Deck 15: Entry, Exit, and Long-Run Profitability

Question 1

Total revenue minus expenses paid equals:

A)economic profit.
B)cost-adjusted revenue.
C)accounting profit.
D)financial revenue.

Answer 1

C

Question 2

Max earns a yearly salary of $120,000 per year from his job and $1,000 per year in interest on his savings. After he quits his job to start a company, he uses all his savings to purchase manufacturing equipment for his company. Given the above information and the data summarizing his first year in business in the table, how much economic profit or loss does Max earn?
$Table\\\begin{array}{|l|l|}\hline \text { Revenue } & \begin{array}{l}\text { Bills paid for } \\\text { inputs }\end{array} \\\hline \$ 300,000 & \$ 175,000 \\\hline\end{array}$

A)$4,000
B)$5,000
C)$125,000
D)$126,000

Answer 2

$4,000

Question 3

Malia earns a yearly salary of $130,000 in her job and earns $1,000 per year in interest on her savings. After she quits her job to start a company, she uses all her savings to purchase manufacturing equipment for her company. Given the above information and the data summarizing her first year in business in the table, how much economic profit or loss does Malia earn?
$${ \text { Table } } \\\begin{array} { | l | l | } \hline \text { Total revenue } & \text { Bills paid } \\\hline \$ 350,000 & \$ 200,000 \\\hline\end{array}$$

A)$19,000
B)$21,000
C)$219,000
D)$171,000

Answer 3

$19,000

Question 4

Juan earns a yearly salary of $120,000 in his job and $1,000 per year in interest on his savings. After he quits his job to start a company, he uses all his savings to purchase manufacturing equipment for his company. Given the above information and the data summarizing his first year in business in the table, how much accounting profit or loss does Juan earn?
$Table\\\begin{array}{|l|l|}\hline \text { Revenue } & \begin{array}{l}\text { Bills paid for } \\\text { inputs }\end{array} \\\hline \$ 300,000 & \$ 175,000 \\\hline\end{array}$

A)$4,000
B)$5,000
C)$125,000
D)$126,000

Question 5

Junko earns a yearly salary of $130,000 in her job and $1,000 per year in interest on her savings. After she quits her job to start a company, she uses all her savings to purchase manufacturing equipment for her company. Given the above information and the data summarizing her first year in business in the table, how much accounting profit or loss does Junko earn?
$${ \text { Table } } \\\begin{array} { | l | l | } \hline \text { Total revenue } & \text { Bills paid } \\\hline \$ 350,000 & \$ 200,000 \\\hline\end{array}$$

A)$19,000
B)$21,000
C)$150,000
D)$171,000

Question 6

The formula for calculating accounting profit is total revenue minus _____ costs.

A)explicit financial
B)total
C)opportunity
D)explicit financial costs minus implicit opportunity

Question 7

Implicit opportunity costs of running a business include:

A)bills that a company pays.
B)debt that a company has accumulated during the year.
C)earnings that are given up in order for the owner to start or run a business.
D)the imagined costs of inputs that a company buys at a discount.

Question 8

The two main types of implicit opportunity costs are:

A)bills paid and revenue forgone.
B)bills paid and forgone wages.
C)earned wages and earned interest.
D)forgone wages and forgone interest.

Question 9

Corinne is offered a job with a salary of $70,000, which she turns down to start her own business. She uses $20,000 of her own savings to help start the business, savings that had been providing her a return of $1,000 per year. Over her first year in business, Corinne collects total revenue of $180,000 and must cover explicit costs of $105,000. During her first year in business, Corinne's accounting profit is _____, and her economic profit is _____.

A)$110,000; $4,000
B)$75,000; $4,000
C)$75,000; -$16,000
D)$110,000; -$16,000

Question 10

How do a company's accounting profit and economic profit compare in size?

