# ECON Exam 2

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1. What can a firm do in the short run?
• 1.earn positive economic profits
• 2.earn zero economic profits
• 3.suffer economic losses but continuing to operate to reduce or minimize those losses 4.shut down and bear losses just equal to fixed costs.
2. In a PC firm, is it a profit or loss is price is below ATC?
an economic loss
3. For a PC firm, should a company stay in business if price is below AVC?
No
4. The short run supply curve for a PC firm is also know as the __________.
A. marginal revenue curve
B. demand curve
C. price curve
D. marginal cost curve
D. marginal cost curve
(this multiple choice question has been scrambled)
5. In the short run, a firm should shut down if _____.
P< AVC
6. Firms earning a negative profit will eventually _____.
leave the market
7. Firms are going to _______ if everyone has a positive profit.
enter
8. There will no be action (no entry and exit into the market) if there is _________ profit.
zero (normal profit)
9. In the short run, perfectly competitive firms can earn ____________.
Positive or negative profits
10. In the long run all PC firms MUST earn________.
zero profit
11. Total revenue equals_______.
Price x Quantity
12. If PC firms are making positive profits, in the long run firms will enter this industry. This shifts the supply curve ________ and ______ the prices.
out, lowers
13. PC firms earning a positive profit will continue to expand as long as there are ______________.
economies of scale
14. True or False: In the long run all firms can make positive profits?
False
15. In the short run when a PC firm is making a negative profit, they will leave the market in the long run. This shifts the supply curve _____ and ______ the prices.
back, increases
16. Know this equation for the tests
P* = SRMC = SRAC = LRAC
17. In the long run, PC firms operate at the _________ point of the LRAC curve.
minimum
18. In the short run when demand increases, what happens to PC firms' revenues? How do other firms respond? In response, what happens to the supply curve? Then, what happens to prices in the long run?
The PC firms raise their prices, and therefore gain more profits. Other firms see the positive profits and enter in the long run. This causes the supply curve to shift out (more products). More products in the industry causes the prices to fall.
19. Suppose the industry we just saw starts out in LR equilibrium at P=\$5. What would happen in the short run if demand shifted back and price fell below \$5?
It depends on whether price falls below average variable cost.
20. When long-run average costs decrease as a result of industry growth, we say that then industry is a ___________.
decreasing-cost industry
21. A change in the size of the industry (total Q) did not affect costs-we had a ___________.
Constant-cost industry
22. When average costs increase as a result of industry growth, we say that the industry is a __________.
increasing-cost industry
23. What is a graph that traces out price and total output over time as an industry expands?
Long-run industry supply curve
24. Perfect competition is the ________ market structure.
A. largest
B. worst
C. smallest
D. ideal
D. ideal
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25. A PC market achieves ___________.
A. neither
B. both allocative and productive
C. allocative efficiency
D. productive efficiency
B. both allocative and productive

Why?: the market supplies the right stuff (allocative) at the lowest possible cost (productive).
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26. What is an industry in which single firms have some control over the price of their output?
imperfectly competitive industry
27. What is an imperfectly competitive firm’s ability to raise price without losing all of the quantity demanded for its product?
market power
28. What is an industry with a single firm that produces a product?
a pure monopoly
29. What are the 2 characteristics of a monopoly?
• 1)there are, no close substitutes and
• 2) significant barriers to entry exist to prevent other firms from entering the industry to compete for profits.
30. The fewer substitutes there are, the _____ elastic the demand is.
A. Less
B. More
A. less

Why? Think about coach purses. There are not many substitutes for these products, so more people are willing to pay a high price.
31. If a product has inelastic demand, a firm should _______ price.
increase

Why? People will buy the item at whatever price because there demand is elastic. The firm should make the most money off of them that they can.
32. The steeper the demand curve, the ______ power a monopoly can have.
steeper
33. When is a monopolist able to exercise more market power?
A. when they have many complementary products
B. When there are no close substitutes
C. When they sell at the lowest price
D. When they offer coupons
B.  When there are no close substitutes
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34. When firms _____ the market, it is no longer a monopoly.
enter

