Deck 6: Sellers and Incentives

Question 1

A firm is said to be a price taker if it ________.

A) can affect the market price of a good by changing its supply
B) sells as much of any good as it wants at the prevailing market price
C) consults the government before fixing the prices of its goods and services
D) is not free to enter a new market or exit from a market

Answer 1

sells as much of any good as it wants at the prevailing market price

Question 2

Scenario: Kellog's makes Raisin Bran, Granola Raisin & Honey Frosted Flakes cereal, Apple Jacks cereal, and Smorz cereal, among others-in all more than forty varieties of breakfast cereal. General Mills, one of Kellog's many competitors, make Cheerios, Chex, Trix, and so on.
Refer to the scenario above.Which condition of a perfectly competitive market could most directly be violated in the market for breakfast cereal?

A) Each seller produces a negligible fraction of the total market supply.
B) Each seller produces an identical good or service.
C) Free entry to and exit from the market.
D) None. The market for cereals satisfies all the condition for perfect competition.

Answer 2

Each seller produces an identical good or service.

Question 3

In a perfectly competitive market,________.

A) sellers produce identical goods
B) there are restrictions on the entry of new firms
C) each seller charges a different price for its product
D) bargaining over prices is a common phenomenon

Answer 3

sellers produce identical goods

Question 4

Which of the following statements is true of a perfectly competitive market?

A) Sellers in the market produce differentiated goods.
B) There is free entry and exit in the market.
C) There are only a few buyers and sellers in the market.
D) Sellers and buyers both set prices to compete in the market.

Question 5

Scenario: In October 2005, the Korean company Samsung pleaded guilty to conspiring with other companies, including Infineon and Hynix Semiconductor, to fix the price of dynamic random access memory (DRAM) chips. Samsung was the third company to be charged in connection with the international cartel and was fined $300 million, the second largest antitrust penalty in U.S. history. In October 2004, four executives from Infineon, a German chip maker, received reduced sentences of 4 to 6 months in federal prison and $250,000 in fines after agreeing to aid the U.S. Department of Justice with their ongoing investigation of the conspiracy. (Source: "Price Fixing," Wikipedia.)
Refer to the scenario above.Which condition of a perfectly competitive market could most directly be hampered in the market for DRAMs?

A) Each seller produces a negligible fraction of the total market supply.
B) Each seller produces an identical good or service.
C) There is free entry to and exit from the market.
D) None. The market for the chips satisfies all the condition for perfect competition.

Question 6

What conditions characterize the sellers' side in a perfectly competitive market?

Question 7

In a competitive market,there are a ________ number of buyers and a ________ number of sellers.

A) large; small
B) small; large
C) small; small
D) large; large

Question 8

Price in a perfectly competitive market will change if ________.

A) a firm decides to reduce its quantity supplied
B) a few firms decide to collude and reduce their quantity supplied at the same time
C) a major power outage forces all firms to reduce their quantity supplied
D) a dominant firm decides to reduce its price

Question 9

In a perfectly competitive market,an individual seller cannot change the price of his product.This is because ________.

A) she sells only a small fraction of the total amount of this product in the market
B) changing the price in this type of market is against the law
C) the price is already the optimal choice for her
D) she always earns positive profits

Question 10

John is a tomato farmer and sells his crops in a perfectly competitive market at the price of $1 per pound.John wants to increase his farm revenue,________.

A) so he would need to charge a higher price for his tomatoes to do so
B) so he would need to produce more tomatoes to do so
C) so he would need to produce fewer tomatoes to do so
D) but there is no way he can do so.

Question 11

Sellers in a perfectly competitive market ________.

A) are price takers
B) sell differentiated goods and services
C) are not allowed to exit the market
D) are few in number

Question 12

In a perfectly competitive market,sellers ________.

A) coordinate to set the market price
B) are told the price to charge by the government
C) each have the power to set the price
D) are price takers

Question 13

The assumption that each firm in a perfectly competitive market is a price taker basically means that ________.

A) market price is independent of the level of industry output
B) each firm's supply curve is perfectly elastic
C) the firm can take any price it wants to choose and still sell all its output
D) changes in the output of an individual firm do not affect the market price

Question 14

Which of the following examples best describes the concept of free entry?

