Question 1

Economists normally assume that the goal of a firm is to  (i) sell as much of its product as possible.  (ii) set the price of the product as high as possible.   (iii) maximize profit.    a. (i) and (ii) only   b. (ii) and (iii) only   c. (iii) only  d. (i), (ii), and (iii)

Accepted Answer

C. (iii) only

Question 2

The amount of money that a firm pays to buy inputs is called   a. total cost.  b. variable cost.  c. marginal cost.  d. fixed cost.

Accepted Answer

A. Total cost

Question 3

John has decided to start his own lawn-mowing business. To purchase the mowers and the trailer to transport the mowers, John withdrew $1,000 from his savings account, which was earning 3% interest, and borrowed an additional $2,000 from the bank at an interest rate of 7%. What is John\'s annual opportunity cost of the financial capital that has been invested in the business?    a. $30  b. $140  c. $170  d. $300

Accepted Answer

C. $170    (1000x3%)+(2000x7%)

Question 4

Explicit costs    a. require an outlay of money by the firm.   b. include all of the firm\'s opportunity costs.   c. include the value of the business owner\'s time.   d. Both b and c are correct.

Accepted Answer

A. Require an outlay of money by the firm.

Question 5

Implicit costs    a. do not require an outlay of money by the firm.  b. do not enter into the economist\'s measurement of a firm\'s profit.  c. are also known as variable costs.  d. are not part of an economist\'s measurement of opportunity cost.

Accepted Answer

A. Do not require an outlay of money by the firm.

Question 6

Jacqui decides to open her own business and earns $50,000 in accounting profit the first year. When deciding to open her own business, she turned down three separate job offers with annual salaries of $30,000, $40,000, and $45,000. What is Jacqui\'s economic profit from running her own business?    a. $-55,000   b. $-5,000   c. $5,000   d. $20,000

Accepted Answer

C. $5,000

Question 7

Economic profit    a. will never exceed accounting profit.  b. is most often equal to accounting profit.  c. is always at least as large as accounting profit.  d. is a less complete measure of profitability than accounting profit.

Accepted Answer

A. Will never exceed account profit.

Question 8

Scenario 13-1  Calvin wants to start his own business making candles. He can purchase a candle factory that costs $400,000. Calvin currently has $500,000 in the bank earning 3 percent interest per year.    Refer to Scenario 13-1. If Calvin purchases the factory with his own money, what is the annual implicit opportunity cost of purchasing the factory?    a. $0  b. $3,000   c. $12,000   d. $15,000

Accepted Answer

C. 12,000    400,000 x 3%

Question 9

Scenario 13-1  Calvin wants to start his own business making candles. He can purchase a candle factory that costs $400,000. Calvin currently has $500,000 in the bank earning 3 percent interest per year.    Refer to Scenario 13-1. Suppose Calvin purchases the factory using $200,000 of his own money and $200,000 borrowed from a bank at an interest rate of 6 percent. What is Calvin\'s annual opportunity cost of purchasing the factory?    a. $3,000   b. $6,000   c. $15,000   d. $18,000

Accepted Answer

D. $18,000    (200,000 x 3%) + (200,000 x 6%)

Question 10

A production function describes    a. how a firm maximizes profits.  b. how a firm turns inputs into output.  c. the minimal cost of producing a given level of output.  d. the relationship between cost and output.

Accepted Answer

B. how a firm turns inputs into output

Question 11

Let L represent the number of workers hired by a firm, and let Q represent that firm\'s quantity of output. Assume two points on the firm\'s production function are (L = 12, Q = 122) and (L = 13, Q = 132). Then the marginal product of the 13th worker is    a. 8 units of output.  b. 10 units of output.  c. 122 units of output.  d. 132 units of output.

Accepted Answer

B. 10 units of output.

Question 12

When marginal cost exceeds average total cost,    a. average fixed cost must be rising.  b. average total cost must be rising.  c. average total cost must be falling.  d. marginal cost must be falling.

Accepted Answer

B. Average total cost must be rising

Question 13

If marginal cost is below average total cost, then average total cost    a. is constant.  b. is falling.  c. is rising.  d. may rise or fall depending on the size of fixed costs.

Accepted Answer

B. is falling

Question 14

The efficient scale of the firm is the quantity of output that    a. maximizes marginal product.  b. maximizes profit.  c. minimizes average total cost.  d. minimizes average variable cost.

Accepted Answer

C. Minimizes average total cost.

Question 15

The length of the short run    a. is different for different types of firms.  b. can never exceed 3 years.  c. can never exceed 1 year.  d. is always less than 6 months.

Accepted Answer

A. is different for different types of firms.

Question 16

How long does it take a firm to go from the short run to the long run?    a. six months  b. one year  c. two years  d. It depends on the nature of the firm.

