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Principles of Microeconomics, 10e (Case/Fair/Oster)

Chapter 8 Short-Run Costs and Output Decisions

8.1 Costs in the Short Run

1 Multiple Choice

1) In the short run

A) a fixed factor of production does NOT impose limits on existing firms.
B) all firms must bear some costs regardless of their output.
C) new firms can enter an industry.
D) existing firms can exit an industry.
Answer: B
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

2) Fixed costs
A) do NOT exist in the long run.
B) depend on a firmʹs level of output.
C) are zero if a firm produces no output.
D) are total costs minus average variable costs.
Answer: A
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

3) Which statement is NOT true? Variable costs are

A) equal to total costs in the long run.
B) zero if output is zero.
C) equal to the product of average variable cost and the output level.
D) constant as output increases.
Answer: D
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

4) Economists usually assume that is a fixed input in the run.

A) labor; short
B) capital; short
C) labor; long
D) capital; long
Answer: B
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

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5) Economists usually assume that labor is input in the run.

A) a fixed; short
B) a fixed; long
C) a variable; short
D) part fixed and part variable; long
Answer: C
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

6) The formula for total fixed cost is

A) TFC = TC + TVC.
B) TFC = TVC ‐TC.
C) TFC = TC/TVC.
D) TFC = TC ‐TVC.
Answer: D
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

7) Total cost is calculated as

A) TFC+TVC.
B) ATCxP.
C) the sum of all the firmʹs implicit costs.
D) AFC+AVC.
Answer: A
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

8) The Lawn Ranger, a landscaping company, has total costs of $5,000 and total variable costs
of $1,000. The Lawn Rangerʹs total fixed costs are
A) $0.
B) $4,000.
C) $6,000.
D) indeterminate because the firmʹs output level is unknown.
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

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9) The Lawn Ranger, a landscaping company, has total costs of $7,000 and total fixed costs of
$5,000. The Lawn Rangerʹs total variable costs are
A) $2,000.
B) $3,000.
C) $5,000.
D) indeterminate because the firmʹs output level is unknown.
Answer: A
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

10) A dairy company, Farley Farm, has total costs of $10,000 and total variable costs of $3,000.
Farley Farmʹs total fixed costs are
A) $0.
B) $7,000.
C) $13,000.
D) indeterminate because the firmʹs output level is not known.
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

11) Wilburʹs Widgets, a widget company, produces 100 widgets. Its average fixed cost is $6 and
its total variable cost is $400. The total cost of producing 100 widgets is .
A) $306.
B) $400.
C) $600.
D) $1,000.
Answer: D
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

12) Amy spends $6,000 on remodeling a storefront that she then opens as a take‐out deli. After
opening her deli her business is terrible and she needs an additional $2,000 to keep the deli
open. Which of the following is TRUE?
A) The $6,000 Amy spent on remodeling represents a part of the total variable cost of her
business.
B) The $6,000 Amy spent on remodeling represents a sunk cost of her business.
C) The $2,000 Amy needs to keep the deli open represents her marginal costs of
production.
D) The $2,000 Amy needs to keep the deli open represents her total fixed costs.
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

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13) Dana spends $10,000 on remodeling a storefront that she then opens as a shoe store. Her
business has not been very successful, and she needs an additional $3,000 to keep the shoe
store open. Which of the following is TRUE?
A) The $10,000 Dana spent on remodeling represents a part of the total variable cost of her
business.
B) The $3,000 represents her marginal costs of production.
C) The $10,000 Dana spent on remodeling is a fixed cost of her business.
D) The $3,000 Dana needs to keep the deli open represents her total fixed costs.
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

14) Firms can their costs in the short run.

A) change; fixed
B) not change; fixed
C) change; overhead
D) not change; variable
Answer: B
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

15) The formula for average fixed costs is

A) TFC ‐q.
B) TFC/q.
C) q/TFC.
D) Δq/ΔTFC.

Answer: B
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

16) Average fixed costs

A) are the costs associated with producing an additional unit of output.
B) provide a per unit measure of costs.
C) fall as output rises.
D) are constant.
Answer: C
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

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Refer to the information provided in Figure 8.1 below to answer the question that follows.

Figure 8.1

17) Refer to Figure 8.1 above. The total fixed costs for Cyndyʹs Floral Arrangements are $1,000. If
Cyndyʹs Floral Arrangements produces 200 silk flower arrangements, the average fixed costs
are
A) $0.20.
B) $5.
C) $20.
D) $50.
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

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Refer to the information provided in Figure 8.2 below to answer the question that follows.

Figure 8.2

18) Refer to Figure 8.2 above. The total fixed costs for The Barber Shop are $3,000. If The Barber
Shop produces 300 hair cuts, the average fixed costs are
A) $.20.
B) $5.
C) $10.
D) $100.
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

19) As output decreases, average fixed costs

A) decrease.
B) initially decrease and then increase.
C) remain constant.
D) increase.
Answer: D
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

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20) Both Kate and Kyle own saltwater taffy factories. Kateʹs factory has low fixed costs and high
variable costs. Kyleʹs factory has high fixed costs and low variable costs. Currently, each
factory is producing 1,000 boxes of taffy at the same total cost. Complete the following
statement with the correct answer. If each produces
A) less, their costs will be equal.
B) more, their costs will be equal.
C) more, the costs of Kateʹs factory will exceed those of Kyleʹs factory.
D) less, the costs of Kateʹs factory will exceed those of Kyleʹs factory.
Answer: C
Diff: 3
Topic: Costs in the Short Run
Skill: Conceptual

21) Short‐run costs that do NOT depend on the level of output are
A) total fixed costs only.
B) total variable costs only.
C) total costs only.
D) both total variable costs and total costs.
Answer: A
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

22) Which statement is NOT true regarding the total variable cost curve?
A) The total variable cost curve increases as output increases.
B) The total variable cost curve shows the variable costs of production given current
factor prices.
C) The total variable cost curve starts at the origin.
D) The total variable cost curve is a horizontal line.
Answer: D
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

23) A point on a total variable cost curve shows the variable cost a firm will bear to
produce a certain output.
A) highest
B) lowest
C) change in
D) average
Answer: B
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

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24) is(are) most likely a variable cost for a firm.