A)Accounting profit is larger than economic profit, if there are implicit costs.
B)Economic profit is larger than accounting profit, if there are implicit costs.
C)They are equal in size, regardless of whether there are implicit costs.
D)Economic profit is larger when the firm has losses, and accounting is larger when there are profits.

Question 11

Which of the following statements is true?

A)A firm with accounting profits will also have economic profits.
B)A firm with economic losses will also have accounting losses.
C)A firm with economic profits will also have accounting profits.
D)A firm with accounting losses can also have economic profits.

Question 12

Amal gives up a salary of $80,000 per year to start his company. He invests $50,000 of his savings in his company, savings that had been earning him $4,000 per year in interest. During Amal's first year in business, total revenue is $300,000, and his explicit financial costs are $225,000. What is Amal's economic profit from his first year in business?

A)-$59.000
B)-$9,000
C)$71,000
D)$75,000

Question 13

Luana gives up a salary of $80,000 per year to start her company. She invests $50,000 of her savings in her company, savings that had been earning her $4,000 per year in interest. During Luana's first year in business, total revenue is $300,000, and her explicit financial costs are $225,000. What is Luana's accounting profit from her first year in business?

A)-$59.000
B)-$9,000
C)$71,000
D)$75,000

Question 14

If a business owner is maximizing their economic profit, the owner:

A)might be suffering accounting losses.
B)cannot have any implicit opportunity costs.
C)is better off financially than with any other use of the resources used in the business.
D)has implicit opportunity costs that are larger than the direct financial costs.

Question 15

Because _____ profit is calculated based on _____ costs, it allows firm owners to make better decisions about _____.

A)economic; total; entering and exiting a market
B)accounting; total; increasing or decreasing output
C)economic; implicit opportunity; increasing or decreasing output
D)accounting; implicit opportunity; entering and exiting a market

Question 16

John is thinking of opening a florist shop. He forecasts revenues of $200,000 per year and explicit financial costs of $140,000 per year. He can pursue this opportunity only if he quits his current job as a driver, where he earns $45,000 per year. He would also need to invest $110,000 of his savings to set up the shop-funds on which he would otherwise be earning a 6% return. Based on this information, how much economic profit or loss would John earn in his first year in business?

A)a loss of $50,000
B)a loss of $5,400
C)a profit of $8,400
D)a profit of $60,000

Question 17

Maia is thinking of opening a restaurant. She forecasts revenues of $200,000 per year and explicit financial costs of $140,000 per year. She can pursue this opportunity only if she quits her current job as a hair stylist, where she earns $45,000 per year. She would also need to invest $110,000 of her savings to set up the restaurant-funds on which she would otherwise be earning a 6% return. Based on this information, what are Maia's implicit opportunity costs?

A)$6,600
B)$51,600
C)$155,000
D)$161,600

Question 18

Neville is a lawyer at a large law firm where he earns a salary of $170,000 per year. He is thinking of leaving the firm to set up his own law office. To do this, he would need to invest $140,000 of his savings, which currently earns 5% in interest each year. He estimates that if he starts a law office, his annual revenue will be $510,000, and his explicit financial costs will be $300,000. How much would Neville earn in economic profits or losses if he starts his own law office?

A)-$100,000
B)$33,000
C)$203,000
D)$210,000

Question 19

Portia is graduating from dental school and has a job offer with a salary of $140,000 from a chain of dental clinics. However, she wants to set up her own dental practice instead. To do this, she would need to invest her own funds in new equipment that would cost $80,000-funds that have been earning her a return of 10% per year. Portia estimates that her practice would have revenue of $470,000 per year and annual explicit financial costs of $330,000. What would Portia's economic profit or loss be if she sets up her own practice?

A)a loss of $80,000
B)a loss of $8,000
C)a profit of $132,000
D)a profit of $322,000

Question 20

How does a business owner know if it is financially worthwhile to open a business?

A)The implicit opportunity costs are less than revenue.
B)There are no implicit opportunity costs.
C)The business earns accounting profits.
D)The business earns economic profits.