Accepted Answer

D. It depends on the nature of the firm

Question 17

Which of the following explains why long-run average cost at first decreases as output increases?    a. diseconomies of scale  b. less-efficient use of inputs  c. fixed costs becoming spread out over more units of output  d. gains from specialization of inputs

Accepted Answer

D. gains from specialization of outputs.

Question 18

When a firm is experiencing economies of scale, long-run    a. average total cost is minimized.  b. average total cost is greater than long-run marginal cost.  c. average total cost is less than long-run marginal cost.  d. marginal cost is minimized.

Accepted Answer

B. Average total cost is greater than long-run marginal cost.

Question 19

Economies of scale occur when a firm\'s    a. marginal costs are constant as output increases.  b. long-run average total costs are decreasing as output increases.  c. long-run average total costs are increasing as output increases.  d. marginal costs are equal to average total costs for all levels of output.

Accepted Answer

B. long-run average total costs are decreasing as output increases

Question 20

Which of the following is not a characteristic of a competitive market?    a. Buyers and sellers are price takers.  b. Each firm sells a virtually identical product.  c. Entry is limited.  d. Each firm chooses an output level that maximizes profits.

Accepted Answer

C. Entry is limited.

Question 21

Who is a price taker in a competitive market?    a. buyers only  b. sellers only  c. both buyers and sellers  d. neither buyers nor sellers

Accepted Answer

C. both buyers and sellers.

Question 22

In a competitive market, the actions of any single buyer or seller will    a. have a negligible impact on the market price.  b. have little effect on market equilibrium quantity but will affect market equilibrium price.  c. affect marginal revenue and average revenue but not price.  d. adversely affect the profitability of more than one firm in the market.

Accepted Answer

A. have a negligible impact on the market price.

Question 23

Free entry means that    a. the government pays any entry costs for individual firms.  b. no legal barriers prevent a firm from entering an industry.  c. a firm\'s marginal cost is zero.  d. a firm has no fixed costs in the short run.

Accepted Answer

B. no legal barriers prevent a firm from entering an industry.

Question 24

When buyers in a competitive market take the selling price as given, they are said to be    a. market entrants.  b. monopolists.  c. free riders.  d. price takers.

Accepted Answer

D. price takers.

Question 25

Suppose a firm in a competitive market reduces its output by 20 percent. As a result, the price of its output is likely to    a. increase.  b. remain unchanged.  c. decrease by less than 20 percent.  d. decrease by more than 20 percent.

Accepted Answer

B. remain unchanged.

Question 26

The Doris Dairy Farm sells milk to a dairy broker in Prairie du Chien, Wisconsin. Because the market for milk is generally considered to be competitive, the Doris Dairy Farm does not choose the    a. quantity of milk to produce.  b. price at which it sells its milk.  c. profits it earns.  d. All of the above are correct.

Accepted Answer

B. price at which it sells its milk.

Question 27

Suppose a firm in a competitive market earned $1,000 in total revenue and had a marginal revenue of $10 for the last unit produced and sold. What is the average revenue per unit, and how many units were sold?    a. $5 and 50 units  b. $5 and 100 units  c. $10 and 50 units  d. $10 and 100 units

Accepted Answer

D. $10 and 100 units    (1,000/$10)

Question 28

Firms operating in competitive markets produce output levels where marginal revenue equals    a. price.  b. average revenue.  c. total revenue divided by output.  d. All of the above are correct.

Accepted Answer

D. all of the above are correct    P=MR=AR

Question 29

For a firm operating in a competitive industry, which of the following statements is not correct?    a. Price equals average revenue.  b. Price equals marginal revenue.  c. Total revenue is constant.  d. Marginal revenue is constant.

Accepted Answer

C. total revenue is constant.

Question 30

Suppose a firm in a competitive market produces and sells 8 units of output and has a marginal revenue of $8.00. What would be the firm\'s total revenue if it instead produced and sold 4 units of output?    a. $4   b. $8   c. $32   d. $64

Accepted Answer

C. $32    (4 x $8.00)

Question 31

Whenever a perfectly competitive firm chooses to change its level of output, its marginal revenue    a. increases if MR  ATC.  b. does not change.  c. increases.  d. decreases.

Accepted Answer

B. does not change

Question 32

If a competitive firm is currently producing a level of output at which marginal REVENUE exceeds marginal COST, then    a. a one-unit increase in output will increase the firm\'s profit.  b. a one-unit decrease in output will increase the firm\'s profit.  c. total revenue exceeds total cost.  d. total cost exceeds total revenue.

Accepted Answer

A. a one-unit increase in output will increase the firm\'s profit.

Question 33

If a competitive firm is currently producing a level of output at which marginal COST exceeds marginal REVENUE, then    a. a one-unit increase in output will increase the firm\'s profit.  b. a one-unit decrease in output will increase the firm\'s profit.  c. total revenue exceeds total cost.  d. total cost exceeds total revenue.