A) The interest payments made on loans
B) The franchiserʹs fee that a restaurant must pay to the national restaurant chain
C) The monthly rent on office space that it leased for a year
D) The payroll taxes that are paid on employee wages
Answer: D
Diff: 3
Topic: Costs in the Short Run
Skill: Conceptual

25) are likely a fixed cost of a firm.

A) Wages paid to employees
B) The payments for supplies
C) Lease payments for office space
D) Travel expenses to meet with clients
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Conceptual

Refer to the information provided in Table 8.1 below to answer the questions that follow.

Table 8.1
Produce Using Techniques Units of Variable K Inputs L
1 unit of output A 8 8
B 4 12

2 units of output A 14 12
B 8 20

3 units of output A 16 12
B 12 22

26) Refer to Table 8.1. Assuming the price of capital (K) is $10 per unit and the price of labor (L)
is $5 per unit, what production technique should this firm use to produce 2 units of output?
A) production technique A
B) production technique B
C) The firm is indifferent between production technique A and production technique B.
D) It is impossible to determine if the firm should select production technique A or B
because total fixed costs are not given.
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

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27) Refer to Table 8.1. Assuming the price of capital (K) is $10 per unit and the price of labor (L)
is $5 per unit, the lowest long‐run total cost of producing one unit of output is
A) $16.
B) $100.
C) $120.
D) $220.
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

28) Refer to Table 8.1. Assume that the relevant time period is the short run. Assuming the price
of capital (K) is $10 per unit and the price of labor (L) is $5 per unit, this firmʹs total cost of
producing one unit of output is
A) $100.
B) $120.
C) $220.
D) indeterminate from this information.
Answer: D
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

29) Refer to Table 8.1. Assume that the relevant time period is the short run. Assuming the price
of labor (L) is $5 per unit and the price of capital (K) is $10 per unit, the average total cost of
producing two unit of output is
A) $20.
B) $40.
C) $90.
D) $100.
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

30) Refer to Table 8.1. Assuming the price of capital (K) is $10 per unit and the price of labor (L)
is $5 per unit, the marginal cost of producing the third unit of output is
A) $30.
B) $40.
C) $50.
D) indeterminate from this information.
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

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31) Refer to Table 8.1. Assuming the price of capital (K) is $10 per unit and the price of labor (L)
is $5 per unit, the firm will use production technique to produce of
output.
A) A; all three units
B) B; all three units
C) B; the first two units of output and production technique A to produce the third unit
D) A; the first unit and production technique B to produce the second and third units
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

32) Marginal cost is the

A) increase in total cost resulting from producing one more unit of output.
B) average cost of production divided by output.
C) increase in AVC resulting from producing one more unit of output.
D) equivalent of average total cost.
Answer: A
Diff: 2
Topic: Costs in the Short Run
Skill: Definition

33) A firm will begin to experience diminishing returns at the output where marginal
A) cost increases.
B) cost decreases.
C) product increases.
D) both B and C
Answer: A
Diff: 2
Topic: Costs in the Short Run
Skill: Definition

34) Diminishing marginal returns implies

A) decreasing average variable costs.
B) decreasing marginal costs.
C) increasing marginal costs.
D) decreasing average fixed costs.
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Definition

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35) Marginal cost is average variable cost when .

A) equal to; average total cost is minimized
B) less than; total cost is maximized
C) greater than; average fixed cost is minimized
D) equal to; average variable cost is minimized.
Answer: D
Diff: 2
Topic: Costs in the Short Run
Skill: Conceptual

36) In a short run production process a(n) marginal product of labor explains why
marginal cost is positive and .
A) zero; falls
B) constant; rises
C) increasing; does not change
D) diminishing; rises
Answer: D
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

37) In the short run when the marginal product of labor , the marginal cost of an
additional unit of output .
A) rises; rises
B) falls; falls
C) rises; falls
D) falls; doesnʹt change
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Fact

38) Total variable costs with increasing output.

A) always increase
B) always decrease
C) initially increase and then decrease
D) initially decrease and then increase
Answer: A
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

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39) One formula for MC is

A) TVC/q.
B) q/TVC.
C) ΔTVC/q.
D) ΔTVC/Δq.
Answer: D
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

40) One formula for AVC is

A) q/TVC.
B) TVC/q.
C) ΔTVC/Δq.
D) Δq/ΔTVC.
Answer: B
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

41) As output increases, in the short run,

A) the difference between average total cost and average variable cost decreases.
B) the difference between total cost and average variable cost decreases.
C) marginal cost eventually increases.
D) All of the above are correct.
Answer: A
Diff: 2
Topic: Costs in the Short Run
Skill: Conceptual

42) Because marginal cost is always in the short run, total variable cost always
when output increases.
A) positive; increases
B) positive; decreases
C) negative; increases
D) negative; decreases
Answer: A
Diff: 2
Topic: Costs in the Short Run
Skill: Conceptual

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43) In the short run marginal cost is positive and decreasing at output levels where total variable
cost is at a(n) rate.
A) increasing; increasing
B) increasing; decreasing
C) decreasing; increasing
D) decreasing; decreasing
Answer: B
Diff: 3
Topic: Costs in the Short Run
Skill: Conceptual

44) In the short run marginal cost is positive and increasing at output levels where total variable
cost is at a(n) rate.
A) increasing; increasing
B) increasing; decreasing
C) decreasing; increasing
D) decreasing; decreasing
Answer: A
Diff: 3
Topic: Costs in the Short Run
Skill: Conceptual

Refer to the information provided in Figure 8.3 below to answer the questions that follow.

