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Unit III – Definition and Application Questions Mr. Stewart’s AP Microeconomics ClassSpring Semester 2020*Krugman pages 173-210, Modules 16-20Concept/Topic/Term:Definition Questions:Application Questions:Accounting and Economic Profit“Normal Profit”“Supernormal Profit”“Loss”*Instead of being employed at a printing company at a salary of $25,000 per year, Sally starts her own printing firm. Rather than renting a building that she owns to someone else for $10,000 per year, she uses it as the location for her company. Her costs for workers, materials, advertising, and energy during her first year are $125,000. If the total revenue from her printing company is $155,000, her total economic profit is:A. -$5,000B. $5,000C. $20,000D. $30,000E. $120,000*At a firm’s current rate of output, the marginal cost is $65, the average variable cost is $35, the average fixed cost is $30, and the product price is $65. Which of the following statements is true for the firm?A. Economic profits are zero because marginal revenue equals marginal cost.B. Economic profits are negative because total revenue is less than total cost.C. Economic profits are positive because total revenue is greater than total cost.D. Economic profits are negative because price is greater than average variable cost.E. Economic profits are zero because price equals average total cost.*Which of the following statements best describes the graph?A. Economic losses are incurred, and the firm will increase price until no losses are incurred.B. Economic losses are incurred, and exit of firms from the market will cause prices to increase in the long run.C. Economic profits are earned, and costs will increase until no profits are earned.D. Economic profits are earned, and entry of firms into the market will cause prices to decrease in the long run.E. Economic profits are earned, and neither exit nor entry of firms will occur in the long run.Profit Maximization Rule (MC=MR)*At the current output level, a firm finds that it has the potential to increase its profit by expanding output. If P = price, and MR = marginal revenue, and MC = marginal cost, which of the following must hold at the current output for this firm?A. P = MR < MCB. P = MR = MCC. MR = MCD. MR > MCE. MR < MCMarginal Cost Curve*An increase in which of the following will cause a firm’s marginal cost curve to shift upward?A. The price of a variable inputB. The price of a fixed inputC. The level of outputD. Labor productivityE. The demand for the firm’s product*If labor is the only variable input in the production process, the short-run marginal cost curve is upward sloping because which of the following occurs as more and more labor is added? ?A. Output decreases, and thus marginal cost increases. ?B. Output increases, and thus marginal cost increases. ?C. Output increases at an increasing rate, and thus the cost of producing each additional unit of output increases. ?D. Output increases at a decreasing rate, and thus the cost of producing each additional unit of output increases. ?E. Output increases at a decreasing rate, and thus the cost of producing each additional unit of output decreases.*Which of the following is true of the marginal cost curve?A. It intersects the average variable cost curve and the average total cost curve at each curve’s minimum point.B. It intersects the average variable cost curve and the average fixed cost curve at each curve’s minimum point.C. It lies between the total cost curve and the total variable cost curve.D. It increases initially, for a time, but begins to decline when the point of diminishing returns is reached.E. It decreases, because average variable cost is less than marginal cost.P=MR (In a perfectly competitive market)Price Above MC/ATCPrice Below MC/ATC*Which of the following is true about the marginal revenue of a firm in a perfectly competitive industry?A. It is constantB. In increases as output sold increasesC. It decreases as output sold decreasesD. It increases at first, then decreasesE. It decreases at first, then increases*If total revenue is increasing as output increases, marginal revenue is always:?A. equal to average revenue B. less than average revenue C. increasing?D. decreasing ?E. greater than zeroTotal Revenue-Total Cost Profit Maximizing QUANTITY *The graph above shows the total revenue and total cost curves for a firm in which type of market structure and what is the profit-maximizing quantity? ? Market Structure Quantity A.?Monopoly Q2 B.?Monopoly Q3 C.?Perfect Competition Q1 D.?Perfect Competition Q3 E. Perfect Competition Q4 Total Cost = Fixed + Variable CostAverage Fixed Cost*In the short run, which of the following costs must continuously decrease as output produced increases? A. ?Total variable cost B. ?Total fixed cost C. ?Average variable cost D. ?Average fixed cost E. ?Average total costAverage Variable Cost*If the marginal cost of producing the first unit of some good is $20 and the marginal cost of producing the second unit is $30, the average variable cost of producing 2 units is:A. $5 B. $10 C. $20D. $25 E. $50Average Total Cost*In the short run, which of the following is true of a firm’s average total cost of production?A. It is equal to marginal cost plus average variable costB. It is equal to marginal cost plus fixed costC. It is equal to average fixed cost plus average variable costD. It always increases when a firm increases productionE. It is zero if the firm shuts down*Units of Labor Input Units of Output1 8220330The table