Practice for Production, Cost, and the Perfect Competition Model

All of the following are examples of fixed costs EXCEPT

• CEO contracted salary

• Insurance

• Raw materials

• Rent

Answer explanation

Fixed costs do not change regardless of whether or not the business produces or not. Fixed cost are the same month to month and must be paid!

What are the characteristics of total product (TP) and marginal product (MP) during diminishing marginal returns?

• TP is increasing, MP is decreasing

• TP is decreasing and MP is increasing

• TP is stays the same, MP is increasing.

• TP is decreasing and MP stays the same

Answer explanation

This the second stage in the production graph (Outputs and inputs). This is the stage where TP will reach its maximum and MP will descend to 0.

The long-run in microeconomics refers to

• a concept that is too far out in the distant future that it should not be considered.

• a period of time when the wages are "sticky" and will not change.

• a period of time around three months.

• a period when all resources/factors are variable and the market can react.

Answer explanation

The long-run is a period of time that is long enough that the market can react and all costs are variable and none are fixed.

Why do economies of scale occur?

• Total production is decreasing at the same time.

• Because of the law of diminishing marginal utility.

• People who produce more will use specialization and mass production techniques.

• The cost of production per unit increases with mass production techniques.

Answer explanation

Increasing production means owners will start buying in bulk and be able to afford more efficient mass production capital which will bring down the per unit cost of the product to a point.

The long run average total cost curve looks like

• the short run average total cost curve

• a marginal cost curve.

• the demand curve.

• a perfectly elastic supply curve.

Answer explanation

The upward pointing semi circle of the LRATC is very similar looking to the short-run ATC. You can say the LRATC is a collection of SRATCs.

Why is accounting profit different from economic profit?

• Accounting profit does not include implicit costs.

• Economic profit will never equal zero.

• Accounting profit does not include explicit costs.

• Economic profit does not include opportunity cost.

Answer explanation

Economic profit= Total Revenue- (implicit and explicit costs). Accounting profit =Total Revenue- explicit costs. Since economic profit includes opportunity costs, zero economic profit usually means there is still an accounting profit being made (AKA People are making take-home money).

What is the profit maximizing rule?

• MR=MC

• MC=Min AVC

• MC=P

• MC=Min ATC

Answer explanation

The quantity of units produced at the spot where MC intersects with the MR curve may not be the place with the largest revenue but it will yield the greatest amount of profit.

All of the following are characteristics of perfect competition EXCEPT

• Low barriers to entry

• Price makers

• Many small firms

• Identical products

Answer explanation

Because firms are dependent on the market setting a price, the firms are PRICE TAKERS. The market has many, many sellers, identical products, and has low barriers to enter and exit the market.

The demand curve for the individual firm in a perfectly competitive market is

• unable to be determined with this information.

• perfectly elastic.

• perfectly inelastic.

• elastic.

Answer explanation

In perfect competition, the demand curve for the individual firm is perfectly elastic because the price is set by the market. Thus, quantity and individual costs will not change the price.

If the average total cost per unit of product X is $5 at 5 units and the total revenue at 5 units is $50, what is the profit made per unit?

• $0 profit

• $5 profit

• $10 profit

• $15 profit

Answer explanation

This gives us the ATC at $5. ATC times Q equals TC. TC is $5 times 5 = $25. Total revenue is $50. Profit= TR ($50)-TC (25). Total profit is $25, BUT this is asking for PER Unit! So $25 (total profit)/ 5(Q)= $5 profit per unit.