Figure 8.3

45) Refer to Figure 8.3. The marginal cost of the 10th basketball is
A) $2.
B) $3.
C) $3.05.
D) $5.80.
Answer: A
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

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46) Refer to Figure 8.3. If total fixed costs are $50, then average total cost of producing 10
basketballs is
A) $3.
B) $5.
C) $8.
D) $80.
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

47) Refer to Figure 8.3. The marginal cost of the ninth basketball is
A) less than $2.
B) $2.
C) $3.
D) greater than $3.
Answer: A
Diff: 3
Topic: Costs in the Short Run
Skill: Analytic

48) Labor is the only variable input for Elliotʹs dog‐walking service. His labor costs are $300 a
day and his service walks 25 dogs per day. His labor costs increase to $315.50 a day to walk
26 dogs per day. The marginal cost of walking that 26th dog is
A) $15.50
B) $19.50.
C) $29.50.
D) indeterminate from the information given.
Answer: A
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

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Refer to the information provided in Table 8.2 below to answer the questions that follow.

Table 8.2
Number of TVC MC AVC TFC TC AFC ATC
Earnings
0 100
1 50
2 95
3 46.67
4 300
5 270

49) Refer to Table 8.2. If Sherry produces zero earrings, her total fixed costs are
A) $0.
B) $50.
C) $100.
D) indeterminate from this information.
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

50) Refer to Table 8.2. If Sherry produces one pair of earrings, her total variable costs are
A) $50.
B) $100.
C) $150.
D) indeterminate from this information.
Answer: A
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

51) Refer to Table 8.2. If Sherry produces two pairs of earrings, her marginal cost is
A) $40.
B) $45.
C) $72.50.
D) $122.50.
Answer: A
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

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52) Refer to Table 8.2. If Sherry produces three pairs of earrings, her total variable costs are
A) $26.67.
B) $140.
C) $175.
D) $225.
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

53) Refer to Table 8.2. If Sherry produces five pairs of earrings, her total costs are
A) $320.
B) $360.
C) $370.
D) $400.
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

54) Refer to Table 8.2. If Sherry produces four pairs of earrings, her average fixed costs are
A) $4.
B) $20.
C) $25.
D) $100.
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

55) Refer to Table 8.2. Assume that Sherryʹs Earrings is producing in a perfectly competitive
market and the market price for earrings is $60. To maximize profits Sherry should produce
pairs of earrings.
A) two
B) three
C) four
D) five
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

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Refer to the information provided in Table 8.3 below to answer the questions that follow.

Table 8.3

56) Refer to Table 8.3. What is the total cost of producing zero units of output?
A) $0
B) $30
C) $60
D) indeterminate from the given information
Answer: A
Diff: 2
Topic: Costs in the Short Run
Skill: Conceptual

57) Refer to Table 8.3. The marginal cost of the fourth unit is and the average total cost
of the fourth unit is .
A) $10; $30
B) $20; $45
C) $30; $35
D) indeterminate from the given information
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

58) Refer to Table 8.3. From the information in the given table,
A) the firm is in the long run.
B) the firm experiences diminishing returns to its variable input.
C) the marginal cost curve intersects the average total cost curve between 3 and 4 units of
output.
D) the difference between total cost and total variable cost decreases as output increases.
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

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59) Refer to Table 8.3. If the firm is in a perfectly competitive industry with a market price of
$30 per unit, the firm will produce units and earn a profit of .
A) three; $20
B) four; $20
C) four; -$20
D) five; $30
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

60) If we know average total cost and the amount of output, then we can always calculate total
cost by average total cost the amount of output.
A) adding; and
B) subtracting; from
C) multiplying; by
D) dividing; by
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

61) If the marginal cost curve is above the average variable cost curve, then
A) average variable cost is increasing.
B) average variable cost is decreasing.
C) average variable cost is constant.
D) marginal cost is decreasing.
Answer: A
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

62) Marginal cost intersects at its minimum.

A) total cost
B) average total cost
C) average fixed cost
D) (B) and (C) are both correct.
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Fact

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63) If the marginal cost curve is below the average variable cost curve, then
A) average variable cost is increasing.
B) average variable cost is decreasing.
C) average variable cost is constant.
D) marginal cost is increasing.
Answer: B
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

64) If the average variable cost curve is above the marginal cost curve, then
A) marginal costs must be decreasing.
B) marginal costs must be increasing.
C) marginal costs can be either increasing or decreasing.
D) average variable costs must be increasing.
Answer: C
Diff: 3
Topic: Costs in the Short Run
Skill: Fact

65) The marginal cost curve intersects the average variable cost curve at the value of
the average variable cost curve.
A) maximum
B) minimum
C) zero
D) average
Answer: B
Diff: 1
Topic: Costs in the Short Run
Skill: Conceptual

66) Twenty‐five students in a class take a test for which the average grade is 75. Then a twenty‐
sixth student enters the class, takes the same test, and scores 70. The test average grade
calculated with 26 students will
A) rise above 75.
B) fall below 75.
C) change from 75 but the direction is unclear.
D) still equal 75.
Answer: B
Diff: 1
Topic: Costs in the Short Run
Skill: Conceptual

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67) If a firmʹs total costs are $75 when it produces 10 units of output and $80 when it produces
11 units of output, then the marginal cost of producing the 11th unit is
A) $1.
B) $5.
C) $8.09.
D) $10.
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

68) If a firmʹs total costs are $100 when 10 units of output are produced and $105 when 11 units
of output are produced, the marginal cost of the 11th unit is
A) $1.
B) $3.
C) $5.
D) $9.36.
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

69) If the average variable cost of the fifth hat is $30, then the total variable cost of five hats is
A) $6.
B) $150.
C) $1800.
D) indeterminate from this information.
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

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Refer to the information provided in Figure 8.4 below to answer the questions that follow.

Figure 8.4

70) Refer to Figure 8.4. Micro Ovenʹs average fixed costs of producing two units of output are
A) $250.
B) $425.
C) $500.
D) indeterminate from this information.
Answer: A
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

71) Refer to Figure 8.4. If three microwave ovens are produced, Micro Ovenʹs total variable costs
are
A) $350.
B) $500.
C) $1000.
D) indeterminate from this information.
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

72) Refer to Figure 8.4. If three microwave ovens are produced, average variable costs are
A) $166.67.
B) $333.33.
C) $500.
D) $1,500.
Answer: A
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

73) Refer to Figure 8.4. The marginal cost of the third microwave oven is

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A) $133.33.
B) $150.
C) $350.
D) indeterminate from this information.
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

74) Refer to Figure 8.4. Up to point A costs are .

