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This Document Contains Chapters 7 to 8 Chapter 07 Supply: The Costs of Doing Business MULTIPLE CHOICE 1. “As I add more workers to the factory line, the additional output produced by each additional worker seems to decline. Eventually, the workers just get in each others’ way. ” This statement by a factory supervisor refers to: A. the law of comparative advantage. B. the law of demand. C. the law of supply. D. the law of diminishing marginal utility. E. the law of diminishing marginal returns. Answer: E 2. Assume that one laborer produces 6 units of output, two laborers produce 14 units, three laborers 22 units, four laborers 24 units, and five laborers 25 units. Diminishing returns set in when the firm hires: A. the first laborer. B. the second laborer. C. the third laborer. D. the fourth laborer. E. the fifth laborer. Answer: D 3. The law of diminishing returns applies: A. in the long run because all inputs are variable. B. in the short run because some inputs remain fixed. C. in both the short run and the long run. D. to fixed inputs in the long run. E. to fixed inputs in the short run. Answer: B 4. After hiring a new employee, a manager finds that the total output has increased. When the manager hires another employee however, he realizes that although the total production has increased, the increment is less than the previous case. This is the result of: A. diseconomies of scale. B. a general economic downturn. C. diminishing marginal returns. D. the lack of skills of the two employees. E. constant returns to scale. Answer: C 5. If labor is the only variable input, an increase in the quantity of labor: A. does not have any effect on the quantity of output. B. causes the output to increase initially at a diminishing rate and then at an increasing rate. C. causes the output to increase at a constant rate till the last worker is hired. D. causes the output to increase initially at an increasing rate and then at a decreasing rate. E. causes the output to decrease at a constant rate till the last laborer is hired. Answer: D 6. Diminishing marginal returns means that as you combine more units of a variable resource with a set of fixed resources: A. the average physical product increases at an increasing rate. B. the marginal physical product decreases. C. the total production decreases. D. the marginal physical product becomes negative. E. the marginal physical product increases at a decreasing rate. Answer: B 7. If a firm is experiencing diminishing returns, then: A. the firm must be hiring less-qualified units of the variable resource. B. the firm must be experiencing diseconomies of scale. C. marginal physical product must be decreasing. D. average physical product must be decreasing. E. total physical product must be decreasing. Answer: C 8. When more and more units of a variable factor are combined with constant amount of fixed factor, such that the variable factor becomes abundant compared to the fixed factor, the output will eventually: A. increase at an increasing rate. B. increase at a diminishing rate. C. increase at a constant rate. D. remain unchanged. E. fall to zero. Answer: B 9. Average total cost is calculated by dividing: A. the change in total cost by the change in the quantity of output. B. total output by the number of people employed. C. the change in total output by the change in the number of people employed. D. total cost by total output. E. total output by total cost. Answer: D 10. If an average cost curve is U-shaped, then: A. costs per unit are constant throughout the entire range of production. B. costs per unit are declining throughout the entire range of production. C. costs per unit are increasing throughout the entire range of production. D. costs per unit first rise, then reach a maximum, and then begin to fall as output is increased. E. costs per unit first fall, then reach a minimum, and then increase as output is increased. Answer: E 11. If the total cost of producing 2 pounds of cheese is $6 and the total cost of producing 4 pounds of cheese is $8, then: A. total cost is declining. B. average total cost is declining. C. average total cost is increasing. D. average total cost is constant. E. total cost is constant. Answer: B 12. Marginal cost equals: A. total cost divided by total quantity. B. the slope of the demand curve under perfect competition. C. the slope of the total product curve when the latter is at its maximum. D. the change in total cost divided by the change in total output. E. the slope of the supply curve. Answer: D 13. Marginal fixed cost: A. is a positive constant irrespective of output level. B. declines as output is increased because a fixed numerator is divided by an ever-growing denominator. C. generally increases as output is increased. D. is equal to average variable cost and average total cost at their minimum points. E. is always equal to zero and is therefore ignored by economists. Answer: E 14. Which of the following reflects the correct relationship between average total cost (ATC) and marginal cost (MC)? A. When MC > ATC; ATC is falling. B. When ATC is minimum; ATC < MC. C. When MC < ATC; ATC is falling. D. When MC < ATC; ATC is constant. E. When ATC < MC; MC is falling. Answer: C 15. At its minimum point, the average-total-cost curve is intersected by the: A. average-fixed-cost curve. B. average-variable-cost curve. C. total-fixed-cost curve. D. total-variable-cost curve. E. marginal-cost curve. Answer: E 16. When average total cost is minimum, it is: A. equal to average variable cost. B. greater than marginal cost. C. equal to average fixed cost. D. equal to marginal cost. E. less than marginal cost. Answer: D 17. If average variable cost is falling, then: A. average fixed cost is rising. B. marginal cost must be falling. C. marginal cost must be rising. D. marginal cost lies below average variable cost. E. marginal cost lies above average variable cost. Answer: D 18. Suppose that the total fixed cost of producing five sailboats is $4,000, total variable cost is $4,000, and the total cost of producing six sailboats is $10,000. The marginal cost of the sixth sailboat is: A. $2,000. B. $4,000. C. $8,000. D. $10,000. E. $6,000. Answer: A 19. Short run refers to a period of time during which: A. all the factors are constant. B. all the factors are variable. C. the producer can shift from one plant size to another. D. some factors are fixed while some others are variable. E. the producer cannot change the level of output. Answer: D 20. Fixed costs are costs paid for: A. plant, equipment, and land that cannot be moved. B. obsolete plant and equipment not used anymore. C. plant and equipment in the long run. D. hiring temporary workers. E. resources that do not change with changes in output. Answer: E 21. With expansion in the level of output, total fixed cost: A. declines. B. increases. C. falls to zero. D. remains constant. E. becomes negative. Answer: D 22. Suppose that for 20 bicycles, the total fixed cost is $100 and total variable cost is $300. Then the average fixed cost and average variable cost are: A. $5 and $10 respectively. B. $5 and $15 respectively. C. $10 and $15 respectively. D. $15 and $10 respectively. E. $10 and $5 respectively. Answer: B 23. Assume that one laborer produces 6 units of output, two laborers produce 14 units, three produce 20 units, and four produce 24 units. If the cost is $20 per unit of labor and fixed costs are $100, what is the average total cost at 14 units of output? A. $50 B. $20 C. $10 D. $100 E. $40 Answer: C 24. If the total cost of producing 6 units is $228 and the total cost of producing 7 units is $245, what is the marginal cost of producing the seventh unit? A. $35 B. $245 C. $3 D. $38 E. $17 Answer: E NARRBEGIN: Table: 7. 