ASSIGNMENT (2)-DUE: (25-12-2012)

CH # 13 & CH # 14
TRUE-FALSE QUESTIONS
1.

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.
2. A profit-maximizing firm in a competitive market will increase production when average
revenue exceeds marginal cost.
3. 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.
4. 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 100th unit for $4.75.
The firm should continue to produce 100 units in order to maximize its profits (or minimize
its losses).
5. 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 firms average variable cost.
6. The marginal cost curve intersects the average total cost curve at the minimum point of the
average total cost curve.
7. 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.
8. In some cases, specialization allows larger factories to produce goods at a lower average
cost than smaller factories.
9. There is general agreement among economists that the long-run time period exceeds one
year.
10. All firms maximize profits by producing an output level where marginal revenue equals
marginal cost; for firms operating in perfectly competitive industries, maximizing profits
also means producing an output level where price equals marginal cost.
11. For a firm operating in a perfectly competitive industry, total revenue, marginal revenue,
and average revenue are all equal.
12. The typical total-cost curve is U-shaped.
13. A dairy farmer must be able to calculate sunk costs in order to determine how much
revenue.
14. Fixed costs are those costs that remain fixed no matter how long the time horizon is.
15. Refer to the following Table. Firm A is experiencing economies of scale.
Listed in the table are the long-run total costs for three different firms.

Quantity
Firm A
Firm B
Firm C

1
100
100
100

2
100
200
300

3
100
300
600

4
100
400
1,000

5
100
500
1,500

SHORT ANSWER
1.
2.
3.

List and describe the characteristics of a perfectly competitive market.

Explain how a firm in a competitive market identifies the profit-maximizing level of
production. When should the firm raise production, and when should the firm lower
production?
Bob Edwards owns a bagel shop. Bob hires an economist who assesses the shape of the
bagel shop's average total cost (ATC) curve as a function of the number of bagels produced.
The results indicate a U-shaped average total cost curve. Bob's economist explains that ATC
is U-shaped for two reasons. The first is the existence of diminishing marginal product,
which causes it to rise. What would be the second reason? Assume that the marginal cost
curve is linear. (Hint: The second reason relates to average fixed cost)

MULTIPLE-CHOICE QUESTIONS
1.

A firm's opportunity costs of production are equal to its

a. explicit costs only.
b. implicit costs only.
c. explicit costs + implicit costs.
d. explicit costs + implicit costs + total revenue.

2.

Which of the following expressions is correct for a competitive firm?

a. Profit = (Quantity of output) x (Price - Average total cost)
b. Marginal revenue = (Change in total revenue)/(Quantity of output)
c. Average total cost = Total variable cost/Quantity of output
d. Average revenue = (Marginal revenue) x (Quantity of output)

3.

Charless Car Wash has average variable costs of $2 and average total costs of $3 when it
produces 100 units of output (car washes). The firm's total variable cost is
a. $100.
b. $200.
c. $300.
d. $500.

4.

If Franco's Pizza Parlor knows that the marginal cost of the 500th pizza is $3.50 and that the
average total cost of making 499 pizzas is $3.30, then
a. average total costs are rising at Q = 500.
b. average total costs are falling at Q = 500.
c. total costs are falling at Q = 500.
d. average variable costs must be falling.

5.
Consider a competitive market with 50 identical firms. Suppose the market demand is
given by the equation QD = 200 - 10P and the market supply is given by the equation QS = 10P. In
addition, suppose the following table shows the marginal cost of production for various levels of
output for firms in this market.
Output
Marginal Cost
0
-1
$5
2
$10
3
$15
4
$20
5
$25
How many units should a firm in this market produce to maximize profit?
a. 1 unit
b. 2 units
c. 3 units
d. 4 units
6.

When price is below average variable cost, a firm in a competitive market will
a. shut down and incur fixed costs.
b. shut down and incur both variable and fixed costs.
c. continue to operate as long as average revenue exceeds marginal cost.
d. continue to operate as long as average revenue exceeds average fixed cost.

7.

The fundamental reason that marginal cost eventually rises as output increases is because of
a. economies of scale.
b. diseconomies of scale.
c. diminishing marginal product.
d. rising average fixed cost.

8.

In the long run, when marginal cost is above average total cost, the average total cost curve
exhibits
a. economies of scale.
b. diseconomies of scale.
c. constant returns to scale.
d. efficient scale.

9.

Refer to the following Table. Which firm is experiencing constant returns to scale?
Listed in the table are the long-run total costs for three different firms.
Quantity
Firm A
Firm B
Firm C

1
100
100
100

2
100
200
300

3
100
300
600

4
100
400
1,000

5
100
500
1,500

a.
b.
c.
d.

Firm A only
Firm B only
Firm C only
Firm A and Firm B only

11. A profit-maximizing firm in a competitive market is able to sell its product for $7. At its
current level of output, the firm's average total cost is $10. The firms marginal cost curve
crosses its marginal revenue curve at an output level of 9 units. The firm experiences a
a. profit of more than $27.
b. profit of exactly $27.
c. loss of more than $27.
d. loss of exactly $27.

Price

(a)

Price

MC

(b)

S0

S1

ATC
B
P2

P2

P1

P1

P0

P0

C
D

D1
D0
Q1

Q2

Quantity

QA QBQD QC

Quantity

12. Refer to previous figure. When the market is in long-run equilibrium at point A in panel (b),
the firm represented in panel (a) will
a. have a zero economic profit.
b. have a negative accounting profit.
c. exit the market.
d. choose to increase production to increase profit.
13. Refer to previous figure. Assume that the market starts in equilibrium at point A in panel
(b). An increase in demand from D0 to D1 will result in
a. a new market equilibrium at point D.
b. an eventual increase in the number of firms in the market and a new long-run
equilibrium at point C.
c. rising prices and falling profits for existing firms in the market.
d. falling prices and falling profits for existing firms in the market.