Deck 9: Long-Run Costs and Output Decisions

Question 1

Refer to Scenario 9.2 below to answer the question(s) that follow.
SCENARIO 9.2: Tom borrowed $40,000 from his parents to open a donut stand. He agrees to pay his parents a 5% yearly return on the money they lent him. His other yearly fixed costs equal $10,000. His variable costs equal $25,000. He sold 40,000 dozen donuts during the year at a price of $2.00 per dozen.
Refer to Scenario 9.2. Tom's total fixed costs equal

A) $1,000.
B) $10,000.
C) $12,000.
D) $21,000.

Answer 1

$12,000.

Question 2

Assume firms break even in an industry. New firms ________ attracted to the industry and current ones ________ exiting it.

A) are not; are not
B) are not; are
C) are; are not
D) are; are

Answer 2

are not; are not

Question 3

Refer to Scenario 9.3 below to answer the question(s) that follow.
SCENARIO 9.3: 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 per cent 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 $5 on average per meal.
Refer to Scenario 9.3. The restaurant is making ________ economic profits per week.

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

Answer 3

positive

Question 4

Refer to Scenario 9.3 below to answer the question(s) that follow.
SCENARIO 9.3: 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 per cent 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 $5 on average per meal.
Refer to Scenario 9.3. The normal return to the investors on a weekly basis is

A) $600.
B) $1,000.
C) $3,600.
D) $4,500.

Question 5

Refer to Scenario 9.3 below to answer the question(s) that follow.
SCENARIO 9.3: 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 per cent 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 $5 on average per meal.
Refer to Scenario 9.3. Total revenue per week is

A) $3,000.
B) $4,000.
C) $4,500.
D) $8,100.

Question 6

Refer to Scenario 9.3 below to answer the question(s) that follow.
SCENARIO 9.3: 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 per cent 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 $5 on average per meal.
Refer to Scenario 9.3. Total fixed costs per week are

A) $1,000.
B) $2,000.
C) $3,000.
D) $4,500.

Question 7

Refer to Scenario 9.3 below to answer the question(s) that follow.
SCENARIO 9.3: 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 per cent 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 $5 on average per meal.
Refer to Scenario 9.3. Economic profit per week is

A) ‐$400.
B) $0.
C) $600.
D) $900.

Question 8

Firms that are "breaking even" are

A) earning zero economic profits.
B) earning less than a normal rate of return.
C) shutting down in the short run.
D) All of the above are correct.

Question 9

Refer to Scenario 9.3 below to answer the question(s) that follow.
SCENARIO 9.3: 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 per cent 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 $5 on average per meal.
Refer to Scenario 9.3. Total variable costs per week are

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

Question 10

Refer to Scenario 9.2 below to answer the question(s) that follow.
SCENARIO 9.2: Tom borrowed $40,000 from his parents to open a donut stand. He agrees to pay his parents a 5% yearly return on the money they lent him. His other yearly fixed costs equal $10,000. His variable costs equal $25,000. He sold 40,000 dozen donuts during the year at a price of $2.00 per dozen.
Refer to Scenario 9.2. Tom's profit is

A) $0.
B) $26,000.
C) $30,000.
D) $43,000.

Question 11

Refer to Scenario 9.4 below to answer the question(s) that follow.
SCENARIO 9.4: Sponsors invest $100,000 in a new deli on the promise that they will earn a return of 10% per year on their investment. The deli sells 52,000 sandwiches per year. The deli's fixed costs include the return to investors and $42,000 in other fixed costs. Variable costs consist of wages ($1,000 per week) plus materials, electricity, etc. ($2,000 per week). The deli is open 52 weeks per year.
Refer to Scenario 9.4. The annual fixed costs of the deli are

A) $10,000.
B) $42,000.
C) $52,000.
D) $156,000.

Question 12

Refer to Scenario 9.3 below to answer the question(s) that follow.
SCENARIO 9.3: 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 per cent 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 $5 on average per meal.
Refer to Scenario 9.3. Total cost per week is

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

Question 13

Refer to Scenario 9.1 below to answer the question(s) that follow.
SCENARIO 9.1: Amy borrowed $20,000 from her parents to open a bagel shop. She pays her parents a 5% yearly return on the money they lent her. Her other yearly fixed costs equal $9,000. Her variable costs equal $30,000. In her first year, Amy sold 40,000 dozen at a price of $1.50 per dozen.
Refer to Scenario 9.1. Amy's total fixed costs equal

A) $1,000.
B) $9,000.
C) $10,000.
D) $21,000.

