Eco 561 week 2 knowledge check

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1.

Purely competitive firms increase total revenue by

· A.

increasing production

· B.

decreasing production

· C.

increasing price

· D.

decreasing price

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2.

What are two ways for a competitive firm to determine the optimal level of production, that is, the level of production that will maximize profit or minimize losses?

· A.

Comparing total revenue to total cost or marginal revenue to marginal costs

· B.

Comparing average revenue to average costs or marginal revenue to marginal costs

· C.

Comparing average variable costs to price or marginal revenue to price

· D.

Comparing total revenue to average variable costs or price to average variable costs

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3.

Suppose that a firm determines that its marginal revenue is greater than its marginal cost, it would be better to

· A.

increase production

· B.

decrease production

· C.

keep production the same

· D.

increase price

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7.

Marginal cost can be defined as the addition to _____ of one more unit of output.

· A.

total variable costs

· B.

average total costs

· C.

average variable costs

· D.

total fixed costs

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4.

It is profitable for a firm to continue employing additional resources as long as

· A.

Marginal Revenue Product >= Marginal Resource Cost

· B.

Marginal Revenue Product <= Marginal Resource Cost

· C.

Marginal revenue >= Marginal cost

· D.

Marginal Revenue Product >= Price

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5.

As additional units are produced, the marginal revenue product falls for all firms because marginal product decreases. For firms operating in industries that are not perfectly competitive, marginal revenue product also falls because

· A.

product price falls as output increases

· B.

product price falls as output decreases

· C.

product price increases as output increases

· D.

product price increases as output decreases

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6.

All things being equal, an increase in demand for a product,

· A.

increases demand for the resources used in its production

· B.

decreases demand for the resources used in its production

· C.

increases the supply of a product

· D.

decreases the supply of resources used in its production

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9.

Demand for resources, including labor, depend on its

· A.

productivity

· B.

profitability

· C.

availability

· D.

accessibility

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11.

When adding labor or other factors of production, businesses may see their total product rise, but see their per-unit increase in return for each additional unit diminish. This phenomenon

· A.

occurs only for firms that do not efficiently use their factors of production

· B.

applies only to capital-intensive industries

· C.

is known as diminishing marginal product and has general market application

· D.

depends on how abundant or scarce labor is in existing factor-markets

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8.

If a firm stars small and, over time, builds successively larger plant sizes or adds additional work space in an office, average total costs are most likely to

· A.

initially decrease, then begin to rise

· B.

initially rise, then begin to decrease

· C.

remain constant over time

· D.

continually increase

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10.

The primary difference between increasing- and decreasing-cost industries lies in

· A.

fixed-cost components: only increasing-cost industries have significant fixed costs

· B.

variable-cost components: only decreasing-cost industries have significant variable costs

· C.

the fact that the average total cost (ATC) of firms in increasing-cost industries will first decline and then eventually increase with output, while decreasing-cost firms experience progressively lower ATC with increased output

· D.

efficiency of production

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12.

In the short run, firms should shut down if

· A.

AVC > P

· B.

ATC > P > AVC

· C.

P > ATC

· D.

P > MC

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Correct :

In the long term, a firm wants to receive a price greater than the cost of production per unit: average total cost. In the short term, a firm may have bills, regardless of whether it is producing anything. For example, a firm may have signed a long-term lease or may have other contracts it is obligated to pay. These costs are generally fixed costs that do not vary with the level of production. However, firms also have a variety of other costs that are only incurred if the firm is producing: variable costs. Thus, in the short term, a firm should determine how to minimize the costs it will face, such as closing down and only paying the fixed costs or continuing to operate and incurring both the fixed costs and variable costs but offsetting the variable costs and some of the fixed costs with the revenues earned from production. If the price is less than the average variable cost, then only some of the variable costs will be covered and all of the fixed costs are incurred; therefore, the firm is spending more by continuing to operate rather than shutting down.

Materials

· Shutdown Case

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13.

When you are considering the value of a resource in its next best use, you are considering its

· A.

opportunity cost

· B.

production cost

· C.

marginal cost

· D.

price

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14.

Of the four major market structures–perfectly competitive, monopolistic competition, oligopoly, monopoly–reducing variable costs of production

· A.

is not a viable option for perfectly competitive firms— or price-takers—because the per-unit profit margin is fixed by the equilibrium price

· B.

can enhance profit for all but the monopoly firm, which, because it has no competition, has little financial incentive to lower its per-unit costs

· C.

will result in significant increases in profit-margin, regardless of market structure, if coupled with significant increases in product price

· D.

enhance profit per-unit, because profit equals revenue minus cost

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