1 The following table shows the cost of producing different units of ball point pens by a firm. 25. Refer to Table 7. 1. What is the marginal cost of producing the fourth and the fifth unit? A. $4 B. $6 C. $8 D. $2 E. $10 Answer: B 26. According to Table 7. 1, the total fixed cost of the firm equals: A. $18. B. $10. C. $2. D. $12. E. $8. Answer: B 27. According to Table 7. 1, the average variable cost of producing five ball point pens is: A. $3. 5. B. $2. C. $4. D. $2. 5 E. $4. 5 Answer: C 28. Refer to Table 7. 1. What will be the average fixed cost of producing five ball point pens? A. $2 B. $5 C. $4 D. $3. 33 E. $10 Answer: A 29. If the average total cost of producing 2 pounds of cheese is $4 and the average total cost of producing 3 pounds of cheese is $4. 2, then the marginal cost of producing third pound of cheese is equal to: A. $4. 2 B. $8 C. $4. 5 D. $4. 6 E. $4. 1 Answer: D 30. For a steel manufacturing firm, overhead costs would include: A. cost of iron ore. B. cost incurred in buying blast furnaces. C. insurance premiums of the firm. D. wages of the laborers. E. cost of electricity for running the machines in the factory. Answer: C NARRBEGIN: Figure: 7. 1 The figure given below shows the average fixed cost (AFC) and the average variable cost (AVC) curves of a competive firm. Figure 7. 1 NARREND 31. Using Figure 7. 1 determine the average total cost of producing the first unit of the output. A. $10. B. $20. C. $30. D. $40. E. $50. Answer: D 32. Refer to Figure 7. 1. Compute the total cost of producing 4 units of the output. A. $64. B. $72. C. $80. D. $84. E. $90. Answer: C NARRBEGIN: Figure: 7. 2 The figure given below shows cost curves of a firm. Figure: 7. 2 In the figure, |: Marginal cost curve ||: Average total cost curve |||: Average variable cost curve NARREND 33. Refer to Figure 7. 2. At an output level of H, average total cost is: A. 0E. B. BE. C. area 0EMH. D. 0B. E. area 0BNH. Answer: A 34. Refer to Figure 7. 2. At an output level of H, total fixed cost is: A. SR. B. LK. C. BE. D. area BEMN. E. area 0EMH. Answer: D 35. Refer to Figure 7. 2. When Average Variable Cost (AVC) is at a minimum, which of the following is true? A. AVC equals AB B. Marginal cost (MC) equals 0G C. Average total cost exceeds AVC by SR D. MC equals HN E. MC equals GJ Answer: D 36. Refer to Figure 7. 2. At an output level of G: A. both average total cost and average variable cost are falling. B. average fixed cost is equal to the distance JK. C. average variable cost exceeds marginal cost by the amount LJ. D. average total cost exceeds marginal cost by the amount KJ. E. total cost is equal to the area 0AJG. Answer: A 37. Which of the following is not correct? A. If Average Variable Cost (AVC) are decreasing, Average Total Cost (ATC) must be decreasing. B. AVC reaches minimum before ATC. C. If ATC is increasing, AVC must be increasing. D. If AVC is increasing, Marginal Cost (MC) is increasing. E. If Average Fixed Cost (AFC) is decreasing, ATC must be decreasing. Answer: E NARRBEGIN: Table: 7. 2 The table below shows the total cost of producing different units of a commodity. 38. From Table 7. 2, derive the value of total fixed costs. A. $10 B. $100 C. $98 D. $50 E. $60 Answer: B 39. According to Table 7. 2, the average variable cost of producing two units of output is: A. $48. B. $50. C. $62. D. $55. E. $60. Answer: A 40. Refer to Table 7. 2. If the production of 2 extra units (units 11 and 12) increases total cost by $162, then: A. the marginal cost of the twelfth unit will be $162. B. the total cost of producing 12 units will be $894. C. the average variable cost of producing 11 units is $732. D. the average total cost of producing 12 units is $61. E. the thirteenth unit will have to go up in price. Answer: D 41. Refer to Table 7. 2. The average fixed cost of the first unit of output is: A. $46. B. $98. C. $100. D. $50. E. $140. Answer: C NARRBEGIN: Table: 7. 3 The table given below shows the total fixed and variable costs of a firm. 42. Using the information in Table 7. 3 we can conclude that the marginal-cost curve intersects the average-variable-cost curve at ____ unit(s) of output. A. 1 B. 2 C. 5 D. 4 E. 6 Answer: D 43. In Table 7. 3, the average fixed cost of the first unit of output is ____ while the average fixed cost of producing 8 units of output is ____. A. $30; $40 B. $40; $5 C. $40; $40 D. $40; $280 E. $40; $320 Answer: B 44. If the firm described in Table 7. 3 decides to produce nothing, which of the following would be true? A. Total cost will become zero. B. Total variable cost will become $30. C. Total cost will equal $40. D. Average total cost will equal zero. E. Marginal cost will equal $10. Answer: C 45. In Table 7. 3, marginal cost is equal to average total cost at a quantity of: A. 1 unit. B. 3 units. C. 4 units. D. 5 units. E. 8 units. Answer: D 46. Refer to Table 7. 3. At what level of output does the average total cost starts increasing? A. 1 B. 6 C. 5 D. 7 E. 4 Answer: B NARRBEGIN: Table: 7. 4 The table given below shows the total cost of producing different units of the output by a competitive firm. 47. Which of the following is correct if the firm described in Table 7. 4 decides to produce nothing? A. Total cost will be zero. B. Total fixed cost will be zero. C. Total variable cost will be zero. D. Average cost will be zero. E. It is impossible for the firm to produce nothing in the short run. Answer: C 48. In Table 7. 4, at 4 units of output, A. AFC = $6. 25 and AVC = $10 B. AFC = $6. 25 and AVC = $40 C. AFC = $40 and AVC = $6. 25 D. AFC = $25 and AVC = $40 E. AFC and AVC cannot be determined from the information provided. Answer: A 49. In Table 7. 4, at 4 units of output marginal cost is: A. $10. B. $15. C. $20. D. $25 E. $30. Answer: B NARRBEGIN: Table: 7. 5 The table given below shows the average total cost of production of a firm at different levels of the output. 50. In Table 7. 5, what is the total cost of producing 4 units? A. $28 B. $10 C. $15 D. $20 E. $35 Answer: D 51. In Table 7. 5, if the total fixed cost is $3, what is the total variable cost of producing 5 units? A. $38 B. $32 C. $3 D. $8 E. Cannot be determined from the information given. Answer: B 52. In Table 7. 5, the marginal cost of producing the third unit of output is: A. $7. B. $8. C. $5. D. $4. E. $6. Answer: C 53. Refer to Table 7. 