ECON PRACTICE TEST 3 – Flashcards
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Jessica makes photo frames. She spends $5 on the materials for each photo frame. She can create one photo frame in an hour. She earns $10 per hour at a part-time job at the local coffee shop. She can sell a photo frame for $30 each. An accountant would calculate the total profit for one photo frame to be _______.
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$25
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Pete owns a shoe-shine business. His accountant most likely includes which of the following costs on his financial statements? (i) shoe polish (ii) rent on the shoe stand (iii) wages Pete could earn delivering newspapers (iv) interest that Pete's money was earning before he spent his savings to set up the shoe-shine business
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a. (i) and (ii) only
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Wanda owns a lemonade stand. She produces lemonade using five inputs: water, sugar, lemons, paper cups, and labor. Her costs per glass are as follows: $0.01 for water, $0.02 for sugar, $0.03 for lemons, $0.02 for cups, and $0.10 for the opportunity cost of her labor. She can sell 300 glasses for $0.50 each. What are Wanda's total accounting profits?
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$126
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Kachina is a senior majoring in graphic design at Awesome University (AU). While she has been attending college, Kachina started a computer consulting business to help senior citizens learn how to use their iPads. Kachina charges $25 per hour for her consulting services. She also works 5 hours a week for the Economics Department to maintain that department's Web page. The Economics Department pays Kachina $20 per hour. If Kachina can work additional hours at either job, what is the opportunity cost if she spends one hour reading a novel?
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$25
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Ziva is an organic lettuce farmer, but she also spends part of her day as a professional organizing consultant. As a consultant, Ziva helps people organize their houses. Due to the popularity of her home-organization services, Farmer Ziva has more clients requesting her services than she has time to help if she maintains her farming business. Farmer Ziva charges $25 an hour for her home-organization services. One spring day, Ziva spends 10 hours in her fields planting $130 worth of seeds on her farm. She expects that the seeds she planted will yield $300 worth of lettuce. An economist would calculate Ziva's total cost of farming to equal____________.
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$380.
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Suppose that Emily opens a restaurant. She receives a loan from a bank for $200,000. She withdraws $100,000 from her personal savings account. The interest rate on the loan is 6%, and the interest rate on her savings account is 2%. Emily's total opportunity cost of capital is
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$14,000.
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Jessica makes photo frames. She spends $5 on the materials for each photo frame. She can create one photo frame in an hour. She earns $10 per hour at a part-time job at the local coffee shop. She can sell a photo frame for $30 each. An economist would calculate the total cost for one photo frame to be ______.
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$15
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A dairy produces and sells organic milk. Last year it sold 500,000 gallons of milk at a price of $7 per gallon. For last year, the firm's ______________________ was $3.5 million.
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total revenue
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As Bubba's Bubble Gum Company adds workers while using the same amount of machinery, some workers may be underutilized because they have little work to do while waiting in line to use the machinery. When this occurs, Bubba's Bubble Gum Company encounters...
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diminishing marginal product
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A production function describes...
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how a firm turns inputs into output.
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When economists refer to a production cost that has already been committed and cannot be recovered, they use the term...
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sunk cost
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Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the market price for rubber bands falls below the minimum of its average total cost, but still lies above the minimum of average variable cost, in the short run the firm will experience _________________ but will continue to _____________________
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loses; produce rubber bands
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For a particular competitive firm, the minimum value of average variable cost (AVC) is $12 and is reached when 200 units of output are produced. For the same firm, the minimum value of average total cost (ATC) is $15 and is reached when 230 units of output are produced. Which of the following statements is correct?
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a. In the short run, the firm will shut down if the price of its product is $11. b. In the long run, the firm will shut down if the price of its product is $14. c. If the price of its product is $12, then the firm's loss if it produces 200 units of output is the same as its loss if it shuts down. Correctd. All of the above are correct.
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In the long run, all of a firm's costs are variable. In this case the exit criterion for a profit-maximizing firm is to shut down if...
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price is less than average total cost.
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Which of the following statements best reflects the production decision of a profit-maximizing firm in a competitive market when price falls below the minimum of average variable cost? a. The firm will continue to produce to attempt to pay fixed costs. b. The firm will stop production as soon as it is able to pay its sunk costs. c. The firm will immediately stop production to minimize its losses. d. The firm will continue to produce in the short run but will likely exit the market in the long run.
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The firm will immediately stop production to minimize its losses.
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A competitive firm has been selling its output for $20 per unit and has been maximizing its profit, which is positive. Then, the price rises to $25, and the firm makes whatever adjustments are necessary to maximize its profit at the now-higher price. Once the firm has adjusted, its a. quantity of output is higher than it was previously. b. average total cost is higher than it was previously. c. marginal revenue is higher than it was previously. d. All of the above are correct.
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All of the above are correct.
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Which of the following represents the firm's short-run condition for shutting down?
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shut down if TR ; VC
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For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $7 and a marginal cost of $10. It follows that the...