A) Jack opening an account on eBay to sell his old cell phone
B) Purecircuit Corp. wanting to expand its production and therefore doubling its annual recruitment
C) System Corp. deciding to charge a price lower than the market price to increase its market share
D) The government entering the market for gasoline to correct any shortage or surplus in the market

Question 15

In a perfectly competitive market,an individual seller sells only a negligible fraction of the total amount of the good produced.This is why ________.

A) he can independently determine the market price
B) he can charge prices above the equilibrium price
C) his individual choices do not affect market price
D) he always earns positive profits

Question 16

Scenario: For the better part of a decade, Della Tarpinian has been locked in a Kafkaesque battle with a trade association she doesn't belong to, the Kentucky Bar Association. She's been fined $5,000 and ordered to pay the costs of her investigation, for violating rules that the average non-lawyer might find maddeningly vague and hard to understand, such as: "A person is guilty of unlawful practice of law when, without a license issued by the Supreme Court, he engages in the practice of law." That one tripped up Tarpinian, 53, who runs a small document-preparation firm in Owensboro, Kentucky, specializing in uncontested divorces, wills, and other simple legal matters. After a lengthy investigation, the Kentucky Bar determined that Tarpinian's clients couldn't possibly have figured out how to fill out the paperwork they filed in court without her coaching them behind the scenes. What surprised Tarpinian-and many other document preparers around the country-is that the Bar could drag her before the state Supreme Court and have her fined for, as she sees it, competing against its members. Especially since a jury acquitted Tarpinian of similar charges in a 2004 criminal trial, after less than half an hour of deliberations. (Source: "Non-Lawyers Find It Hard Avoid Breaking Bar's Vague Rules," Forbes, July 25, 2011.)
Refer to the scenario above.Which condition of a perfectly competitive market could most directly be hampered in the market for legal advice?

A) Each seller produces a negligible fraction of the total market supply.
B) Each seller produces an identical good or service.
C) Free entry to and exit from the market.
D) Preparation services satisfies all the condition for perfect competition.

Question 17

Scenario: According to New York Department of State, Division of Licensing Services, "The practice of 'cosmetology' means providing service to the hair, head, face, neck, or scalp of a human being, including but not limited to shaving, trimming, and cutting the hair or beard either by hand or mechanical appliances and the application of antiseptics, powders, oils, clays, lotions or applying tonics to the hair, head, or scalp, and in addition includes providing, for a fee or any consideration or exchange, whether direct or indirect, services for the application of dyes, reactive chemicals, or other preparations to alter the color or to straighten, curl, or alter the structure of the hair of a human being." You must acquire a license to be a beautician to offer any of the services described above in New York State, as in many other states. Many aspiring beauticians enroll in accredited cosmetology schools to complete a 1,000-hour approved course of study and to pass both the New York State written and practical examinations to get a license to operate.
Refer to the scenario above.Which condition of a perfectly competitive market could most directly be hampered by the licensing requirement?

A) Each seller produces a negligible fraction of the total market supply.
B) Each seller produces an identical good or service.
C) Free entry to and exit from the market.
D) None. The market for beauticians' services satisfy all the condition for perfect competition.

Question 18

Scenario: In 2012, the company behind the EpiPen settled a lawsuit by agreeing to allow a generic competitor into the market in 2015, potentially cutting into a big part of its business. The company, Mylan, had already been steadily increasing the price of EpiPen, an injector containing a drug that can save people from life-threatening allergy attacks. After the settlement, it started to raise the price even faster. Now, as Mylan faces growing public furor over its pricing of EpiPen, the company's history of pricing the product highlights a common tactic in the drug industry: sharply raising prices in the years just before a generic competitor reaches the market, as a sort of final attempt to milk big profits from the brand-name drug. Whether the looming generic competition was a motive for the price increases is not entirely clear, because Mylan has declined to answer questions about its thinking. But while the company was once taking two 10 percent price increases a year, it has made two 15 percent increases annually starting in 2014, when the generic competition seemed imminent. Over all, the list price for a pack of two EpiPens is now over $600, up from a little more than $100 in 2007, the year Mylan acquired the product. Most of that increase-a rise to $609 from $265-has come in the last three years. (Source: "Mylan Raised EpiPen's Price Before the Expected Arrival of a Generic," New York Times, August 24, 2016.)
Refer to the scenario above.Which condition of a perfectly competitive market could most directly be hampered in the market for epinephrine autoinjectors?

