Question 1

A perfectly competitive firm, Paula's Pineapple Farm, is incurring a loss. In the short run it should continue to produce if ________, but in the long run, if there is no change in economic conditions, it should exit the industry.

Accepted Answer

A)  price is below minimum AVC 
B)  price is above minimum ATC 
C)  price is above minimum AVC 
D)  price is equal to minimum ATC

Question 2

Refer to Scenario 9.10 below to answer the question(s) that follow.
SCENARIO 9.10: Investors put up $1,040,000 to construct a building and purchase all equipment for a new cafe. The investors expect to earn a minimum return of 10 percent on their investment. The cafe is open 52 weeks per year and serves 900 meals per week. The fixed costs are spread over the 52 weeks (i.e. prorated weekly). Included in the fixed costs is the 10% return to the investors and $2,000 in other fixed costs. Variable costs include $2,000 in weekly wages, and $600 per week in materials, electricity, etc. The cafe charges $6 on average per meal.
-Refer to Scenario 9.10. Weekly total revenue is

Accepted Answer

A)  $1,600. 
B)  $2,000. 
C)  $3,600. 
D)  $5,400.

Question 3

A profit-maximizing strategy becomes a loss minimization strategy when a firm in a perfectly competitive industry is producing where

Accepted Answer

A)  AVC  ATC. 
C)  P = ATC. 
D)  MR = MC < P.

Question 4

An industry is in ________ if firms have no incentive to enter or exit in the ________ run.

Accepted Answer

A)  disequilibrium; short 
B)  disequilibrium; long 
C)  equilibrium; short 
D)  equilibrium; long

Question 5

A delivery company lowers its automobile insurance costs as it increases in size because as the size of the fleet of delivery trucks increases, the premium per driver decreases substantially. This is an example of

Accepted Answer

A)  constant returns to scale. 
B)  diseconomies of scale. 
C)  economies of scale. 
D)  diminishing marginal returns.

Question 6

A firm suffers losses if

Accepted Answer

A)  price exceeds average variable cost but is less than average total cost. 
B)  price exceeds marginal cost. 
C)  total revenue is greater than the total fixed cost of production. 
D)  total revenue is greater than the total variable cost of production but less than total costs.

Question 7

For a perfectly competitive industry, a decline in technology will cause

Accepted Answer

A)  a movement up the short-run industry supply curve. 
B)  a movement down the short-run industry supply curve. 
C)  the industry short-run supply curve to shift to the right. 
D)  the industry short-run supply curve to shift to the left.

Question 8

Refer to the information provided in Figure 9.1 below to answer the question(s) that follow.  Figure 9.1
-Refer to Figure 9.1. This farmer's shutdown point is at a price of

Accepted Answer

A)  $0. 
B)  $4. 
C)  $7. 
D)  $10.

Question 9

The Speedy Typesetting Company, a perfectly competitive firm, is currently producing where P = MC and is earning a normal profit. The firm mainly employs minimum wage workers and the government just increased the minimum wage from $7.25 to $9.55 per hour. In the short run, this firm will most likely

Accepted Answer

A)  reduce the amount of output it produces because its cost curves have shifted up and to the left. 
B)  continue to produce the same amount of output because only its fixed costs have increased. 
C)  produce more units of output to increase revenue to cover the additional fixed costs. 
D)  shut down because it will no longer be earning a normal profit.

Question 10

Information on MC of production is all that is necessary to obtain the long-run industry supply curve, because P = MC is the profit-maximization condition for all firms.

Accepted Answer

A) True 
 B)False

Question 11

A firm will choose to shut down rather than operate as long as

Accepted Answer

A)  price is greater than or equal to AFC. 
B)  AVC is greater than AFC. 
C)  price is less than AVC. 
D)  MC is greater than AVC.