A) marginal; decreasing
B) marginal; increasing
C) average variable; decreasing
D) average variable; increasing
Answer: C
Diff: 3
Topic: Costs in the Short Run
Skill: Analytic

75) Refer to Figure 8.4. After point A costs are .

A) average total; increasing
B) marginal; decreasing
C) average variable; decreasing
D) average variable; increasing
Answer: D
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

76) Refer to Figure 8.4. Marginal costs will equal average variable costs at
A) two microwave ovens.
B) three microwave ovens.
C) six microwave ovens.
D) an indeterminate number of microwave ovens from this information.
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

22
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77) Refer to Figure 8.4. Micro Ovenʹs average total costs are if it produces six
microwave ovens.
A) $33.33
B) $83.33
C) $116.67
D) $200.00
Answer: D
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

78) Refer to Figure 8.4. The marginal cost of the sixth microwave oven is
A) $83.33.
B) $116.67.
C) $200.
D) $1200.
Answer: B
Diff: 3
Topic: Costs in the Short Run
Skill: Analytic

79) Refer to Figure 8.4. Average variable costs are minimized at an output level of
A) 2.
B) 3.
C) 6.
D) an indeterminate number based on the available information.
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

80) Refer to Figure 8.4. ʹs average fixed costs are if it produces six microwave ovens.
A) $33.33
B) $83.33
C) $116.67
D) indeterminate from this information
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

23
 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com

81) Refer to Figure 8.4. Micro Oven minimizes average total costs at microwave ovens.
A) two
B) between three and five
C) six
D) greater than six
Answer: D
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

82) Refer to Figure 8.4. The vertical distance AB represents costs.

A) total fixed
B) average fixed
C) marginal
D) average total
Answer: A
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

Refer to the information provided in Figure 8.5 below to answer the questions that follow.

Figure 8.5

83) Refer to Figure 8.5. The total fixed costs for Ollieʹs Ovens are
A) $0.
B) $250.
C) $300.
D) indeterminate from this information.
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

24
To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com

84) Refer to Figure 8.5. Average variable costs are if Ollieʹs Ovens produces two ovens.
A) $100
B) $200
C) $225
D) indeterminate from this information.
Answer: A
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

85) Refer to Figure 8.5. Average variable costs are if Ollieʹs Ovens produces three
ovens.
A) $166.67
B) $83.33
C) $500
D) $1,500
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

86) Refer to Figure 8.5. The marginal cost of the third oven is
A) $50.
B) $100.
C) $150.
D) indeterminate from this information.
Answer: A
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

25
 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com

Refer to the information provided in Figure 8.5 below to answer the questions that follow.

Figure 8.5

87) Refer to Figure 8.5. The marginal cost is equal to average variable cost when ovens
are produced.
A) two
B) three
C) six
D) indeterminate from this information.
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

88) Refer to Figure 8.5. The average total costs are minimized when ovens are
produced.
A) exactly six
B) more than six
C) less than six
D) indeterminate from this information.
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

89) Refer to Figure 8.5. The marginal cost of the sixth oven is
A) $50.00.
B) $66.67.
C) $108.33.
D) indeterminate from this information.
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

26
To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com

90) A short run total cost schedule is a cost schedule shifted upward by the amount of
cost.
A) total fixed; marginal
B) marginal; total variable
C) total variable; total fixed
D) total variable; marginal
Answer: C
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

91) There are outputs for which costs exceed costs in the short run.
A) total fixed; total
B) average variable; average total
C) total variable; total
D) average total; average variable
Answer: D
Diff: 1
Topic: Costs in the Short Run
Skill: Conceptual

92) Total cost is

A) TFC ‐TVC.
B) TFC/TVC.
C) TFC + TVC.
D) AFC + AVC.
Answer: C
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

93) Total cost refers to

A) the full economic costs of production.
B) the sum of average fixed cost and average variable cost.
C) the fixed costs of production.
D) the explicit costs of production.
Answer: A
Diff: 1
Topic: Costs in the Short Run
Skill: Definition

27
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94) ATC is
A) TC/q.
B) q/TC.
C) AFC -AVC.
D) ΔTC -Δq.
Answer: A
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

95) Average total cost

A) measures the spread of overhead across output.
B) is the average cost of producing each unit of output.
C) is always increasing.
D) is the sum of fixed cost and average variable cost.
Answer: B
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

96) The Framing Gallery frames posters and has total fixed costs of $1,000. The Framing Gallery
is currently framing posters if its average variable cost is $20 and its average total
cost is $30.
A) 5
B) 25
C) 100
D) an indeterminate number of
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

97) The average variable cost of producing 100 sundaes is $3. At this level of output, average
variable cost is minimized. Which of the following statements is TRUE?
A) Marginal cost of the 100th sundae is $300.
B) Average total cost is minimized at an output greater than 100 sundaes.
C) Average fixed cost is minimized at an output less than 100 sundaes.
D) Total cost of producing 100 sundaes is $300.
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

28
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98) Average variable and average total costs get closer together as output increases because
as output increases.
A) diminishing returns set in
B) average fixed costs decrease
C) marginal costs decrease
D) total and total variable costs get closer together
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

Refer to the information provided in Figure 8.6 below to answer the questions that follow.

Figure 8.6

99) Refer to Figure 8.6. Curve 1 is Outdoor Equipmentʹs cost curve.

A) marginal
B) average variable
C) average total
D) average fixed
Answer: A
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

100) Refer to Figure 8.6. Outdoor Equipmentʹs average total costs are minimized at the output
level
A) where Curves 1 and 2 intersect.
B) where Curves 1 and 3 intersect.
C) between the intersections of Curves 1 and 2 and Curves 1 and 3.
D) indeterminate with the given information.
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

29
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101) Refer to Figure 8.6. Curve 2 is Outdoor Equipmentʹs cost curve.

A) marginal
B) average variable
C) average total
D) average fixed
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

102) Refer to Figure 8.6. Curve 3 is Outdoor Equipmentʹs cost curve.