A monopoly is the only firm!
35. Because of barriers, monopolies can maintain _______ profits year after year.
positive
36. What are types of barriers to entry in a monopoly?
• 1.Government Franchising or Licensing:
• (Examples:  Defense, ABC stores, USPS)
• 2.Patents: grants exclusive use of patented product to its inventor for a limited period of time.
• (Example: Brand-name drugs.)
• 3.Economies of scale or other cost advantages (high start-up costs).
• (Example:  The gas company)
• 4.Ownership of a scarce factor of production
• (Examples:  DeBeers in diamonds, Alcoa in bauxite)
37. Perfectly-competitive firms are called "price-takers" and monopolies are called ________.
price seekers
38. A monopoly wants to produce where ___ = ____.
MR = MC
39. In perfect competition, the demand curve is _____________.
perfectly elastic(at the market price).
40. In a monopoly, if the firm wants to choose a higher quantity, it has to charge a _____ price.
lower
41. What is price discrimination?
It is charging different prices to different customers.
42. For a monopoly, marginal revenue is always going to be _____ than price.
less
43. What is the equation to find marginal revenue?
Total revenue/ quantity = marginal revenue
44. Go study Lecture 20, slide 15
45. As monopolies produce more and more, what happens to price?
It decreases. (falls)
46. True or False: A monopoly will never choose a quantity with negative marginal revenue
True
47. How do you locate the point on the graph that represents the price and quantity that maximizes monopolies profit?
• 1. locate where MR=MC
• 2. Go straight up to the demand curve.

Why? They want to sell at the highest price possible and be productive with their own money.
48. All firms raise output as long as marginal revenue is _____ than marginal cost.
greater

Why? If marginal costs were greater that means it is more costly to produce the product.
49. As with perfect competition, the ________ should produce in the SR if P≥AVC but should shut down if P<AVC.
monpolist
50. True or False: A monopoly firm has no supply curve that is independent of the demand curve for its product.
True
51. A monopolist sets
A. Price and Quantity
B. Price
C. Quantity
D. They have no power to make decisions.
A. Price and Quantity
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52. The amount of output that a monopoly supplies depends on what 2 curves?
• 1. the marginal costs curve
• 2. the demand curve
53. True or False: All monopolist earn a positive economic profit.
False
54. Compared to the perfectly competitive equilibrium, monopolists choose a ______ quantity and charge a ______ price.
lower, higher
55. Which apply to monopolists?
A. charges high profits
B. All choices are correct
C. earning positive profits
D. restricts output
B. All choices are correct
(this multiple choice question has been scrambled)
56. In monopolies, all deadweight loss is (borne) tolerated by ______.
A. consumers
B. producers
C. firms
D. markets
A. consumers
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57. For a monopoly graph, the box represents ___________.
A monopolies' profit
58. Draw what consumer surplus would look like under perfect competition.
It should be a large triangle from d=MR=AR=P to the peak of the triangle.
59. Draw what consumer surplus would look like under a monopoly.
It would be from the price the monopoly is choosing to the peak of the triangle
60. Draw what deadweight loss would look like under a monopoly.
The deadweight loss will be to the right of the monopolies' profit and underneath the demand curve.
61. What is rent seeking?
It is when firms spend lots of money trying to influence policy to keep their monopoly.
62. Monopolies cause deadweight loss because_____.
A. They set the price too low
B. They set the price too high
C. They produce too much
D. They produce too little
B. They set the price too high
(this multiple choice question has been scrambled)
63. Why are monopolies bad?

Summary
1.They aren’t socially efficient
2.Do not want to cut costs they want a profit
3. They are trying to maintain their monopoly so they don’t try to improve the quality of the product
• 1.Result in quantity less than the optimal PC quantity (and price higher than PC price) – this causes “deadweight loss”
• 2.Monopolies do not have as much incentive to cut costs.  And to begin with, monopolist do not operate at the minimum of ATC like PC firms do (in the long run).
• 3.Monopolies often spend resources to keep their power (rent seeking) and may do other bad things to keep power.
64. True or False: While monopolies can earn more profit by cutting costs, the benefits are not as large as they would be for a PC firm.
True
65. True or False: Monopolies should make improvements to their product even if they have a patent.
True

