chapter 13-15

Question 1

Trevor’s Tire Company produced and sold 500 tires. The average cost of production per tire was $50. Each tire sold for a price of $65. Trevor’s Tire Company’s total profits are

Answer 1

$7,500.

Question 2

The amount of money that a firm pays to buy inputs is called

Answer 2

total cost.

Question 3

Total cost is the

Answer 3

market value of the inputs a firm uses in production.

Question 4

Explicit costs

Answer 4

require an outlay of money by the firm.

Question 5

Which of the following is an example of an implicit cost?
(i)
the owner of a firm forgoing an opportunity to earn a large salary working for a Wall Street brokerage firm
(ii)
interest paid on the firm’s debt
(iii)
rent paid by the firm to lease office space

Answer 5

(i) only

Question 6

Scenario 13-4
Suppose that Abdul opens a coffee shop. He receives a loan from a bank for $100,000. He withdraws $50,000 from his personal savings account. The interest rate on the loan is 8%, and the interest rate on his savings account is 2%.

Refer to Scenario 13-4. Abdul’s explicit cost of capital is

Answer 6

$8,000.

Question 7

Scenario 13-7
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.

Refer to Scenario 13-7. What are Wanda’s explicit costs per glass?

Answer 7

$0.08

Question 8

Scenario 13-7
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.

Refer to Scenario 13-7. What are Wanda’s total accounting profits?

Answer 8

$126

Question 9

Scenario 13-8
Ellie has been working for an engineering firm and earning an annual salary of $80,000. She decides to open her own engineering business. Her annual expenses will include $15,000 for office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a secretary/bookkeeper. Ellie will cover her start-up expenses by cashing in a $20,000 certificate of deposit on which she was earning annual interest of $500.

Refer to Scenario 13-8. According to Ellie’s accountant, which of the following revenue totals will yield her business $50,000 in profits?

Answer 9

$105,200

Question 10

Scenario 13-9
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.

Refer to Scenario 13-9. An economist would calculate the total profit for one photo frame to be

Answer 10

$15

Question 11

Table 13-1
Number of Workers
Total Output
Marginal Product
0
0
–
1
30
–
2
40
–
3
50
–
4
40
–
5
30

Refer to Table 13-1. What is total output when 1 worker is hired?

Answer 11

30

Question 12

When the marginal product of an input declines as the quantity of that input increases, the production function exhibits

Answer 12

diminishing marginal product.

Question 13

*graph
Refer to Figure 13-2. As the number of workers increases,

Answer 13

total output increases but at a decreasing rate.

Question 14

*graph
Refer to Figure 13-2. If the figure represented production at a cookie factory, the factory would be experiencing

Answer 14

diminishing marginal product of workers.

Question 15

Scenario 13-12
If Farmer Brown plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 5 bushels of wheat. If he plants 2 bags, he gets 9 bushels. If he plants 3 bags, he gets 12 bushels. A bag of seeds costs $120, and seeds are his only cost.

Refer to Scenario 13-12. Farmer Brown’s total-cost curve is

Answer 15

increasing at an increasing rate.

Question 16

*chart
Refer to Table 13-7. What is the value of B?

Answer 16

$100

Question 17

chart
Refer to Table 13-8. What is the average fixed cost of producing 5 units of output?

Answer 17

$4

Question 18

chart
Refer to Table 13-12. What is the fixed cost of production at Betty’s Bakery?

Answer 18

$25

Question 19

chart
Refer to Table 13-12. What is the marginal cost of the 2nd cake at Betty’s Bakery?

Answer 19

$15

Question 20

chart
Refer to Table 13-13. What is variable cost when output equals 30 units?

Answer 20

$90

Question 21

Scenario 13-14
If Farmer Brown plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 5 bushels of wheat. If he plants 2 bags, he gets 9 bushels. If he plants 3 bags, he gets 12 bushels. A bag of seeds costs $120, and seeds are his only cost.