A) marginal
B) average variable
C) average total
D) average fixed
Answer: C
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

103) Refer to Figure 8.6. The vertical distance AB is Outdoor Equipmentʹs cost.
A) marginal
B) average fixed
C) total fixed
D) total
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Definition

104) If marginal cost is below average total cost, average total cost will
A) be maximized.
B) decrease.
C) increase.
D) remain constant.
Answer: B
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

105) If marginal cost equals average total cost, average total cost will
A) be maximized.
B) decrease.
C) increase.
D) be minimized.
Answer: D
Diff: 2
Topic: Costs in the Short Run
Skill: Analytic

30
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106) The short‐run average total cost curve eventually begins to increase at an increasing rate
because of
A) diseconomies of scale phenomena.
B) a constraint that does not allow the firm to change its production technology.
C) diminishing returns phenomena.
D) increasing returns to scale to capital.
Answer: C
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

107) The law of diminishing marginal returns

A) results in average variable cost (AVC), average total cost (ATC), and marginal cost (MC)
curves eventually increasing at an increasing rate.
B) results in MC but not AVC curves eventually increasing at an increasing rate.
C) causes average fixed costs to decline continuously as output increases.
D) causes the difference between average total cost and average variable cost to increase
as output increases.
Answer: A
Diff: 2
Topic: Costs in the Short Run
Skill: Definition

108) In the short run a firm using variable labor and fixed capital inputs achieves the efficient
(lowest cost) level of output at the minimum point on its cost curve.
A) average total
B) total variable
C) average fixed
D) marginal
Answer: A
Diff: 2
Topic: Costs in the Short Run
Skill: Fact

109) A firm is producing output less than the output associated with the minimum point on the
firmʹs short run average variable cost curve. At this level of output the firm uses its fixed
capital input and its variable labor input .
A) efficiently; efficiently
B) efficiently; inefficiently
C) inefficiently; efficiently
D) inefficiently; inefficiently
Answer: D
Diff: 3
Topic: Costs in the Short Run
Skill: Conceptual

31
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110) Consider an output beyond the minimum point of a firmʹs short run average total cost curve.
At this level of output the firm can use its input at a lower average cost but only by
using its input at a higher average cost.
A) fixed capital; variable labor
B) variable labor; fixed capital
C) variable capital; fixed labor
D) fixed labor; variable capital
Answer: A
Diff: 3
Topic: Costs in the Short Run
Skill: Analytic

111) Related to the Economics in Practice on page 166: When considering expanding its student
body a college should
A) compare the marginal cost of educating an additional student to the tuition that
student pays.
B) compare the average total cost of educating an additional student to the tuition that
student pays.
C) definitely expand because education is very important and should be made available to
as many people as possible.
D) only consider doing so if they have sufficient housing.
Answer: A
Diff: 2
Topic: Costs in the Short Run: Economics in Practice
Skill: Conceptual

112) Related to the Economics in Practice on page 166: In higher education

A) the average total cost of educating students equals the marginal cost of educating an
additional student.
B) the average total cost of educating students exceeds the marginal cost of educating an
additional student.
C) the average total cost of educating students is less than the marginal cost of educating
an additional student.
D) the total fixed cost of educating students is less than the marginal cost of educating an
additional student.
Answer: B
Diff: 2
Topic: Costs in the Short Run: Economics in Practice
Skill: Fact

2 True/False

1) Average fixed costs rise continuously as quantity of output rises.

Answer: FALSE
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

32
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2) The increase in total cost that results from producing one more unit of output is the marginal
cost.
Answer: TRUE
Diff: 2
Topic: Costs in the Short Run
Skill: Definition

3) The best combination of inputs at one level of production may not be best at other levels.
Answer: TRUE
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

4) If marginal cost is increasing, then average variable cost must be increasing simultaneously.
Answer: FALSE
Diff: 1
Topic: Costs in the Short Run
Skill: Fact

5) Average total cost is minimized at a higher level of output than average variable cost.
Answer: TRUE
Diff: 1
Topic: Costs in the Short Run
Skill: Conceptual

6) When marginal cost is between average variable cost and average total cost, marginal cost is
decreasing.
Answer: FALSE
Diff: 2
Topic: Costs in the Short Run
Skill: Conceptual

7) Average total cost of producing 100 units of output is $5. If the marginal cost of producing
the 101st unit is $6, then average total cost of 101 units is less than $5.
Answer: FALSE
Diff: 2
Topic: Costs in the Short Run
Skill: Conceptual

8) Total variable cost divided by output is marginal cost.

Answer: FALSE
Diff: 1
Topic: Costs in the Short Run
Skill: Definition

33
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8.2 Output Decisions: Revenues, Costs, and Profit Maximization

1 Multiple Choice

1) Marginal revenue (MR) is

A) TR/q
B) ΔTR/Δq.
C) P*q
D) P/q
Answer: B
Diff: 1
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Definition

2) The main decision for a profit maximizing perfectly competitive firm is NOT what
but what .
A) level of output to produce; price to charge
B) price to charge; level of output to produce
C) level of output to produce; total revenue to achieve
D) price to charge; total cost to achieve
Answer: B
Diff: 1
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Fact

3) If an individual perfectly competitive firm charges a price above the industry equilibrium
price while competitors charge the equilibrium price, the firm will
A) sell all that it can produce and forgo no revenue.
B) sell all that it can produce and gain more revenue with the higher price.
C) sell part of what it can produce and forgo some revenue that it could have had.
D) not sell any of what it produces.
Answer: D
Diff: 1
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Fact

4) If an individual perfectly competitive firm charges a price below the industry equilibrium
price while competitors charge the equilibrium price, the firm will
A) not sell any of what it produces.
B) sell part of what it produces but forgo no revenue.
C) sell all that it produces and forgo no revenue.
D) sell all that it produces but forgo revenue that it could have had.
Answer: D
Diff: 1
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Fact

34
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5) Any firmʹs total revenue equals

A) MR × q.
B) P × q.
C) P/q.
D) MR/q.
Answer: B
Diff: 1
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Fact