Question 21

Mario's company definitely has economic losses in which of the following situations?

A)Total costs exceed total revenue.
B)Implicit opportunity costs exceed direct financial costs.
C)Total revenue exceeds direct financial costs.
D)Total revenue exceeds implicit opportunity costs.

Question 22

Marta's company definitely has economic profits in which of the following situations?

A)Implicit opportunity costs are less than direct financial costs.
B)Total revenue is less than direct financial costs.
C)Total costs are less than total revenue.
D)Total revenue exceeds implicit opportunity costs.

Question 23

Total revenue divided by the quantity sold equals:

A)marginal revenue.
B)price.
C)medium revenue.
D)profit.

Question 24

Price is equal to:

A)marginal revenue divided by the quantity sold.
B)total revenue divided by average revenue.
C)total revenue divided by the quantity sold.
D)the quantity sold divided by total revenue.

Question 25

Total revenue divided by quantity is called _____ or _____.

A)average revenue; profit
B)price; marginal revenue
C)price; profit
D)average revenue; price

Question 26

A firm's average revenue curve is:

A)horizontal.
B)above the firm's demand curve.
C)below the firm's demand curve.
D)the same as the firm's demand curve.

Question 27

Average cost equals:

A)price.
B)the cost of producing one additional unit.
C)total cost divided by output.
D)total revenue divided by quantity.

Question 28

Samuel's company is in the following situation:
What is the price at Samuel's company?
$$\begin{array} { | l | l | l | l | l | } \hline \text { Total cost } & \begin{array} { l } \text { Total } \\\text { revenue }\end{array} & \begin{array} { l } \text { Direct } \\\text { financial cost }\end{array} & \begin{array} { l } \text { Implicit } \\\text { opportunity } \\\text { cost }\end{array} & \text { Quantity } \\\hline \$ 102,000 & \$ 142,000 & \$ 40,000 & \$ 62,000 & 7,100 \\\hline\end{array}$$

A)$14.37
B)$5.63
C)$34.37
D)$20.00

Question 29

Samuel's company is in the following situation:
What is the average cost at Samuel's company?
$$\begin{array} { | l | l | l | l | l | } \hline \text { Total cost } & \begin{array} { l } \text { Total } \\\text { revenue }\end{array} & \begin{array} { l } \text { Direct } \\\text { financial cost }\end{array} & \begin{array} { l } \text { Implicit } \\\text { opportunity } \\\text { cost }\end{array} & \text { Quantity } \\\hline \$ 102,000 & \$ 142,000 & \$ 40,000 & \$ 62,000 & 7,100 \\\hline\end{array}$$

A)$14.37
B)$5.63
C)$34.37
D)$20.00

Question 30

Which of the following statements is FALSE regarding total costs?

A)Total costs are equal to fixed costs plus variable costs.
B)Total costs are equal to direct financial costs plus implicit opportunity costs.
C)Total costs minus fixed costs equals average cost.
D)Total costs divided by output equals average cost.

Question 31

(Figure: Average Cost Curve) Which curve below has the most common shape of an average cost curve?

A)Curve A
B)Curve B
C)Curve C
D)Curve D

Question 32

What happens to average fixed costs as output rises?

A)They follow an unpredictable pattern.
B)They hold steady.
C)They rise.
D)They diminish.

Question 33

As output increases, fixed costs:

A)rise.
B)fall.
C)remain constant.
D)fall and then rise.

Question 34

As output rises, average fixed costs:

A)rise.
B)fall.
C)remain constant.
D)fall and then rise.

Question 35

Beginning at an output of one, as output increases, average variable costs:

A)rise.
B)fall.
C)remain constant.
D)fall and then rise.

Question 36

Why do average variable costs eventually rise if a company's output increases enough?

