ECN 104 Study Guide - Quiz Guide: Form 10-Q, Opportunity Cost, Sunk Costs

A firm is producing where its marginal costs are at the lowest level. What can one most likely infer from this? a. there is either lost opportunity for further profits by producing more, or the firm should shut-down if it is competitive and price is at that low level. b. It is a price-taker who is producing too much. c. It is a monopolist who is producing the socially optimal quantity. d. The firm is producing rationally.

6. A single-price monopolist sets price a. where MR=demand. b. where supply=demand c. from the demand curve at the quantity for which MC=MR. d. where MR=MC.

7. Assume that the Law of Diminishing Marginal Product applies at the current output level of a competitive firm. The price is $20 and, at the current output level, marginal cost is $16 and average total cost is $20. To maximize profits the firm should: a. produce the current output level, since average revenue (price) = average cost. b. produce more since marginal revenue exceeds marginal cost at current output. c. produce less since marginal revenue is always below average revenue. d. any of the above is possible, without further information.

8. Which of the following statements is true? (i) When a competitive firm sells an additional unit of output, its revenue increases by an amount less than the price. (ii) When a monopoly firm sells an additional unit of output, its revenue increases by an amount less than the price. (iii) Average revenue is the same as price for both competitive and monopoly firms. a. (i) only b. (iii) only c. (i) and (ii) d. (ii) and (iii)

9. If a firm in a competitive market triples the number of units of output sold, then total revenue will a. more than triple. b. less than triple. c. exactly triple. d. All of the above are potentially true.

10. When a competitive firm makes a decision to shut down, it is most likely that a. marginal cost is above average variable cost. b. marginal cost is above average total cost. c. price is below the minimum of average variable cost. d. fixed costs exceed variable costs.

A farmer is producing where MC = MR. Say that half of the cost of producing wheat is the rental cost of land (a fixed cost) and half is the cost of labor and machines (a variable cost). If the average total cost of producing wheat is $26 and the price of wheat is $10, what would you advise the farmer to do? (“Grow something else” is not allowed.)

a. In the short run, the farmer should shut down because he is making a net loss. By producing he will lose $16 per unit, but if he did not produce he would simply have zero profit.

b. The farmer should reduce output so that average total costs would decline.

c. The farmer should increase the price at which he sells wheat to $26.

d. In the short run, the farmer should still grow wheat because by producing he will lose $16 per unit, but if he did not produce he would lose $13 per unit. In the long run, the farmer will go out of business.

To maximize profits, the perfectly competitive firm should produce output at an output where:

A. the difference between price and marginal cost is at its maximum
B. total cost equals total revenue
C. price equals marginal cost
D. total revenue equals variable cost