Question 12

Refer to the data provided in Table 9.4 below to answer the question(s) that follow.
Table 9.4
 $$\begin{array} { c c c c c c c } 
\text { q } & \text { TFC } & \text { TVC } & \text { TC } & \text { MC } & \text { AVC } & \text { ATC } \
\hline 0 & \$ 100 & \$ 0 & \$ 100 & - - & - - & - - \
\hline 1 & 100 & 40 & 140 & 40 & 40 & 140 \
\hline 2 & 100 & 60 & 160 & 20 & 30 & 80 \
\hline 3 & 100 & 90 & 190 & 30 & 30 & 63.33 \
\hline 4 & 100 & 124 & 224 & 34 & 31 & 56 \
\hline 5 & 100 & 180 & 280 & 56 & 36 & 56 \
\hline 6 & 100 & 264 & 364 & 84 & 44 & 60.67 \
\hline 7 & 100 & 372 & 472 & 108 & & 67.42 \
\hline
\end{array}$$
-Refer to Table 9.4. If the market price is $34 and the firm produces 4 units of output, then its profit would be

Accepted Answer

A)  -$100. 
B)  -$88. 
C)  $0. 
D)  $36.

Question 13

A firm's long-run average cost curve is increasing as output increases over all levels of output. As a result

Accepted Answer

A)  small firms and large firms will have identical average costs. 
B)  there should be only one firm in the industry. 
C)  small firms would have higher average costs of production than large firms. 
D)  there should be more than one firm in the industry.

Question 14

Refer to Scenario 9.8 below to answer the question(s) that follow.
SCENARIO 9.8: Investors put up $1,040,000 to construct a building and purchase all equipment for a new gourmet cupcake bakery. The investors expect to earn a minimum return of 10 per cent on their investment. The bakery is open 52 weeks per year and sells 900 cupcakes per week. The fixed costs are spread over the 52 weeks (i.e. prorated weekly). Included in the fixed costs is the 10% return to the investors and $2,000 in other fixed costs. Variable costs include $2,000 in weekly wages, and $600 per week in materials, electricity, etc. The bakery charges $8 on average per cupcake.
-Refer to Scenario 9.8. The bakery is making ________ economic profits per week.

Accepted Answer

A)  positive 
B)  zero 
C)  negative 
D)  break-even

Question 15

If the price of an input decreases, each individual firmʹs marginal cost curve shifts ________ and the industry supply curve ________.

Accepted Answer

A)  downward; shifts to the left 
B)  downward; shifts to the right 
C)  up; does not change 
D)  up; shifts to the left

Question 16

A firm is earning an economic profit. In the short run the firm should ________. In the long run the firm should probably ________.

Accepted Answer

A)  shut down; expand 
B)  produce where MC = MR; leave the industry 
C)  produce where MC = MR; expand 
D)  shut down; exit the industry

Question 17

Refer to Scenario 9.5 below to answer the question(s) that follow.
SCENARIO 9.5: Investors put up $520,000 to construct a building and purchase all equipment for a new restaurant. The investors expect to earn a minimum return of 10 percent on their investment. The restaurant is open 52 weeks per year and serves 900 meals per week. The fixed costs are spread over the 52 weeks (i.e. prorated weekly). Included in the fixed costs is the 10% return to the investors and $1,000 per week in other fixed costs. Variable costs include $1,000 in weekly wages and $600 per week for materials, electricity, etc. The restaurant charges $3 on average per meal.
-Refer to Scenario 9.5. The weekly economic profit is

Accepted Answer

A)  $1,000. 
B)  $0. 
C)  -$900. 
D)  -$3,600.

Question 18

A perfectly competitive firm will be operating at its shutdown point if it operates

Accepted Answer

A)  where P = MC. 
B)  at the minimum point on its average variable cost curve. 
C)  at the minimum point on its average total cost curve. 
D)  at the minimum point on its marginal cost curve.

Question 19

A firm is experiencing ________ on the downward-sloping portion of a firm's long run average cost curve.

Accepted Answer

A)  increasing returns to scale 
B)  constant returns to scale 
C)  decreasing returns to scale 
D)  diminishing marginal returns

Question 20

When long-run average costs decrease as a result of industry growth, there are

Accepted Answer

A)  internal economies. 
B)  internal diseconomies. 
C)  external economies. 
D)  external diseconomies.

Exam 9: Long-Run Costs and Output Decisions