Accepted Answer

B. a one-unit decrease in output will increase the firm\'s profit.

Question 34

At the profit-maximizing level of output,    a. marginal revenue equals average total cost.  b. marginal revenue equals average variable cost.   c. marginal revenue equals marginal cost.  d. average revenue equals average total cost.

Accepted Answer

C. marginal revenue equals marginal cost.

Question 35

The intersection of a firm\'s marginal revenue and marginal cost curves determines the level of output at which     a. total revenue is equal to variable cost.  b. total revenue is equal to fixed cost.  c. total revenue is equal to total cost.  d. profit is maximized.

Accepted Answer

D. profit is maximized.

Question 36

Sam sells soybeans to a broker in Chicago, Illinois. Because the market for soybeans is generally considered to be competitive, Sam maximizes his profit by choosing    a. to produce the quantity at which average variable cost is minimized.  b. to produce the quantity at which average fixed cost is minimized.  c. to sell at a price where marginal cost is equal to average total cost.  d. the quantity at which market price is equal to Sam\'s marginal cost of production.

Accepted Answer

D. the quantity at which market price is equal to Sam\'s marginal cost of production.

Question 37

Profit-maximizing firms enter a competitive market when existing firms in that market have    a. total revenues that exceed fixed costs.  b. total revenues that exceed total variable costs.  c. average total costs that exceed average revenue.  d. average total costs less than market price.

Accepted Answer

D. average total costs less than market price

Question 38

We can measure the profits earned by a firm in a competitive industry as    a. (P-ATC) x Q.  b. (P-MC) x Q.  c. MR x MC.  d. (MC-ATC) x Q.

Accepted Answer

A. (P-ATC) x Q

Question 39

Assume a firm in a competitive industry is producing 800 units of output, and it sells each unit for $6. Its average total cost is $4. Its profit is    a. $-1,600.   b. $1,600.   c. $3,200.   d. $8,000.

Accepted Answer

B. $1,600

Question 40

Consider a firm operating in a competitive market. The firm is producing 40 units of output, has an average total cost of production equal to $5, and is earning $240 economic profit in the short run. What is the current market price?    a. $9  b. $10   c. $11   d. $12

Accepted Answer

C. 11    (240/40) + 5

Question 41

The short-run supply curve for a firm in a perfectly competitive market is    a. horizontal.  b. likely to slope downward.  c. determined by forces external to the firm.  d. the portion of its marginal cost curve that lies above its average variable cost.

Accepted Answer

D. the portion of its marginal cost curve that lies above its average variable cost.

Question 42

Competitive firms that earn a loss in the short run should    a. shut down if P < AVC.  b. raise their price.  c. lower their output.  d. All of the above are correct.

Accepted Answer

A. shut down if P < AVC

Question 43

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    a. price is less than average total cost.  b. price is greater than average total cost.  c. average revenue is greater than average fixed cost.  d. average revenue is greater than marginal cost.

Accepted Answer

A. price is less than average total cost

Question 44

A monopoly  a. can set the price it charges for its output and earn unlimited profits.  b. takes the market price as given and earns small but positive profits.  c. can set the price it charges for its output but faces a downward-sloping demand curve so it cannot earn unlimited profits.  d. can set the price it charges for its output but faces a horizontal demand curve so it can earn unlimited profits.

Accepted Answer

C. can set the price it charges for its output but faces a downward-sloping demand curve so it cannot earn unlimited profits.

Question 45

The DeBeers company faces very little competition from other firms in the wholesale diamond market. Why  isn\'t the price of the wholesale diamonds $10,000 per carat?    a. because the government would not allow such a high price  b. because stockholders would not allow such a high price  c. because the company would sell so few copies that they would earn higher profits by selling at a  lower price  d. All of the above are correct.

Accepted Answer

C. because the company would sell so few copies that they would earn higher profits by selling at a  lower price

Question 46

Which of the following is not a characteristic of a monopoly?    a. barriers to entry  b. one seller  c. one buyer  d. a product without close substitutes

Accepted Answer

C. one buyer

Question 47

The simplest way for a monopoly to arise is for a single firm to    a. decrease its price below its competitors\' prices.  b. decrease production to increase demand for its product.  c. make pricing decisions jointly with other firms.  d. own a key resource.

Accepted Answer

D. own a key resource

Question 48

A firm that is the sole seller of a product without close substitutes is    a. perfectly competitive.  b. monopolistically competitive.  c. an oligopolist.  d. a monopolist.

Accepted Answer

D. a monopolist

Question 49

Most markets are not monopolies in the real world because    a. firms usually face downward-sloping demand curves.  b. supply curves slope upward.  c. firms usually equate price with marginal cost.  d. there are reasonable substitutes for most goods.