Why? Even if a company has a patent, once the patent is up other companies have the ability to take over by producing better products
66. Because of __________, sometimes it makes sense to have a monopoly in certain industries.  In these cases, the government often allows the monopoly but regulates it closely.
economies of scale
67. What is an industry that realizes such large economies of scale in producing its product that single-firm production of that good or service is most efficient?
a natural monopoly
68. True or False: Although monopolies are illegal in the United States, sometimes an industry has to be a monopoly.
True
69. Which one of these examples is a natural monopoly?
A. a gas company
B. an electric company
C. both options are appropriate
D. neither of the options are because they compete with many other firms
C. both options are apporpraite
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70. What are some possible limitations the government would set on a natural monopoly?
• 1.Government has input on price
• 2.Government make sure that they support everyone (even people out of the local reach)

Some firms can change and some will never make sense as a competitive company
71. Why do natural monopolies happen?
economies of scale
72. True or False: A monopoly can make negative profits.
True

Example: a natural monopoly can make negative profits because of government regulations force them to lose money.
73. ________________occurs when a firm charges the maximum amount that buyers are willing to pay for each unit.  Also called “First Degree” price discrimination.
Perfect price discrimination
74. True or False: When a monopoly is price discriminating, the firm stops where the cost to produce is the same as the highest price the customer is willing to spend.
True

Why?: Why not?
75. A monopolist wants to produce at a price where there is no __________.
76. What is the best form of price discrimination?
first degree price discrimination (meaning you are charging everyone at the highest price they are willing to pay)
77. ________ occurs when firms charge different prices based on unobservable consumer attributes.
Second-degree price discrimination
78. What is are examples of second degree price discrimination?
• - Costco or Sam’s Club – these firms extract some consumer surplus by charging membership fees that allow you to buy large quantities for cheap.
• - Quantitydiscounts
79. ___________ occurs when firms charge people different prices based on observable consumer attributes.
Third Degree Price Discrimination
80. What are some examples of third degree discrimination?
- Cheaper movie tickets for students or the elderly
81. These factors may indicate, in some way, the consumers’ willingness to pay. Explain how these topics relate.
- Hardback vs. Paperback
- desert vs. coffee
- airline tickets
• -Hardbacks are more expensive but people  want them now.
• -At restaurants people by deserts for pleasure and will pay more.
• - last minute flyers will pay more for tickets that they need badly
82. True or False:The firm will charge those with less elastic demand (business travelers for example) more than those with more elastic demand (leisure travelers) who are more sensitive to price.
True
83. An inelastic demand curve is more ______.
A. steep
B. flat
A. steep
84. An elastic demand curve is more _______.
A. steep
B. flat
B. flat
85. in a perfectly competitive market, can firms sell different products?
no
86. What kind of products are sold in monopolistic competition?
differentiated
87. True or False: There is easy entry and exit in a PC Industry.
True
88. Review Lecture 21, slide 25.
89. Which one is a common form of industry (market) structure in the United States?
A. perfect competition
B. oligopoly
C. monopolistic competition
D. monopoly
C. monopolistic competition
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90. What are the characteristics of a monopolistic competitive industry?
• 1. a large number of firms
• 2. no barriers to entry
• 3. product differentiation.
91. There are more than 1,500 restaurants in San Francisco. This industry is an example of what?
A. an oligopoly
B. a monopolistic competitive industry
C. perfectly competitive industry
D. a monopoly
B. a monopolistic competitive industry
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92. What are the 3 features distinguish monopolistic competition from monopoly and oligopoly?
• 1.Firms cannot influence the market price by virtue of their size.
• 2.Good (but not “perfect”) substitutes exist.
• 3.There is unrestricted entry and exit. (so, on average, firms in a Monopolistically Competitive industry will earn zero profits in the long run)
93. What is a strategy that firms use to achieve market power.
product differentiation
94. What types of product differentiation are possible?
• - location
• - services
• - product image
• - physical differences