A) Each seller produces a negligible fraction of the total market supply.
B) Each seller produces an identical good or service.
C) There is free entry to and exit from the market.
D) None. The market for the product satisfies all the condition for perfect competition.

Question 19

Which of the following markets is NOT characterized by free entry and exit?

A) Car manufacturing
B) Agriculture
C) Convenience stores
D) Landscaping services

Question 20

Price in a perfectly competitive market is ________.

A) affected by government policies
B) determined by the dominant seller
C) affected by the combined decision of all buyers and sellers
D) determined by buyers alone

Question 21

The following table shows the total output produced by different numbers of workers in a shoe factory.

Refer to the table above.What is the marginal product of the third worker?

A) 60 pairs of shoes
B) 68 pairs of shoes
C) 112 pairs of shoes
D) 180 pairs of shoes

Question 22

The process by which inputs are transformed to outputs is referred to as ________.

A) production
B) distribution
C) depreciation
D) accumulation

Question 23

A firm produced 376 units with ten workers.When an eleventh worker was hired,the output increased to 398 units.The marginal product of the eleventh worker is ________.

A) 22 units
B) 37.6 units
C) 36.18 units
D) 398 units

Question 24

The primary goal of a seller is to ________.

A) minimize deadweight loss
B) maximize profits
C) maximize opportunity cost
D) minimize consumer surplus

Question 25

Which of the following is NOT an element of a seller's decision-making process in a perfectly competitive market?

A) The relationship between inputs and output
B) The cost of inputs
C) The price of output
D) The number of buyers in the market

Question 26

The profits of sellers represent their ________.

A) revenue
B) net benefits
C) sales
D) inventory

Question 27

Which of the following statements is true in the short run?

A) Only some of a firm's input can be varied.
B) All firms earn zero economic profits.
C) All factors of production can be changed.
D) All factors of production are fixed.

Question 28

A firm uses workers,land,and machinery in its production process.Which of the following statements is true in the long run?

A) The only way the firm can change its output level is by changing the number of workers.
B) The only way the firm can change its output level is by changing the amount of land it owns.
C) The only way the firm can change its output level is by changing the amount of machinery it owns.
D) The firm can change its output level by changing any or all of its three inputs.

Question 29

Which market is more likely to be perfectly competitive?

A) Electric cars in the United States
B) Bowls of white rice in Chinatown, New York City
C) Vodka in Russia during the Soviet union era
D) Luxury watches in Switzerland

Question 30

A firm produces 200 units of a good when it employs seven workers.The marginal product of an eighth worker is 46 units.If the eighth worker is hired,the firm's total product will increase to ________.

A) 208 units
B) 228 units
C) 246 units
D) 322 units

Question 31

A production function establishes the relationship between ________.

A) the market price of a good and the sales revenue generated
B) the quantity of output produced and a firm's profit
C) the quantity of inputs used and the quantity of output produced
D) the market price of a good and the quantity of output supplied

Question 32

According to the U.S. Internal Revenue Service, "A section 501(c)(3) [a.k.a. non-profit] organization must not be organized or operated for the benefit of private interests, such as the creator or the creator's family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization."
Refer to the scenario above.The IRS rule implies that ________.

A) it is illegal for a nonprofit organization to make a profit
B) a nonprofit organization must make zero profit (break even)
C) it is illegal for a nonprofit organization to maximize the profit
D) a nonprofit organization can use its profit only to further its mission

Question 33

Consider a textile factory operating in the short run.Classify the following costs that the firm incurs as variable costs,sunk costs,or fixed costs.
a)The cost of issuing identity cards to all workers
b)The wages paid to the workers of the factory
c)The yearly rent paid for production space
d)The tax paid on the sale of its products

Question 34

A firm ________.