A)The diminishing marginal revenue triggers increased use of resources.
B)The reduction in average fixed costs must be offset by increasing variable costs.
C)Diminishing marginal product occurs, causing average variable costs to rise.
D)The price paid for each unit of input keeps rising.

Question 37

A company's profit margin per unit sold equals:

A)total cost minus total revenue.
B)total revenue minus total cost.
C)average cost minus price.
D)price minus average cost.

Question 38

A company's profit margin is calculated as:

A)price minus total cost.
B)average revenue minus average cost.
C)price minus average direct financial costs.
D)average revenue minus total cost.

Question 39

The table provides daily data on Marla's Smoothie Shop. Use these data to answer the question.
What is Marla's profit margin?
$$\begin{array}{l}\text { Table: Marla's Smoothie Shop }\\\begin{array} { | c | c | c | c | c | c | } \hline \begin{array} { c } \text { Total } \\\text { revenue }\end{array} & \text { Total cost } & \begin{array} { c } \text { Average } \\\text { revenue }\end{array} & \begin{array} { c } \text { Fixed } \\\text { costs }\end{array} & \begin{array} { c } \text { Variable } \\\text { costs }\end{array} & \text { Quantity } \\\hline \$ 1,400 & \$ 900 & \$ 7 & \$ 200 & \$ 700 & 200 \\\hline\end{array}\end{array}$$

A)$5.00
B)$4.50
C)$3.50
D)$2.50

Question 40

The table provides daily data on Artem's Sandwich Shop. Use these data to answer the question.
What is Artem's profit margin?
$$\begin{array}{l}\text { Table: Artem's Sandwich Shop }\\\begin{array} { | c | c | c | c | c | c | } \hline \begin{array} { c } \text { Total } \\\text { revenue }\end{array} & \text { Total cost } & \begin{array} { c } \text { Average } \\\text { revenue }\end{array} & \begin{array} { c } \text { Fixed } \\\text { costs }\end{array} & \begin{array} { c } \text { Variable } \\\text { costs }\end{array} & \text { Quantity } \\\hline \$ 1,600 & \$ 1,400 & \$ 8 & \$ 400 & \$ 1,000 & 200 \\\hline\end{array}\end{array}$$

A)$1
B)$2
C)$7
D)$8

Question 41

If your company has losses, then its:

A)average revenue exceeds its costs.
B)profit margin is positive.
C)average cost falls short of price.
D)profit margin is negative.

Question 42

On a graph of a company's cost, revenue, and demand curves, the company's profit margin can be identified as the gap between _____ and _____ for a given quantity.

A)price; marginal revenue
B)price; average cost
C)marginal revenue; marginal cost
D)marginal revenue; average cost

Question 43

(Figure: Profit Margin) What is the profit margin for this firm if it produces a quantity of six?

A)$7 - $4 = $3
B)$5 - $4 = $1
C)$7 - $2 = $5
D)$5 - $2 = $3

Question 44

(Figure: Profit Margin 2) What is the profit margin for this firm at a quantity of eight?

A)$6.00 - $3.00 = $3.00
B)$6.00 - $3.50 = $2.50
C)$3.50 - $3.00 = $.50
D)$3.50 - $6.00 = $2.50

Question 45

(Figure: Profit Margin 3) JoJo's company data is in the graph below. JoJo would earn a profit:

A)only at an output of nine.
B)at all output levels.
C)at any output between eight and 18.
D)at any output between three and 14.

Question 46

Candice's stand-up paddleboard company will earn profits producing and selling at any output level where the company's:

A)marginal cost curve is above its demand curve.
B)average cost curve is above its marginal revenue curve.
C)demand curve is above its average cost curve.
D)marginal revenue curve is below its average cost curve.

Question 47

In the short run, companies face _____, and in the long run, _____.

A)a changing number of competitors; the number of competitors is fixed
B)a fixed set of competitors; the number of competitors can change
C)variation in all costs; all costs are fixed
D)only fixed costs; all costs vary

Question 48

How long does it take for a company to be in the long run?