Question 14

In the short run, firms earning a profit will want to ________ their profits while firms suffering losses will want to ________ their losses.

A) maximize; maximize
B) maximize; minimize
C) minimize; maximize
D) minimize; minimize

Question 15

Refer to Scenario 9.1 below to answer the question(s) that follow.
SCENARIO 9.1: Amy borrowed $20,000 from her parents to open a bagel shop. She pays her parents a 5% yearly return on the money they lent her. Her other yearly fixed costs equal $9,000. Her variable costs equal $30,000. In her first year, Amy sold 40,000 dozen at a price of $1.50 per dozen.
Refer to Scenario 9.1. Amy's total costs equal

A) $39,000.
B) $40,000.
C) $50,000.
D) $59,000.

Question 16

Refer to Scenario 9.2 below to answer the question(s) that follow.
SCENARIO 9.2: Tom borrowed $40,000 from his parents to open a donut stand. He agrees to pay his parents a 5% yearly return on the money they lent him. His other yearly fixed costs equal $10,000. His variable costs equal $25,000. He sold 40,000 dozen donuts during the year at a price of $2.00 per dozen.
Refer to Scenario 9.2. Tom's total costs equal

A) $37,000.
B) $40,000.
C) $50,000.
D) $59,000.

Question 17

Refer to Scenario 9.1 below to answer the question(s) that follow.
SCENARIO 9.1: Amy borrowed $20,000 from her parents to open a bagel shop. She pays her parents a 5% yearly return on the money they lent her. Her other yearly fixed costs equal $9,000. Her variable costs equal $30,000. In her first year, Amy sold 40,000 dozen at a price of $1.50 per dozen.
Refer to Scenario 9.1. Amy's profit is

A) $0.
B) $20,000.
C) $30,000.
D) $50,000.

Question 18

Refer to Scenario 9.2 below to answer the question(s) that follow.
SCENARIO 9.2: Tom borrowed $40,000 from his parents to open a donut stand. He agrees to pay his parents a 5% yearly return on the money they lent him. His other yearly fixed costs equal $10,000. His variable costs equal $25,000. He sold 40,000 dozen donuts during the year at a price of $2.00 per dozen.
Refer to Scenario 9.2. Tom's total revenue was

A) $30,000.
B) $40,000.
C) $45,000.
D) $80,000.

Question 19

In the short run

A) all firms that earn a loss will shut down.
B) if current firms are earning a profit, new firms will enter the industry.
C) firms act to minimize losses or maximize profits.
D) All of the above are correct.

Question 20

Refer to Scenario 9.3 below to answer the question(s) that follow.
SCENARIO 9.3: 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 per cent 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 $5 on average per meal.
Refer to Scenario 9.3. If the restaurant were to shut down, losses per week would be

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

Question 21

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. If this farmer is maximizing profits, his total revenue will be

A) $90.
B) $135.
C) $180.
D) $240.

Question 22

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. If this farmer maximizes profits, his average fixed costs will be

A) $2.
B) $7.
C) $11.
D) $24.

Question 23

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 would earn a zero economic profit if price was

A) $7.
B) $9.
C) $10.
D) $11.

Question 24

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 would be breaking even if price was

A) $7.
B) $9.
C) $10.
D) $11.

Question 25

Refer to Scenario 9.4 below to answer the question(s) that follow.
SCENARIO 9.4: Sponsors invest $100,000 in a new deli on the promise that they will earn a return of 10% per year on their investment. The deli sells 52,000 sandwiches per year. The deli's fixed costs include the return to investors and $42,000 in other fixed costs. Variable costs consist of wages ($1,000 per week) plus materials, electricity, etc. ($2,000 per week). The deli is open 52 weeks per year.
Refer to Scenario 9.4. Suppose the average price per sandwich is $5.50. What is the annual profit of the deli?

A) -$22,000
B) $78,000
C) $130,000
D) $244,000

Question 26

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. If this farmer maximizes profits, his average total cost will be

A) $7.
B) $9.
C) $11.
D) $15.

Question 27

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 will earn ________ economic profit if the price is $10.

A) -$2.
B) $0.
C) $2.
D) $7.

Question 28

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. If this farmer is maximizing his profits, his TVC is

A) $24.
B) $42.
C) $108.
D) $255.

Question 29

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 fixed costs are

A) $0.
B) $24.
C) $45.
D) indeterminate unless we know the level of output the firm is producing.