A) includes many people and cannot consist of only one person.
B) is a business entity that produces goods or services
C) is a business entity that is owned by the government
D) is always a price taker

Question 35

Scenario: David runs a janitorial service company. The following table shows the total number of rooms that can be cleaned by the specified number of workers and industrial vacuum cleaners.

Refer to the scenario above.The variable input in this janitorial service is ________,and the fixed input is ________.

A) vacuum cleaners; workers
B) vacuum cleaners; clean rooms
C) clean rooms; vacuum cleaners
D) workers; vacuum cleaners

Question 36

The change in the total output of a firm associated with using one more unit of an input is referred to as the ________.

A) marginal product of the input
B) total product
C) average product of the input
D) variable product of the input

Question 37

Which one of the following characteristics of a market would you expect to be inconsistent with price-taking behavior?

A) There are a large number of firms in the industry.
B) Each firm's product is distinguishable from that of its competitors.
C) Each firm's share of total industry output is insignificant.
D) Each firm behaves as if it faces a perfectly elastic demand curve.

Question 38

Scenario: David runs a janitorial service company. The following table shows the total number of rooms that can be cleaned by the specified number of workers and industrial vacuum cleaners.

Refer to the scenario above.There is a(n)________ relationship between the variable input and the output in this production process.

A) increasing
B) decreasing
C) increasing at first, and then decreasing
D) decreasing at first, and then increasing

Question 39

In the long run,________.

A) all factors of production are fixed
B) only some inputs of a firm can be changed
C) all firms earn positive economic profits
D) all factors of production can be changed

Question 40

Which of the following statements is true in the long run?

A) There are no fixed inputs.
B) Capital cannot be changed.
C) Labor cannot be changed.
D) A firm cannot alter its level of output.

Question 41

The following table shows the total output produced by different numbers of workers in a shoe factory.

Refer to the table above.What is the marginal product of the sixth worker?

A) 20 pairs of shoes
B) 46.7 pairs of shoes
C) 60 pairs of shoes
D) 280 pairs of shoes

Question 42

Scenario: Selma runs a pastry shop. The following table shows the total number of cupcakes produced as a function of the number of hours of labor put into making them.

Refer to the scenario above.The "diminishing marginal returns" in this production process is observed when the ________ hour of labor is employed.

A) second
B) third
C) fourth
D) fifth

Question 43

Which of the following is an example of diminishing marginal returns?

A) The revenue of a cell phone manufacturer decreasing when it increases its product price
B) The additional output produced by a firm decreasing as more workers are hired
C) The profits of an entrepreneur increasing substantially after she fires a few of her employees
D) The total output of a firm decreasing as more workers are hired

Question 44

The following table shows the total output of bread produced by different numbers of workers in a bakery.

Refer to the table above.Diminishing marginal returns begin to occur when ________.

A) the second worker is hired
B) the fourth worker is hired
C) the fifth worker is hired
D) the seventh worker is hired

Question 45

Which of the following is an example of specialization?

A) The output of workers in a chocolate factory doubling when a new manager was appointed
B) The cost of production of a light bulb making factory decreasing as its capacity increased
C) Different workers in a shoe factory being allotted different parts of shoe making instead of a worker making an entire shoe
D) The import of better technology and machinery from developed countries greatly increasing the number of laser printers manufactured by a company

Question 46

Specialization is the result of ________.

A) hiring experienced workers
B) paying higher wages to experienced workers
C) workers developing a certain skill set
D) increased demand for a firm's commodity

Question 47

The following graph shows the short-run production function of a firm.

Refer to the graph above.When does the "diminishing marginal returns to inputs" begin?

A) When the first unit of input is hired
B) When the second unit of input is hired
C) When the third unit of input is hired
D) When the fourth unit of input is hired

Question 48

Scenario: Selma runs a pastry shop. The following table shows the total number of cupcakes produced as a function of the number of hours of labor put into making them.

Refer to the scenario above.The "specialization" effect in this production process is observed when the ________ hour of labor is employed.

A) second
B) third
C) fourth
D) fifth

Question 49

Increases in the marginal product of labor can be attributed to ________.

A) the specialization of workers
B) the depreciation of capital
C) diminishing returns to workers
D) better use of work space

Question 50

The Law of Diminishing Returns states that ________.