5. At what level of production will the average total cost curve intersect the marginal cost curve? A. 3 units B. 2 units C. zero units D. 5 units E. 4 units Answer: E 54. As the output produced by a firm increases, the average fixed cost: A. continues to decline. B. initially increases, and then declines. C. quickly drops to zero. D. becomes constant. E. declines and finally becomes negative. Answer: A 55. In the short run when output is zero, total cost is: A. equal to total variable cost. B. greater than total fixed cost. C. equal to total fixed cost. D. less than total fixed cost. E. less than total variable cost. Answer: C 56. Why does the law of diminishing return not apply in the long run? A. All the factors of production are fixed B. There are no fixed factors of production C. There are some fixed and some variable factors D. The producer is required to produce a fixed level of output E. The producer can change the level of output only by changing the variable factors,fixed factors remaining unchanged Answer: B 57. According to economic theory, the difference between the long run and the short run is: A. about two months. B. about two years. C. not relevant for executive decision makers. D. strictly theoretical so that in practice there is no difference between the short run and the long run. E. the ability for a firm to vary all resources. Answer: E 58. In the long run, A. some resources are variable and some resources are fixed. B. all the resources can be varied. C. all resources are fixed. D. at least one resource is fixed. E. there are no explicit costs. Answer: B 59. If a firm doubles its resources and generates an output level which is more than double, it is said to be experiencing: A. economic fluctuations. B. recession. C. diseconomies of scale. D. increasing marginal returns to a factor. E. economies of scale. Answer: E 60. In the long run, total variable cost: A. is equal to total fixed cost. B. is equal to total cost. C. is equal to average fixed cost. D. is more than total fixed cost. E. is less than total cost. Answer: B 61. A firm gets less efficient as it gets bigger, if it is experiencing: A. economies of scale. B. constant returns to scale. C. increasing returns to factors. D. diseconomies of scale. E. a period of post war recovery. Answer: D 62. Diseconomies of scale: A. occur only in the short run. B. occur when at least one resource is fixed and unit costs decrease as the quantity of production increases. C. occur when at least one resource is fixed and unit costs increase as the quantity of production increases. D. are represented by the upward-sloping portion of the short-run average-total-cost curve. E. occur when all resources are variable and unit costs increase as the quantity of production increases. Answer: E 63. If long-run costs are plotted on the vertical axis and quantity of output plotted on the horizontal axis, a line that is perfectly horizontal implies: A. constant returns to scale. B. economies of scale. C. diseconomies of scale. D. inefficient use of capital. E. inefficient use of labor. Answer: A 64. If a firm experiences economies of scale, A. it moves up along the long run average total cost curve. B. expansion of output becomes more expensive for the firm. C. the firm can reduce its per unit cost by producing less. D. the firm must shut down in the long run. E. the firm can reduce its per unit cost by expanding production. Answer: E 65. A positively sloped long run average cost implies: A. economies of scale. B. constant returns to scale. C. diseconomies of scale. D. diminishing marginal returns to a factor. E. increasing returns to scale. Answer: C 66. The long-run average-total- cost curve represents: A. the maximum cost of producing any level of output when all the factors are fixed. B. the lowest cost of producing any level of output when all the factors are variable. C. the maximum cost of producing any level of output when all the factors are variable. D. the lowest cost of producing any level of output when all the factors are fixed. E. he lowest cost of producing any level of output when at least one factor fixed. Answer: B 67. The long-run average-total-cost curve is U-shaped because: A. a firm initially experiences economies of scale and then diseconomies of scale. B. the law of diminishing returns to a factor sets in beyond a certain level of output. C. a firm initially experiences diseconomies of scale and then economies of scale. D. division of labor keeps labor productivity constant irrespective of expansion or contraction in production. E. efficiency of capital increases over a period of time. Answer: A 68. Which of the following is not a reason for economies of scale? A. Division of labor helps in specialization B. Merger of two firms C. Hiring larger machines which are more efficient than the smaller ones D. Increase in overhead expenses E. Research and development Answer: D 69. Which of the following may lead to diseconomies of scale? A. Specialization on the basis of comparative advantage B. Lack of coordination among the division heads C. Using larger and more efficient machineries D. Division of labor on the basis of capability E. Specialization of marketing,pricing, and research Answer: B NARRBEGIN: Figure: 7. 3 The figure given below shows three Short Run Average Total Cost (SRATC) curves and the Long Run Average Total Cost (LRATC) curve of a firm. Figure 7. 3 NARREND 70. Refer to the Figure 7. 3. In the long run, an increase in production from Q1 to Q3 would: A. increase average cost by C4 - C1. B. increase average cost by C3 - C1. C. increase average cost by C3 - C2. D. decrease average cost by C3 - C1. E. decrease average cost by C3 - C2. Answer: D 71. Which of the following would account for the shape of the long-run average-total-cost curve in Figure 7. 3? A. Low worker morale B. Low productivity C. Administration overhead D. Specialization of labor E. Managerial problems Answer: D 72. When a firm is experiencing economies of scale, it will: A. under use a larger plant size than is indicated by short-run efficiency concerns. B. under use a smaller plant than is indicated by short-run efficiency concerns. C. overuse a larger plant size than is indicated by short-run efficiency concerns. D. overuse a smaller plant size than is indicated by short-run efficiency concerns. E. produce at the minimum short-run and long-run average costs. Answer: A 73. Which of the following statements is true? A. When long-run average total costs are increasing, the firm enjoys economies of scale. B. Most industries exhibit long-run average costs that are shaped like an upside-down U. C. Constant returns to scale occur when the short-run average-total-cost curve is horizontal. D. When long-run average total costs are increasing, the firm has diseconomies of scale. E. Constant returns to scale are never present in the real world. Answer: D 74. In the electricity generation industry, the cost per kilowatt hour of electricity declines as the capacity to generate output increases. This situation represents: A. a poor opportunity for investors. B. constant returns to scale. C. diseconomies of scale. D. economies of scale. E. decreasing returns to scale. Answer: D 75. If long-run costs are plotted on the vertical axis and quantity of output plotted on the horizontal axis, a positively sloped line implies _____. A. constant returns to scale. B. economies of scale. C. diseconomies of scale. D. an increase in capital-labor ratio. E. a decrease in cost-output ratio. Answer: C 76. If a firm experiences constant returns to scale throughout: A. the long run average total cost curve is a negatively sloped curve. B. the short run average total cost curves are tangential to the long run average total cost curve at a point on their positively sloped portion. C. the short run average total cost curves are tangential to the long run average total cost curve at their minimum points. D. the short run average total cost curves are tangential to the long run average total cost curve at a point on their negatively sloped portion. E. the long run average total cost falls to zero. Answer: C 77. As the confectionary, Mrs. Fields’ Cookies, gained popularity in California and decided to expand its operations to Utah, it was able to achieve economies of scale. This means that: A. property taxes were lower in its new location in Utah. B. transport and communication systems were more developed in Utah. C. wages were higher in Utah compared to California. D. expansion of output and firm size led to specialization among the workers. E. government policies were more favorable in Utah. Answer: D 78. The term minimum efficient scale means: A. the output corresponding to the minimum point of the short run average