Handout 5 Flashcards
A firm’s total profit equals its marginal revenue minus its marginal cost.
False
Profit equals total revenue minus total cost.
True
The difference between economic profit and accounting profit is that economic profit is calculated based on both implicit and explicit costs whereas accounting profit is calculated based on explicit costs only.
True
Accounting profit is greater than or equal to economic profit.
True
Implicit costs are costs that do not require an outlay of money by the firm.
True
Diminishing marginal product exists when the total cost curve becomes horizontal as outputs increases.
False
A second or third worker may have a higher marginal product than the first worker in certain circumstances.
True
In the short run, if a firm produces nothing, total costs are zero.
False
For a typical firm, fixed costs increase in direct proportion to the increases in output.
False
The shape of the total-cost curve is unrelated to the shape of the production function.
False
Suppose that a worker can produce 100 units of output in 7 hours. In the 8th hour, he can produce 12 units of output. The worker can produce 112 units of output in 8 hours.
True
Variable costs equal fixed costs when nothing is produced.
False
Average variable cost is equal to total variable cost divided by quantity of output.
True
If the marginal-cost curve is rising, then so is the average-total-cost curve.
False
If the marginal cost of producing the tenth unit of output is $3, and if the average total cost of producing the tenth unit of output is $2, then at ten units of output, average total cost is rising.
True
The shape of the marginal cost curve tells a producer something about the marginal product of her workers.
True
When average total cost is above marginal cost, average total cost is rising.
False
Fixed costs are those costs that remain fixed no matter how long the time horizon is.
False
For a firm operating in a perfectly competitive industry, marginal revenue and average revenue are equal.
True
A profit-maximizing firm in a competitive market will increase production when average revenue exceeds marginal cost.
True
A profit-maximizing firm in a competitive market will decrease production when marginal cost exceeds average revenue.
True
Because there are many buyers and sellers in a perfectly competitive market, no one seller can influence the market price.
True
In competitive markets, firms that raise their prices are typically rewarded with larger profits.
False
In a competitive market, firms are unable to differentiate their product from that of other producers.
True
Firms operating in perfectly competitive markets produce an output level where marginal revenue equals marginal cost.
True
A firm is currently producing 100 units of output per day. The manager reports to the owner that producing the 100th unit costs the firm $5. The firm can sell the unit for $6. The firm should produce more than 100 units in order to maximize its profits (or minimize its losses).
True
When a profit-maximizing firm in a competitive market experiences rising prices, it will respond with an increase in production.
True
A firm operating in a perfectly competitive industry will continue to operate in the short run but earn losses if the market price is less than that firm’s average total cost but greater than the firm’s average variable cost.
True
The supply curve of a firm in a competitive market is the average variable cost curve above the minimum of marginal cost.
False
A firm will shut down in the short run if revenue is not sufficient to cover all of its fixed costs of production.
False
In the short run, if the market price is below the firm’s average total cost of production, the firm will always shut down.
False
The marginal firm in a competitive market will earn zero economic profit in the long run.
True
A profit-maximizing firm in a competitive market will earn zero accounting profits in the long run.
False
In the long run, when price is less than average total cost for all possible levels of production, a firm in a competitive market will choose to exit (or not enter) the market.
True
In the long run, a firm should exit the industry if its total costs exceed its total revenues.
True
Which of the following is not a determinant of the price elasticity of demand for a good?
a. the time horizon
b. the steepness or flatness of the supply curve for the good
c. the definition of the market for the good
d. the availability of substitutes for the good
ANS: B
The greater the price elasticity of demand, the
a. more likely the product is a necessity.
b. smaller the responsiveness of quantity demanded to a change in price.
c. greater the percentage change in price over the percentage change in quantity demanded.
d. greater the responsiveness of quantity demanded to a change in price.
ANS: D
Suppose that Juan Carlos is filling out a survey that he received in the mail. The survey asks him what he would do if the price of his favorite toothpaste increased. Juan Carlos reports that he would switch to a different brand. The survey asks what he would do if the price of all toothpastes increased. Juan Carlos reports that he must use toothpaste, so he would have to adjust his spending elsewhere. These examples illustrate the importance of
a. changes in total revenue in determining the price elasticity of demand.
b. a necessity versus a luxury in determining the price elasticity of demand.
c. the definition of a market in determining the price elasticity of demand.
d. the time horizon in determining the price elasticity of demand.
ANS: C
Refer to Figure 5-5. Using the midpoint method, between prices of $12 and $18, price elasticity of demand is
a. 0.33.
b. 0.67.
c. 1.33.
d. 1.89.
ANS: A
Refer to Figure 5-13. Over which range is the supply curve in this figure the most elastic?
a. $16 to $40
b. $40 to $100
c. $100 to $220
d. $220 to $430
ANS: A
Which of the following is an illustration of the market for original paintings by deceased artist Vincent Van Gogh?
ANS: C
Refer to Figure 5-17. Which of the following statements is not correct?
a. Supply curve A is perfectly inelastic.
b. Supply curve B is perfectly elastic.
c. Supply curve C is unit elastic.
d. Supply curve D is more elastic than supply curve C.
ANS: C
Refer to Table 5-6. Which scenario describes the market for oil in the short run in comparison to the long run?
a. Scenario A describes both the short run and the long run.
b. Scenario D describes both the short run and the long run.
c. Scenario D describes the short run, whereas scenario A describes the long run.
d. Scenario C describes the short run, whereas scenario B describes the long run.
ANS: C
