Market structure is determined by the A. Annual revenue, costs, and profits for an industry. B. Number and relative size of the firms in an industry. C. Amount of compensation given to the CEOs. D. Price charged for the good or service produced.
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Number and relative size of the firms in an industry.
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The perfectly competitive market structure includes all of the following except A. Many firms. B. Identical products. C. Large advertising budgets. D. Low entry barriers.
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Large advertising budgets.
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Perfect competition is a situation in which A. Every year, owners are likely to earn economic profits. B. Every year, owners are likely to earn economic losses. C. There are many firms and several buyers or sellers have market power. D. There are many firms and no buyer or seller has market power.
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There are many firms and no buyer or seller has market power.
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When a producer can control the market price for the good it sells, the producer A. Is an entrepreneur. B. Is certain to make a profit. C. Has market power. D. Is a perfectly competitive firm.
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Has market power.
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If a firm can change market prices by altering its output, then it A. Has market power. B. Faces a horizontal demand curve. C. Is a price taker. D. Is a competitive firm.
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Has market power.
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In which of the following types of markets does a single firm have the most market power? A. Perfect competition. B. Monopolistic competition. C. Oligopoly. D. Monopoly.
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Monopoly.
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A perfectly competitive firm is a price taker because A. The price of the product is determined by many buyers and sellers. B. It has market power. C. Market supply is upward-sloping. D. Its products are differentiated.
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The price of the product is determined by many buyers and sellers.
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A competitive firm A. Has the market power to compete effectively. B. Is large enough relative to the market to be taken into account by competitors. C. Confronts a downward-sloping firm demand curve. D. Is a price taker.
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Is a price taker.
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In order to sell additional units of their products, competitive firms must A. Increase their advertising. B. Lower their price. C. Cut their expenses. D. Increase output.
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Increase output.
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Competitive firms cannot individually affect market price because A. There is an infinite demand for their goods. B. Demand is perfectly inelastic for their goods. C. Their individual production is insignificant relative to the production of the industry. D. The government exercises control over the market power of competitive firms.
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Their individual production is insignificant relative to the production of the industry.
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The market price for T-shirts sold in a perfectly competitive market is determined by A. The largest firm in the industry. B. Supply and demand. C. Government regulation. D. Strategic interaction.
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Supply and demand.
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If the equilibrium price in a perfectly competitive market for walnuts is $4.99 per pound, then an individual firm in this market can A. Not sell additional walnuts unless the firm lowers its price. B. Not sell additional walnuts at any price because the market is at equilibrium. C. Sell an additional pound of walnuts at $4.99. D. Sell more only by increasing its advertising budget.
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Sell an additional pound of walnuts at $4.99.
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Which of the following characterizes a competitive market? A. A downward-sloping demand curve for the firm. B. A vertical demand curve facing each firm in the market. C. Some of the firms sell at a price above the market equilibrium price. D. A downward-sloping demand curve for the market.
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A downward-sloping demand curve for the market.
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The demand curve for each perfectly competitive firm is A. Downward-sloping. B. Horizontal. C. Vertical. D. Upward-sloping.
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Horizontal.
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Which of the following industries is perfectly competitive? A. Autos. B. Cell phone service. C. Wholesale fresh flowers. D. Fast-food restaurants.
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Wholesale fresh flowers.
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The demand curve confronting a competitive firm is A. Horizontal, as is market demand. B. Horizontal, while market demand is downward-sloping. C. Downward-sloping, while market demand is flat. D. Downward-sloping, as is market demand.
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Horizontal, while market demand is downward-sloping.
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The demand curve confronting a competitive firm A. Equals the marginal revenue curve. B. Is horizontal, as is the market demand curve. C. Slopes downward, while the market demand curve is horizontal. D. Slopes downward, and the marginal revenue curve is below it.
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Equals the marginal revenue curve.
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Which of the following is a production decision? A. How much output the firm should produce in the long run. B. Whether the firm should shut down or produce. C. Whether the firm should exit or enter the market. D. Whether the firm should merge with one of its rivals.
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Whether the firm should shut down or produce.