Question 30

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. If this farmer is maximizing profits, his total costs will be

A) $11.
B) $66.
C) $90.
D) $132.

Question 31

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. If this farmer maximizes profits, his revenue per bushel will be

A) $7.
B) $9.
C) $11.
D) $15.

Question 32

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. If this farmer maximizes profits, his average variable cost will be

A) $7.
B) $9.
C) $11.
D) $15.

Question 33

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. The profit-maximizing price of wheat is ________ per bushel.

A) $7
B) $9
C) $11
D) $15

Question 34

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

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

Question 35

Refer to Scenario 9.4 below to answer the question(s) that follow.
SCENARIO 9.4: Sponsors invest $100,000 in a new deli on the promise that they will earn a return of 10% per year on their investment. The deli sells 52,000 sandwiches per year. The deli's fixed costs include the return to investors and $42,000 in other fixed costs. Variable costs consist of wages ($1,000 per week) plus materials, electricity, etc. ($2,000 per week). The deli is open 52 weeks per year.
Refer to Scenario 9.4. What must the average price per sandwich be for the deli to earn a normal return?

A) $1
B) $3
C) $4
D) $5.92

Question 36

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. If this farmer is maximizing profits, his profit will be

A) -$24.
B) $45.
C) $48.
D) $72.

Question 37

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. If this farmer maximizes profits, his per-bushel profit will be

A) $2.
B) $4.
C) $9.
D) $15.

Question 38

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 will continue to produce at any price above ________, but will not produce below that price.

A) $15
B) $11
C) $9
D) $7

Question 39

Refer to Scenario 9.4 below to answer the question(s) that follow.
SCENARIO 9.4: Sponsors invest $100,000 in a new deli on the promise that they will earn a return of 10% per year on their investment. The deli sells 52,000 sandwiches per year. The deli's fixed costs include the return to investors and $42,000 in other fixed costs. Variable costs consist of wages ($1,000 per week) plus materials, electricity, etc. ($2,000 per week). The deli is open 52 weeks per year.
Refer to Scenario 9.4. The annual total costs of the deli are

A) $42,000.
B) $52,000.
C) $156,000.
D) $208,000.

Question 40

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. For this farmer to maximize profits he should produce ________ bushels of wheat.

A) 6
B) 9
C) 12
D) 16

Question 41

Refer to the information provided in Figure 9.2 below to answer the question(s) that follow. Figure 9.2
Refer to Figure 9.2. In the $6-$7 price range, the firm will

A) shut down.
B) continue to operate but at a loss.
C) break even.
D) earn a profit.

Question 42

Refer to the information provided in Figure 9.2 below to answer the question(s) that follow. Figure 9.2
Refer to Figure 9.2. Suppose demand for wheat is initially D₂. If the price of rice (a substitute for wheat) falls, then demand for wheat will shift to ________. This will ________ the equilibrium price of wheat, and individual profit-maximizing firms will produce ________ bushels of wheat.

A) D₃; increase; 15
B) D₁; increase; 13
C) D₃; decrease; 10
D) D₁; decrease; 0

Question 43

Refer to the information provided in Figure 9.2 below to answer the question(s) that follow. Figure 9.2
Refer to Figure 9.2. If demand for wheat is D₃, then in the long run

A) the firm will shut down.
B) the firm will exit the industry.
C) new firms will enter the industry, and the current firms will expand production.
D) None of the above is correct.

Question 44

Refer to the information provided in Figure 9.2 below to answer the question(s) that follow. Figure 9.2
Refer to Figure 9.2. If MR = $7, then a profit-maximizing firm will produce ________ units and earn a profit of ________.

A) 13; $0
B) 7; $0
C) 13; $91
D) 15; $30

Question 45

Refer to the information provided in Figure 9.2 below to answer the question(s) that follow. Figure 9.2
Refer to Figure 9.2. Suppose demand for wheat is initially D₂. If consumer incomes increase, then demand for wheat will shift to ________. This will ________ the equilibrium price of wheat, and individual profit-maximizing firms will produce ________ bushels of wheat.

A) D₃; increase; 15
B) D₁; increase; 10
C) D₃; decrease; 7
D) D₁; decrease; 0

Question 46

Profit is

A) TR -TC.
B) TR -TFC.
C) TR -TVC.
D) TVC -TFC.

Question 47

Refer to the information provided in Figure 9.2 below to answer the question(s) that follow. Figure 9.2
Refer to Figure 9.2. If MR = $9, then in the long run

A) the firm will shut down.
B) the firm will exit the industry.
C) new firms will enter the industry and the current firms will expand production.
D) None of the above is correct.

Question 48

Refer to the information provided in Figure 9.2 below to answer the question(s) that follow. Figure 9.2
Refer to Figure 9.2. In which of the following price ranges will the firm continue to operate but at a loss?

A) $5-$6
B) $6-$7
C) $7-$8
D) $8-$9

Question 49

Refer to the information provided in Figure 9.2 below to answer the question(s) that follow. Figure 9.2
Refer to Figure 9.2. The firm's shut down point is at a price of

A) $5.
B) $6.
C) $7.
D) $8.

Question 50

Refer to the information provided in Figure 9.2 below to answer the question(s) that follow. Figure 9.2
Refer to Figure 9.2. Suppose demand for wheat is initially D₂. If the price of rice (a substitute for wheat) rises, then demand for wheat will shift to ________. This will ________ the equilibrium price of wheat and individual profit-maximizing firms will produce ________ bushels of wheat.

A) D₃; increase; 15
B) D₁; increase; 13
C) D₃; decrease; 10
D) D₁; decrease; 0

Question 51

Refer to the information provided in Figure 9.2 below to answer the question(s) that follow. Figure 9.2
Refer to Figure 9.2. If demand for wheat is D₁, then a profit-maximizing firm will produce ________ units and earn ________.

A) 0; negative profits
B) 5; zero profits
C) 10; negative profits
D) 12; positive profits

Question 52

Refer to the information provided in Figure 9.2 below to answer the question(s) that follow. Figure 9.2
Refer to Figure 9.2. If MR = $5, then in the long run

A) the firm will increase its price and output.
B) the firm will exit the industry.
C) new firms will enter the industry and the current firms will expand production.
D) firms will increase their output so that their average fixed cost per unit falls.

Question 53

Refer to the information provided in Figure 9.2 below to answer the question(s) that follow. Figure 9.2
Refer to Figure 9.2. If MR = $9, then a profit-maximizing firm will produce ________ units and earn ________.

A) 15; positive profits
B) 9; positive profits
C) 12; negative profits
D) 13; exactly a normal return

Question 54

Refer to the information provided in Figure 9.2 below to answer the question(s) that follow. Figure 9.2
Refer to Figure 9.2. The firm's ________ point is at a price of $6.

A) profit maximizing
B) break even
C) shut down
D) loss maximizing

Question 55

Refer to the information provided in Figure 9.2 below to answer the question(s) that follow. Figure 9.2
Refer to Figure 9.2. If demand for wheat is D₁, then in the long run

A) the firm will increase its price and output.
B) the firm will exit the industry.
C) new firms will enter the industry, and the current firms will expand production.
D) firms will increase their output so that their average fixed cost per unit falls.

Question 56

Refer to the information provided in Figure 9.2 below to answer the question(s) that follow. Figure 9.2
Refer to Figure 9.2. Suppose demand for wheat is initially D₂. If consumer incomes decrease, then demand for wheat will shift to ________. This will ________ the equilibrium price of wheat and individual profit-maximizing firms will produce ________ bushels of wheat.

A) D₃; increase; 15
B) D₁; increase; 10
C) D₃; decrease; 7
D) D₁; decrease; 0

Question 57

Refer to the information provided in Figure 9.2 below to answer the question(s) that follow. Figure 9.2
Refer to Figure 9.2. If MR = $5, then a profit-maximizing firm will produce ________ units and earn ________.

A) 0; negative profits
B) 5; zero profits
C) 10; negative profits
D) 12; positive profits

Question 58

Economic profit is

A) TR -TC.
B) TR -TFC.
C) TR -TVC.
D) TVC -TFC.

Question 59

Refer to the information provided in Figure 9.2 below to answer the question(s) that follow. Figure 9.2
Refer to Figure 9.2. If demand for wheat is D₂, then a profit-maximizing firm will produce ________ units and earn a profit of ________.

A) 13; $0
B) 7; $0
C) 13; $91
D) 15; $30

Question 60

Refer to the information provided in Figure 9.2 below to answer the question(s) that follow. Figure 9.2
Refer to Figure 9.2. If demand for wheat is D₃, then a profit-maximizing firm will produce ________ units and earn ________.

