ECONOMICS

As part of an estate settlement Mary received $1 million. She decided to use the money to purchase a small

business in Anywhere, USA. Her business operates in a perfectly competitive industry. If Mary would have

invested the $1 million in a risk-free bond fund she could have made $100,000 each year. She also quit her job

with Lucky.Com Inc. to devote all of her time to her new business; her salary at Lucky.Com Inc. was $75,000 per

year.

39. Refer to Scenario 14-3. What are Mary’s opportunity costs of operating her new business?

a. $25,000

b. $75,000

c. $100,000

d. $175,000

40. When firms are neither entering nor exiting a perfectly competitive market,

a. total revenue must equal total variable cost for each firm.

b. economic profits must be zero.

c. price must equal average variable cost for each firm.

d. Both a and c are correct.

Figure 14-10

41. Refer to Figure 14-10. If the price is P3 in the short run, what will happen in the long run?

a. Nothing. The price is consistent with zero economic profits, so there is no incentive for

firms to enter or exit the industry.

b. Individual firms will earn positive economic profits in the short run, which will entice

other firms to enter the industry.

c. Individual firms will earn negative economic profits in the short run, which will cause

some firms to exit the industry.

d. Because the price is below the firm’s average variable costs, the firms will shut down.

42. The production decisions of perfectly competitive firms follow one of the Ten Principles of Economics, which

states that rational people

a. consider sunk costs.

b. equate prices to the average costs of production.

c. will eventually leave markets that experience zero profit.

d. think at the margin.

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43. Charles’s Car Wash has average variable costs of $2 and average total costs of $3 when it produces 100 units of

output (car washes). The firm’s total variable cost is

a. $100.

b. $200.

c. $300.

d. $500.

44. Marginal cost is equal to

a. TC/Q.

b. ATC/Q.

c. TC/Q.

d. Q/TC.

45. A firm has a fixed cost of $500 in its first year of operation. When the firm produces 100 units of output, its total

costs are $3,500. When it produces 101 units of output, its total costs are $3,750. What is the marginal cost of

producing the 101st unit of output?

a. $250

b. $275

c. $340.91

d. $350

Table 13-5

The Flying Elvis Copter Rides

Quantity Total

Cost

Fixed

Cost

Variable

Cost

Marginal

Cost

Average

Fixed

Cost

Average

Variable

Cost

Average

Total

Cost

0 $50 $50 $0 — — — —

1 $150 A B C D E F

2 G H I $120 J K L

3 M N O P Q $120 R

46. Refer to Table 13-5. What is the value of A?

a. $25

b. $50

c. $100

d. $200

47. Refer to Table 13-5. What is the value of B?

a. $25

b. $50

c. $100

d. $200

48. Refer to Table 13-5. What is the value of C?

a. $25

b. $50

c. $100

d. $200

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Table 13-6

Quantity

of Output

Fixed

Cost

Variable

Cost

0 $20 $0

1 $20 $10

2 $20 $40

3 $20 $80

4 $20 $130

5 $20 $200

6 $20 $300

49. Refer to Table 13-6. What is the average fixed cost of producing 5 units of output?

a. $4

b. $5

c. $40

d. $44

50. Refer to Table 13-6. What is the shape of the marginal cost curve for this firm?

a. constant

b. upward-sloping

c. downward-sloping

d. U-shaped

Figure 13-9

The figure below depicts average total cost functions for a firm that produces automobiles.

51. Refer to Figure 13-9. Which of the curves is most likely to characterize the short-run average total cost curve of

the smallest factory?

a. ATCA

b. ATCB

c. ATCC

d. ATCD

15

52. Refer to Figure 13-9. Which curve represents the long-run average total cost?

a. ATCA

b. ATCB

c. ATCC

d. ATCD

53. Refer to Figure 13-9. In the long run, the firm can operate on which of the following average total cost curves?

a. ATCA

b. ATCB

c. ATCC

d. All of the above are correct.

54. Refer to Figure 13-9. The firm experiences economies of scale at which output levels?

a. output levels less than M

b. output levels between M and N

c. output levels greater than N

d. All of the above are correct as long as the firm is operating in the long run.

55. Refer to Figure 13-9. At levels of output less than M, the firm experiences

a. economies of scale.

b. diseconomies of scale.

c. constant returns to scale.

d. both diminishing marginal productivity and coordination problems.

Table 13-13

Consider the following table of long-run total cost for four different firms:

Quantity 1 2 3 4 5 6 7

Firm 1 $210 $340 $490 $660 $850 $1,060 $1,290

Firm 2 $180 $350 $510 $660 $800 $930 $1,050

Firm 3 $120 $250 $390 $540 $700 $870 $1,050

Firm 4 $150 $300 $450 $600 $750 $900 $1,050

56. Refer to Table 13-13. Which firm has constant returns to scale over the entire range of output?

a. Firm 1

b. Firm 2

c. Firm 3

d. Firm 4

57. Refer to Table 13-13. Which firm has diseconomies of scale over the entire range of output?

a. Firm 1

b. Firm 2

c. Firm 3

d. Firm 4

58. Refer to Table 13-13. Which firm has economies of scale over the entire range of output?

a. Firm 1

b. Firm 2

c. Firm 3

d. Firm 4

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59. Refer to Table 13-13. Which firm has economies of scale and then diseconomies of scale as output increases from

1 to 7?

a. Firm 1

b. Firm 2

c. Firm 3

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