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firm's profit-maximizing level of output is less than 100 units
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The information below applies to a competitive firm that sells its output for $40 per unit. • When the firm produces and sells 150 units of output, its average total cost is $24.50. • When the firm produces and sells 151 units of output, its average total cost is $24.55. Refer to Scenario 14-4. How does the firm's marginal revenue (MR) compare to its marginal cost (MC) when it increases its output from 150 units to 151 units? Selected Answer: Incorrecta. MR exceeds MC by $11.05. Answers: a. MR exceeds MC by $11.05. Correctb. MR exceeds MC by $7.95. c. MC exceeds MR by $13.50. d. MC exceeds MR by $11.05.
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MR exceeds MC by $7.95.
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In a long-run equilibrium, the marginal firm has a. price equal to average total cost. b. total revenue equal to total cost. c. economic profit equal to zero. d. All of the above are correct.
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All of the above are correct
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Roger owns a small health store that sells vitamins in a perfectly competitive market. If vitamins sell for $12 per bottle and the average total cost per bottle is $12.50 at the profit-maximizing output level, then in the long run...
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some firms will exit from the market.
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A study sponsored by the Food Consumer Safety Board found that consumption of irradiated tomatoes increased the health of laboratory rats. As a result of national press coverage of the report, the demand for irradiated tomatoes increased dramatically. Organic farmers were able to switch from organic production of tomatoes to irradiated production with no additional cost. Assume that the tomato market satisfies all of the assumptions of perfect competition. If the increased production of irradiated tomatoes caused a rise in the marginal transportation costs of moving irradiated tomatoes to market, the long-run market supply of irradiated tomatoes would be __________________ sloping.
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upward
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In a perfectly competitive market, the process of entry and exit will end when (i) accounting profits are zero. (ii) economic profits are zero. (iii) price equals minimum marginal cost. (iv) price equals minimum average total cost.
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(ii) and (iv) only
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In a competitive market, the actions of any single buyer or seller will have a _____________________ impact on the market price.
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negligible
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Which of the following industries is most likely to exhibit the characteristic of free entry?
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tennis shoes
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For a competitive firm, average revenue equals __________________ ____________________.
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marginal revenue
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Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that when the firm hires 4 workers, the firm produces 50 units of output. If the fixed cost of production is $4, the variable cost per unit of labor is $20, and the marginal product of labor for the fifth unit of labor is 2, what is the average total cost of production when the firm hires 5 workers?
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$2.00
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The firm's efficient scale is the quantity of output that minimizes ________________________
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average total cost
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The average fixed cost curve always _____________ with increased levels of output.
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declines
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The average fixed cost curve a. declines as long as it is below marginal cost. b. always declines with increased levels of output. c. declines as long as it is above marginal cost. d. always rises with increased levels of output.
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b. always declines with increased levels of output.
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Which of the following is the best example of a variable cost? a. annual property tax payments for a building b. monthly rent payments for a warehouse c. annual insurance payments for a warehouse d. monthly wage payments for hired labor
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d. monthly wage payments for hired labor
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Marginal cost increases as the quantity of output increases. This reflects the property of...
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diminishing marginal product.
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Riva crafts and sells hard cider as a part-time job. She can bottle and sell four cases in a week. She is considering hiring her friend Atul to help her. Together, Riva and Atul can bottle and sell seven cases per week. What is Atul's marginal product?
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3 cases
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Number of Workers- Output (number of students tutored per week) 0-0 1-20 2-45 3-60 4-70 Refer to Table 13-4. Suppose that Charles's math tutoring company has a fixed cost of $50 per month for his cell phone. Each worker costs Charles $60 per day. As output increases from 45 to 70 students, Charles's total cost curve...
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increases and gets steeper
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The marginal product of labor is equal to the increase in __________ obtained from a _________________ increase in labor.
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output; one unit
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On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires 2 workers. He is able to produce 4,400 bushels of wheat when he hires 3 workers. Which of the following possibilities is consistent with the property of diminishing marginal product? a. The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers. b. The farmer is able to produce 5,400 bushels of wheat when he hires 4 workers. c. The farmer is able to produce 5,200 bushels of wheat when he hires 4 workers. d. Any of the above could be correct.
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d. any of the above could be correct
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Which of the following industries is least likely to exhibit the characteristic of free entry?
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municipal water and sewer
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Whenever a perfectly competitive firm chooses to change its level of output, its marginal revenue...
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does not change
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Which of the following is a characteristic of a competitive market? Buyers and sellers are _______________ ______________
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price takers
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Land of Many Lakes (LML) sells butter to a broker in Albert Lea, Minnesota. Because the market for butter is generally considered to be competitive, LML can choose ________________ of butter that it produces but not the...
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quantity; price at which it sells butter
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A marginal cost curve will be ___________ and sloping _________________
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flat; upward
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At Bert's Bootery, the total cost of producing twenty pairs of boots is $400. The marginal cost of producing the twenty-first pair of boots is $83. We can conclude that the average total cost of 21 pairs of boots is ______
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$23
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Which of the following statements is correct? a. If marginal cost is rising, then average total cost is rising. b. If average total cost is rising, then marginal cost is greater than average total cost. c. If marginal cost is rising, then average variable cost is rising. d. If average variable cost is rising, then marginal cost is minimized.
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b. If average total cost is rising, then marginal cost is greater than average total cost.
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The average-total-cost curve intersects marginal cost at the minimum of _____________________________
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average total cost
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Bubba is a shrimp fisherman who catches 4,000 pounds of shrimp per year. He can sell the shrimp for $5 per pound. His average total cost of catching shrimp is $3 per pound. Bubba's annual total revenue is ____________________
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$20,000
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Gwen has decided to start her own photography studio. To purchase the necessary equipment, Gwen withdrew $2,000 from her savings account, which was earning 3% interest, and borrowed an additional $4,000 from the bank at an interest rate of 7%. What is Gwen's annual opportunity cost of the financial capital that has been invested in the business?
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$340
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Walter builds birdhouses. He spends $5 on the materials for each birdhouse. He can build one in 30 minutes. He is semi-retired but earns $8 per hour at the local hardware store. He can sell a birdhouse for $20 each. An accountant would calculate the total cost for one birdhouse to be ____
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$5
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Suppose that Emily opens a restaurant. She receives a loan from a bank for $200,000. She withdraws $100,000 from her personal savings account. The interest rate on the loan is 6%, and the interest rate on her savings account is 2%. Emily's implicit cost of capital is _____________
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$2,000
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Anya has decided to start her own hair-styling salon. To purchase the necessary equipment, Anya withdrew $10,000 from her savings account, which was earning 3% interest, and borrowed an additional $5,000 from the bank at an interest rate of 8%. What is Anya's annual opportunity cost of the financial capital that has been invested in the business?
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$700
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Bubba is a shrimp fisherman who used $2,000 from his personal savings account to buy a boat and equipment for his shrimp business. The savings account paid 2% interest. What is Bubba's annual opportunity cost of the financial capital that he invested in his business?
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$40
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Scenario 13-13 Christine is an artist who creates custom cookie jars. Her annual revenue from selling the cookie jars is $90,000. The annual explicit costs of the materials used to make the cookie jars are $54,000. Refer to Scenario 13-13. Christine used $5,000 from her personal savings account to buy pottery tools for her business. The savings account paid 1% annual interest. Christine could earn $6,000 per year as a tax preparer. What is the annual economic profit of her cookie jar business?
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d. $29,950
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Julia prepares tax returns and does bookkeeping. Last year her revenues from the tax and bookkeeping business were $150,000, and her expenses for the business were $15,000. When she started her tax and bookkeeping business, Julia gave up her supplemental job doing in-home pet sitting. She used to earn $10,000 per year from pet sitting. Assume that she incurred no costs for her pet sitting business. Refer to Scenario 13-7. Julia's accounting profits are ______________
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$135,000
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Consider a competitive market with a large number of identical firms. The firms in this market do not use any resources that are available only in limited quantities. In this market, an increase in demand will____________ price in the ___________________ but not in the ________________.
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increase; short run; long run
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A competitive market is in long-run equilibrium. If demand increases, we can be certain that price will ___________ in the short run. Some firms will enter the industry. Price will the....
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rise; fall to reach the new long-run equilibrium.
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In a long-run equilibrium, the marginal firm has a. price equal to minimum marginal cost. b. total revenue equal to total cost. c. accounting profit equal to zero. d. All of the above are correct.
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b. total revenue equal to total cost.
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When new firms have an incentive to enter a competitive market, their entry will....
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drive down profits of existing firms in the market.
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If the profit-maximizing quantity of production for a competitive firm occurs at a point where the firm's average total cost of production is falling as production increases, then the firm a. will have economic profit less than zero at the profit-maximizing quantity. b. will have zero economic profit at the profit-maximizing quantity. c. will be earning positive economic profit at the profit-maximizing quantity. d. should increase the quantity of production to increase profit.
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a. will have economic profit less than zero at the profit-maximizing quantity.
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In order to maximize profits in the short run, a firm should produce where _____________________ equals __________________________.
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marginal cost; marginal revenue
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Assume a certain firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $20 and its average total cost equals $25. The firm sells its output for $30 per unit. Refer to Scenario 14-2. At Q = 999, the firm's profits equal
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$4,990
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Comparing marginal revenue to marginal cost (i) reveals the contribution of the last unit of production to total profit. (ii) is helpful in making profit-maximizing production decisions. (iii) tells a firm whether its fixed costs are too high.
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b. (i) and (ii) only
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Suppose you bought a ticket to a football game for $30 and that you place a $35 value on seeing the game. If you lose the ticket, then what is the maximum price you should pay for another ticket? Assume that losing the ticket does not alter how you value it.
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$35
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The information below applies to a competitive firm that sells its output for $40 per unit. • When the firm produces and sells 150 units of output, its average total cost is $24.50. • When the firm produces and sells 151 units of output, its average total cost is $24.55. Refer to Scenario 14-4. When the firm produces 150 units of output, its profit is
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$2,325.00
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The term shutdown refers to a ______________ decision that a firm might make, whereas the term exit refers to a ________________ decision that a firm might make.
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short-run; long-run
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The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average ___________________
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total cost