It is all about what the customer thinks
95. What is the one thing that makes monopolistic competition different from perfect competition is?
product differentiation
96. According to monopolistic competitors, _________ gives the market system its vitality and are the basis of its power.
97. Why do some people think advertising is dumb?
• 1. Enormous sums are spent to create minute, meaningless, and possibly nonexistent differences among products.
• 2. Advertising raises the cost of products and frequently contains very little information.
98. True or False: I=In monopolistic competition, profits for representative firms must be zero in the long run.
True
99. When more firms enter an industry, what happens to the demand curve of each individual firm?
It shifts back
100. Review lecture 22, slide 24
Review
101. What is a form of industry (market) structure characterized by a few dominant and interdependent firms?
an oligopoly
102. What are the characteristics of an oligopoly?
• •Products may be homogenous or differentiated.
• •Oligopolistic industries often have significant barriers to entry (usually cost related but could be legal).
• •When those barriers to entry come in the form of economies of scale, the oligopoly is sometimes called a “natural oligopoly” (remember natural monopolies?)
• •Most importantly, the behavior of any one firm in an oligopoly depends to a great extent on the behavior of others (this is what we mean by “interdependent”).
103. Which industry is an example of an oligopoly?
A. soybeans market
B. motor vehicles
C. pizza industry
D. fast food industry
B. motor vehicles
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104. Very IMPORTANT FACT
The behavior of any given oligopolistic firm depends on the behavior of the other firms in the industry comprising the oligopoly.
105. An oligopoly is an industry with?
A. little firms with different products
B. a few big firms selling identical or different products
C. little firms that are dependent on each other
D. a few big firms selling only identical products
D. A few big firms selling identical or different products
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106. The act of working with other producers in an effort to limit competition and increase joint profits
collusion
107. A group of firms that gets together and makes joint price and output decisions to maximize joint profits.
cartel
108. Collusion occurs when price- and quantity-fixing agreements among producers are explicit. Tacit collusion occurs when such agreements are implicit
Tacit collusions
109. True or False: The cartel seeks to find where MC=MR for the entire market.  It then sets a market price for the industry equal to the monopoly price.  The cartel restricts output to Q.
True
110. The cartel sets production ________.
quotas
111. A form of oligopoly in which one dominant firm sets prices and all the smaller firms in the industry follow its pricing policy.
112. _______ is a web of contracts between input suppliers and the owner(s).
A. a monopoly
B. a firm
C. an oligopoly
D. a market
B.
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113. Production is when ________ are turned into _____.
A. natural resources, objects
B. inputs, outputs
C. goods, products
D. outputs, inputs
B.
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114. If company is not trying to maximize profits it is considered a firm.
A. True
B. False
B.

ALL FIRMS MAXIMIZE PROFITS
115. The U.S. Department of Agriculture is not a firm because it is government involved.
A. True
B. False
A.
116. What 2 main things do firms do?
• 1. make outputs
• 2. maximize profits
117. What is the equation to calculate profits?
A. TR -TC = Profit
B. MC + MB = Profit
C. Consumer surplus + producer surplus = Profit
D. TR x MU = Profit
A.

Don't forget TR = P x Q
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118. A negative profit is called a ______.
B. net welfare loss
C. gain
D. loss
D.
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119. Accountants measure _______ costs and economists measure ___________ costs.
A. implicit, explicit
B. explicit, implicit
C. explicit, implicit and explicit
D. implicit, implicit and explicit
C.
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120. Implicit costs are also known as __________.
A. opportunity costs
B. unimportant
C. transaction costs
D. loss cause
A.
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121. Suppose GM made their own tires, they put the tires on the car when bought. We can also sell to a tire market. It might be more profitable to do that. When we give up one thing, economists like to figure out what they are losing. The implicit cost is \$100. This is how _______ analyze costs.
economists
122. To find the accounting profit, the formula is _______.
A. MC + MB
B. TR- TC
C. finding (TR-TC) and opportunity costs
D. TU -MU
B.
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123. The economist asks the owner of the lemonade stand(that makes 3 million a year) what he would have done if he did not run a stand.  The owner says he would have gotten a job at Wendy’s and made \$24,000. What is the opportunity costs of working at the lemonade stand?
\$24,000
124. What are explicit costs?
They are basically the costs of production.
125. Suppose you go to a movie, and the ticket price is \$7.00.  Suppose you could have earned \$30 during that movie at a part time job. What is the accountant's costs and the economists costs?
• Accountant cost ==> \$7
• Economists cost ==> \$37
126. If you turn down money it is jus like earning money.
A. True
B. False
A.

