tion1. A certain firm manufactures and sells computer chips. Last year it sold 2 million chips at a price of $10 per chip. For last year, the firm’sa. accounting profit was $20 million.b. economic profit was $20 million.c. total revenue was $20 million.d. explicit costs was $20 million. 2. Total revenue minus only explicit costs is calleda. accounting profit.b. economic profit.c. average total cost.d. implicit profit. 3. Jane was a partner at a law firm earning $223,000 per year. She left the firm to open her own law practice. In the first year of business she generated revenues of $347,000 and incurred explicit costs of $163,000. Jane’s economic profit from her first year in her own practice isa. -$39,000.b. $124,000.c. $163,000.d. $184,000. 4. If Farmer Brown plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 5 bushels of wheat. If he plants 2 bags, he gets 9 bushels. If he plants 3 bags, he gets 12 bushels. A bag of seeds costs $120, and seeds are his only cost. Farmer Brown’s production function exhibitsa. increasing marginal product.b. constant marginal product.c. diminishing marginal product.d. The production function is unrelated to the marginal product. 5. The cost of producing an additional unit of output is the firm’sa. marginal cost.b. productivity offset.c. variable cost.d. average variable cost. 6. Which of the following is not a property of a firm’s cost curves?a. Marginal cost must eventually rise as a result of diminishing marginal product.b. Average total cost is U-shaped.c. Economies of scale will exist when average total cost falls as output rises.d. Average total cost will cross marginal cost at the minimum of marginal cost. 7. Competitive markets are characterized bya. a small number of buyers and sellers.b. unique products.c. the interdependence of firms.d. free entry and exit by firms. 8. Which of the following industries is least likely to exhibit the characteristic of free entry?a. restaurantsb. municipal water and sewerc. soybean farmingd. selling running apparel 9. For a firm in a competitive market, an increase in the quantity produced by the firm will result ina. a decrease in the product’s market price.b. an increase in the product’s market price.c. no change in the product’s market price.d. either an increase or no change in the product’s market price depending on the number of firms in the market. 10.

The average revenue when 14 units are produced and sold is

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a. $9.b. $11.c. $13.d. $15. 11. Marcia is a fashion designer who runs a small clothing business in a competitive industry. Marcia specializes in making designer dresses. Marcia sells 10 dresses per month. Her monthly total revenue is $5,000. The marginal cost of making a dress is $400. In order to maximize profits, Marcia shoulda. make more than 10 dresses per month.b. make fewer than 10 dresses per month.c. continue to make 10 dresses per month.d. We do not have enough information with which to answer the question. 12.

Suppose that a firm in a competitive market faces the following revenues and costs:

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The firm will not produce an output level beyond

a. 4 units.b. 5 units.c. 6 units.d. 7 units. 13. Mrs. Smith operates a business in a competitive market. The current market price is $8.10. At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith shoulda. shut down her business in the short run but continue to operate in the long run.b. continue to operate in the short run but shut down in the long run.c. continue to operate in both the short run and long run.d. shut down in both the short run and long run. 14.

Suppose a firm operating in a competitive market has the following cost curves:

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In the short run, if the market price is higher than P1 but less than P4, individual firms in a competitive industry will earn.

a. positive profits.b. zero profits.c. losses but will remain in business.d. losses and will shut down. 15.

Suppose a firm operating in a competitive market has the following cost curves:

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The firm will exit the market for any price on the line segment

a. ABCD.b. AB.c. CD.d. None of the above is correct. 16. In the long-run equilibrium of a competitive market, the number of firms in the market adjusts until the market demand is satisfied at a price equal to the minimum ofa. average fixed cost for the marginal firm.b. marginal cost of the marginal firm.c. average total cost of the marginal firm.d. average variable cost of the marginal firm. 17.

If the market starts in equilibrium at point C in panel (b), a decrease in demand will ultimately lead to

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a. more firms in the industry but lower levels of output for each firm.b. fewer firms in the market.c. a new long-run equilibrium at point D in panel (b).d. lower prices once the new long-run equilibrium is reached. 18. At the profit-maximizing level of output,a. marginal revenue equals average total cost.b. marginal revenue equals average variable cost.c. marginal revenue equals marginal cost.d. average revenue equals average total cost. 19. Max sells maps. The map industry is competitive. Max hires a business consultant to analyze his company’s financial records. The consultant recommends that Max increase his production. The consultant must have concluded that Max’sa. total revenues exceed his total accounting costs.b. marginal revenue exceeds his total cost.c. marginal revenue exceeds his marginal cost.d. marginal cost exceeds his marginal revenue. 20. Which of the following statements is correct regarding a firm’s decision-making?a. The decision to shut down and the decision to exit are both short-run decisions.b. The decision to shut down and the decision to exit are both long-run decisions.c. The decision to shut down is a short-run decision, whereas the decision to exit is a long-run decision.d. The decision to exit is a short-run decision, whereas the decision to shut down is a long-run decision. 21. Accountants often ignore implicit costs.a. Trueb. False 22. The graph of the production function plots total cost versus quantity of output.a. Trueb. False 23. Suppose that a worker can produce 100 units of output in 7 hours. In the 8th hour, he can produce 12 units of output. The worker can produce 112 units of output in 8 hours.a. Trueb. False 24. Average variable cost is equal to total variable cost divided by quantity of output.a. Trueb. False 25. When an individual firm in a competitive market decreases its production, it is likely that the market price will rise.a. Trueb. False 26. The two characteristics of a competitive market are 1) many buyers and sellers in the market and 2) the goods offered by the various sellers are highly differentiated.a. Trueb. False 27. Firms operating in perfectly competitive markets try to maximize profits.a. Trueb. False 28. A firm operating in a competitive market will stay in business in the short run so long as the market price exceeds the firm’s average total cost; otherwise, the firm will shut down.a. Trueb. False 29. A firm operating in a perfectly competitive industry will shut down in the short run if its economic profits fall to zero because it is likely to be earning negative accounting profits.a. Trueb. False 30. A competitive market will typically experience entry and exit until accounting profits are zero.a. Trueb. False

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