U3 Progress Check Frequently Missed Questions

The graph below shows the short-run cost curves for a perfectly competitive firm. Assume that the market price is P0 and the firm is producing at quantity Q0. To maximize profit, the firm should

• increase production to quantity Q3, where average total cost is at its minimum

• increase production to quantity Q2, where price is equal to marginal cost

• increase production to quantity Q1, where average variable cost is at its minimum

• shut down and incur losses equal to fixed costs

• shut down and incur zero losses

In a comparison of a perfectly competitive firm's short-run equilibrium to its long-run equilibrium, which of the following is true?

• Price must equal marginal cost in the long run, but not necessarily in the short run.

• Economic profit must be positive in the long run, but not necessarily in the short run.

• The firm can set price in the short run, but not necessarily in the long run.

• The firm must produce at minimum average total cost in the short run, but not necessarily in the long run.

• Price equals average total cost in the long run, but not necessarily in the short run.

The graph below shows per unit cost information for firm X. At what quantity of output do diminishing returns begin for firm X?

• Q1

• Q2

• Q3

• Q4

• Q5

Kieran owns and operates his own bike shop. In the past week, he received two offers: one to work for a competitor for $50,000 per year and one to sell his bike shop for $100,000. Assume the annual interest rate is 6 percent, and Kieran is indifferent between owning his bike shop or working for the competitor. Kieran currently receives enough annual revenue to cover all explicit costs and has $60,000 left over. There are no additional implicit costs (excluding the items listed above). Under these circumstances, Kieran’s economic profit is equal to which of the following?

• −$96,000

• −$90,000

• $4,000

• $10,000

• $60,000

Given a short-run production function, which of the following is true when total product is increasing at a decreasing rate?

• Average product must be positive and increasing.

• Average product must be negative and decreasing.

• Marginal product must be negative and decreasing.

• Marginal product must be positive and increasing.

• Marginal product must be positive and decreasing.

The graph shows a firm in a perfectly competitive industry. Assume all the firms in the industry have identical costs.

Given the price P4, what is a firm’s profit-maximizing quantity of output?

• Q1

• Q2

• Q3

• Q4

• Q5

The graph shows a firm in a perfectly competitive industry. Assume all the firms in the industry have identical costs

Firms will have no incentive to exit or enter this market if the price in this market is

• above P4

• below P2

• between P2 and P3

• equal to MC

• equal to ATC

Which of the following is true when total product is at its maximum?

• Marginal product is at its maximum.

• Marginal product is equal to zero.

• Marginal product is equal to average product.

• Average product is increasing.

• Average product is equal to zero.

At a firm’s current output level, average fixed cost is $10, average variable cost is $30, average total cost is $40, and marginal cost is $55. Which of the following must be true?

• Average fixed cost, average variable cost, and average total cost are all decreasing.

• Average fixed cost, average variable cost, and average total cost are all increasing.

• Average fixed cost and average total cost are both decreasing, while average variable cost is increasing.

• Average fixed cost is decreasing, and both average variable cost and average total cost are increasing.

• Average fixed cost and average variable cost are both decreasing, while average total cost is increasing.

Habib withdrew $100,000 from his bank account paying 5% interest to purchase equipment for his construction company. If Habib earns an accounting profit of $10,000 and he has no other opportunity costs, his economic profit will be equal to

• $0

• $5,000

• $15,000

• $105,000

• $115,000