It is considered a costs that you have to weigh
127. If you gave the CEO of Philip Morris the choice between someone bombing the factory in Richmond or taking away the company’s exclusive right to sell Marlboro brand cigarettes, he would say, “Bomb the factory to the ground.” Why?
The intangible assets of the company are more important than the tangible assets. The brand name is so valuable.
128. For  the ___________ cost, we are going to total the costs of housing, food, transportation, and classes while at college for 1 year.
A. economists
B. accountants
B.
129. For the __________ cost, we are going to total the cost of classes, transportation, and the money we would be making if we were back at home working.
A. economists
B. accountants
A.

Remember that for costs of housing and food, we would be paying if we were back at home (so they are not included).
130. IMPORTANT
A profit is also known as a(n) ____________.
A. overall profit
B. consumer surplus
C. producer surplus
D. economic profit
D.

• Read these types of questions carefully.
• Profit is positive!
131. How do you find total revenue?
P x Q = TR
132. Total cost is the total amount of _________.
A. implicit and explicit costs
B. implicit costs
C. explicit costs
D. none of the above
A.
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133. ___________ is basically the minimum amount you have to pay back your investors to convince them to keep investing in your firm.  Unless you have lots of money on your own, you must borrow to run a firm.
A. capital gain
B. economic balance measurement
C. normal rate of return
D. none of the above
C.
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134. ___________ is the accounting profit earned when all resources earn their opportunity cost.  This occurs when TR=Total economic cost
A. normal profit
B. economic profit
C. negative profit
D. positive profit
A.

It is also known as zero profit
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135. When TR - TC is equal to zero there is a ______.
A. economic profit
B. positive profit
C. negative profit
D. normal profit
D.
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136. Is having zero profit a bad state for a company?
No, everyone is happy. Products are being made and everyone is profiting. Everyone is making money for it but there is no extra money. It is not “negative.” Everyone is happy.
137. What are the 3 decisions made by profit maximizing firms?
• 1. how much output to supply
• 2. Which production technology to use
• 3. how much of each input to demand
138. What 3 factors determine firms decisions?
• 1. The market price of output
• 2. The techniques of production that are available
• 3. The prices of inputs
139. Optimal method of production __________.
A. measures costs to share
B. minimizes costs
C. optimizes costs
D. increases costs to help households
B.
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140. ____________ is the relationship between inputs and outputs – how inputs get turned into outputs.
A. production technology
B. labor intensive technology
C. capital-intensive technology
A.
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141. ________ is when technology relies heavily on human labor instead of capital.
A. production technology
B. labor intensive technology
C. capital-intensive technology
B.
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142. ___________ is when technology relies heavily on capital instead of human labor.
A. labor intensive technology
B. capital-intensive technology
C. production technology
B.
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143. Getting your car washed by a group of 30 kids is an example of a ________.
A. capital-intensive technology
B. production technology
C. labor intensive technology
C.

Why would we have kids wash it? We want it to be cheaper.
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144. Getting your car washed by an autospa is an example of a _____________.
A. labor intensive technology
B. capital-intensive technology
C. production technology
B.
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145. How do firms choose what method to use (capital or labor intensive technology)?
They decide to choose the option that is cheaper. They want to minimize the costs as much as possible.
146. If labor gets expensive, we want _____ labor and _____ capital.
A. less, more
B. more, more
C. less, less
D. more, less
A.
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147. If capital gets expensive, we want ______ labor and ______ capital.
A. more, less
B. less, more
C. less, less
D. more, more
A.
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148. Inputs can be substitutes for each other. If you are making a desk, you can use metal OR wood – these are __________ inputs.
A. neither
B. complementary
C. substitute
C.
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149. Capital (buildings and machines) is of no use without people to operate it, we sometimes say that capital and labor are ________ inputs.
A. complementary
B. substitute
C. neither
A.
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150. Firms in an economy with high labor costs have an incentive to use:
A. more labor
B. more capital
C. none of the above
D. less capital
B.
151. __________ is the relationship between the amount of resources (inputs) employed and a firm’s total product (output).
A. final product
B. functional resources
C. ending result
D. production function
D.
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152. __________ is the additional output that can be produced by adding one more unit of a specific input, ceteris paribus.
A. marginal benefit
B. marginal product
C. marginal utility
D. marginal cost
B.
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153. Go to Lecture 15, slide 15 to find out what the equations are to find marginal product
Look it up!
154. If we hire a new worker to a pizza shop, how much more pizzas can we make. This is marginal _______.
A. utility
B. benefit
C. costs
D. product
D.
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155. Add 1 unit of labor, 50 more pizzas a day. Total product is ______.
A. 5
B. 1/50
C. 50
D. 10
C.