6) The added revenue that a firm takes in when it increases output by one additional unit is
revenue.
A) total
B) marginal
C) variable
D) fixed
Answer: B
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

7) Marginal revenue is the

A) ratio of total revenue to quantity.
B) difference between total revenue and total costs.
C) added revenue that a firm takes in when it increases output by one additional unit.
D) additional profit the firm earns when it sells an additional unit of output.
Answer: C
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Definition

8) In perfect competition, a firmʹs marginal revenue curve

A) and the demand curve facing the firm are identical.
B) is always above the demand curve facing the firm.
C) is always below the demand curve facing the firm.
D) intersects the demand curve when marginal revenue is minimized.
Answer: A
Diff: 1
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Fact

35
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9) In perfect competition, a firmʹs marginal revenue curve is

A) downward sloping.
B) upward sloping.
C) horizontal.
D) vertical.
Answer: C
Diff: 1
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Fact

10) The relationship between the price that a perfectly competitive firm can charge buyers and
the firmʹs marginal revenue is that the price is marginal revenue over all output.
A) above
B) below
C) equal to
D) sometimes above and sometimes below
Answer: C
Diff: 1
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Fact

11) Profit‐maximizing firms want to maximize the difference between revenue and
cost.
A) total; marginal
B) total; total
C) marginal; marginal
D) marginal; average
Answer: B
Diff: 1
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Fact

12) Assume Dell Computer Company operates in a perfectly competitive market producing
5,000 computers per day. At this output level, price exceeds the firmʹs marginal and average
variable costs. It follows that producing one more computer will cause this firmʹs
A) total cost to decrease.
B) profits to increase.
C) profits to decrease.
D) profits to remain unchanged.
Answer: B
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

36
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13) Assume Dell Computer Company operates in a perfectly competitive market producing
5,000 computers per day. At this output level, price exceeds this firmʹs marginal and average
variable costs. To maximize profits, Dell should
A) make no adjustments as they are already maximizing their profits.
B) increase their output.
C) decrease their output.
D) stop producing since it is earning a loss.
Answer: B
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

14) Assume Dell Computer Company operates in a perfectly competitive market producing
5,000 computers per day. At this output level, marginal cost exceeds this firmʹs price.
Assuming price exceeds average variable cost, to maximize profits Dell should
A) make no adjustments as they are already maximizing their profits.
B) increase their output.
C) decrease their output.
D) stop producing since it is earning a loss.
Answer: C
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

15) Assume Dell Computer Company operates in a perfectly competitive market producing
5,000 computers per day. At this output level, price equals this firmʹs marginal cost.
Assuming price exceeds average variable cost, to maximize profits Dell should
A) make no adjustments as they are already maximizing their profits.
B) increase their output.
C) decrease their output.
D) stop producing since it is earning a loss.
Answer: A
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

37
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Refer to the information provided in Table 8.5 below to answer the following questions.

Table 8.5
Number of
TFC TVC TC MC
Fruit Baskets
0 $50 $0 $50 --
1 50 10 60 10
2 50 15 65 5
3 50 21 71 6
4 50 31 81 10
5 50 46 96 15
6 50 68 118 22

16) Refer to Table 8.5. Assume that Exotic Fruit sells fruit baskets in a perfectly competitive
market. The market price of a fruit basket is $22. To maximize profits, Exotic Fruit should
sell fruit basket(s) and their profit is .
A) three; $5
B) four; $7
C) five; $14
D) six; $14
Answer: D
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

17) Refer to Table 8.5. Assume that Exotic Fruit sells fruit baskets in a perfectly competitive
market. The market price of a fruit basket is $15. To maximize profits, Exotic Fruit should
sell fruit basket(s) and their profit it .
A) zero; $0
B) two; -$35
C) three; -$26
D) five; -$21
Answer: D
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

18) If a firmʹs demand curve is perfectly elastic, then at the profit maximizing level of output
A) P > MR > MC.
B) P = MR = MC.
C) P < MR < MC.
D) P > 0 and MR = 0.
Answer: B
Diff: 3
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Conceptual

38
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19) If a profit maximizing firm is currently producing output where MR = MC, it should
A) increase output so that marginal revenue is less than marginal cost.
B) decrease output so that marginal revenue will be greater than marginal cost and the
firmʹs profit will increase.
C) not change output because it is already maximizing profit.
D) exit the industry.
Answer: C
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Conceptual

20) If a firm is producing where MR > MC

A) the revenue gained by producing one more unit of output exceeds the cost incurred by
doing so.
B) the revenue gained by producing one more unit of output equals the cost incurred by
doing so.
C) the revenue gained by producing one more unit of output is less than the cost incurred
by doing so.
D) the firm is already maximizing profits because revenue is being increased by more than
costs.
Answer: A
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

21) Joeʹs Butcher Shop is producing where MR = MC, Joeʹs Butcher Shop must be
A) earning a zero economic profit.
B) incurring a loss.
C) maximizing profits.
D) maximizing revenue but not maximizing profits.
Answer: C
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

22) The profit‐maximizing level for all firms, regardless of industry structure, is the output level
where
A) TR = MC.
B) P = MC.
C) ATC = P.
D) MC = MR.
Answer: D
Diff: 1
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Fact

39
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Refer to the information provided in Figure 8.7 below to answer the question that follows.

Figure 8.7

23) Refer to Figure 8.7. If Buffy gives 17 perms per day, her daily profit is
A) $3.
B) $51.
C) $153.
D) $204.
Answer: B
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

24) A firm in a perfectly competitive industry produces its profit‐maximizing quantity, 40 units.
Industry price is $3, total fixed costs are $45, and total variable costs are $60. The firmʹs
economic profit is
A) $15.
B) $30.
C) $35.
D) $60.
Answer: A
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

40
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25) An individual wheat farmer produces wheat in a perfectly competitive market. An increase
in the market demand for wheat will cause the farmerʹs marginal revenue to and
his profit maximizing level of output to .
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: A
Diff: 3
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Conceptual

26) Corn is produced in a perfectly competitive market. The demand for ethanol decreases. This
will cause the individual corn farmerʹs marginal revenue to and their profit
maximizing level of output to .
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: D
Diff: 3
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Conceptual

27) Strawberries, a normal good, are produced in a perfectly competitive market. Average
consumer incomes increase. This will cause the individual strawberry farmerʹs marginal
revenue to and their profit maximizing level of output to .
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: A
Diff: 3
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Conceptual

28) A farmer producing bushels of soybeans in the perfectly competitive soybean industry is
currently maximizing profits. If the market price of soybeans falls and the farmer adjusts
output to the new price, he will produce soybeans and make profit.
A) fewer; the same
B) fewer; less
C) more; more
D) the same bushels of; the same
Answer: B
Diff: 3
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Conceptual

41
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Refer to the information provided in Figure 8.8 below to answer the questions that follow.

Figure 8.8

29) Refer to Figure 8.8. A soybean farmerʹs profit‐maximizing level of output is units of
output.
A) 200
B) 700
C) 1,000
D) 1,400
Answer: C
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

30) Refer to Figure 8.8. If this farmer is producing the profit‐maximizing level of output, her
profit is
A) $0.
B) $2,800.
C) $3,000.
D) $12,000.
Answer: C
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

31) Refer to Figure 8.8. What is the total cost of producing the profit maximizing level of output?
A) $9.
B) $1,000.
C) $5,600.
D) $9,000.
Answer: D
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

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32) Refer to Figure 8.8. If the market price of soybeans falls to $8, then to maximize profits this
farmer should produce
A) 200 bushels of soybeans.
B) 700 bushels of soybeans.
C) 1,000 bushels of soybeans.
D) a level of output that is indeterminate from this information.
Answer: B
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

33) Refer to Figure 8.8. If this farmer produces the profit maximizing level of soybeans when the
market price is $8 per bushel, then her total revenue would be
A) $1,200.
B) $2,800.
C) $5,600.
D) $8,400.
Answer: C
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

34) Refer to Figure 8.8. If this farmer produces the profit maximizing level of soybeans when the
market price is $8 per bushel, then her profit would be
A) $0.
B) $2,800.
C) $5,600.
D) $8,000.
Answer: A
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

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Refer to the information provided in Figure 8.9 below to answer the questions that follow.

Figure 8.9

35) Refer to Figure 8.9. This farmerʹs profit‐maximizing level of output is units of
output.
A) 100
B) 350
C) 500
D) 700
Answer: C
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

36) Refer to Figure 8.9. If this farmer is producing the profit maximizing level of output, her
profit is
A) $0.
B) $1,000.
C) $2,000.
D) $3,000.
Answer: C
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

44
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37) Refer to Figure 8.9. If the market price of hay falls to $18, then to maximize profits this
farmer should produce
A) 350 bales of hay.
B) 500 bales of hay.
C) 750 bales of hay.
D) a level of output that is indeterminate from this information.
Answer: A
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

38) Refer to Figure 8.9. If this farmer produces the profit maximizing level of hay when the
market price is $18 per bale, her total revenue would be
A) $1,200.
B) $2,800.
C) $5,600.
D) $6,300.
Answer: D
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

39) Refer to Figure 8.9. If this farmer produces the profit maximizing quantity when the market
price is $18, her profit is
A) $0.
B) $700.
C) $2,000.
D) indeterminate from this information.
Answer: A
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

40) A perfectly competitive firm will earn positive economic profits in the range of output for
which the firmʹs price is its minimum average total cost.
A) below
B) above
C) equal to
D) below its marginal cost and
Answer: B
Diff: 3
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

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41) If a perfectly competitive firmʹs average total cost curve is above its demand schedule at
every level of output, then the firm will earn profits.
A) positive
B) breakeven
C) negative
D) zero
Answer: C
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

42) A perfectly competitive firm breaks even at the level of output where
A) P > ATC.
B) P < ATC.
C) P = ATC.
D) P = MC.
Answer: C
Diff: 3
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

43) If P = MC and MC > ATC, then a perfectly competitive firm will earn profits.
A) positive
B) zero
C) negative
D) breakeven
Answer: A
Diff: 3
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

44) If a perfectly competitive firm is currently producing where P = MC and MC = ATC, then the
firm will earn profits.
A) positive
B) zero
C) negative
D) above normal
Answer: B
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

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45) If industry supply increases while the industry demand remains the same, then an
individual firm in a perfectly competitive industry currently earning positive profits will see
its profits
A) increase.
B) not change.
C) decrease.
D) impossible to determine
Answer: C
Diff: 3
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

46) If an industry supply curve decreases while the industry demand curve remains the same,
then an individual firm in a perfectly competitive industry currently earning losses will see
its losses
A) increase.
B) not change.
C) decrease.
D) impossible to determine
Answer: C
Diff: 3
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

47) Perfectly competitive firms

A) sell homogeneous products.
B) are price takers.
C) are small relative to the size of the market.
D) All of the above are correct.
Answer: D
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Definition

48) The rising part of a perfectly competitive firmʹs cost curve is the firmʹs short-run
curve.
A) average total; supply
B) average variable; demand
C) average fixed; demand
D) marginal; supply
Answer: D
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Conceptual

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49) The law of supply holds for perfectly competitive firms assuming that each firm tries to
A) maximize profits.
B) minimize total costs.
C) maximize revenue.
D) minimize variable costs.
Answer: A
Diff: 1
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Fact

Refer to the information provided in Figure 8.10 below to answer the question that follows.

Figure 8.10

50) Refer to Figure 8.10. Panel represents the demand curve facing a perfectly
competitive producer of wheat.
A) A
B) B
C) C
D) D
Answer: B
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Analytic

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51) Jerry sells cherry sno‐cones along the boardwalk in New Jersey. During the summer this is a
perfectly competitive business, and Jerry faces a perfectly price elastic demand curve. If he
wants to try to increase revenues, he should
A) raise the price of his sno‐cones to make more per sale.
B) lower the price of his sno‐cones to try to sell more.
C) keep the price the same but produce more to increase revenues.
D) do nothing since he can do nothing to increase revenue.
Answer: C
Diff: 3
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Conceptual

52) A firm in a perfectly competitive market has no control over price because
A) the government imposes price ceilings on the products produced in perfectly
competitive markets.
B) any firm may freely enter into and/or exit from the market.
C) each firmʹs product perfectly substitutes for every other firmʹs product.
D) the market demand for products produced in perfectly competitive markets is perfectly
price elastic.
Answer: C
Diff: 1
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Fact

53) The closest example of a perfectly competitive industry is

A) fast foods.
B) beer.
C) gasoline stations.
D) soybeans.
Answer: D
Diff: 3
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Conceptual

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Refer to the information provided in Figure 7.13 below to answer the questions that follow.