A) 15; positive profits
B) 9; positive profits
C) 12; negative profits
D) 13; exactly a normal return

Question 61

The Reliable Auto Repair Shop is earning a total revenue of $7,000. Its total fixed costs are $700, and its total variable costs are $2,500. The Reliable Auto Repair Shopʹs profit is

A) -$1,800.
B) $3,800.
C) $4,500.
D) $6,300.

Question 62

As long as price is sufficient to cover ________, the firm is better off by operating rather than by shutting down.

A) marginal cost
B) average fixed cost
C) average variable cost
D) marginal revenue

Question 63

You are hired as an economic consultant to The Pampered Pet Shop. The Pampered Pet Shop operates in a perfectly competitive industry. This firm is currently producing at a point where market price equals its marginal cost. The Shop's total revenue exceeds its total variable cost, but is less than its total cost. You should advise the firm to

A) cease production immediately because it is incurring a loss.
B) lower its price so that it can sell more units of output.
C) produce in the short run to minimize its loss, but exit the industry in the long run.
D) raise its price until it breaks even.

Question 64

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

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

Question 65

If a firm shuts down in the short run, then

A) its economic profits are zero.
B) its losses are equal to its fixed costs.
C) its fixed costs are greater than its variable costs.
D) it must be the case that its revenues from operating were less than its total costs.

Question 66

The Taste Freeze Ice Cream Company is a perfectly competitive firm producing where MR = MC. The current market price of an ice cream sandwich is $5.00. Taste Freeze sells 200 ice cream sandwiches. Its AVC is $8.00 and its AFC is $3.00. What should Taste Freeze do?

A) Continue to produce because price exceeds AFC.
B) Shut down and produce zero sandwiches because price is less than AVC.
C) Decrease production so that AVC will decrease.
D) Increase production so that AFC will decrease.

Question 67

The Taste Freeze Ice Cream Company is a perfectly competitive firm producing where MR = MC. The current market price of an ice cream sandwich is $5.00. Taste Freeze sells 200 ice cream sandwiches. Its AVC is $4.00 and its AFC is $3.00. What should Taste Freeze do?

A) Continue to produce because price exceeds AVC.
B) Shut down and produce zero sandwiches because price is less than ATC.
C) Decrease production so that AVC will decrease.
D) Increase production so that AFC will decrease.

Question 68

A firm will shut down in the short run if

A) it is suffering a loss.
B) fixed costs exceed revenues.
C) variable costs exceed revenues.
D) total costs exceed revenues.

Question 69

If a firm's economic profit is $0, then it must be true that

A) TR equals TC.
B) TR equals TVC.
C) TR equals TFC.
D) TFC is zero.

Question 70

Economic profit is

A) (P‐ATC)q.
B) (P+ATC)q.
C) P(q-ATC).
D) Pq/ATC.

Question 71

If revenues exceed ________, profit is ________.

A) total cost; negative
B) fixed cost; positive
C) variable cost; negative
D) total cost; positive

Question 72

If a firm's profit is $0, then it must be true that

A) TR equals TC.
B) TR equals TVC.
C) TR equals TFC.
D) TFC is zero.

Question 73

A firm that is earning positive profits in the short run has an incentive to ________ its scale of operation in the long run.

A) expand
B) contract
C) not change
D) encourage another firm to expand

Question 74

You are hired as an economic consultant to The Pampered Pet Shop. The Pampered Pet Shop operates in a perfectly competitive industry. This firm is currently producing at a point where market price equals its marginal cost. The market price is less than its average variable cost. You should advise the firm to

A) cease production immediately because it is not covering its variable costs of production.
B) lower its price so that it can sell more units of output.
C) produce in the short run to minimize its loss, but exit the industry in the long run.
D) raise its price until it breaks even.

Question 75

The shutdown point for a perfectly competitive firm is the

A) lowest point on the ATC curve.
B) point at which a firm's long-run supply curve ends.
C) lowest point on the AVC curve.
D) lowest point on the marginal cost curve.

Question 76

A firm suffers losses if

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 77

A firm can minimize its losses by shutting down when ________ are less than ________ costs.

A) variable costs; fixed
B) fixed costs; variable
C) revenues; variable
D) operating profits; sunk

Question 78

A firm earns a profit if

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

Question 79

A firm suffering economic losses decides whether or not to produce in the short run on the basis of whether

A) revenues cover variable costs.
B) revenues from operating are sufficient to cover fixed costs.
C) revenues from operating are sufficient to cover fixed plus variable costs.
D) Firms suffering economic losses will always shut down.

Question 80

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

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