A) successive increases in inputs eventually lead to less additional output when one of the inputs is fixed
B) successive increases in product prices lead to a fall in revenue
C) the demand for a good decreases as the price of the good increases, all other things remaining constant
D) the net benefits of a perfectly competitive firm decrease as more firms enter the market

Question 51

Which of the following statements is true of the marginal product of an input?

A) The marginal product of an input is given by the ratio of the firm's total output to the units of the input used.
B) The marginal product of an input increases as more and more of the input is used.
C) The marginal product of an input can be negative.
D) The marginal product of the first unit of a variable input is zero.

Question 52

The following table shows the total output of bread produced by different numbers of workers in a bakery.

Refer to the table above.The marginal product of workers falls below zero when the ________ worker is hired.

A) first
B) fourth
C) sixth
D) seventh

Question 53

The following graph shows the short-run production function of a firm.

Refer to the graph above.When do we observe a negative return to inputs?

A) When the tenth unit of input is hired
B) When the second unit of input is hired
C) This production process does not exhibit negative returns
D) When the first unit of input is hired

Question 54

The following table shows the total output produced by different numbers of workers in a shoe factory.

Refer to the table above.If the factory plans to hire a seventh worker whose marginal product is 15 pairs,the total output after he is hired will be ________.

A) 15 pairs
B) 105 pairs
C) 280 pairs
D) 295 pairs

Question 55

Billy runs an accounting firm.He has three full-time employees who are paid an annual salary of $135,000 each.For 4 weeks during the tax preparation season,Billy hires additional staff on a temporary basis to meet the surge in demand for his firm's service.Billy must also pay a premium for professional liability insurance for the whole firm every month.For Billy's firm,________.

A) the full-time employees and the liability insurance are fixed inputs
B) all employees, full-time and temporary, are variable inputs
C) the liability insurance is a variable input
D) all inputs are variable

Question 56

Scenario: Selma runs a pastry shop. The following table shows the total number of cupcakes produced as a function of the number of hours of labor put into making them.

Refer to the scenario above.What is the marginal product of the fifth hour of labor?

A) 52 cupcakes
B) 35 cupcakes
C) 10 cupcakes
D) 8 cupcakes

Question 57

Scenario: Selma runs a pastry shop. The following table shows the total number of cupcakes produced as a function of the number of hours of labor put into making them.

Refer to the scenario above.What is the marginal product of the third hour of labor?

A) 25 cupcakes
B) 35 cupcakes
C) 10 cupcakes
D) 8 cupcakes

Question 58

The following table shows the total output produced by different numbers of workers in a shoe factory.

Refer to the table above.Which of the following statements is true about the marginal product of labor?

A) The marginal product of labor initially decreases and then increases.
B) The marginal product of labor initially increases and then decreases.
C) The marginal product of labor is always negative for the first unit of labor.
D) The marginal product of labor remains unchanged as the number of laborers increases.

Question 59

The following graph shows the short-run production function of a firm.

Refer to the graph above.What is the marginal product of the second input?

A) 80 units
B) 40 units
C) 10 units
D) 30 units

Question 60

Which production function in the figure below exhibits diminishing returns with respect to labor input?

A) Production function A
B) Production function B
C) Production function C
D) None of the production functions

Question 61

What a firm must pay for its inputs is referred to as its ________.

A) production value
B) cost of production
C) opportunity cost
D) loss in production

Question 62

Consider the following two scenarios:
i)The marginal product of a worker in a firm is 10 units.When an additional worker is employed,his marginal product is less than 10 units.
ii)The average total cost of a firm producing 10 units of output is $200.When it produces an additional unit,the average total cost increases to $300.
a)What is the difference between these scenarios?
b)What could be the reason behind both phenomena occurring?
c)Does specialization explain either of the two scenarios?

Question 63

The following graph represents the total production of a firm on the y-axis, and the number of employees on the x-axis.

Refer to the figure above.Marginal product of labor falls below zero when ________.

A) the second worker is hired
B) the third worker is hired
C) the fourth worker is hired
D) the fifth worker is hired

Question 64

Which of the following business is most likely to have the largest amount (or value)of fixed input?

A) A lawn-care service
B) An airline company
C) A law firm
D) A barber shop

Question 65

Which of the costs below is an example of a fixed cost in the short run?

A) The cost of paper to a copy shop
B) The wages paid to workers at a landscaping firm
C) Fuel costs to a taxicab service
D) A 3-year lease on retail space at the local mall for a clothing retailer

Question 66

The following figure depicts the marginal cost curve, the average total curve, and the average variable cost curve of a certain firm.

Refer to the figure above.What is the price on the market when the firm makes a profit of -$3,00?

A) $4
B) $5
C) $6
D) $8

Question 67

Which of the following is the difference between variable costs and fixed costs?

A) Variable costs are the costs incurred on variable factors of production, whereas fixed costs are the costs incurred on all factors of production.
B) Variable costs of a firm are zero after a firm shuts down, whereas the firm continues to incur the fixed costs of production in the short run.
C) Variable costs exist even when production is zero, whereas fixed costs exist only when there is some positive level of production.
D) Variable costs are incurred by a firm only in the long run, whereas the firm incurs some fixed costs in both the short run and the long run.

Question 68

The following table shows the total output, variable costs, fixed costs, total costs, average total costs, and marginal costs of a firm, with some cells in the table intentionally left blank.

Refer to the table above.What is the total cost of producing 5 units of output?

A) $100
B) $120
C) $110
D) $30

Question 69

The total cost of production refers to the ________.

A) sum of variable costs and fixed costs
B) product of variable costs and fixed costs
C) difference between variable costs and fixed costs
D) ratio of variable costs to fixed costs

Question 70

The following table shows the total output, variable costs, fixed costs, total costs, average total costs, and marginal costs of a firm, with some cells in the table intentionally left blank.

Refer to the table above.What is the variable cost of producing 17 units of output?

A) $100
B) $8.23
C) $40
D) $50

Question 71

The following table shows the total output, variable costs, fixed costs, total costs, average total costs, and marginal costs of a firm, with some cells in the table intentionally left blank.

Refer to the table above.What is the average total cost of producing 5 units of output?

A) $10
B) $22
C) $11
D) $30

Question 72

The following figure depicts the marginal cost curve, the average total curve, and the average variable cost curve of a certain firm.

Refer to the figure above.What is the price on the market when the firm makes a profit of $4,50?

A) $4
B) $5
C) $6
D) $8

Question 73

The following table shows the total output, variable costs, fixed costs, total costs, average total costs, and marginal costs of a firm, with some cells in the table intentionally left blank.

Refer to the table above.What is the marginal cost when the firm produces 5 units of output?

A) $10
B) $0.50
C) $1
D) $2

Question 74

Marginal cost is the ________.

A) cost(s) a firm must pay even if it produces zero output
B) total cost of producing a given level of output
C) average cost of producing a given level of output
D) change in total cost from producing one more unit of output

Question 75

The following table shows the total output, variable costs, fixed costs, total costs, average total costs, and marginal costs of a firm, with some cells in the table intentionally left blank.

Refer to the table above.What is the fixed cost of this firm when it produces 14 units of output?

A) $100
B) $120
C) $0
D) $15

Question 76

The following graph represents the total production of a firm on the y-axis, and the number of employees on the x-axis.

Refer to the figure above.Diminishing marginal returns begin to occur when ________.

A) the second worker is hired
B) the third worker is hired
C) the fourth worker is hired
D) the fifth worker is hired

Question 77

Define the terms "production" and "production function." Differentiate between the short run and the long run based on the usage of inputs by a firm.

Question 78

The following graph represents the total production of a firm on the y-axis, and the number of employees on the x-axis.

Refer to the figure above.Specialization begins to occur when the ________.

A) the second worker is hired
B) the third worker is hired
C) the fourth worker is hired
D) the fifth worker is hired

Question 79

Is it possible for an input to have a negative marginal product?

Question 80

The following table shows the total output, variable costs, fixed costs, total costs, average total costs, and marginal costs of a firm, with some cells in the table intentionally left blank.

Refer to the table above.What is the total cost of this firm when it doesn't produce any output?

A) $100
B) $120
C) $0
D) $15