50/ 1
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156. _______ is the average amount produced by each unit of a variable factor of production (input).
A. average cost
B. average benefit
C. average input
D. average product
D.
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157. To find average product, the equation is _____.
A. Total product/ total units of (labor of capital)
B. Change in total product/ change in total (labor or capital)
A.
158. Take the number of units,
500 pizzas/5 workers = 1pizza per worker
This the ___________.
A. marginal product
B. average product
B.
159. One person working at subway, one person makes sandwich and has to take gloves off to ring up. The second person adds more than the first person because he can double the help. They can finally divide up tasks. The third person does not make a  big difference. What law is this?
the law of diminishing marginal product
160. Draw 2 separate graphs of the total product(production function) and the marginal product.
• total product is slowly increasing
• marginal product goes up for the first 2 inputs then falls
161. ___________ is when additional units of a variable input are added to fixed inputs, after a certain point the marginal product of the variable input declines.
Law of diminishing marginal returns(product)

They are the same thing.
162. Every firm has some limit on capacity (like the size of a shop) and so you reach the point where adding more labor will hurt the shop. Too many people and it is costly to add a worker (input). This is the law of diminishing __________.
A. both A and B.
B. marginal return
C. marginal product
D. none of the above
A.
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163. ___________is the period of time for which two conditions hold:  The firm is operating under a fixed scale (fixed factor) of production, and firms can neither enter nor exit an industry.
A. short run
B. long run
A.
164. __________ is the period of time for which there are no fixed factors of production:  Firms can increase or decrease the scale of operation, and new firms can enter and existing firms can exit the industry.
A. short run
B. long run
B.
165. In the short run, total production will _____ because of specialization.
A. fall slowly
B. rise slowly
C. stay the same
B.

It is like an S curve
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166. The short run is:
A. The period during which some factor of production cannot be changed.
B. The period during which some factor of production can be changed.
A.
167. If there are fixed costs, a firm is operating in the _____ run.
A. long
B. short
B.
168. If there are only variable costs and no fixed costs, a firm is operating in the ____ run.
A. short
B. long
B.
169. Draw what the average product line and the marginal product line look like in the short run.
• Average product is a upside down parabola.
• Marginal product is like a bump and goes down once it intersects with the average product.
170. What are the 4 important types of costs that firms are concerned with?
• 1. total costs
• 2. marginal costs
• 3. variable costs
• 4. fixed costs
171. ___________ any cost that does not depend on the firm’s level of output (Q).
Fixed costs
172. Rent on a store and property taxes are considered ________.
A. fixed costs
B. variable costs
C. marginal costs
D. total costs
A.
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173. Sunk costs are also known as ______. Check all that apply.
A. opportunity costs
B. fixed costs
D. all of the above
D.
174. For ________ costs, firms have no choice but to pay them in the short run.
fixed
175. Fixed costs influence our decisions.
A. True
B. False
B.

We cannot do anything about them so why care.
176. How do we find average fixed costs?
TFC/q = AFC
177. Draw the total fixed costs in the short run and an average fixed costs in the long run.
• Short run --> straight line (horizontal)
• Long run --> downward sloping (like a demand curve)
178. Average fixed costs _________ as quantity rises.
A. declines
B. stays the same
C. rises
D. shifts out
A.
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179. As quantity increase, total fixed costs
A. increases
B. Stays the same
C. declines
D. shifts in
B.

