Managerial Economics Exam 2

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| By Mattyoung741
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Managerial Economics Exam 2 - Quiz

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Questions and Answers
  • 1. 

    An old friend takes you out to dinner, and pays for your meal. Which of the following best represents your opportunity costs? 

    • A.

      The amount of money that you would have spent to pay for your own dinner

    • B.

      The money your friend could have made buying a winning lottery ticket

    • C.

      The money you could have made working overtime at your job

    • D.

      Both A and C

    Correct Answer
    C. The money you could have made working overtime at your job
    Explanation
    The opportunity cost in this scenario refers to the value of the next best alternative that is forgone. In this case, the money you could have made working overtime at your job represents the opportunity cost because by going out to dinner with your friend, you are giving up the potential earnings from working extra hours. Therefore, option C is the correct answer as it best represents your opportunity cost.

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  • 2. 

    One problem with measuring a durable goods cost is

    • A.

      That the good may break before the end of its estimated useful life

    • B.

      When to decide to throw it away for a newer model even if the cost has not been accounted for

    • C.

      How to handle the cost if the value changes overtime

    • D.

      How to account for depreciation of the good

    Correct Answer
    C. How to handle the cost if the value changes overtime
    Explanation
    The given correct answer is "How to handle the cost if the value changes overtime." This is because the cost of a durable good may fluctuate over time due to various factors such as inflation, changes in market demand, or technological advancements. Therefore, it becomes challenging to accurately account for the cost of the good if its value keeps changing.

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  • 3. 

    A sunk cost is?

    • A.

      A cost that is highly relevant for decision making

    • B.

      An opportunity cost

    • C.

      The cost for drilling certain types of wells, such as for water

    • D.

      A past cost that cannot be recovered

    Correct Answer
    D. A past cost that cannot be recovered
    Explanation
    A sunk cost refers to a past cost that has already been incurred and cannot be recovered. It is no longer relevant for decision making because the cost has already been spent and cannot be changed. When making decisions, it is important to focus on future costs and benefits rather than being influenced by sunk costs. Sunk costs should not be considered when evaluating the potential outcomes of a decision.

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  • 4. 

    Average fixed cost (AFC) 

    • A.

      Is always fixed across all output ranges for the given production function

    • B.

      Falls as output falls

    • C.

      Rises as output falls

    • D.

      Rises as output rises

    Correct Answer
    C. Rises as output falls
    Explanation
    As output falls, the total fixed cost remains the same while the output decreases. Therefore, the average fixed cost increases because it is calculated by dividing the total fixed cost by the output. This means that as the output decreases, the same fixed costs are spread over a smaller output, resulting in a higher average fixed cost.

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  • 5. 

    Suppose the total cost of producing t shirts can be represented by TC= 50+2Q. The average cost of the 5th shirt is? 

    • A.

      2

    • B.

      12

    • C.

      60

    • D.

      52

    Correct Answer
    B. 12
    Explanation
    The total cost of producing t-shirts is given by the equation TC = 50 + 2Q, where Q represents the quantity of t-shirts produced. To find the average cost of the 5th shirt, we need to divide the total cost by the quantity of shirts. Since we know that Q = 5, we can substitute this value into the equation to get TC = 50 + 2(5) = 50 + 10 = 60. Finally, we divide the total cost of 60 by the quantity of shirts, which is 5, to get an average cost of 12.

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  • 6. 

    If the average cost is decreasing 

    • A.

      Marginal cost equals average cost

    • B.

      Marginal cost is less than average cost

    • C.

      Marginal cost exceeds average cost

    • D.

      Not enough information is given

    Correct Answer
    B. Marginal cost is less than average cost
    Explanation
    If the average cost is decreasing, it means that the cost of producing each additional unit is decreasing. This implies that the marginal cost, which represents the cost of producing one additional unit, must be less than the average cost. Therefore, the correct answer is "Marginal cost is less than average cost."

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  • 7. 

    Suppose the short run production function is q=10* L. If the wage rate is 10 per unit of labor, then AVC equals

    • A.

      10/q

    • B.

      Q

    • C.

      Q/10

    • D.

      1

    Correct Answer
    D. 1
    Explanation
    The average variable cost (AVC) is calculated by dividing the total variable cost (TVC) by the quantity of output (q). In this case, the short-run production function is q=10*L, where L represents the units of labor. Since the wage rate is given as 10 per unit of labor, the TVC can be calculated as 10*L. Dividing the TVC by q, which is also equal to L in this case, we get AVC = (10*L)/L = 10. Therefore, the correct answer is 1.

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  • 8. 

    If the Cobb Douglas production function for a beer manufacturer is q=1.52L^0.6K^0.4. If we assume the firms capital is fixed at 250 units and the rental rate of capital is 5 per unit, then the average fixed cost is

    • A.

      1.52L^.6 (250)^.4

    • B.

      1250

    • C.

      1250/q

    • D.

      Not enough information

    Correct Answer
    C. 1250/q
    Explanation
    The average fixed cost can be calculated by dividing the total fixed cost by the quantity produced. In this case, the total fixed cost is 1250 (given in the answer) and the quantity produced is represented by "q" in the production function. Therefore, the average fixed cost is 1250/q.

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  • 9. 

    When the isocost line is tangent to the isoquant, then 

    • A.

      The firm is producing that level of output at minimum cost

    • B.

      The firm has achieved the right economics of scale

    • C.

      MPL=MPK

    • D.

      All of the above

    Correct Answer
    A. The firm is producing that level of output at minimum cost
    Explanation
    When the isocost line is tangent to the isoquant, it means that the firm is producing the desired level of output at the minimum cost. This occurs when the firm is allocating its resources efficiently, using the optimal combination of inputs to produce the desired level of output. At this point, the marginal rate of technical substitution (MRTS) equals the ratio of input prices, indicating that the firm is getting the most output for the least cost. Therefore, the firm is producing that level of output at minimum cost.

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  • 10. 

    If the marginal rate of technical substitution for a cost minimizing firm is 10, and the wage rate for labor is 5$, what is the rental rate for capital in dollars 

    • A.

      .5

    • B.

      10

    • C.

      2

    • D.

      1

    Correct Answer
    A. .5
    Explanation
    The marginal rate of technical substitution (MRTS) represents the rate at which a firm can substitute one input for another while keeping the level of output constant. In this case, the MRTS is given as 10. The wage rate for labor is $5. To minimize costs, the firm will hire inputs in such a way that the ratio of their marginal products to their prices is equal. Since the MRTS is the ratio of the marginal products of labor and capital, and the wage rate for labor is known, we can calculate the rental rate for capital. Dividing the wage rate by the MRTS, we get $5/10 = $0.5. Therefore, the rental rate for capital is $0.5.

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  • 11. 

    Suppose MPL=.5 *(q/l) and MPK =.5 * (q/k). In the long run, the firm will hire equal amounts of capital and labor 

    • A.

      Only when w=.5 * r

    • B.

      All of time

    • C.

      Only when w=r

    • D.

      No point in time

    Correct Answer
    C. Only when w=r
    Explanation
    In the long run, the firm will hire equal amounts of capital and labor only when the wage rate (w) is equal to the rental rate of capital (r). This is because MPL and MPK represent the marginal product of labor and capital respectively, and the firm will hire additional units of labor and capital as long as their marginal products are greater than their respective costs (wage rate and rental rate). When w=r, it means that the additional output produced by hiring one more unit of labor is equal to the additional output produced by hiring one more unit of capital, making it optimal for the firm to hire equal amounts of both factors of production.

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  • 12. 

    If there diseconomics of scale within a given range of output, which of following is(are) TRUE?

    • A.

      The long run average cost curve must be upward sloping within the range of output.

    • B.

      Long run average cost must equal short run average cost

    • C.

      The short run average cost curve must be upward sloping within that range of output

    • D.

      All of the above

    Correct Answer
    A. The long run average cost curve must be upward sloping within the range of output.
    Explanation
    If there are diseconomies of scale within a given range of output, it means that as the level of output increases, the long run average cost also increases. This implies that the long run average cost curve must be upward sloping within that range of output. Therefore, the correct answer is that the long run average cost curve must be upward sloping within the range of output.

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  • 13. 

    Long run average cost is never greater than short run average cost because in the long run 

    • A.

      Capital cost equals zero

    • B.

      The firm can move to the lowest possible isocost curve

    • C.

      Wages always decrease over time

    • D.

      Wages always increase over time

    Correct Answer
    B. The firm can move to the lowest possible isocost curve
    Explanation
    In the long run, a firm has the flexibility to adjust its inputs and production processes. This means that it can choose the most efficient combination of inputs to minimize its costs. By moving to the lowest possible isocost curve, the firm can achieve the lowest average cost of production. Therefore, the long run average cost is never greater than the short run average cost.

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  • 14. 

    Learning by doing, which leads to lower level costs in the long run, is often 

    • A.

      Improved through better use of computers in the production process

    • B.

      Increased when new machinery is brought into the production process

    • C.

      Not very important to most firms

    • D.

      A function of cumulative output, that is producing more of the good or service

    Correct Answer
    D. A function of cumulative output, that is producing more of the good or service
    Explanation
    Learning by doing refers to the process of acquiring knowledge and skills through hands-on experience. This learning process becomes more effective and efficient as the cumulative output of goods or services increases. As the production volume increases, workers become more experienced and efficient, leading to lower costs in the long run. Therefore, learning by doing is a function of cumulative output, making the answer "A function of cumulative output, that is producing more of the good or service" the correct choice.

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  • 15. 

    Suppose the cost of producing two goods, x and y, can be represented as C=ax+by+cxy. If there are economies of scope 

    • A.

      A+b=-c

    • B.

      C=0

    • C.

      C>0

    • D.

      C

    Correct Answer
    D. C
    Explanation
    The correct answer is c. In this scenario, the equation C=ax+by+cxy represents the cost of producing two goods, x and y, taking into account the interaction between them. If c is greater than 0, it implies that there are economies of scope, meaning that the joint production of x and y is more cost-effective than producing them separately. This suggests that there are cost savings or synergies when producing both goods together, indicating the presence of economies of scope.

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  • 16. 

    Limited liability is a benefit to? 

    • A.

      Partnerships

    • B.

      Sole proprietorships

    • C.

      Corporations

    • D.

      All of the above

    Correct Answer
    C. Corporations
    Explanation
    Limited liability is a benefit to corporations because it protects the personal assets of the shareholders from being used to satisfy the debts and liabilities of the corporation. This means that if the corporation were to face financial difficulties or legal issues, the shareholders would not be personally responsible for the debts or liabilities beyond their investment in the corporation. This provides a level of financial protection and security for the shareholders, making corporations an attractive business structure.

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  • 17. 

    A firm sets output where

    • A.

      A marginal revenue minus marginal profit equals zero (MR-MP=0)

    • B.

      Marginal profit minus marginal cost equals zero (MP-MC=0)

    • C.

      Marginal revenue minus marginal cost equals zero (MR-MC=0

    • D.

      None of the above

    Correct Answer
    C. Marginal revenue minus marginal cost equals zero (MR-MC=0
    Explanation
    The correct answer is that a firm sets output where marginal revenue minus marginal cost equals zero (MR-MC=0). This means that the additional revenue generated from producing one more unit of output is equal to the additional cost incurred in producing that unit. At this point, the firm maximizes its profit because any further increase in output would result in higher costs than the revenue generated. Similarly, any decrease in output would result in lower revenue than the cost saved. Therefore, setting output where MR-MC=0 ensures that the firm is operating at the optimal level of production.

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  • 18. 

    A small business owner earns 60,000 in revenue annually. The explicit costs equals 40,000. The business owner could for someone else and make 25,000 annually. The owners accounting profit is ______ and the owners economic profit is______

    • A.

      45,000, -5000

    • B.

      20,000, 5000

    • C.

      25,000, -5000

    • D.

      20,000, -5000

    Correct Answer
    D. 20,000, -5000
    Explanation
    The owner's accounting profit is $20,000 because it is calculated by subtracting explicit costs ($40,000) from revenue ($60,000). The owner's economic profit is -$5,000 because it takes into account both explicit costs and the opportunity cost of working for someone else ($25,000). Therefore, the economic profit is calculated by subtracting both explicit costs and the opportunity cost from revenue.

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  • 19. 

    If a profit maximizing firm finds that, at its current level of production, MR>MC, it will 

    • A.

      Increase output

    • B.

      Earn greater profit than MR=MC

    • C.

      Decrease output

    • D.

      Shut down

    Correct Answer
    A. Increase output
    Explanation
    If a profit maximizing firm finds that, at its current level of production, MR>MC, it means that the marginal revenue (MR) from selling an additional unit of output is greater than the marginal cost (MC) of producing that unit. This suggests that the firm can increase its profits by producing and selling more units. Therefore, the firm should increase its output.

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  • 20. 

    A firm should always shut down if its revenue is

    • A.

      Less than avoidable costs

    • B.

      Declining

    • C.

      Less than its average fixed costs

    • D.

      Less than its total costs

    Correct Answer
    A. Less than avoidable costs
    Explanation
    If a firm's revenue is less than avoidable costs, it means that the firm is not generating enough income to cover the costs that can be avoided by shutting down. In this situation, it would be more beneficial for the firm to shut down rather than continue operating at a loss. Shutting down would prevent further financial losses and allow the firm to redirect its resources towards more profitable ventures.

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  • 21. 

    If the present value of all future profit is positive, then 

    • A.

      Then a firm should shut down if it is earning a negative profit in the short run

    • B.

      The firm should shut down if it cannot carry over its fixed costs in the short run

    • C.

      The firm should remain operating, even if it earns negative profit in the short run

    • D.

      None of the above

    Correct Answer
    C. The firm should remain operating, even if it earns negative profit in the short run
    Explanation
    If the present value of all future profit is positive, it means that the firm is expected to generate enough profit in the long run to cover all its costs, including fixed costs. Therefore, even if the firm is currently earning a negative profit in the short run, it should continue operating because it has the potential to turn profitable in the future. Shutting down the firm would result in the loss of potential future profits.

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  • 22. 

    One problem with compensation systems is that 

    • A.

      Sometimes a manager is rewarded for an objective other than maximizing profits

    • B.

      The Dodd Frank Act of 2010 requires shareholder votes on compensation that are non binding

    • C.

      Managers are often paid too much

    • D.

      Owners sometimes want to pursue social objectives

    Correct Answer
    A. Sometimes a manager is rewarded for an objective other than maximizing profits
    Explanation
    Sometimes a manager is rewarded for an objective other than maximizing profits. This means that the compensation system in place may incentivize managers to focus on goals other than maximizing profits, such as increasing market share, expanding the company's product line, or improving employee morale. This can lead to a misalignment between the interests of the manager and the interests of the shareholders, as the manager may prioritize other objectives over maximizing profits.

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  • 23. 

    A firms horizontal dimension refers to 

    • A.

      It's size in its primary market

    • B.

      The level of supply chain integration the firm undertakes

    • C.

      It's size in all markets in which it competes

    • D.

      The number of stages in the production process that are upstream from the stages the firm undertakes.

    Correct Answer
    A. It's size in its primary market
    Explanation
    A firm's horizontal dimension refers to its size in its primary market. This means that it is referring to the size of the firm in terms of its market share or sales volume in the primary market where it operates. The horizontal dimension focuses on the firm's position and performance within its specific industry or market, rather than considering its size in all markets or the level of supply chain integration. It does not consider the number of stages in the production process that are upstream from the firm's operations.

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  • 24. 

    A firm that backward vertically integrates 

    • A.

      Moves downstream in the production process

    • B.

      Requires that the production process be relatively simple

    • C.

      May be producing its own inputs

    • D.

      Has to merge with another firm

    Correct Answer
    C. May be producing its own inputs
    Explanation
    A firm that backward vertically integrates may be producing its own inputs. This means that the firm is acquiring or creating the resources and materials it needs for production internally, rather than relying on external suppliers. By producing its own inputs, the firm can have more control over the quality, cost, and availability of these resources, which can lead to increased efficiency and competitiveness. This strategy can also help the firm to secure a stable supply of inputs and reduce dependence on external suppliers.

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  • 25. 

    Firms might vertically distinengrate when 

    • A.

      The industry becomes too large to support its self

    • B.

      The industry shrinks in size

    • C.

      It becomes more profitable for a firm to specialize

    • D.

      The IRS cracks down on transfer pricing

    Correct Answer
    C. It becomes more profitable for a firm to specialize
    Explanation
    When it becomes more profitable for a firm to specialize, it means that the firm can generate higher profits by focusing on a specific aspect of the production process and outsourcing the rest. This allows the firm to take advantage of economies of scale and expertise in that particular area, leading to increased efficiency and profitability. As a result, firms may choose to vertically disintegrate and specialize in order to maximize their profits.

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  • 26. 

    According to economist, competitive firms 

    • A.

      Are price takers

    • B.

      Compete for the same customers

    • C.

      Differentiate their products

    • D.

      Are able to change output and affect the market price

    Correct Answer
    A. Are price takers
    Explanation
    Competitive firms are considered price takers because they have no control over the price of their products. They simply accept the market price determined by the forces of supply and demand. These firms have no market power to influence prices and must adjust their output and production levels based on the prevailing market conditions. This means that they cannot set higher prices to increase their profits or lower prices to attract more customers. Instead, they must accept the market price as given and focus on maximizing their efficiency and reducing costs to remain competitive.

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  • 27. 

    An oligopoly 

    • A.

      Always collude to keep prices high

    • B.

      Has relatively few firms, but they are still price takers

    • C.

      Requires government licensing

    • D.

      Has barriers to entry

    Correct Answer
    D. Has barriers to entry
    Explanation
    An oligopoly refers to a market structure where there are only a few firms that dominate the industry. These firms have significant market power and often collaborate to control prices and limit competition. However, the given correct answer, "Has barriers to entry," suggests that oligopolies also have obstacles that make it difficult for new firms to enter the market. These barriers can include high capital requirements, economies of scale, patents, or government regulations. These barriers protect existing firms from new competition and allow them to maintain their market dominance.

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  • 28. 

    In a monopolistically competitive market 

    • A.

      Earn positive economic profit in the long run

    • B.

      Barriers to entry are high

    • C.

      Firms are price setters

    • D.

      Products are undifferentiated

    Correct Answer
    C. Firms are price setters
    Explanation
    In a monopolistically competitive market, firms have some degree of control over the price of their products. Unlike in perfect competition where firms are price takers, in monopolistic competition, firms can set their own prices based on factors such as product differentiation and brand image. This ability to set prices allows firms to potentially earn positive economic profit in the long run, as they can adjust prices to maximize revenue and cover their costs. However, it is important to note that in the long run, economic profit tends to be driven towards zero due to the entry of new firms attracted by the potential profits.

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  • 29. 

    A Monopoly 

    • A.

      Doesn't lose any sales when it raises its price

    • B.

      Produces the market output

    • C.

      Is a price taker

    • D.

      Must have a patent

    Correct Answer
    B. Produces the market output
    Explanation
    A monopoly is a market structure in which there is a single seller of a product or service with no close substitutes. As the sole provider in the market, a monopoly has the power to set its own prices without losing any sales. This is because there are no alternative options for consumers to choose from. Therefore, the statement "Produces the market output" is the correct answer as it accurately describes the behavior of a monopoly.

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  • 30. 

    Market structure depends upon 

    • A.

      The number of firms in the market

    • B.

      The ease of entry

    • C.

      The ability of firms to differentiate their goods and services

    • D.

      All of the above

    Correct Answer
    D. All of the above
    Explanation
    The market structure depends on all three factors mentioned: the number of firms in the market, the ease of entry, and the ability of firms to differentiate their goods and services. The number of firms determines the level of competition in the market, while the ease of entry determines how easy or difficult it is for new firms to enter the market. Additionally, the ability of firms to differentiate their goods and services allows them to create a unique selling proposition and gain a competitive advantage. Therefore, all of these factors play a significant role in determining the market structure.

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  • 31. 

    The deadweight loss associated with output less than the competitive level can be determined by

    • A.

      summing the change in the total consumer and producer surplus from moving from the competitive level of output to less output.

    • B.

      Summing the consumer and producer surplus associated with less output

    • C.

      Subtracting the consumer surplus from the producer surplus associated with less output.

    • D.

      subtracting the competitive level producer surplus from the producer surplus associated with less output.

    Correct Answer
    A. summing the change in the total consumer and producer surplus from moving from the competitive level of output to less output.
    Explanation
    The deadweight loss associated with output less than the competitive level can be determined by summing the change in the total consumer and producer surplus from moving from the competitive level of output to less output. This means that the deadweight loss is calculated by considering the difference in consumer and producer surplus between the competitive level of output and the actual level of output. By summing these changes, we can measure the overall welfare loss caused by producing less than the competitive level.

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  • 32. 

     Deadweight loss occurs when 

    • A.

      producer surplus is greater than consumer surplus

    • B.

      An inferior good is consumed.

    • C.

      consumer surplus is reduced

    • D.

      the maximum level of total welfare is not achieved.

    Correct Answer
    D. the maximum level of total welfare is not achieved.
    Explanation
    Deadweight loss occurs when the maximum level of total welfare is not achieved. This means that there is a loss of economic efficiency in the market, where the total surplus of both producers and consumers is not maximized. This can happen due to various reasons such as market distortions, government interventions, or externalities. When deadweight loss occurs, it indicates that resources are not allocated efficiently, leading to a loss of overall welfare in the economy.

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  • 33. 

     The above figure shows the market demand curve for telecommunication while driving one's car (time spent on the car phone). At the current price of $0.35 per minute, consumer surplus equals

    • A.

      $924.50

    • B.

      $1,225.5

    • C.

      $301.0

    • D.

      $1,250.00

    Correct Answer
    A. $924.50
  • 34. 

    A firm will enter a competitive market when

    • A.

      it can earn a positive long-run profit.

    • B.

      the long-run supply curve is upward sloping.

    • C.

      it would not be the last firm entering.

    • D.

      it can gather market share at the expense of incumbent firms

    Correct Answer
    A. it can earn a positive long-run profit.
    Explanation
    A firm will enter a competitive market when it can earn a positive long-run profit. This means that the firm expects to make more revenue than its costs in the long run, which is a desirable outcome for any business. By entering the market, the firm believes it can offer a product or service that will be in demand and generate profits. This decision is based on the firm's analysis of market conditions, potential competition, and its own capabilities to succeed in the market.

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  • 35. 

     If market price is greater than or equal to the minimum of AVC but below the minimum of AC, then 

    • A.

      the firm will operate because its loss is less than if it shut down.

    • B.

      revenue is lower than variable costs

    • C.

      profit is positive and so the firm will operate.

    • D.

      the firm will shut down.

    Correct Answer
    A. the firm will operate because its loss is less than if it shut down.
    Explanation
    If the market price is greater than or equal to the minimum of AVC but below the minimum of AC, it means that the firm is able to cover its variable costs but not all of its fixed costs. In this case, the firm will still operate because its loss is less than if it shut down. By continuing to operate, the firm can at least cover its variable costs and minimize its losses compared to shutting down completely.

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  • 36. 

     If a firm is a price taker, then its marginal revenue will always equal 

    • A.

      price.

    • B.

      one

    • C.

      zero.

    • D.

      total cost.

    Correct Answer
    A. price.
    Explanation
    If a firm is a price taker, it means that it has no control over the price of its product and must accept the market price. In such a scenario, the firm's marginal revenue will always equal the price because any additional unit sold will generate revenue equal to the market price. This is because a price taker firm can sell as much as it wants at the prevailing market price without affecting the price itself. Therefore, the marginal revenue will always be equal to the price in a price taker situation.

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  • 37. 

     The perfectly competitive model makes a lot of fairly unrealistic assumptions. Why do economics text books still talk a lot about this model?

    • A.

      It is an important model to use as a benchmark to compare other markets structures to.

    • B.

      Perfectly competitive markets maximize societal welfare

    • C.

      Many markets are close to being perfectly competitive.

    • D.

      All of the above

    Correct Answer
    D. All of the above
    Explanation
    The perfectly competitive model is still discussed in economics textbooks because it serves as a benchmark for comparing other market structures. Despite its unrealistic assumptions, it provides a useful framework for understanding how markets work and the implications of different market structures. Additionally, perfectly competitive markets are believed to maximize societal welfare, making it important to study and analyze. Furthermore, many real-world markets are close to being perfectly competitive, which further justifies the relevance of this model.

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  • 38. 

     If a firm operates in a perfectly competitive market, then it will most likely

    • A.

      have a difficult time obtaining information about the market price.

    • B.

      take the price of its product as determined by the market.

    • C.

      advertise its product on television.

    • D.

      have an easy time keeping other firms out of the market.

    Correct Answer
    B. take the price of its product as determined by the market.
    Explanation
    In a perfectly competitive market, there are many buyers and sellers, and all firms sell identical products. This means that no single firm has control over the market price. Instead, the price is determined by the overall supply and demand in the market. As a result, a firm operating in a perfectly competitive market will have to accept the market price for its product, rather than being able to set its own price. This is because if the firm tries to charge a higher price, buyers will simply choose to purchase from a competitor who is offering the product at the market price. Therefore, the firm must take the price of its product as determined by the market.

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  • 39. 

     Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at $0.20 per pound when 500 pounds are grown. The demand for potatoes is Q = 10,000/p. If the long-run supply curve is horizontal, then how many pounds of potatoes will be consumed in total?

    • A.

      50,000

    • B.

      10,000

    • C.

      0

    • D.

      500

    Correct Answer
    A. 50,000
    Explanation
    In a competitive market, the long-run supply curve is horizontal, meaning that firms can produce any quantity of output at the same constant cost. Given that the long-run average cost is minimized at $0.20 per pound when 500 pounds are grown, it implies that the price of potatoes in the market will be $0.20 per pound. Using the demand equation Q = 10,000/p, we can substitute the price of $0.20 to find that the quantity demanded is 50,000 pounds. Therefore, 50,000 pounds of potatoes will be consumed in total.

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  • 40. 

     If a market is not perfectly competitive,.then government intervention

    • A.

      guarantees that societal well-being will be maximized.

    • B.

      is always justifiable

    • C.

      May increase economic well-being

    • D.

      will usually decrease economic well-beihg.

    Correct Answer
    C. May increase economic well-being
    Explanation
    If a market is not perfectly competitive, government intervention may increase economic well-being. This is because in imperfectly competitive markets, there are barriers to entry and limited competition, which can result in higher prices and lower output. Government intervention, such as implementing regulations or antitrust laws, can help promote competition, reduce market power, and improve efficiency. This can lead to lower prices, increased consumer surplus, and overall economic well-being. However, it is important to note that government intervention may not always be successful and can have unintended consequences, so it is not always guaranteed to increase economic well-being.

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  • 41. 

    Consumer surplus

    • A.

      is the extra money a consumer pays above the minimum necessary price for the producer to produce it.

    • B.

      is the difference between what a consumer would willingly pay for a good and the price actually paid.

    • C.

      is the difference between what a consumer pays for a good and the producer's cost.

    • D.

      equals zero in the long run.

    Correct Answer
    B. is the difference between what a consumer would willingly pay for a good and the price actually paid.
    Explanation
    Consumer surplus is the difference between what a consumer is willing to pay for a good and the actual price they pay. It represents the additional value that the consumer receives from the good beyond what they had to pay for it. This surplus occurs when the consumer perceives the good to be more valuable than its market price, resulting in a gain for the consumer.

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  • 42. 

     Suppose the market supply curve is p = 5 + Q. At a price of 10, producer surplus equals

    • A.

      50

    • B.

      10

    • C.

      12.50

    • D.

      25

    Correct Answer
    C. 12.50
    Explanation
    The market supply curve represents the relationship between the price of a good and the quantity supplied by producers. In this case, the supply curve is given by p = 5 + Q, where p is the price and Q is the quantity supplied. To find the producer surplus at a price of 10, we need to determine the quantity supplied at that price. By substituting p = 10 into the supply curve equation, we get 10 = 5 + Q, which gives us Q = 5. The producer surplus is then calculated as the area between the price and the supply curve, which is (10 - 5) * (5 / 2) = 12.50.

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Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

  • Current Version
  • Mar 22, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Mar 23, 2016
    Quiz Created by
    Mattyoung741
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