Refer to Scenario 13-14. Farmer Brown’s marginal-cost curve is

Answer 21

increasing.

Question 22

Marginal cost increases as the quantity of output increases. This reflects the property of

Answer 22

diminishing marginal product.

Question 23

Diminishing marginal product suggests that the marginal

Answer 23

product of an extra worker is less than the previous worker’s marginal product.

Question 24

graph
Refer to Figure 13-8. Quantity C represents the output level where the firm

Answer 24

produces at the efficient scale.

Question 25

Whenever marginal cost is greater than average total cost,

Answer 25

average total cost is rising.

Question 26

When a firm is experiencing economies of scale, long-run

Answer 26

average total cost is greater than long-run marginal cost.

Question 27

Economies of scale occur when a firm’s

Answer 27

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

Question 28

Economies of scale occur when

Answer 28

long-run average total costs fall as output increases.

Question 29

*graph
Refer to Figure 13-9. The firm experiences constant returns to scale at which output levels?

Answer 29

output levels between M and N

Question 30

In his book, An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith described a visit he made to a

Answer 30

pin factory.

Question 31

Who is a price taker in a competitive market?

Answer 31

both buyers and sellers

Question 32

When firms are said to be price takers, it implies that if a firm raises its price,

Answer 32

buyers will go elsewhere.

Question 33

Why does a firm in a competitive industry charge the market price?

Answer 33

If a firm charges less than the market price, it loses potential revenue.

If a firm charges more than the market price, it loses all its customers to other firms.

The firm can sell as many units of output as it wants to at the market price.

All of the above are correct.

Question 34

If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then

Answer 34

decreasing output would increase the firm’s profit.

Question 35

A certain competitive firm sells its output for $20 per unit. The 50th unit of output that the firm produces has a marginal cost of $22. Production of the 50th unit of output does not necessarily

Answer 35

increase the firm’s average variable cost by $0.44.

Question 36

chart
Refer to Table 14-7. If the firm is maximizing profit, how much profit is it earning?

Answer 36

There is insufficient data to determine the firm’s profit.

Question 37

chart
Refer to Table 14-9. The maximum profit available to the firm is

Answer 37

$4.

Question 38

chart
Refer to Table 14-10. If the firm produces the profit-maximizing level of production, how much profit will the firm earn?

Answer 38

$6

Question 39

chart
Refer to Table 14-12. What is the total revenue from selling 7 units?

Answer 39

$560

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 $6, and is earning $240 economic profit in the short run. What is the current market price?

Answer 40

$12

Question 41

In the short run, a firm operating in a competitive industry will shut down if price is

Answer 41

less than average variable cost.

Question 42

chart
If the market price is $4, this firm will

Answer 42

produce 3 units in the short run and exit in the long run.

Question 43

graph
Refer to Figure 14-1. The firm will earn a negative economic profit but remain in business in the short run if the market price is

Answer 43

less than $6.30 but more than $4.50.

Question 44

graph
Refer to Figure 14-3. If the market price is $10, what is the firm’s short-run economic profit?

Answer 44

$15

Question 45

graph
Refer to Figure 14-6. When market price is P3, a profit-maximizing firm’s total costs

Answer 45

can be represented by the area P3 ´ Q2.

Question 46

graph
Refer to Figure 14-6. Firms will shut down in the short run if the market price

Answer 46

is less than P1.

Question 47

chart
In the short run, a market consists of 100 identical firms. The market price is $8, and the total cost to each firm of producing various levels of output is given in the table below. What will total quantity supplied be in the market?

Answer 47

300 units

Question 48

When firms in a competitive market have different costs, it is likely that

Answer 48

some firms will earn positive economic profits in the long run.

Question 49

Which of the following is not an example of a barrier to entry?

Answer 49

A soybean farmer is the first in her county to use a new brand of fertilizer.