ICLLICKER
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180. __________ is a cost that depends on the level of production chosen.
A. marginal costs
B. variable costs
C. fixed costs
D. total costs
B.
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181. Lemons and labor at a lemonade stand are examples of _________.
A. fixed costs
B. total costs
C. marginal costs
D. variable costs
D.
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182. Variable cost _____ change as quantity changes.
A. stay the same
B. do not
C. do
C.
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183. Variable costs are also known as _____.
Fixed costs are also known as ______.
• TVC
• and
• TFC
184. How do you calculate average variable costs?
TVC/q = AVC
185. Remember this equation when looking at how much capital or labor intensive technologies you are going to use.
TVC= (Kx PK)+ (Lx PL
186. How do we calculate average total costs?
ATC = AFC + AVC

or

TC/ q = ATC
187. How do we calculate total costs?
TC = FC + VC
188. There are no fixed costs in the long run.
A. true
B. false
A.
189. _________ is the increase in total cost that results from producing one more unit of output.  Marginal costs reflect changes in variable costs only since fixed costs do not change.
Marginal cost
190. How do we calculate marginal cost?
MC = change in TC/change in Q
191. Your variable costs will ________ if you increase production.
A. fall
B. rise
C stay the same
D. none of the above
B.
192. What are the 2 effects of fixed costs on firms?
• 1. leads to diminishing marginal returns
• 2. limits its capacity to produce
193. Marginal costs ultimately _______ with output in the short run.
A. decrease
B. increase
C. stay the same
B.
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194. The law of diminishing marginal returns is the same as the law of increasing marginal costs.
A. true
B. false
A.
195. The fixed costs at the production of zero, will stay the same in the _____.
A. long run
B. short run
B.
196. Draw the graphs for the marginal product and the marginal costs.
• The marginal product increases and then decreases once it hits about 2.
• The marginal cost decreases at first and then it increases once it hits about 2.
197. The shape of the short-run marginal cost curve is fundamentally attributed to:
A. the short run curve not allowing firms to make decisions
B. A capacity constraint due to limited fixed       inputs
B.

ICLICKER
198. Marginal cost intersects average variable cost at the lowest, or minimum, point of AVC.
A. True
B. False
A.

Try to draw the curves
199. Draw the average variable curve and the marginal cost curve.
• The marginal costs curve is like a check mark.
• The average variable costs is like a U with the marginal costs intersecting at the lowest point.
200. Marginal cost below average -->pulls average down--> average declining
Marginal cost above average-->pulls average up--> average increasing
IMPORTANT
201. What is the difference between the total fixed costs and the total variable costs?
the total fixed costs.

Draw the graphs.
202. Lecture 15, slide 42 is REALLY helpful.
Look it up.
203. If marginal cost is below average total cost, average total cost will decline toward marginal cost.  If marginal cost is above average total cost, average total cost will increase.   As a result, marginal cost intersects average total cost at ATC’s minimum point
IMPORTANT
204. If you want a review of all the costs
Go to Lecture 15, slide 48
205. When we talk about costs in economics, we are always talking about the economic costs.
A. True
B. False
A.
206. What is the main goal for the long run?
A. find the absolute lowest costs to produce
B. maintain variable cost
C. maximize production costs
D. develop fixed costs
A.
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207. _______ is a curve that indicates the lowest average cost of production at each rate of output when the size or “scale” of the firm is allowed to vary.
The long run average cost curve
208. For a long run average cost curve, each point of tangency represents the least cost way of producing that level of output.
A. True
B. False
A.
209. _________ is an increase in a firm’s scale of production leads to lower costs per unit produced.
A. diseconomies of scale
B. economies of scale
C. constant returns to scale
B.
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210. ___________ is an increase in a firm’s scale of production has no effect on costs per unit produced.
A. economies of scale
B. diseconomies of scale
C. constant returns to scale
C.
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211. ___________ is an increase in a firm’s scale of production leads to higher costs per unit produced.
A. diseconomies of scale
B. constant returns to scale
C. economies of scale
A.
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212. Wal-Mart is a firm that has achieved _______.
A. diseconomies of scale
B. economies of scale
C. constant returns to scale
B.
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213. You have a lemonade stand and you make another one. You make the same prices. This firm has achieved _________.
A. economies of scale
B. diseconomies of scale
C. constant returns to scale
C.
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214. ____________ is the lowest point on the LRAC.  It is also known as the optimum plant size (where production occurs at the lowest possible cost), and varies for each firm/industry.
Minimum efficient scale

