Handout 5

Question 1

A firm’s total profit equals its marginal revenue minus its marginal cost.

Answer 1

False

Question 2

Profit equals total revenue minus total cost.

Answer 2

True

Question 3

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.

Answer 3

True

Question 4

Accounting profit is greater than or equal to economic profit.

Answer 4

True

Question 5

Implicit costs are costs that do not require an outlay of money by the firm.

Answer 5

True

Question 6

Diminishing marginal product exists when the total cost curve becomes horizontal as outputs increases.

Answer 6

False

Question 7

A second or third worker may have a higher marginal product than the first worker in certain circumstances.

Answer 7

True

Question 8

In the short run, if a firm produces nothing, total costs are zero.

Answer 8

False

Question 9

For a typical firm, fixed costs increase in direct proportion to the increases in output.

Answer 9

False

Question 10

The shape of the total-cost curve is unrelated to the shape of the production function.

Answer 10

False

Question 11

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.

Answer 11

True

Question 12

Variable costs equal fixed costs when nothing is produced.

Answer 12

False

Question 13

Average variable cost is equal to total variable cost divided by quantity of output.

Answer 13

True

Question 14

If the marginal-cost curve is rising, then so is the average-total-cost curve.

Answer 14

False

Question 15

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.

Answer 15

True

Question 16

The shape of the marginal cost curve tells a producer something about the marginal product of her workers.

Answer 16

True

Question 17

When average total cost is above marginal cost, average total cost is rising.

Answer 17

False

Question 18

Fixed costs are those costs that remain fixed no matter how long the time horizon is.

Answer 18

False

Question 19

For a firm operating in a perfectly competitive industry, marginal revenue and average revenue are equal.

Answer 19

True

Question 20

A profit-maximizing firm in a competitive market will increase production when average revenue exceeds marginal cost.

Answer 20

True

Question 21

A profit-maximizing firm in a competitive market will decrease production when marginal cost exceeds average revenue.

Answer 21

True

Question 22

Because there are many buyers and sellers in a perfectly competitive market, no one seller can influence the market price.

Answer 22

True

Question 23

In competitive markets, firms that raise their prices are typically rewarded with larger profits.

Answer 23

False

Question 24

In a competitive market, firms are unable to differentiate their product from that of other producers.

Answer 24

True

Question 25

Firms operating in perfectly competitive markets produce an output level where marginal revenue equals marginal cost.

Answer 25

True

Question 26

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).

Answer 26

True

Question 27

When a profit-maximizing firm in a competitive market experiences rising prices, it will respond with an increase in production.

Answer 27

True

Question 28

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.

Answer 28

True

Question 29

The supply curve of a firm in a competitive market is the average variable cost curve above the minimum of marginal cost.

Answer 29

False

Question 30

A firm will shut down in the short run if revenue is not sufficient to cover all of its fixed costs of production.

Answer 30

False

Question 31

In the short run, if the market price is below the firm’s average total cost of production, the firm will always shut down.

Answer 31

False

Question 32

The marginal firm in a competitive market will earn zero economic profit in the long run.

Answer 32

True

Question 33

A profit-maximizing firm in a competitive market will earn zero accounting profits in the long run.

Answer 33

False

Question 34

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.

Answer 34

True

Question 35

In the long run, a firm should exit the industry if its total costs exceed its total revenues.

Answer 35

True

Question 36

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

Answer 36

ANS: B

Question 37

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.

Answer 37

ANS: D

Question 38

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.

Answer 38

ANS: C

Question 39

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.

Answer 39

ANS: A

Question 40

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

Answer 40

ANS: A

Question 41

Which of the following is an illustration of the market for original paintings by deceased artist Vincent Van Gogh?

Answer 41

ANS: C

Question 42

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.

Answer 42

ANS: C

Question 43

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.

Answer 43

ANS: C