ALLIED ECN150 module 5 Check Your Understanding

Question Points
1. The graph
of the production function plots total cost versus quantity of output.
a. True
b. False

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2. Which of
the following is not a property of a firm’s cost curves?
a. Marginal cost
must eventually rise as a result of diminishing marginal product.
b. Average total
cost is U-shaped.
c. Economies of
scale will exist when average total cost falls as output rises.
d. Average total
cost will cross marginal cost at the minimum of marginal cost.
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3. Max sells
maps. The map industry is competitive. Max hires a business consultant to
analyze his company’s financial records. The consultant recommends that Max
increase his production. The consultant must have concluded that Max’s:
a. total revenues exceed
his total accounting costs.
b. marginal revenue
exceeds his total cost.
c. marginal revenue
exceeds his marginal cost.
d. marginal cost
exceeds his marginal revenue.
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4. Jane was
a partner at a law firm earning $223,000 per year. She left the firm to open
her own law practice. In the first year of business she generated revenues of
$347,000 and incurred explicit costs of $163,000. Jane’s economic profit from
her first year in her own practice is:
a. -$39,000.
b. $124,000.
c. $163,000.
d. $184,000.
5. Which of
the following statements is correct regarding a firm’s decision-making?
a. The decision to
shut down and the decision to exit are both short-run decisions.
b. The decision to
shut down and the decision to exit are both long-run decisions.
c. The decision to
shut down is a short-run decision, whereas the decision to exit is a long-run
decision.
d. The decision to
exit is a short-run decision, whereas the decision to shut down is a long-run
decision.
6. The two
characteristics of a competitive market are 1) many buyers and sellers in the
market and 2) the goods offered by the various sellers are highly
differentiated.
a. True
b. False
7. The Doris
Dairy Farm sells milk to a dairy broker in Prairie du Chien, Wisconsin. Because
the market for milk is generally considered to be competitive, the Doris Dairy
Farm does not:

a. choose the
quantity of milk to produce.
b. choose the price
at which it sells its milk.
c. have any fixed
costs of production.
d. set marginal
revenue equal to marginal cost to maximize profit.
8. A
competitive market will typically experience entry and exit until accounting
profits are zero.
a. True
b. False
9. Average
variable cost is equal to total variable cost divided by quantity of output.
a. True
b. False
10. If Farmer
Brown plants no seeds on his farm, he gets no harvest. If he plants 1 bag of
seeds, he gets 5 bushels of wheat. If he plants 2 bags, he gets 9 bushels. If
he plants 3 bags, he gets 12 bushels. A bag of seeds costs $120, and seeds are
his only cost. Farmer Brown’s production function exhibits:
a. increasing
marginal product.
b. constant marginal
product.
c. diminishing
marginal product.
d. The production
function is unrelated to the marginal product.
11. The
average revenue when 14 units are produced and sold is:

a. $9.
b. $11.
c. $13.
d. $15.
12. Marcia is
a fashion designer who runs a small clothing business in a competitive
industry. Marcia specializes in making designer dresses. Marcia sells 10
dresses per month. Her monthly total revenue is $5,000. The marginal cost of
making a dress is $400. In order to maximize profits, Marcia should
a. make more than 10
dresses per month.
b. make fewer than
10 dresses per month.
c. continue to make
10 dresses per month.
d. We do not have
enough information with which to answer the question.
Explain the concept of diminishing marginal productivity.
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13. The cost
of producing an additional unit of output is the firm’s:
a. marginal cost.
b. productivity
offset.
c. variable cost.
d. average variable
cost.
14. A firm
operating in a competitive market will stay in business in the short run so
long as the market price exceeds the firm’s average total cost; otherwise, the
firm will shut down.
a. True
b. False
Hint: pp. 281-282
SLO3:Compare and contrast public goods, private goods,
common resources, and natural monopolies (club goods).
LO3D:Identify different costs associated with production.
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15. Firms
operating in perfectly competitive markets try to maximize profits.
a. True
b. False
16. If the
market starts in equilibrium at point C in panel (b), a decrease in demand will
ultimately lead to:

a. more firms in the
industry but lower levels of output for each firm.
b. fewer firms in
the market.
c. a new long-run
equilibrium at point D in panel (b).
d. lower prices once
the new long-run equilibrium is reached.
17. Suppose
that a worker can produce 100 units of output in 7 hours. In the 8th hour, he
can produce 12 units of output. The worker can produce 112 units of output in 8
hours.
a. True
b. False
18. Which of
the following industries is least likely to exhibit the characteristic of free
entry?
a. Restaurants
b. Municipal water
and sewer
c. Soybean farming
d. Selling running
apparel
19. In the
long-run equilibrium of a competitive market, the number of firms in the market
adjusts until the market demand is satisfied at a price equal to the minimum
of:
a. average fixed
cost for the marginal firm.
b. marginal cost of
the marginal firm.
c. average total
cost of the marginal firm.
d. average variable
cost of the marginal firm.
20. A firm
operating in a perfectly competitive industry will shut down in the short run
if its economic profits fall to zero because it is likely to be earning
negative accounting profits.
a. True
b. False