Accepted Answer

D. there are reasonable substitutes for most goods.

Question 50

Patent and copyright laws are major sources of    a. natural monopolies.  b. government-created monopolies.  c. resource monopolies.  d. antitrust regulation.

Accepted Answer

B. government-created monopolies.

Question 51

Which of the following is a characteristic of a natural monopoly?    a. Fixed costs are typically a small portion of total costs.  b. Average total cost declines over large regions of output.  c. The product sold is a natural resource such as diamonds or water.  d. All of the above are correct.

Accepted Answer

B. average total cost declines over large regions of output.

Question 52

A natural monopoly occurs when    a. the product is sold in its natural state, such as water or diamonds.  b. there are economies of scale over the relevant range of output.  c. the firm is characterized by a rising marginal cost curve.  d. production requires the use of free natural resources, such as water or air.

Accepted Answer

B. there are economies of scale over the relevant range of output.

Question 53

The market demand curve for a monopolist is typically    a. unit price elastic.  b. downward sloping.  c. horizontal.  d. vertical.

Accepted Answer

B. downward sloping.

Question 54

In order to sell more of its product, a monopolist must    a. lobby the government for a subsidy.  b. lower its price.  c. advertise.  d. enact barriers to entry in related markets.

Accepted Answer

B. lower its price

Question 55

Competitive firms have    a. downward-sloping demand curves, and they can sell as much output as they desire at the market  price.  b. downward-sloping demand curves, and they can sell only a limited quantity of output at each price.  c. horizontal demand curves, and they can sell as much output as they desire at the market price.  d. horizontal demand curves, and they can sell only a limited quantity of output at each price.

Accepted Answer

C. horizontal demand curves, and they can sell as much output as they desire at the market price.

Question 56

For a monopoly firm, which of the following equalities is always true?    a. price = marginal revenue  b. price = average revenue  c. price = total revenue  d. marginal revenue = marginal cost

Accepted Answer

B. Price= Average revenue

Question 57

A monopolist can sell 200 units of output for $36 per unit. Alternatively, it can sell 201 units of output for $35.80 per unit. The marginal revenue of the 201st unit of output is    a. $-4.20.   b. $-0.20.   c. $4.20.   d. $35.80.

Accepted Answer

A. $-4.20    MR= (change in TR/ change in Q)  TR 200 units: 7200  TR 201 units: 7195.80  (7195.80-7200)/1

Question 58

If the monopolist\'s linear demand curve intersects the quantity axis at Q = 30, then the monopolist\'s marginal revenue will be equal to zero at    a. Q=10.   b. Q=15.   c. Q=20.   d. Q=30.

Accepted Answer

B. Q=15

Question 59

A profit-maximizing monopolist charges a price of $12. The intersection of the marginal revenue and marginal cost curves occurs where output is 10 units and marginal cost is $6. Average total cost for 10 units of output is $5. What is the monopolist\'s profit?    a. $60   b. $70   c. $100   d. $120

Accepted Answer

B. $70    ? = ($12 x 10 units) - (10 units x $5)

Question 60

Which of the following formulas would correctly calculate a monopolist\'s profit?    a. profit = price - marginal cost  b. profit = price - average total cost  c. profit = (price - marginal cost) x quantity  d. profit = (price - average total cost) x quantity

Accepted Answer

D. profit = (price - average total cost) x quantity

Question 61

Monopolies are inefficient because they   (i) eliminate barriers to entry.  (ii) price their product at a level where marginal revenue exceeds marginal cost.   (iii) restrict output below the socially efficient level of production.    a. (i) and (ii) only   b. (ii) and (iii) only   c. (iii) only  d. (i), (ii), and (iii)

Accepted Answer

C. (iii) only

Question 62

A monopolist produces    a. more than the socially efficient quantity of output but at a higher price than in a competitive market.  b. less than the socially efficient quantity of output but at a higher price than in a competitive market.  c. the socially efficient quantity of output but at a higher price than in a competitive market.  d. possibly more or possibly less than the socially efficient quantity of output, but definitely at a higher price than in a competitive market.

Accepted Answer

B. less than the socially efficient quantity of output but at a higher price than in a competitive market.

Question 63

Deadweight loss    a. measures monopoly inefficiency.  b. exceeds monopoly profits.  c. equals monopoly profits.  d. equals monopoly revenues minus profits.

Accepted Answer

A. measures monopoly inefficiency.

Question 64

The economic inefficiency of a monopolist can be measured by the    a. number of consumers who are unable to purchase the product because of its high price.  b. excess profit generated by monopoly firms.  c. poor quality of service offered by monopoly firms.  d. deadweight loss.

Accepted Answer

D. deadweight loss.

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