total cost curve. B. the total of all efficient points along the long-run average-cost curve. C. diseconomies of scale. D. the minimum point of the long-run average-cost curve, or the output level at which the cost per unit of output is the lowest. E. the maximum point of the long-run average-cost curve, or the output level at which the cost per unit of output is the highest. Answer: D 79. If a company is producing at a level of output at which the long-run average-total-cost curve reaches a minimum, the company: A. is experiencing economies of scale. B. is at minimum efficient scale. C. is experiencing increasing returns to scale. D. will shut down. E. is experiencing diseconomies of scale. Answer: B 80. The long run is referred to as a planning horizon because: A. the firm has committed to a fixed quantity of at least one resource and the other resources are variable. B. the manager has selected the size of the firm that appears to be the least profitable and does not have the option of selecting any other plant size. C. the firm has not committed to a fixed quantity of any resource and has all options available to it. D. the manager has selected a scale of production. E. the firm is operating along a specific average-cost curve. Answer: C 81. In the oil tanker industry, large companies have lower risk and are able to optimize vessel utilization. If consolidation allows companies to lower their long-run average total costs, this is an example of: A. the opportunity costs of mergers. B. the increase in utility of managers by being able to control larger companies. C. the dangers of oil tankers to the environment. D. economies of scale in the oil tanker industry. E. the law of diminishing returns. Answer: D TRUE/FALSE 1. As long as there are fixed resources, diminishing marginal returns will never exist. Answer: False 2. When more and more doses of fertilizers are added to a fixed plot of agricultural land, the crop yield initially declines but eventually rises. Answer: False 3. If marginal physical product of labor is declining, then average physical product must also be declining. Answer: False 4. When the marginal-cost curve lies above the average-total-cost curve, the average-total-cost curve slopes up and the average-variable-cost curve slopes down. Answer: False 5. The marginal cost curve intersects the average total cost curve at the firm’s most efficient point of production. Answer: True 6. If marginal product increases with an increase in the variable input, the marginal cost must also increase as more units of the input are hired. Answer: False 7. The average fixed cost continues to decline with expansion of output. Answer: True 8. Every firm has to bear its fixed costs even when it produces nothing. Answer: True 9. If the cost borne by a firm when output is zero is $100 and that of producing 5 units is $250, then the variable cost of the firm is equal to $150. Answer: True 10. The difference between average total cost and average variable cost decreases with an increase in output. Answer: True 11. Overhead costs are identical to fixed costs. Answer: False 12. The phrase “to spread the overhead” refers to reducing the cost that are not directly attributable to the production process. Answer: True 13. In the long run, total cost is equal to total fixed cost at an output of zero. Answer: False 14. If short-run average total costs are rising in the oil tanker industry, it implies that economies of scale exist in that industry. Answer: True 15. If a firm has constant returns to scale, then doubling all of its inputs will just double its output. Answer: True 16. Economies of scale exist when the long-run average-total-cost curve is positively sloped. Answer: False 17. Economies and diseconomies of scale are the reasons why short-run average total cost decreases and then increases. Answer: False 18. In the long run, the producer can change the entire plant size to produce a certain level of the output. Answer: True 19. If a firm experiences economies of scale throughout it will have a horizontal long-run average total cost curve. Answer: False 20. The long-run average total cost curve connects the lowest cost for each level of output given by the short run average total cost curves. Answer: True 21. When a firm grows to such an extent that it is unable to coordinate between its employees properly it is likely to experience economies of scale. Answer: False 22. When a firm expands in size such that its workers can specialize in any one activity, the long run average total cost of the firm gradually increases. Answer: False 23. The minimum efficient scale is the level of output where the short-run average-total-cost curve reaches its minimum point. Answer: True 24. The minimum efficient scale is same across all industries irrespective of the types of goods they produce. Answer: False 25. The planning horizon refers to the short run, when the firm must plan how much of a variable input to apply to a fixed input. Answer: False Chapter 08 Profit Maximization MULTIPLE CHOICE 1. In economic theory, we assume that the goal of the firm is to: A. maximize sales revenue. B. maximize market share. C. maximize the benefits it provides to its customers. D. maximize the profit. E. maximize the sales volume. Answer: D 2. Profit is the difference between: A. total output and total cost. B. total revenue and total cost. C. total revenue and total sunk cost. D. total output and total sunk cost. E. total revenue and opportunity cost. Answer: B 3. A firm wishing to maximize profits will produce at the level of output where: A. marginal cost is equal to zero. B. its total-cost curve intersects its total-revenue curve. C. costs are at a minimum. D. total revenue exceeds total cost by the largest amount. E. marginal revenue exceeds marginal cost by the greatest amount. Answer: D 4. Suppose that at a given level of output, a perfectly competitive firm charges a price of $12 and has average total costs of $10. If its economic profit is $20,000, then it must be producing: A. 40,000 units of output. B. 20,000 units of output. C. 30,000 units of output. D. 10,000 units of output. E. 50,000 units of output. Answer: D 5. Assume that a firm’s marginal revenue curve intersects the rising portion of the marginal cost curve at 100 units of output. At this output level, a profit-maximizing firm’s total cost is $1,000. If the price of the product is $3 per unit and the firm produces at the profit-maximizing level, the firm will earn an economic profit equal to: A. -$1,000. B. -$700. C. -$400. D. -$600. E. $200. Answer: B NARRBEGIN: Table 8. 1 The table given below shows the total revenue and total cost of producing a commodity. 6. In Table 8. 1, the marginal revenue from the sixth unit of output is: A. $1,700. B. $1,600. C. $1,500. D. $1,300. E. $1,200. Answer: E 7. In Table 8. 1, the marginal cost of producing the sixth unit of output is equal to _____. A. $700. B. $600. C. $500. D. $300. E. $200. Answer: A 8. In Table 8. 1, marginal revenue exceeds marginal cost: A. until the fifth unit of output. B. until the sixth unit of output. C. up to the seventh unit of output. D. up to the eighth unit of output. E. at all units of output. Answer: C 9. In Table 8. 1, if the firm produces five units of output, it makes a profit of _____. A. $3,000 B. $0. C. $3,000. D. $1,200. E. $1,000. Answer: A 10. In Table 8. 1, in order to maximize profits, the firm should produce ____ units of output. A. five B. six C. seven D. eight E. nine Answer: D NARRBEGIN: Table 8. 2 The table given below reports the marginal revenue and marginal cost of Holmes Detective Agency for each client. 11. In Table 8. 2, assume that Holmes’s total fixed cost is zero. Compute the profit earned by the agency with two clients. A. -$110 B. $110 C. $120 D. -$10 E. $10 Answer: A 12. According to Table 8. 2, what will be the total number of clients that will maximize profits for the Holmes Detective Agency? A. 2 B. 3 C. 5 D. 6 E. 8 Answer: D 13. Refer to Table 8. 1. If we assume that Holmes is currently serving 8 clients, then Holmes Agency: A. is maximizing profit. B. should find more clients to increase profits. C. is maximizing total revenue. D. could increase profits by serving less clients. E. is minimizing cost. Answer: D 14. Goodspeed Automobiles manufactures 100 disc brake cylinders. At this output level, its marginal revenue is equal to its marginal cost. If the revenue per unit of output is $500 and the per unit cost is $350, its profit is: A. $20,000. B. $15,000. C. $45,000. D. $25,000. E. $10,000. Answer: B 15. Assume that the marginal revenue curve intersects the rising portion of the marginal cost curve at 100 units of output. At this output level, a profit-maximizing firm’s total fixed cost is $600 and its total variable cost is $400. If the price of the product is $8 per unit, the firm should produce: A. zero units of output. B. less than 100 units of output. C. 100 units of output. D. more than 100 units of output. E. 200 units of the output. Answer: C 16. Assume that a firm’s marginal revenue curve intersects the rising portion of the marginal cost curve at 100 units of output. At this output level, a profit-maximizing firm’s total cost is $1,000. If the price of the product is $10 per unit, the firm will earn an economic profit of: A. zero. B. $400. C. more than zero but less than $100. D. $100. E. more than $100. Answer: A 17. Which of the following is true of marginal revenue? A. Marginal revenue equals total revenue divided by quantity. B. Marginal revenue is the slope of the supply curve of a firm. C. Marginal revenue is the slope of the total cost curve when profit is maximized. D. Marginal revenue equals the change in total revenue divided by the change in the quantity. E. Marginal revenue equals the income earned by selling the stocks on the margin. Answer: D 18. The MR schedule can be obtained from the TR schedule by: A. adding two successive values in the TR schedule. B. subtracting the succeeding TR value from the preceding TR value. C. subtracting the preceding TR value from the succeeding TR value. D. multiplying two successive TR values. E. dividing the succeeding TR value by the preceding TR value. Answer: C 19. Marginal revenue of nth unit of output is: A. total revenue of (n + 1)th unit minus total revenue of nth unit. B. total revenue of nth unit minus total revenue of (n - 1)th unit. C. total revenue of (n + 1)th unit minus total revenue of (n - 1)th unit. D. the sum of total revenue of (n + 1)th unit and nth unit. E. the sum of total revenue of (n + 1)th unit and (n - 1)th unit. Answer: B 20. Which of the following is true of marginal cost? A. Marginal cost is the cost per unit of output produced. B. Marginal cost is the change in total cost divided by the change in total output. C. Marginal cost curve is negatively sloped at the profit-maximizing level of output. D. Marginal cost is equal to total cost divided by the quantity of output. E. Marginal cost initially increases with an increase in output but subsequently declines. Answer: B 21. A producer can raise profit by expanding output if: A. marginal revenue is equal to marginal cost. B. marginal revenue is less than marginal cost. C. marginal revenue is negative. D. marginal cost is negative. E. marginal revenue is greater than marginal cost. Answer: E 22. The addition to a business firm’s total costs that comes from producing one more unit of output is: A. total variable cost. B. marginal cost. C. sunk cost. D. opportunity cost. E. total fixed cost Answer: B 23. Profit of a firm is maximized when: A. marginal revenue is maximum. B. marginal revenue is greater than marginal cost. C. marginal revenue is equal to marginal cost. D. marginal cost is minimum. E. marginal revenue is less than marginal cost. Answer: C 24. A profit-maximizing firm will produce the level of output at which: A. average revenue equals average cost. B. average revenue equals average variable cost. C. marginal revenue equals marginal cost. D. marginal cost equals average revenue. E. marginal revenue exceeds marginal cost by the maximum amount. Answer: C 25. Assume that a firm is producing an output level such that marginal revenue equals marginal cost. One can correctly conclude that the firm is producing a level of output which is: A. equal to the profit maximizing level of output. B. equal to revenue maximizing level of output. C. less than the profit maximizing level of output. D. zero. E. greater than the profit maximizing level of output. Answer: A 26. If a firm’s marginal revenue is greater than its marginal cost, then: A. each added unit of output will reduce profits. B. the firm is maximizing profit. C. more output will add more to revenue than to cost. D. more output will add more to cost than to revenue. E. less output will add more to revenue than to cost. Answer: C 27. Assume that a firm’s marginal revenue curve intersects the rising portion of its marginal cost curve at 500 units of output. At this output level, a profit-maximizing firm’s total cost of production is $1,000. If the price of the product is $5 per unit, the total revenue earned by the firm will be: A. $1,500. B. $250. C. $500. D. $2,500. E. $1,000. Answer: D 28. Suppose that Cheapo Industries, a perfectly competitive firm, currently produces 500 units of imitation ham spread for a total cost of $1,500. The marginal cost of the 500th unit is $20, and the marginal revenue of the 500th unit is $15. To maximize profits, Cheapo Industries should: A. continue to produce 500 units. B. produce more than 500 units but less than 1500 units. C. produce less than 500 units. D. produce more than 1500 units. E. stop producing at 500 units. Answer: C 29. Suppose at a certain quantity of output, a firm’s average-total-cost curve lies above its demand curve. At this quantity of output, the firm: A. is earning negative economic profit. B. is earning zero economic profit. C. is maximizing profit. D. should increase its output to maximize profit. E. should reduce output to maximize negative economic profit. Answer: A 30. A firm enjoys a positive economic profit when: A. the demand curve touches the average cost curve at the profit maximizing level of output. B. the marginal revenue curve has a negative intercept in the ordinate axis. C. the average revenue curve lies below the average cost curve at the profit maximizing level of output. D. the marginal cost is declining at the profit maximizing level of output. E. the average revenue curve lies above the average cost curve at the profit maximizing level of output. Answer: E 31. Graphically, total cost is equal to the area of the: A. triangle formed under the demand curve. B. rectangle formed under the demand curve at a given price and quantity combination. C. rectangle formed under the average-total-cost curve at a given ATC and quantity combination. D. triangle formed by a line segment between the demand and average-total-cost curves. E. triangle formed by a line segment between the horizontal axis and the average-total-cost curves. Answer: C 32. Graphically, total revenue is represented by the: A. triangle formed under the demand curve. B. rectangle formed under the demand curve at a given price and quantity combination. C. rectangle formed under the average-total-cost curve at a given ATC and quantity combination. D. line segment between the demand and average-total-cost curves at any level of output. E. the line segment between the horizontal axis and the average-total-cost curves at any level of output. Answer: B 33. Graphically, profit per unit of output can be found by: A. the triangle formed under the demand curve. B. the rectangle formed under the demand curve at a given price and quantity combination. C. the rectangle formed under the average-total-cost curve at a given ATC and quantity combination. D. the line segment between the demand and average-total-cost curves at any level of output. E. the line segment between the horizontal axis and the average-total-cost curves at any level of output. Answer: D NARRBEGIN: Figure 8. 