A)It takes as long as is needed for the number of sellers in the company's market to increase or decrease.
B)It is any time period longer than one year.
C)It takes as long as is needed for the prices of inputs to vary.
D)It is any time period longer than two years.

Question 49

What attracts new sellers into a market?

A)A large number of sellers already in the market.
B)A market that has not changed in several years.
C)Fewer sellers in the market than a year previously.
D)Existing sellers in the market earning economic profits.

Question 50

When sellers in a market earn economic profits:

A)average costs must be falling.
B)marginal revenue is above price.
C)new sellers will be attracted into the market.
D)marginal cost is above average revenue.

Question 51

The Rational Rule for Entry says that a seller should enter a market when:

A)price exceeds average cost.
B)the number of sellers in the market is falling.
C)marginal revenue is below average cost.
D)average cost exceeds average revenue.

Question 52

Marcella is deciding whether to start a bakery in her hometown. She should start it if she expects that:

A)her marginal revenue will be below her marginal cost.
B)her average revenue will exceed her average cost.
C)the average cost curve will shift downward.
D)the number of bakeries will soon decrease.

Question 53

Adhika is deciding whether to open a company to produce step stools. He should start the company if he expects that:

A)the number of step stool manufacturers will soon decrease.
B)the average cost curve will shift downward.
C)his price will exceed his average cost.
D)his marginal revenue will be below his average cost.

Question 54

Almira is a chocolatier with a small chocolate shop. There are three other chocolatiers in her city. Almira should be concerned that new companies will enter her city's chocolate market and take away some of her customers if the average chocolatier in her city:

A)has average revenue that is below average cost.
B)has marginal revenue that is below price.
C)is facing rising costs.
D)is earning economic profits.

Question 55

Carlos owns one of the 30 lawn mowing businesses in his city. What will happen to his business if there are new entrants into his city's lawn mowing market?

A)Carlos's marginal cost will fall.
B)Carlos's marginal cost will rise.
C)The demand for Carlos's services will rise.
D)The demand for Carlos's services will fall.

Question 56

If a new company enters a product market, what will happen to the existing companies in the market?

A)Their average cost curves will shift up.
B)Their marginal revenue curves will shift to the right.
C)Their demand curves will shift to the left.
D)Their demand curves will shift to the right.

Question 57

Sellers in a market will become less profitable when:

A)new sellers enter the market.
B)marginal cost falls.
C)average revenue rises.
D)market demand rises.

Question 58

When there are new entrants into a market, an existing seller will NOT face:

A)decreased demand.
B)lower profits.
C)upwardly shifting cost curves.
D)customers with more choices.

Question 59

When new sellers enter a market, existing sellers will:

A)have less market power.
B)face reductions in average cost.
C)see average revenue rise.
D)face upward shifts in their average cost curves.

Question 60

Ari owns a hair salon in a small city. Which of the following is NOT an effect that the opening of new hair salons in her city will have on her salon?

A)Its profit will decrease.
B)It will have less market power.
C)The quantity it sells will decrease.
D)Its cost curves will shift upward.

Question 61

When sellers exit a market in which the average seller has losses, what results?

A)The sellers that exit avoid the losses that the remaining market sellers continue to suffer.
B)The losses shrink or disappear as the market demand is spread over a smaller number of sellers.
C)The market demand shrinks as consumers avoid struggling sellers.
D)The remaining sellers have higher demand but also face cost curves that shift upward.

Question 62

Victor owns a shoe store that is losing money, and several other shoe stores in his market are also losing money. Which of the following guidelines will help him decide whether to remain in business or exit the market?

A)Remain in the market only if average costs are greater than average revenue.
B)Remain in the market only if average costs exceed marginal revenue.
C)Exit the market if price is expected to be less than average costs.
D)Exit the market if price is less than average revenue.