above shows the amount of labor inputs necessary to produce given levels of output. If the cost of a unit of labor is $20 and total fixed cost is $100, the average total cost of producing 20 units of output isA. $1B. $2C. $7D. $40E. $120Cost Curves (Combined)*At 100 units of a firm’s output, average total cost is $10, average variable cost is $8, average fixed costs is $2, and marginal cost is $12. How will each of the following change as the firm’s output further increases? ATC AVCAFCA. Increase Increase IncreaseB. Increase Increase DecreaseC. Increase Decrease DecreaseD. Decrease Increase IncreaseE. Decrease DecreaseDecrease*The graph above shows the short-run cost curves of a firm in a perfectly competitive market. Which of the following are true at the firm’s profit- maximizing output level? I. Price exceeds average total cost. II. Economic profits are zero. III. Marginal cost equals average total cost. IV. New firms are likely to enter the market in the long run. A. I and II only?B. I and III onlyC. I and IV only?D. II, III, and IV only E. I, II, III, and IVInputs/Costs and Output*If a perfectly competitive firm is producing where marginal cost is rising and greater than marginal revenue, to maximize profits it should:A. Increase the level of production?B. Decrease the level of production?C. Maintain current level of production D. Increase price?E. Decrease price“U-Shape” Curve“Spreading Effect” and “Specialization”“Diminishing Returns”*Beyond a certain level of output, the short-run marginal cost will rise becauseA. There is no fixed input and costs will increaseB. At least one input is fixed and eventually diminishing returns will occurC. The cost of the variable input increases when marginal product increasesD. The demand for the good decreases when production is limitedE. Input prices increase when production increases and consumption is limited“Minimum-Cost Output” (Where MC hits ATC and AVC and the bottom of the “U”)ATC is “Falling” or ATC is “Rising”*If a firm’s average total cost decreases as the firm increases its output, the firm’s marginal cost must be:A. Greater than the average variable costB. Less than the average fixed costC. Less than the average total costD. DecreasingE. Negative“Shut-Down” = Price at or below AVC*In the short run, a profit-maximizing firm should shut down if which of the following is true?A. It is not making an economic profit.B. It is not making a normal profit.C. Its total revenue is less than its total cost.D. Its product price is less than its average variable cost.E. Its product price is greater than its average variable cost but less than its average total cost.*In order to minimize short-run losses, a profit- maximizing firm will necessarily shut down production under which of the following conditions?A. Total revenue is less than total cost.?B. Marginal cost is greater than average total cost.?C. Marginal cost is less than marginal revenue. D. Average revenue is less than average variable cost.?E. Average revenue is less than average total cost.“Short-Run versus Long-Run”*In microeconomics, the short run is defined as which of the following?A. A period that is less than one yearB. A period that is between one year and four yearsC. A period that is too short for a firm to be able to change its level of outputD. A period during which some inputs in a firm’s production process cannot be changedE. A period during which a firm’s fixed costs exceed it variable costs*If the firm produces Q1 units of output with two inputs, the firm will be experiencing which of the following in the short run and in the long run? Short run Long runA. Increasing marginal returns Economies of scaleB. Increasing marginal returns Diseconomies of scaleC. Diminishing marginal returns Economies of scaleD. Diminishing marginal returns Diseconomies of scaleE. Constant marginal returns Diseconomies of scale*Which of the following will be true if the firm is in perfectly competitive market and the price is P1? A. The firm will earn short-run profits but suffer long-run losses.B. In the long run, existing firms in the industry will produce an output level greater than Q1.C. In the long run, existing firms will leave the industry.D. Firms will leave the industry until profits are increased.E. New firms will be dissuaded from entering the industry, at least until the price increases.Fixed Cost in the Short-Run (Land/Capital) and Variable Cost in the Short-Run (Labor)Total Product and Marginal Product of Labor*Suppose that a firm begins to hire workers for a newly completed plant with a fixed amount of machinery. As the firm hires additional workers, one would expect the marginal product to: ?A. Fall initially, but eventually rise?B. Rise initially, but eventually fall?C. Rise consistently due to diminishing return D. Rise consistently due to the advantages of specialization?E. Rise consistently due to economies of scale*If labor is the only variable input of a firm and the marginal product of labor is falling, the firm will always produce:?A. More than the profit-maximizing level of output ?B. Less than the profit-maximizing level of output ?C. At a level of output where average total cost is at a minimum ?D. At a level of output where marginal costs are rising ?E. At a level of output where average variable costs are fallingThe Long-Run and LRATCEconomies and Diseconomies of ScaleIncreasing Returns to ScaleDecreasing Returns to Scale Constant Returns to Scale*The long-run average cost curve will be sloping downward if a firm experiences:A. Diminishing marginal returnsB. Decreasing returns to scaleC. Constant returns to scaleD. Diseconomies of scaleE. Economies of scale*If a firm’s long-run average total cost increases as output increases, the firm is experiencing:A. Economies of ScaleB. Diseconomies of ScaleC. Increasing Returns to ScaleD. Efficiency in Plant SizeE. Maximum Economic Profit*F&D Manufacturing Company increases al its inputs by 50 percent each. If F&D’s output increases by 100%, the F&D is experiencing:A. Increasing returns to scaleB. Constant returns to scaleC. Diseconomies of scaleD. Increasing marginal costE. Decreasing profits*A farmer grows wheat using two inputs: labor and land whose prices are constant. If she doubles her inputs, she finds that the quantity of wheat produced more than doubles. Therefore, it must be true that in this output range her long-run average total cost curve isA. Upward sloping B. Downward slopingC. Horizontal?D. Vertical? E. U-shaped*If a firm’s production process exhibits economies of scale, which of the following will occur when the firm’s output increases?A. Its short-run average total costs will rise. B. Its long-run average total costs will rise. C. Its long-run average total costs will fall. D. Its short-run total costs will fall.E. Its long-run total costs will fall.*If a firm is experiencing economies of scale, which of the following will decrease as output increases? ?A. Fixed cost?B. Long-run total cost?C. Long-run average total cost D. Marginal cost? E. Marginal revenue*Which of the following is a result of increasing returns to sale? ?A. Upward-sloping short-run marginal cost curve ?B. Downward-sloping marginal physical product of labor curve ?C. Downward-sloping long-run average total cost curve ?D. Diseconomies of scale E. Diminishing returnsLong-Run Equilibrium *Which of the following indicates that a perfectly competitive firm is in long-run equilibrium? ?A. Price equals marginal cost.?B. Price equals average revenue.?C. Price equals marginal cost, which equals average total cost.D. Price equals average revenue, which equals marginal revenue.?E. Price equals average fixed cost.*A perfectly competitive firm is currently in long-run equilibrium. Its total revenue is $100,000, and the average total cost of production is $100. Which of the following can be concluded from this information?A. The firm’s marginal cost is $1,000 and its profit is positive.B. The firm’s marginal cost is $1,000 and its profit is zero.C. The firm’s output is 1,000 units and its profit is negative.D. The firm’s output is 1,000 units and its profit is zero.E. The firm’s output is 1,000 units, and its profit is positive.Cost-Minimizing Combinations*Assume that the last worker a firm hired produces 60 additional units of output per hour and the last machine rented produces 6,000 units of output per hour. A worker’s hourly wage rate is $12, and the rental cost of a machine is $1,000 per hour. In order to minimize the cost of its current output, the firm shouldA. Do nothing, because the cost of production are minimizedB. Increase the use of labor and decrease the use of capitalC. Increase the use of capital and decrease the use of laborD. Increase the use of labor and increase the use of capitalE. Decrease the use of labor and decrease the use of capital*At its current employment level of labor and capital, a firm observes the following:Marginal product of labor = 30 units Marginal product of capital = 60 units Price of labor = $3 per unit Price of capital = $15 per unit ?Which of the following actions should the firm take in order to achieve the least-cost combination of labor and capital and produce the same level of output? Labor CapitalA. Increase IncreaseB. Increase DecreaseC. DecreaseIncreaseD. Decrease DecreaseE. No change No change*A firm produces truffles by using labor and capital. The price of labor is $10 per unit, and the price of capital is $20 per unit. At current output level, the marginal product of labor is 40 truffles and the marginal product of capital is 60 truffles. To reduce the total cost of producing the current quantity of truffles, how should the firm change it’s spending on labor and capital? LaborCapitalNo ChangeIncreaseDecreaseNo ChangeDecreaseIncreaseIncreaseNo ChangeIncreaseDecreaseChange in Equilibrium*A constant-cost, perfectly competitive gadget industry is in long run equilibrium. An increase in the number of consumers of gadgets will most likely result inA. Higher short-run and long-run prices for gadgetsB. Reduced short-run profits, followed by the exit of some firmsC. An upward shift in all short-run cost curves, followed by a higher long-run price for gadgetsD. A higher short-run price for gadgets, followed by an increase in the quantity producedE. A decrease in the demand for gadgets, followed by a decrease in the supply of gadgets*For a perfectly competitive, increasing-cost industry, an increase in the industry’s demand will lead to which of the following in the long run? ?A. An upward shift in each firm’s long-run average cost curve ?B. An increase in each firm’s profit?C. A decrease in the price of an input and ?a decrease in total industry profits?D. A decrease in total industry sales?E. A decrease in total producer surplus and ?an increase in total consumer surplusMarginal Cost and the Supply Curve/How the Supply Curve is Derived*Which of the following segments of the marginal cost curve lies entirely on the firm’s short-run supply curve?A. TUVB. STU C. RSTU D. RSTUV E. RS ................
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