Figure 7.13
54) Refer to the figure above. Assuming the wool market (industry) is perfectly competitive,
each wool producer faces a(n) demand curve starting at $3.00 per pound.
A) downward sloping
B) upward sloping
C) vertical
D) horizontal
Answer: D
Diff: 1
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Fact

55) Refer to figure above. Assuming the coffee market (industry) is perfectly competitive, each
coffee producer faces a(n) demand curve starting at $4.00 per pound.
A) downward sloping
B) upward sloping
C) vertical
D) horizontal
Answer: D
Diff: 3
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Conceptual

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56) A market demand curve is

A) downward sloping.
B) upward sloping.
C) perfectly elastic.
D) perfectly inelastic.
Answer: A
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Definition

57) If a firm in a perfectly competitive industry raises its price above the market price, its
A) total revenue will increase.
B) profit will increase.
C) sales will drop to zero.
D) demand curve will become downward sloping.
Answer: C
Diff: 3
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Conceptual

58) A firm facing a perfectly price elastic demand curve, ceteris paribus
A) can sell all it produces only by lowering its price below the market price.
B) can raise its price and not lose all its customers.
C) will sell the same amount regardless if it raises or lowers the price it charges.
D) will have zero quantity demanded if it raises its price above the market price.
Answer: D
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Fact

59) It is difficult for a wool producer in a perfectly competitive wool industry to make excess
profits because
A) wool producers are ʺprice takers.ʺ
B) wool producers in the industry do not ʺdifferentiateʺ their products.
C) the demand curve facing each wool producer is perfectly elastic.
D) entry into the wool industry is free.
Answer: D
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Definition

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60) If the wool industry is perfectly competitive, the market demand curve for wool is
and an individual wool producerʹs demand curve is .
A) downward sloping; horizontal
B) horizontal; downward sloping
C) horizontal; horizontal
D) downward sloping; downward sloping
Answer: A
Diff: 3
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Conceptual

61) Free entry implies that

A) a perfectly competitive firm can never earn a profit.
B) if an industryʹs existing firms make excessively high profits, new firms are likely to
enter the industry.
C) the government regulates the number of firms it allows in an industry.
D) firms will always earn above normal profit, as new firms can enter the industry at any
time they like.
Answer: B
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Definition

62) Economists do NOT consider the fast‐food industry perfectly competitive because
A) the government strictly regulates entry and exit.
B) fast‐food products are heterogeneous.
C) fast food firms face a large number of customers each relatively small.
D) there are a large number of fast‐food firms.
Answer: B
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Definition

63) Related to the Economics in Practice on page 170: Janice owns an ice cream shop. Monthly
revenue is $12,000. Her fixed cost of operation include rent, electricity, interest on a loan,
etc. and come to $3,500 per month. Her variable costs include wages for her workers and ice
cream supplies which are $4,000 per month. Janice is trying to decide whether to stay in
business or return to her previous occupation as an elementary school teacher. Janice should
return to teaching only if she earns more than a month.
A) $4,500
B) $8,000
C) $8,500
D) She should return to teaching regardless of her salary because education is the most
important career anyone can have.
Answer: A
Diff: 2
Topic: Output Decisions: Economics in Practice
Skill: Analytic

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64) Related to the Economics in Practice on page 170: You are the owner of an ice cream shop.
You normally close at 8pm, but are considering staying open an additional hour. You
A) should definitely stay open as your profits will increase as your sales increase.
B) should only stay open if the additional revenue you generate exceeds the average total
cost of operation.
C) should only stay open if the additional revenue you generate exceeds the marginal cost
of operating an additional hour.
D) work too hard -- donʹt stay open any later.
Answer: C
Diff: 2
Topic: Output Decisions: Economics in Practice
Skill: Conceptual

2 True/False

1) In perfectly competitive industries all firms supply a homogeneous product.

Answer: TRUE
Diff: 1
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Fact

2) A firmʹs demand curve in a perfectly competitive industry is price inelastic.

Answer: FALSE
Diff: 1
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Fact

3) The total revenue curve for a perfectly competitive firm will be a straight line with positive
slope.
Answer: TRUE
Diff: 1
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Fact

4) The marginal revenue curve for a perfectly competitive firm will be downward sloping.
Answer: FALSE
Diff: 1
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Fact

5) Marginal costs reflect changes in variable costs.

Answer: TRUE
Diff: 1
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Fact

6) The short run is a period of less than one year.

Answer: FALSE
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Definition

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7) The shut-down decision is a short‐run decision.

Answer: TRUE
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Definition

8) If demand in a perfectly competitive market decreases, then an individual firm in that

industry will see its profits fall.
Answer: TRUE
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Conceptual

9) For a perfectly competitive firm, when P=MC=ATC the firm should reduce its output so as
to increase its profits.
Answer: FALSE
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Conceptual

10) Firms maximize their profits by producing the output level where MR=ATC.
Answer: FALSE
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Conceptual

11) Perfectly competitive firms minimize their losses by producing the output level where
P=MR=AVC.
Answer: FALSE
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Conceptual

12) The upward sloping portion of the perfectly competitive firmʹs average variable cost curve is
the firmʹs short run supply curve.
Answer: FALSE
Diff: 2
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Conceptual

13) Perfectly competitive firms sell heterogeneous products.

Answer: FALSE
Diff: 1
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Definition

14) Perfectly competitive firms are price takers.

Answer: TRUE
Diff: 1
Topic: Output Decisions: Revenues, Costs, and Profit Maximization
Skill: Definition

54