Deck 5: The Behavior of Firms

Question 1

A change in a variable cost causes a parallel upward shift in the marginal cost curve.

Answer 1

False

Question 2

If marginal cost exceeds marginal revenue,then a reduction in output will create higher profits.

Answer 2

True

Question 3

In order to maximize profits,firms should produce to the point where marginal revenue is equal to marginal cost.

Answer 3

True

Question 4

When the price of fabric falls,it does not benefit a clothing manufacturer to lower its prices since that will only reduce its profit margin.

Question 5

Economists attempt to understand firm behavior by making the generalization that firms act to maximize growth.

Question 6

Firms are so diverse in size and organization that it is not possible to make any general statements about their behavior.

Question 7

All cost increases are passed on to a firm's customers in the form of higher prices.

Question 8

Profits will be positive as long as marginal revenue is greater than marginal cost.

Question 9

Since Marginal Revenue measures the additional revenue generated by selling one more unit of the product,it must always be positive.

Question 10

Either a rise in marginal cost or a fall in marginal revenue could cause a firm to reduce its output.

Question 11

Total cost and marginal cost can both be plotted on the same graph since both include a measure of quantity.

Question 12

Fixed costs have no effect on a firm's profit.

Question 13

When faced with a rent increase,the firm's best policy is to use a small price increase to compensate for some,but not all,of the loss.

Question 14

A firm's revenue can be calculated from its demand curve using the formula "price times quantity."

Question 15

Higher fuel costs would cause a delivery firm to raise the price it charges.

Question 16

Higher fixed costs may cause a firm to shut down its operations but will not otherwise affect its production and pricing decisions.

Question 17

If 1,000 yards of denim can produce 10,000 pairs of jean,then 2,000 yards of denim can produce 20,000 pairs of jeans and 30,000 yards of denim can produce 30,000 pairs of jeans.

Question 18

Higher insurance costs would cause a delivery firm to raise the price it charges.

Question 19

The marginal cost of producing tea can be measured in dollars per pound of tea.

Question 20

If the total benefits received from drug enforcement exceed its total costs,then the government should expand its drug enforcement activity.

Question 21

If a firm can sell one more unit of its product for $7 and the marginal cost of producing that one more unit is only $5,then it should definitely produce and sell one more unit.

Question 22

If a firm increases production from 120 units to 130 units,then its Marginal Revenue is 10.

Question 23

Marginal Revenue measures the slope of the Demand curve.

Question 24

As increasing amounts of a good are produced,the marginal cost of production tends to

A) rise.
B) fall.
C) remain constant.
D) change unpredictably.

Question 25

The Marginal Benefit of consuming an additional unit of a good tends to increase as the number of units consumed increases.

Question 26

A firm would find it profitable to increase its production when

A) its marginal revenue exceeds its marginal cost.
B) its fixed costs decrease.
C) higher resource costs raise its marginal costs.
D) new competitors reduce the demand for the firm's product.

Question 27

If an activity is worth pursuing at all,then the only information the decision maker needs to make a choice is

A) total benefits.
B) marginal benefits and marginal costs.
C) variable costs.
D) fixed costs.

Question 28

Mike,of Mike's Machines has hired a consultant who informs Mike that since the total revenue from current operations exceeds total cost,he should consider increasing production of machines.Mike would be best off if he

A) increases production of machines until total revenue is equal to total cost.
B) increases production until net gains are equal to zero.
C) maintains his current level of production so long as marginal revenue is equal to marginal cost.
D) decreases his current level of production if marginal revenue is equal to marginal cost.

Question 29

Marginal cost is defined as

A) the additional cost attributable to the last unit produced.
B) the change in fixed costs associated with the production of one more unit of output.
C) the difference between total revenue and total cost.
D) price times quantity.

Question 30

Costs that are independent of the firm's level of output are called

A) fixed costs.
B) marginal costs.
C) opportunity costs.
D) sunk costs.

Question 31

When should a firm increase its production?

A) When it is earning a positive profit.
B) When its revenues are too low to cover the firm's fixed costs.
C) When there is a fall in the price of its product.
D) When its marginal revenue exceeds its marginal cost.

Question 32

As more of an activity is undertaken,it is reasonable to assume that

A) the total benefits will decline.
B) the marginal benefits will decline.
C) the fixed costs will decline.
D) the marginal benefits will increase.

Question 33

Marginal benefit is defined as

A) the net gain from a particular level of an activity.
B) the additional benefit gained from the last unit of an activity.
C) the difference between total benefits and total costs of a particular level of an activity.
D) the difference between variable costs and fixed costs.

Question 34

Marginal Cost measures the slope of the total cost and total variable cost curves.

Question 35

If a firm's marginal cost exceeds its marginal revenue,then

A) the firm's profit is negative (i.e.,the firm is suffering losses).
B) the firm should shut down its operations.
C) cutting back production will increase the firm's profit.
D) the firm should reduce its per-unit cost by increasing its output.

Question 36

A firm is defined in Economics as

A) a corporation that creates demand for the goods it produces.
B) an entity that produces and sells goods that individuals demand.
C) an individual or group of individuals providing public services at no charge.
D) any group of individuals seeking to increase their income.

Question 37

If a firms fixed costs increase from $2,000 to $3,000,then its marginal cost is $1,000.

Question 38

Demand and Total Cost of Production

The following questions refer to the following tables which show the demand for a firm's product and the firm's total cost of production.


-Refer to Demand and Total Cost of Production.The marginal cost of producing the second unit is

A) $4 per unit.
B) $7 per unit.
C) $11 per unit.
D) $15 per unit.

Question 39

If an activity is worth pursuing at all,then it should be pursued up to the point where

A) total cost equals total benefit.
B) average cost equals average benefit.
C) marginal cost equals marginal benefit.
D) sunk costs equal zero.

Question 40

Economists generally assume that the firm's goal is to

A) minimize its costs.
B) maximize its profit.
C) make its market share as large as possible.
D) maximize its production.

Question 41

Demand and Total Cost of Production

The following questions refer to the following tables which show the demand for a firm's product and the firm's total cost of production.


-Refer to Demand and Total Cost of Production.The profit from selling three units would be

A) $60.
B) $39.
C) $21.
D) $10.

Question 42

You are deciding whether or not to take your car on a 1,500 mile highway trip.Which of the following is the least likely to affect your decision?

A) The price of gasoline.
B) The cost of oil changes.
C) Your annual insurance payment.
D) Highway tolls.

Question 43

Which of the following would not increase the price of books?

A) A new literacy program that encourages reading.
B) A $10,000 permission fee paid for the right to reprint an author's work.
C) An increase in the price of the ink used to print the books.
D) Higher costs for the glycerin used to make the glue with which the books are bound.

Question 44

Marginal Cost of Production

The following questions refer to the following table which shows a firm's marginal cost of production.


-Refer to Marginal Cost of Production.Suppose the firm has $20 in fixed costs,and demand for the firm's product is horizontal at a price of $24 per unit.What is the firm's maximum profit?

A) $21.
B) $24.
C) $71.
D) $91.

Question 45

Economists use the term variable costs to refer to

A) prices of inputs that are subject to sudden change,like fuel.
B) an increase in the price of any input.
C) costs that vary with the type of final product being produced.
D) costs that vary with the quantity of output produced.

Question 46

What do economists mean by the phrase "sunk costs are sunk"?

A) Sunk costs are irretrievable,but they do lower profits and thus affect the firm's output level.
B) Sunk costs are a primary reason why marginal costs tend to increase.
C) Sunk costs cannot be recovered and are irrelevant to future decision making.
D) Sunk costs lower consumer welfare,because producers "pass on" these costs in the form of higher prices.

Question 47

An increase in fixed costs will lower a firm's

A) total cost.
B) output.
C) prices.
D) profit.

Question 48

Suppose that the price of labor,the only variable input needed to produce cotton,increases from $100 day to $120 day.The effect on costs will be

A) a parallel shift in the total cost curve.
B) a parallel shift in the fixed cost curve.
C) a parallel shift in the marginal cost curve.
D) a shift in total cost by different amounts for different quantities.

Question 49

Suppose the government increases the annual cost of the liquor permit that a tavern needs to serve alcohol.What effect will this increased cost have on the tavern's production and pricing decisions?

A) None-the tavern will maintain its current prices.
B) The tavern will raise its prices to cover the higher cost.
C) The tavern will scale back its operations.
D) The tavern will cut its prices to increase its sales.

Question 50

Caterpillar has spent $5 million to date on a new plant,and another $2 million is needed to complete the plant.When construction was started,it was projected that production at the new plant would add $12 million to Cat's profit,but new projections show the additional profit will be only $6 million.Assuming the incomplete plant is worthless,should Cat complete the new plant or abandon it?

A) Cat should complete the plant because it would create a net profit of $4 million.
B) Cat should complete the plant because it would create a net profit of $1 million.
C) Cat should abandon the plant because a $5 million loss is better than a $7 million loss.
D) Cat should abandon the plant because it would create a net loss of $1 million..

Question 51

Demand and Total Cost of Production

The following questions refer to the following tables which show the demand for a firm's product and the firm's total cost of production.


-Refer to Demand and Total Cost of Production.According to the equimarginal principle,how many units should the firm produce in order to maximize its profit?

A) 2 units.
B) 3 units.
C) 4 units.
D) 5 units.

Question 52

Demand and Total Cost of Production

The following questions refer to the following tables which show the demand for a firm's product and the firm's total cost of production.


-Refer to Demand and Total Cost of Production.The marginal revenue received from selling the fourth unit is

A) $60 per unit.
B) $15 per unit.
C) $13 per unit.
D) $0 per unit.

Question 53

A sunk cost is one that

A) does not vary with the level of output.
B) increases as the firm's production increases.
C) measures the value of the firm's self-owned resources.
D) can no longer be avoided.

Question 54

Marginal Cost of Production

The following questions refer to the following table which shows a firm's marginal cost of production.


-Refer to Marginal Cost of Production.Suppose the firm has $20 in fixed costs.Its total cost of producing 5 units of output is

A) $35.
B) $33.
C) $55.
D) $73.

Question 55

The government authorized $10 million to build bridges on an interstate.After $8 million were spent,serious engineering flaws were discovered.At that point,experts testified that the government must authorize another $10 million in funding to make the bridges safe,bringing the project's total cost to $20 million.The government should authorize the additional funding as long as the benefits from the completed bridges exceed

A) $10 million.
B) $12 million.
C) $18 million.
D) $20 million.

Question 56

Marginal Cost of Production

The following questions refer to the following table which shows a firm's marginal cost of production.


-Refer to Marginal Cost of Production.Suppose the firm's fixed costs increase to $100,and demand for the firm's product remains horizontal at a price of $24 per unit.What is the firm's maximum profit?

A) $-9.
B) $ 9.
C) $68.
D) $71.

Question 57

Consider a firm that produces peanut butter.An increase in the price of peanuts will cause the firm to lower its output because

A) fixed costs will rise.
B) marginal cost will rise.
C) the price of peanut butter will rise.
D) marginal revenue will fall.

Question 58

Marginal Cost of Production

The following questions refer to the following table which shows a firm's marginal cost of production.


-Refer to Marginal Cost of Production.Suppose demand for the firm's product is horizontal at a price of $24 per unit.How much output should the firm produce in order to maximize its profit?

A) 3 units.
B) 4 units.
C) 6 units.
D) 7 units.

Question 59

Marginal Cost of Production

The following questions refer to the following table which shows a firm's marginal cost of production.


-Refer to Marginal Cost of Production.If the firm has $20 in fixed costs,producing 3 units generates variable costs of

A) $ 9.
B) $13.
C) $29.
D) $33.

Question 60

Marginal Cost of Production

The following questions refer to the following table which shows a firm's marginal cost of production.


-Refer to Marginal Cost of Production.Suppose the firm can sell as many units as it wants at a price of $20,then it should produce

A) three units
B) four units
C) zero units
D) the number of units is indeterminate without more information

Question 61

This firm's fixed costs are

A) zero.
B) $100.
C) $230.
D) cannot be determined without specifying the output level.

Question 62

What is the variable cost of producing three units of output?

A) $20.
B) $130.
C) $230.
D) Cannot be determined with the information available.

Question 63

Consider the following:

Question 64

Describe the effect that a surplus of tobacco will have on a cigarette producer's pricing and production decisions.

Question 65

A firm's total cost schedule and the demand for its product are summarized in the table below.

Question 66

A firm is considering entering a market where demand for its product is Q = 100 - P.This demand function implies that the firm's marginal revenue function is MR = 100 - 2Q.The firm's total cost of producing the product for that market is TC = 500 + 10Q + Q² which indicates that its marginal cost function is MC = 10 + Q.Indicate whether or not the firm should enter the market by calculating the firm's profit (Hint: to find the price that the firm should charge,take the profit maximizing quantity and plug it into the demand equation).Describe how your previous answer would change if the firm's total cost function became TC = 1000 + 10Q + Q².

Question 67

Define the terms marginal revenue and marginal cost.What action should a firm take if its marginal revenue exceeds its marginal cost? Explain.

Question 68

A firm will increase its production when

A) its marginal revenue rises.
B) its marginal cost rises.
C) its fixed costs fall.
D) the demand for its product falls.

Question 69

What is the marginal cost of producing a sixth unit of output?

A) $29.
B) $92.
C) $100.
D) Cannot be determined with the information available.

Question 70

A firm is currently producing at a level where its MC = 10 and its MR = 5.We can conclude that this firm is

A) profit maximizing.
B) under-producing.
C) over-producing.
D) no definite conclusion can be made about the firm's level of production.

Question 71

A comic book company pays an annual licensing fee of $10,000 for the rights to an artist's character.Which would have the bigger effect on the readers of that character's comic: an increase in printing costs or an increase in the artist's licensing fee? Explain.

Question 72

If this firm produces 5 units of output,then its total cost equals

A) $100
B) $130
C) $200
D) $230

Question 73

Which of the following will result in a firm increasing its level of production?

A) An increase in its Marginal Costs.
B) A decrease in its Marginal Revenue.
C) An increase in its Fixed Costs.
D) An increase in the price of its product.

Question 74

Explain why a rent increase at Joe's Rib Shack would not cause Joe to raise his prices,but a rent increase at Joe's competitors may cause him to raise prices.

Question 75

Suppose a new Dunkin' Donuts shop has opened in town.Its main competitor,Doughnut Delite,will likely

A) begin to produce more doughnuts.
B) experience higher marginal costs.
C) reduce its prices and production.
D) make no changes in its pricing and production decisions.

Question 76

A firm has MR = $70 and MC = $20 + Q.Fixed costs are $175.