1 The following graph shows the demand and cost curves of an imperfectly competitive firm. MC and ATC represent the marginal cost curve and the average cost curve respectively. Figure 8. 1 NARREND 34. Refer to Figure 8. 1. At price P1 the firm sells quantity Q1, and total revenue is shown by: A. the rectangle ABCD. B. the rectangle ABEF. C. the rectangle FECD. D. the distance AB. E. the distance BC. Answer: A 35. Refer to Figure 8. 1. At price P1 the firm sells quantity Q1, and total cost is shown by: A. the rectangle ABCD. B. the rectangle ABEF. C. the rectangle FECD. D. the distance AB. E. the distance BC. Answer: B 36. According to Figure 8. 1, what is the firm’s profit when it sells quantity Q1 at price P1? A. Rectangle ABCD B. Rectangle DCEF C. Rectangle ABEF D. Distance AB E. Distance FD Answer: B 37. In Table 8. 1, in order to maximize profits, the firm should increase output until the ____ unit of output. A. fifth B. sixth C. seventh D. eighth E. ninth Answer: D NARRBEGIN: Figure 8. 2 The following graph shows the marginal revenue (MR) and marginal cost (MC) curves of an imperfectly competitive firm. Figure 8. 2 NARREND 38. According to Figure 8. 2, the firm is maximizing profit at a quantity of _____ units. A. 10 B. 35 C. 50 D. 75 E. 90 Answer: D 39. Refer to Figure 8. 2. If the current production level is 90 and the firm wishes to maximize profit, it should: A. leave the current production level unchanged. B. decrease the quantity produced to 75. C. decrease the quantity produced to 50. D. decrease the quantity produced to 35. E. increase production until MR = MC. Answer: B 40. Refer to Figure 8. 2. At a quantity of 10 the firm should _____ , but at a quantity of 75 the firm should _____. A. leave production unchanged; also leave production unchanged B. leave production unchanged; decrease production C. increase production; decrease production D. increase production; leave production unchanged E. decrease production; increase production Answer: D NARRBEGIN: Figure 8. 3 The figure given below shows the cost curves of a firm. Figure 8. 3 ATC: Average Total Cost AVC: Average Variable Cost MC: Marginal Cost NARREND 41. In Figure 8. 3, what is the total cost of producing 140 units of the output? A. $40 B. $55 C. $300 D. $5,600 E. $7,700 Answer: E 42. In Figure 8. 3, what is marginal cost at a quantity of 120 units? A. $35 B. $40 C. $55 D. $60 E. $4,800 Answer: B 43. In Figure 8. 3, if the marginal revenue of the firm is constant at $55, calculate the profit earned by the firm? A. $35 B. $40 C. $600 D. $4,800 E. $0 Answer: E 44. Refer to Figure 8. 3. If the firm maximizes profits at 120 units of the output, calculate the firm’s marginal revenue. A. $35 B. $40 C. $55 D. $4,200 E. Cannot be determined from the information given. Answer: B NARRBEGIN: Figure 8. 4 The figure given below shows the revenue and cost curves of a firm. MC represents the marginal cost curve, AC the average cost curve, MR the marginal revenue curve, and AR the average revenue curve. Figure 8. 4 NARREND 45. Refer to Figure 8. 3. The profit maximizing level of output is: A. 80 units. B. 70 units. C. 60 units. D. 50 units. E. 40 units. Answer: D 46. Refer to Figure 8. 3. The firm suffers a negative profit of: A. 100 units. B. 50 units. C. 80 units. D. 150 units. E. 250 units. Answer: B 47. Which among the following does not determine the shape of the demand curve under different market structures? A. Number of substitutes in the market B. Importance of the good in consumer’s budget C. Cost structure of the firm D. Price-elasticity of demand E. The length of time being considered Answer: C 48. If barriers to entry exist in a market, then: A. the costs of entry and exit are relatively low. B. there will be few close substitutes of the product in the market. C. firms will be incurring losses in both the short and long runs. D. firms will tend to have relatively less monopoly power. E. the existing firms will quit the market in the long run due to mounting losses. Answer: B 49. Under perfect competition, at the profit maximizing level of output: A. price is greater than marginal revenue. B. price is equal to marginal revenue. C. marginal revenue is equal to zero. D. the marginal revenue curve is downward sloping. E. the average revenue curve is upward sloping. Answer: B 50. The ordering of market structures from most market power to least market power (where market power is the ability to set its own price) is: A. monopoly, monopolistic competition, oligopoly, perfect competition. B. perfect competition, monopolistic competition, oligopoly, monopoly. C. oligopoly, monopoly, monopolistic competition, perfect competition. D. monopoly, oligopoly, monopolistic competition, perfect competition. E. monopoly, perfect competition, monopolistic competition, oligopoly. Answer: D 51. In general, the two extreme cases of market structure models are represented by A. monopolistic competition and oligopoly. B. oligopoly and monopoly. C. oligopoly and perfect competition. D. perfect competition and monopoly. E. perfect monopoly and oligopolistic competition. Answer: D 52. An industry which has no barriers to entry, no product promotion strategy, a standardized product, and a very large number of firms operating within it, is said to have: A. a monopoly market structure. B. perfect competition. C. monopsonistic competition. D. monopolistic competition. E. an oligopoly market structure. Answer: B 53. Firms under perfect competition produce: A. homogeneous products. B. unique products. C. either standardized or differentiated products. D. differentiated products. E. antique products. Answer: A 54. A(n) ____ is a price taker. A. monopolistic firm. B. oligopoly firm. C. perfectly competitive firm. D. monopolistically competitive firm. E. duopoly firm. Answer: C 55. In a perfectly competitive industry, the price of good A is $2. If a firm in this inudustry decides to increase its price to $2. 50, it will: A. realize an increase in profits of $. 50 per unit. B. be able to increase the quantity sold. C. be unable to sell any quantity of good A that is produced. D. lose some of its customers in the market. E. experience a decrease in profits of $. 50 per unit. Answer: C 56. The only decision that a perfectly competitive firm makes is: A. what price to charge. B. what quantity to produce. C. how much to spend on advertisements. D. how much to price discriminate. E. how to differentiate its products from its rivals. Answer: B 57. Identify the characteristics of a monopoly firm. A. Barred entry and homogeneous product B. Unique product and large number of sellers C. Standardized product and price taker D. Barred entry and price taker E. Barred entry and price maker Answer: E 58. Monopoly is a market structure in which: A. there are significant barriers to the entry of new firms. B. the firms face a perfectly elastic demand curve. C. there are a large number of close substitutes for the good. D. a homogeneous product is sold. E. the firms are price takers. Answer: A 59. Why does a monopolist face the market demand curve? A. Presence of a large number of substitutes B. Presence of large number of buyers in the market C. Barred entry of any new firm in the market D. Produces a homogeneous product E. Consumers have perfect knowledge of the market Answer: C 60. Which of the following is not true of monopolistic competition? A. There are a large number of buyers and sellers. B. The firms produce differentiated products. C. There exists free entry and exit of firms. D. Each of the firms faces a horizontal demand curve. E. Each of the firms act as a minimonopoly in the market. Answer: D 61. Steve is about to start up a business in a monopolistically competitive market. Which of the following can he expect? A. He can expect market entry to be difficult as there exist entry barriers. B. He can expect to enjoy a huge market power. C. He can expect to face a highly inelastic demand curve. D. He can expect to find close substitutes of the product he is planning to produce. E. He can expect to face an infinitely elastic demand curve. Answer: D 62. Which of the following characteristics distinguishes oligopoly from other market structures? A. Firms operating in an oligopoly are independent of each other. B. Firms operating in an oligopoly are interdependent. C. Oligopoly is the simplest of all the other market structures. D. An oligopolist does not face a downward-sloping demand curve. E. Entry into an oligopolistic market is easier than entry into a monopolistically competitive market. Answer: B 63. A(n) ____ may offer products that are either differentiated or identical. A. monopolistically competitive firm B. monopolist C. oligopolistic firm D. perfectly competitive firm E. monopsonist Answer: C 64. In contrast to both perfect competition and monopolistic competition, an oligopoly market structure is characterized by: A. price discrimination. B. a perfectly inelastic demand curve. C. the presence of infinite number of firms. D. only differentiated products. E. difficulty in the entry of new firms. Answer: E 65. Under imperfect competition: A. demand curve lies below the marginal revenue curve. B. demand curve lies above the marginal revenue curve. C. demand curve coincides with the marginal revenue curve. D. demand curve coincides with the marginal cost curve. E. demand curve coincides with the average cost curve. Answer: B 66. The demand curve faced by a perfectly competitive firm is: A. perfectly inelastic. B. relatively elastic. C. unit elastic. D. perfectly elastic. E. relatively inelastic. Answer: D 67. A monopolist faces the least price elastic demand curve because: A. the consumers have only one place to buy the good. B. the monopolist produces a standardized product. C. the monopolist undertakes a huge expenditure to produce the product. D. the monopolist supplies an insignificant portion of the market. E. the monopolist produces an absolutely necessary good having close substitutes. Answer: A 68. A monopolistically competitive firm faces a relatively elastic demand curve than a monopolist firm because of the: A. presence of a large number of buyers and barriers to entry. B. presence of a large number of firms and easy entry. C. production a perfectly homogeneous products. D. production of unique products and presence of barriers to entry. E. production of goods that are perfect complements of each other. Answer: B 69. A downward-sloping demand curve is faced by firms: A. under perfect competition B. under perfect competition and monopoly C. in all market structures except monopoly D. in all market structures except monopolistic competition E. in all market structures except perfect competition Answer: E 70. The characteristic that distinguishes a perfectly competitive market from a monopolistically competitive market is the: A. ease of entry. B. number of firms operating in the market. C. degree of government regulation in the activities of the firms. D. product differentiation. E. extent of market share of each firm. Answer: D NARRBEGIN: Figure 8. 5 The following figure shows the cost and revenue structures of a firm. MC represents the marginal cost curve, AC represents the average cost curve, AR represents the average revenue curve, and MR represents the marginal revenue curve. P* is the equilibrium price and Q* is the equilibrium output. Figure 8. 5 NARREND 71. Refer to Figure 8. 5. Identify the market structure in which the firm operates: A. Perfect competition B. Monopolistic competition C. Monopoly D. Oligopoly E. Duopoly Answer: A 72. Accounting profit of a business firm is also called: A. royalty income. B. net income from equity. C. compensatory income. D. windfall gain. E. net operating income. Answer: E 73. Accounting profit does not include: A. explicit cost. B. sunk cost. C. fixed cost. D. opportunity cost. E. variable cost. Answer: D 74. The opportunity cost of capital is: A. the cost of labor inputs required to operate that capital. B. the cost of raw materials necessary to put that capital to work. C. the payment necessary to keep that capital from moving to an alternative use. D. the costs of maintenance necessary to keep that capital operating. E. the cost of hiring more units of capital to generate additional units of output. Answer: C 75. Suppose Mark invests a sum of $100,000 in a new venture. To fund his investment, Mark withdraws $50,000 from a savings account paying 10% per year and uses the proceeds from a bond that has just matured worth $50,000. If he had reinvested the proceeds from the bond he could have earned interest at the rate of 5%. Calculate the opportunity cost of capital for Mark in a particular year? A. $5,000 B. $7,500 C. $10,000 D. $12,500 E. $100,000 Answer: B NARRBEGIN: Scenario 8. 1 Scenario 8. 1 Jane left her job at Siemens and started her own boutique. She used to earn $50,000 annually at Siemens. She took a loan of $10,000 and used $20,000 from her personal savings to begin her venture. She agreed to repay the loan with 10% interest. Her business is bringing in $80,000 annually. She has rent and labor expenses of $15,000. Also assume that Jane could have used her own money i. e. $20,000 to buy stocks in Intel which would have returned 5% to her last year. NARREND 76. Refer to Scenario 8. 1 and calculate Jane’s accounting profit. A. $50,000. B. $65,000. C. $80,000. D. $64,000. E. $35,000. Answer: D 77. Refer to Scenario 8. 1. Compute Jane’s economic profit. A. $13,000 B. $14,000 C. $20,000 D. $15,000 E. $10,000 Answer: A 78. Suppose a mechanic uses $150,000 of his own money to start a business. The rate of interest he could earn in a savings account is 5 percent, and the rate of interest he could earn by investing in bonds is 8 percent. What is the opportunity cost of capital when the mechanic uses his money to start his own business? A. $7,500/year B. $8,000/year C. $19,500/year D. $12,000/year E. $150,000/year Answer: D 79. Nancy owns and operates a drug store that generates total revenues worth $30 million in a particular year. Her accounting costs for the year are $25 million. She could have earned $3 million in this year if she had worked as a consultant for a pharmaceutical firm. Further, she could have earned 5 percent interest on $40 million of her own money that she invests in the business this year. Nancy’s accounting profit in this year is _____ and her economic profit is _____. A. $5 million; zero B. $5 million; $3 million C. $5 million; $8 million D. zero; $3 million E. $3 million; $43 million Answer: A 80. The equity capital of a privately owned firm includes: A. the owner’s own dollars put into the firm. B. the cost of raw materials. C. the cost of labor resource used in production. D. economic rent only. E. the value added at each stage of production. Answer: A NARRBEGIN: Table 8. 3 The following table shows the annual income statement of Max Computers. 81. Refer to the Table 8. 3. The net income of Max Computers is: A. $10,000 million. B. $25,000 million. C. $11,000 million. D. $13,000 million. E. $12,500 million. Answer: C 82. Refer to Table 8. 3. The economic profit of Max Computers is: A. $1,000 million. B. -$4,000 million. C. $10,000 million. D. -$5,000 million. E. $5,000 million. Answer: B NARRBEGIN: Scenario 8. 2 Scenario 8. 2 Consider a publicly held firm (one whose stock shares are traded on the stock exchange) that earned revenue worth $350 million and incurred land, labor, and debt costs worth $320 million. The stockholders who have invested a total of $100 million in this firm could have earned 10 percent return on other comparable investments. NARREND 83. According to the information in Scenario 8. 2, how much accounting profit did the firm make last year? A. $112 million B. $30 million C. $20 million D. -$20 million E. $2 million Answer: B 84. According to the information in Scenario 8. 2, how much economic profit did the firm make last year? A. $112 million B. $30 million C. $20 million D. -$20 million E. $2 million Answer: C 85. According to the information in Scenario 8. 2, the cost of equity capital is: A. $112 million. B. $30 million. C. $20 million. D. $120 million. E. $10 million. Answer: E 86. The reason accountants do not often report economic profits on income statements and balance sheets is: A. economic profits are exactly the same as accounting profits, and thus they do not need to be broken out on financial statements. B. the cost of capital, while easy to measure, is very difficult to report. C. it might make some firms look as though they possessed an unfair competitive advantage over other firms. D. the cost of equity capital is very difficult to measure, and opportunity costs vary from investor to investor. E. the concept of economic profit is not firmly established in economic theory. Answer: D 87. When a firm incurs negative economic profit, it should: A. hire more laborers to make the business activity profitable. B. transfer the resources from current use to other alternative uses. C. purchase additional raw materials to produce more output. D. transfer the resources from alternative uses to the current activity. E. continue to operate with the same resources. Answer: B 88. Accounting profit is called normal profit when: A. accounting profit is equal to zero. B. economic profit is equal to zero. C. opportunity cost is equal to zero. D. average cost is minimum. E. economic profit is equal to accounting profit. Answer: B 89. A zero economic profit is not a bad thing because: A. it is a situation in which the owners, or shareholders, of a firm could not do better elsewhere. B. it is a situation in which the resources of a firm are always underutilized. C. it means that a firm is paying an interest rate that is above the market rate. D. it means that stock prices will not fall. E. it means that investors are better off in the current venture than they would be in any other investment. Answer: A 90. The entry of new firms into the market stops when: A. accounting profit falls to zero. B. the general price level in the economy rises. C. the rate of interest declines. D. economic profit falls to zero. E. the corporate taxes are relaxed. Answer: D TRUE/FALSE 1. The primary goal of any business firm is to maximize social welfare. Answer: False 2. A firm maximizes its profit at a level of output, where the additional revenue earned by selling an extra unit of the output is equal to the additional cost borne for producing that extra unit of the output. Answer: True 3. Suppose that Megabucks Corporation is earning economic profit of $4,000. If its price is $6 per unit and its ATC is $4 per unit, it must be producing 8,000 units. Answer: False 4. If marginal revenue is greater than marginal cost, the producer must reduce the level of output to maximize profit. Answer: False 5. The firm will always maximize profit where average total costs are minimized. Answer: False 6. When the average cost curve lies below the average revenue curve at the profit maximizing level of output, it implies that the firm is suffering losses. Answer: False 7. Irrespective of the market structure, a firm maximizes profit where the price of its product equals its marginal cost. Answer: False 8. A perfectly competitive firm spends a significant part of its revenue on advertisements, and tries to sell more by reducing its price below the market price. Answer: False 9. The market power enjoyed by a particular producer depends on the number of firms in the industry. Answer: True 10. In general, the number of firms is lesser in monopolistic competition compared to oligopoly. Answer: False 11. Each firm under perfect competition charges different prices for their products. Answer: False 12. Entry barriers exist in a perfectly competitive industry. Answer: False 13. A perfectly competitive firm cannot affect the market price by raising or reducing its supply. Answer: True 14. A monopolist faces the market demand curve. Answer: True 15. In monopolistic competition there are no brands, all the producers produce only identical, generic products. Answer: False 16. The greater the differentiation among products of the monopolistically competitive firms, the less price-elastic is the demand. Answer: True 17. Each firm under monopolistic competition produces a unique product which does not have a close substitute. Answer: False 18. Under oligopoly market structure, the rival firms take complete independent decisions. Answer: False 19. The daily vegetable market is an example of oligopoly. Answer: False 20. When the average revenue falls, marginal revenue also falls and is less than the average revenue. Answer: True 21. A monopolistically competitive firm faces a relatively steeper demand curve than a perfectly competitive firm. Answer: True 22. The marginal revenue curve of a firm coincides with the average revenue curve under perfect competition. Answer: True 23. A perfectly competitive firm charges a price which is greater than its marginal cost. Answer: False 24. Economic profit is the difference between accounting profit and total fixed cost. Answer: False 25. Economic profit includes all opportunity costs. Answer: True 26. Economic profits is the difference of total revenue and total costs including the opportunity costs of the resources used in the business. Answer: True 27. Accounting profit is always equal to or greater than economic profit. Answer: True 28. The opportunity cost of going to the movies is the price of entry into the movies. Answer: False 29. When economic profit is zero, producers do not have any incentive to deviate from the current line of production. Answer: True 30. When economic profit is greater than zero, accounting profit is called normal profit. Answer: False 31. Positive economic profit signals that the investors should divert their funds to alternative ventures. Answer: False 32. Entry of new firms to the industry lowers the economic profit of the existing firms. Answer: True Test Bank for Microeconomics William Boyes, Michael Melvin 9781111826154

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