Question 63

Which of the following does NOT occur in a market when one or more sellers exits the market?

A)The remaining sellers' demand curves shift to the right.
B)The remaining sellers have more market power.
C)The market demand rises.
D)The market price rises.

Question 64

Jane is one of 10 chiropractors in her city. Demand for chiropractic services is low enough that all chiropractors in the city are suffering losses. After three chiropractors close their practices, which of the following changes does Jane's practice NOT experience?

A)Its price falls.
B)It loses market power.
C)Its demand curve shifts to the right.
D)It sells more chiropractic services.

Question 65

When sellers exit a market due to losses, the:

A)remaining sellers face reduced demand.
B)amount of market power in the market rises.
C)market demand holds steady.
D)market price falls.

Question 66

When sellers exit a market in which the average seller has losses, the remaining sellers will each experience:

A)a rising price, higher sales, and increased market power.
B)a rising price, lower sales, and increased market power.
C)a steady price, higher sales, and decreased market power.
D)a steady price, lower sales, and decreased market power.

Question 67

Which of the following is FALSE?

A)If an industry is profitable, new entrants will be attracted to it.
B)If an industry has losses, competition will decline as sellers exit.
C)When sellers exit an industry, market power will fall for the remaining sellers.
D)When sellers enter an industry, market price will fall.

Question 68

When a market has free entry and exit, in the long run, sellers:

A)tend to leave the market.
B)suffer economic losses.
C)have positive profits.
D)have zero economic profits.

Question 69

When firms in a market with free entry and exit have economic profits, then:

A)some companies will exit the market, reducing average company profits.
B)new companies will enter the market, reducing average company profits.
C)some companies will exit the market, raising average company profits.
D)new companies will enter the market, raising average company profits.

Question 70

When firms in a market with free entry and exit experience economic losses, then:

A)some sellers will exit the market, reducing average seller losses.
B)new sellers will enter the market, reducing average seller losses.
C)some sellers will exit the market, raising average seller losses.
D)new sellers will enter the market, raising average seller losses.

Question 71

When there is free entry and exit of sellers in an industry, in the long run, sellers will have:

A)positive economic profits.
B)economic losses.
C)zero economic profits.
D)enhanced market power.

Question 72

Free entry into a market tends to cause _____ to disappear.

A)desirable opportunities
B)low prices
C)product quality
D)freedom

Question 73

Free entry and exit means that in the long run, price will:

A)trend upward.
B)trend downward.
C)equal average cost.
D)allow all firms to earn economic profit.

Question 74

Assume that there is free entry and exit in the management consulting market. How profitable can Mario expect his new consulting business to be in the long run?

A)It will experience continually rising economic profits.
B)It will suffer economic losses.
C)It will earn positive economic profits.
D)It will experience zero economic profits.

Question 75

When there is free entry and exit in a market, in the long run, price will:

A)keep rising.
B)keep falling.
C)never change.
D)equal average cost.

Question 76

When the typical seller in a market suffers economic losses, then:

A)new sellers will enter the market.
B)some sellers will exit the market.
C)the number of sellers will remain steady.
D)the market will disappear.

Question 77

When the typical seller in a market has economic profits, then:

A)new sellers will enter the market.
B)some sellers will exit the market.
C)the number of sellers will remain steady.
D)the market will disappear.

Question 78

What is the dominant factor determining market price in the long run?

A)average costs
B)the profit level
C)the prices of inputs
D)the number of sellers in the market

Question 79

When free entry and free exit exist in a market, then in the long run, a seller's demand curve will:

A)barely touch its average cost curve.
B)be below its average cost curve.
C)be above its average cost curve.
D)cross its average cost curve.

Question 80

(Figure: Demand and Average Cost Curves) Which of the following diagrams represents the demand and average cost curves of a firm in the long run, given free entry and exit?

A)Firm A
B)Firm B
C)Firm C
D)Firm D