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A production decision involves choosing A. The amount of plants and equipment and is a short-run decision. B. The amount of plants and equipment and is a long-run decision. C. A rate of output and is a short-run decision. D. A rate of output and is a long-run decision.
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A rate of output and is a short-run decision.
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In making a production decision, an entrepreneur A. Decides whether to enter or exit the market. B. Decides what level of output will maximize profits. C. Determines plants and equipment. D. Can change both fixed and variable inputs.
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Decides what level of output will maximize profits.
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A firm's total revenue can be determined by A. Price times quantity. B. Profits minus costs. C. Total costs minus variable costs. D. Fixed costs minus quantity.
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Price times quantity.
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The fact that a perfectly competitive firm's total revenue curve is an upward-sloping straight line implies that A. The total profit curve is also an upward-sloping straight line. B. Product price is constant at all levels of output. C. Product price decreases as output increases, and demand is elastic. D. Product price increases at all output levels
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Product price is constant at all levels of output.
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If a perfectly competitive firm wanted to maximize its total revenues, it would produce A. The output where MC equals price. B. As much as it is capable of producing. C. The output where the ATC curve is at a minimum. D. The output where the marginal cost curve is at a minimum.
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As much as it is capable of producing.
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The short run is the time period A. Over which an investment decision can be made. B. Necessary so that profits can be earned from production. C. In which some costs are fixed. D. In which only the amount of capital may be altered.
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In which some costs are fixed.
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Fixed costs A. Increase with the level of production in the short run. B. Can be altered in the short run but not in the long run. C. Increase as we move from the short run to the long run. D. Are constant in the short run.
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Are constant in the short run.
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A firm maximizes total profit when A. Total costs exceed total revenue by the largest amount. B. Total revenues are maximized. C. Marginal costs are greater than marginal revenues. D. Total revenue exceeds total cost by the greatest amount.
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Total revenue exceeds total cost by the greatest amount.
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Which of the following is generally a fixed cost? A. Property taxes on land used in production. B. Wages. C. Profit taxes. D. Utilities.
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Property taxes on land used in production.
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Which of the following represents the change in total cost that results from a one-unit increase in production? A. Marginal profit. B. Total revenue. C. Marginal cost. D. Marginal revenue
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Marginal cost.
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When the short-run marginal cost curve is upward-sloping, A. The average total cost curve is upward-sloping. B. The average total cost curve is above the marginal cost curve. C. Diminishing returns occurs with greater output. D. There are diseconomies of scale.
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Diminishing returns occurs with greater output.
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If diminishing returns exist, then A. Each unit produced will cost incrementally less. B. Each unit produced will cost incrementally more. C. The total cost curve will be flat. D. The total cost curve will be negatively sloped.
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Each unit produced will cost incrementally more.
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The difference between the total revenue and total cost curves at a given output is equal to A. Total profit. B. Profit per unit. C. Average revenue. D. Average total cost.
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Total profit.
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Marginal revenue is the change in A. Total revenue when output is changed. B. Total revenue when price is changed. C. Average revenue when output is changed. D. Average revenue when price is changed.
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Total revenue when output is changed.
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For the perfectly competitive firm, the marginal revenue is always A. Increasing. B. Constant. C. Equal to average total cost. D. Decreasing.
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Constant.
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For perfectly competitive firms, price A. Is greater than marginal revenue. B. Is equal to marginal revenue. C. Is less than marginal revenue. D. And marginal revenue are not related.
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Is equal to marginal revenue.
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Short-run profits are maximized at the rate of output where A. Average total costs are minimized. B. Total revenue is maximized. C. Marginal revenue is zero. D. Marginal revenue is equal to marginal cost.
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Marginal revenue is equal to marginal cost.
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A perfectly competitive firm will maximize profits by choosing an output level where A. Price is greater than marginal cost. B. Price equals marginal cost. C. Price equals total cost. D. Price is greater than total cost.
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Price equals marginal cost.
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A perfectly competitive firm should expand output when A. P ATC. C. P MC.
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P > MC.
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If a perfectly competitive firm is producing a rate of output at which MC exceeds price, then the firm A. Must have an economic loss. B. Can increase its profit by increasing output. C. Can increase its profit by decreasing output. D. Is maximizing profit.
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Can increase its profit by decreasing output.
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If price is greater than marginal cost, a perfectly competitive firm should increase output because A. Marginal costs are increasing. B. Additional units of output will add to the firm's profits (or reduce losses). C. The price it receives for its product is increasing. D. Total revenues would increase.
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Additional units of output will add to the firm's profits (or reduce losses).
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If price is less than marginal cost, a perfectly competitive firm should decrease output because A. Marginal costs are increasing. B. Total revenues are decreasing. C.The firm is producing units that cost more to produce than the firm receives in revenue, thus reducing profits (or increasing losses). D. Marginal revenue is decreasing.
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The firm is producing units that cost more to produce than the firm receives in revenue, thus reducing profits (or increasing losses).
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Profit per unit is equal to A. TR - TC. B. P - MR. C. P - ATC. D. TR - ATC.
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P - ATC.
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A catfish farmer will shut down production when A. He is losing money. B. Price falls below AVC. C. Total revenue falls below total costs. D. The best he can do is break even.
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Price falls below AVC.
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A firm experiencing economic losses will still continue to produce output in the short run as long as A. Revenues are greater than total fixed cost. B. MR = MC. C. Price is above average variable cost. D. Price is above average fixed cost.
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Price is above average variable cost.
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A competitive firm should always continue to operate in the short run as long as A. P < ATC. B. P AVC. D. MR > MC.
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MR > AVC.
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When a firm minimizes its losses in the short run, A. It continues to produce only if price exceeds average variable cost. B. The firm makes an investment decision. C. The firm enters or exits from the market. D. It continues to produce only if price exceeds marginal revenue.
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It continues to produce only if price exceeds average variable cost.
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When price exceeds average variable cost but not average total cost, the firm should, in the short run, A. Shut down. B. Produce at the rate of output where MR = MC. C. Minimize per-unit losses by producing at the rate of output where ATC is minimized in the short run. D. Minimize total losses by producing at the rate of output where ATC is minimized.
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Produce at the rate of output where MR = MC.
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The shutdown point occurs where price equals the minimum of A. MR. B. AVC. C. AFC. D. ATC.
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AVC.
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The decision to start or expand a business is known as the A. Output decision. B. Investment decision. C. Production decision. D. Profit maximization decision.
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Investment decision.
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An investment decision involves choosing A. A rate of output and is a short-run decision. B. A rate of output and is a long-run decision. C. The amount of plants and equipment and is a short-run decision. D. The amount of plants and equipment and is a long-run decision.
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The amount of plants and equipment and is a long-run decision.
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In making an investment decision, an entrepreneur A. Treats all costs as variable. B. Makes a shutdown decision if price is below average variable cost. C. Must take account of diminishing returns to fixed factors. D. Decides the level of output to produce
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Treats all costs as variable.
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The long run is A. A period longer than one year. B. The period required to produce a unit of the firm's output. C. A period long enough for all inputs to be variable. D. Approximately one year.
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A period long enough for all inputs to be variable.
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If Microsoft is thinking about building a new factory, it is making a A. Long-run decision that will definitely enhance its profit. B. Long-run decision that may enhance its profit. C. Short-run decision that will definitely enhance its profit. D. Short-run decision that may enhance its profit.
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Long-run decision that may enhance its profit.
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Short-run supply determinants include A. Technology. B. Number of buyers. C. Income. D. Consumer preferences.
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Technology.
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The supply curve is upward-sloping (i.e., it takes a higher price to induce greater production) because of A. Increasing total costs. B. Increasing fixed costs. C. Increasing marginal costs. D. The decreasing skill level of additional workers.
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Increasing marginal costs.
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The marginal cost curve A. Is not affected by changes in the price of variable inputs. B. Slopes downward to the right as output increases. C. Is the long-run supply curve for a competitive firm at prices below the AVC curve. D. Is the short-run supply curve for a competitive firm at prices above the AVC curve.
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Is the short-run supply curve for a competitive firm at prices above the AVC curve.
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A change in which of the following will change the optimal rate of output? A. Payroll taxes. B. Profit taxes. C. Property taxes. D. Inflation taxes.
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Payroll taxes.
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Suppose the cost of insecticide (a variable input) decreases for broccoli farmers. In order to maximize profits, ceteris paribus, broccoli farmers should A. Decrease output. B. Keep output the same since the market price did not change. C. Increase output. D. Increase prices.
answer
Increase output.
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If a perfectly competitive firm is producing at its profit-maximizing output in the short run and fixed costs decline, the firm should A. Use less capital but increase output by hiring more labor. B. Not change output. C. Reduce output. D. Increase output.
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Not change output.
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Which of the following does not affect marginal costs? A. An increase in property taxes. B. A decrease in Social Security taxes. C. An increase in payroll taxes. D. An increase in state unemployment taxes.
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An increase in property taxes.
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Which of the following affects both the marginal and average total cost curves of a firm in the short run? A. A change in profit taxes. B. A change in payroll taxes. C. A change in property taxes. D. A change in consumer income.
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A change in payroll taxes.
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When payroll taxes are raised, the firm's marginal cost curve shifts A. Upward, and supply increases. B. Downward, and supply increases. C. Upward, and supply decreases. D. Downward, and supply decreases.
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Upward, and supply decreases.
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When technology improves, the firm's marginal cost curve shifts A. Upward, and supply increases. B. Downward, and supply increases. C. Upward, and supply decreases. D. Downward, and supply decreases.
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Downward, and supply increases.
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Which of the following affects the ATC curve for a firm but not the MC curve? A. A change in property taxes. B. A change in payroll taxes. C. A change in profit taxes. D. A change in the price of the good.
answer
A change in property taxes.
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An In the News article, "T-Shirt Shop Owner's Lament: Too Many T-Shirt Shops," states that if Tshirt shops are perfectly competitive firms, then each shop A. Is a price setter. B. Has market power. C. Confronts a downward-sloping demand curve for its own output. D. Is a price taker.
answer
Is a price taker.
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An In the News article discusses "T-Shirt Shop Owner's Lament: Too Many T-Shirt Shops." If T-shirt shops are perfectly competitive firms, then A. The barriers to entry are low. B. Shops can definitely earn an economic profit in the long run. C. There are few T-shirt shops. D. Each shop has market power
answer
The barriers to entry are low.
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Businesses that fail to account for implicit costs, like the strawberry farmer, Hiroshi Fujishige, who failed to consider the enormous opportunity of selling his property to Disneyland, will A. Go out of business immediately. B. Make higher-than-normal profits. C. Make more money when they shut down. D. Have to increase revenues in order to stay in business.
answer
Make more money when they shut down.
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Production of catfish has skyrocketed in the United States from 16 million pounds in 1975 to an expected 340 million pounds this year. The business is growing among farmers in Alabama, Arkansas, and Louisiana. Which of the following is the motive that enticed many farmers to give up the production of row crops to produce catfish? A. Row crops are relatively more profitable than catfish. B. Row crops necessarily have negative economic profits. C. Catfish is relatively more profitable than row crops. D. Catfish is easier to produce than row crops.
answer
Catfish is relatively more profitable than row crops.
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One In the News feature reports that General Motors planned to essentially quit making cars and trucks in the United States for nine weeks from mid-May through July 2009 and Dell planned to close one of its Texas computer-manufacturing plants. Based on these particular news clips, what is the difference between GM's and Dell's decisions? A. Dell was trying to get rid of excess inventory, and GM was trying to become more efficient. B. GM was trying to maximize profits while Dell was trying to minimize losses. C. GM's decision to idle plants was a short-run shutdown decision. Dell, by contrast, made a long-run decision to exit a specific market. D. There is no difference between GM's and Dell's decisions; both were trying to get rid of excess inventory.
answer
GM's decision to idle plants was a short-run shutdown decision. Dell, by contrast, made a long-run decision to exit a specific market.
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In the News article, "Are Profits Bad?" most Americans feel that profits A. Are bad. B. Do not motivate better product results and lower prices. C. Are good. D. Cause firms to ignore social needs.
answer
Are good.