Question 50

Drug companies are allowed to be monopolists in the drugs they discover in order to

Answer 50

encourage research

Question 51

Scenario 15-2
Consider a local, privately-owned electrical cooperative named Minny County Megawatts (MCM, LLC). MCM has just completed a natural-gas-burning electrical power plant in the Midwest. Currently, MCM can meet the electricity needs of all residents in the county. In fact, its capacity far exceeds the needs of the county. After just a few years of operation, the shareholders of MCM experienced incredible rates of return on their investment due to the profitability of the corporation.

Refer to Scenario 15-2. MCM will continue to be a monopolist in the electricity industry only if

Answer 51

there are no new entrants to the market.

Question 52

When a firm’s average total cost curve continually declines, the firm is a

Answer 52

natural monopoly.

Question 53

For a monopoly firm, which of the following equalities is always true?

Answer 53

price = average revenue

Question 54

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

Answer 54

Q = 15.

Question 55

graph
Refer to Figure 15-3. If the monopoly firm is currently producing Q3 units of output, then a decrease in output will necessarily cause profit to

Answer 55

increase as long as the new level of output is at least Q2.

Question 56

graph
Refer to Figure 15-4. Profit on a typical unit sold for a profit-maximizing monopoly would equal

Answer 56

P4-P1.

Question 57

chart
Refer to Table 15-4. If the monopolist produces 5 units, what is its marginal revenue?

Answer 57

$15

Question 58

chart
Refer to Table 15-9. What price should the monopoly charge to maximize profit?

Answer 58

$24

Question 59

Which of the following statements is correct? Monopolies are socially inefficient because they
(i) charge a price above marginal cost.
(ii) produce too little output.
(iii) earn profits at the expense of consumers.
(iv) maximize the market’s total surplus.

Answer 59

(i) and (ii) only

Question 60

A monopoly chooses to supply the market with a quantity of a product that is determined by the intersection of the

Answer 60

marginal revenue and marginal cost curves.

Question 61

Scenario 15-4
Suppose a monopolist has a demand curve that can be expressed as P=90-Q. The monopolist’s marginal revenue curve can be expressed as MR=90-2Q. The monopolist has constant marginal costs and average total costs of $10.

Refer to Scenario 15-4. The profit-maximizing monopolist will produce an output level of

Answer 61

40 units.

Question 62

Price discrimination is the business practice of

Answer 62

selling the same good at different prices to different customers.

Question 63

When a monopolist is able to sell its product at different prices, it is engaging in

Answer 63

price discrimination.

Question 64

Which of the following can eliminate the inefficiency inherent in monopoly pricing?

Answer 64

price discrimination

Question 65

When deciding what price to charge consumers, the monopolist may choose to charge them different prices based on the customers’

Answer 65

geographical location.
age.
income.
Correct Answer
All of the above are correct.

Question 66

Round-trip airline tickets are usually cheaper if you stay over a Saturday night before you fly back. What is the reason for this price discrepancy?

Answer 66

Airlines are practicing imperfect price discrimination to raise their profits.

Airlines charge a different rate based on the different nature of peoples’ travel needs.

Airlines are attempting to charge people based on their willingness to pay.

All of the above are correct.

Question 67

During the holiday season, high-end retailers frequently place a high price on merchandise on weekends and discount the price during the week. They do this because they believe that two groups of customers exist: shoppers with little free time and bargain hunters. Bargain hunters have time to shop around and frequently shop during the week. What do economists call this price strategy used by high-end retailers?

Answer 67

price discrimination

Question 68

With perfect price discrimination the monopoly

Answer 68

eliminates deadweight loss.

Question 69

chart
Refer to Table 15-18. If the monopolist can engage in perfect price discrimination, what is the total revenue when 7 ties are sold?

Answer 69

$910

Question 70

The task of economic regulation is to

Answer 70

approximate the results of the competitive market

Question 71

In which of the following markets is economic profit driven to zero in the long run?

Answer 71

monopolistic competition