It can occur over a range, it does not just have to be a point. The range is where the curve is flat.
215. MES is the lowest rate of _________.
A. price
B. output
C. input
D. cost
B.
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216. If P>AVC the firm should not shut down.
A. True
B. False
B.
217. If P<AVC the firm should not shut down.
A. True
B. False
A.
218. If the P>AVC the firm should shut down.
A. True
B. False
A.
219. If P<AVC the firm should shut down.
A. True
B. False
B.
220. If P> ATC then there is a _________ profit.
A. negative
B. positive
I don't know
221. How do you calculate profits?
• Profits = TR - TC
• Profits = Q (P - ATC)
222. A firm will want to produce where ______ to maximize profits.
A. P = MC
B. ATC = 0
C. TR>TC
D. MR = MC
D.
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223. Marginal revenue is also known as ________.
A. profit
B. product
C. demand
D. marginal cost
C.

This is important when we are trying to set
MR =MC
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224. When P=ATC the profit is _________.
A. negative
B. positive
C. zero
D. none of the above
C.
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225. Overall, the best option for society is when a firm sets ________.
A. MR=MC
B. MC = MF
C. P = MC
D. P = MR
C.

This is efficient because benefit = society
(this multiple choice question has been scrambled)
226. If the benefit is greater than the marginal cost, ____ products should be produced.
A. more
B. less
A.
227. If the marginal cost is greater than the benefit, _______ products should be produced.
A. more
B. less
B.
228. Where marginal benefit = marginal cost, it is considered socially efficient because we have allocated all the goods.
A. true
B. false
A.
229. ________ is an industry structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run.
Perfectly competition
230. What are the 5 characteristics of a perfectly competitive firm?
• 1.There are many small firms and many small consumers.
• 2.The firms sell a homogeneous product (commodity).
• 3.Everyone (buyers and sellers) has access to full information.
• 4.There is unrestricted entry and exit to the market, (but not necessarily “costless”).
• 5.Prices are not fixed or regulated by the state
231. __________ can change their level of output without affecting the price. The follow the price given and change their output in response.
A. price followers
B. price renters
C. price seekers
D. price takers
D.
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232. You are on the Drillfield and want to buy a pencil. There are 200 companies selling at one price. No one can make their own price but they can choose their own quantities. This is a _____ firm.
perfectly competitive
233. Wheat, copper, and stocks are examples of products that are __________.
A. perfect competition
B. monopolies
C. oligopolies
D. monopolistic competition
A.
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234. Which one is perfectly competitive?
A. shoes
B. soybeans
C. cars
D. hot dogs
B.

If you can think of a brand name for a certain product, it is probably not perfectly competitive.
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235. The curve for a perfectly competitive firm is ___________.
A. perfectly elastic
B. inelastic
C. perfectly inelastic
D. elastic
A.

Same price, different quantities
Because they have a perfect \$1,000 substitutes because there are 1,000 other companies that are selling the same product
(this multiple choice question has been scrambled)
236. Buyers know exactly what they are buying is a characteristic of ________ firms.
A. monopolies
B. oligopolies
C. monopolistic competition
D. perfect competition
D.
(this multiple choice question has been scrambled)
237. Unprofitable firms can leave the market and new firms can enter profitable markets.
This is a characteristic of ___________.
A. monopolies
B. perfect competition
C. monopolistic competition
D. oligopolies
B.
(this multiple choice question has been scrambled)
238. Which is Not a characteristic of a perfectly competitive firm
A. unregulated prices
B. full information
C. firms can exit and enter freely
D. large firms
E. many small firms
F. homogenous product
D.
(this multiple choice question has been scrambled)
239. Where does the price taken for perfect competition come from?
A. the firms
B. the government
C. the households
D. the market equilibrium
D.
(this multiple choice question has been scrambled)
240. For a perfectly competitive firm, the demand curve is equal to what?
A. D= P
B. D=MR
C. D=AR
D. all over the above
D.

D = P = MR =AR
 Author: rbeato ID: 210965 Card Set: ECON Exam 2 Updated: 2013-05-11 17:18:02 Tags: Econ Trost Folders: Description: Notecards for Exam 2 Show Answers: