21-1. Economists assume the principal motivation of
producers is:
Psychological gratification.
Social status.
→ Profit.
Their preference for being "their own person."
21-2. Accounting costs and economic costs differ because:
Accounting costs exceed economic costs whenever any
factor is not paid an explicit wage.
Accounting costs include implicit costs and economic
costs do not.
→ Economic costs include the opportunity costs of all
resources used while accounting costs include actual
dollar outlays.
Accounting costs include explicit costs and economic
costs do not.
21-3. Normal profit implies that:
Economic profit must be positive.
Economic profit must be negative.
→ The factors employed are earning as much as they
could in the best alternative employment.
Firms will expand their scale of production.
21-4. The accounting profit is equal to:
→ $925.
$1,525.
$2,125.
$4,000.
21-5. Suppose the entrepreneur could earn $1,000 as an
employee elsewhere. This means the economic profit is:
-$925.
→ -$75.
-$1,000.
$0.
21-6. Adam Weed is the owner/operator of a flower shop.
Last year he earned $250,000 in total revenue. His explicit
costs were $175,000 paid to his employees and suppliers
(assume that this amount represents the total opportunity
cost of these resources). During the course of the year he
received three offers to work for other flower shops with
the highest offer being $75,000 per year. Which of the
following is true about Adam's accounting and economic
profit?
→ Accounting profit = $75,000; economic profit = $0.
21-7. The perfectly competitive market structure includes
all of the following except:
Many firms.
Identical products.
→ Large advertising budgets.
Low-entry barriers.
21-2. Accounting costs refer to the explicit dollar outlays
made by a producer. Economic costs, in contrast, refer to
the value of all costs, both explicit and implicit.
21-1. Profit isn't the only thing that motivates producers;
they also may worry about social status and/or crave
recognition. However, the principal incentive for
producing goods and services is the expectation of profit.
21-3. Normal profit is the profit one makes if they cover all
of their explicit costs and implicit costs but do not make
any profit above and beyond what they could have made
using those resources elsewhere.
21-4. Accounting profit is equal to revenue ($4,000) minus
explicit costs ($200 + 75 + 250 + 750 + 600 + 1,200) which
is $925.
21-5. Economic profit is the accounting profit ($925)
minus implicit costs ($1,000) which is -$75.
21-7. A perfectly competitive industry has several
distinguishing characteristics, including many firms,
identical products, and low-entry barriers. Because the
products are near identical, it is not necessary or even
beneficial to advertise.
21-6. Accounting profit is equal to revenue ($250,000)
minus explicit costs ($175,000) which is $75,000.
Economic profit is equal to accounting profit ($75,000)
minus implicit costs ($75,000); therefore his economic
profit is $0.
21-8. A perfectly competitive firm is a price taker because:
→ The price of the product is determined by many buyers
and sellers.
It has market power.
Market supply is upward sloping.
Its products are differentiated.
21-10. The demand curve for each perfectly competitive
firm is:
Downward sloping.
→ Horizontal.
Vertical.
Upward sloping.
21-9. Competitive firms cannot individually affect market
price because:
There is an infinite demand for their goods.
Demand is perfectly inelastic for their goods.
→ Their individual production is insignificant relative to
the production of the industry.
The government exercises control over the market
power of competitive firms.
21-11. The short run is the time period:
Over which an investment decision can be made.
Necessary so that profits can be earned from
production.
→ In which some costs are fixed.
In which only the amount of capital may be altered.
21-12. Marginal revenue is the change in:
→ Total revenue when output is changed.
Total revenue when price is changed.
Average revenue when output is changed.
Average revenue when price is changed.
21-13. For perfectly competitive firms, price:
Is greater than marginal revenue.
→ Is equal to marginal revenue.
Is less than marginal revenue.
And marginal revenue are not related.
21-14. A perfectly competitive firm will maximize profits
by choosing an output level such that:
Price is greater than marginal cost.
→ Price equals marginal cost.
Price equals total cost.
Price is greater than total cost.
21-15. A catfish farmer will shut down production when:
He is losing money.
→ Price falls below AVC.
Total revenue falls below total costs.
The best he can do is breakeven.
21-16. When price exceeds average variable cost but not
average total cost, the firm should, in the short run:
Shut down.
→ Produce at the rate of output where MR = MC.
Minimize per-unit losses by producing at the rate of
output where ATC is minimized in the short run.
Minimize total losses by producing at the rate of output
where ATC is minimized.
21-9. An individual firm in a perfectly competitive market
is so small relative to the entire market that it confronts a
horizontal demand curve (perfectly elastic demand) for its
output. If it changes the quantity of output, it does not
affect the market price.
21-8. A perfectly competitive firm risks losing all of its
customers, who will shop elsewhere, if they increase the
price of their product above the market established price.
Therefore, they are compelled to "take" the market price
that is determined by the interaction of supply and
demand.
21-11. The short run is the period in which the quantity
(and quality) of some inputs can't be changed.
21-10. The market demand curve for a product is always
downward-sloping (law of demand). The demand curve
confronting a perfectly competitive firm is horizontal
(perfectly elastic demand).
21-13. Because a competitive firm can sell all its output at
the prevailing price, the marginal revenue will always be
equal to price and the MR curve will be equal to the
demand curve.
21-12. In general, the contribution to total revenue of an
additional unit of output is called marginal revenue.
21-15. A firm should shut down only if the losses from
continuing production exceed fixed costs. This happens
when total revenue is less than total variable cost or price
is less than average variable cost.
21-14. A competitive firm maximizes total profit at the
output rate where MC is equal to price (which is the same
as MR in perfect competition). If MC is less than price, the
firm can increase profits by producing more. If MC exceeds
price, the firm should reduce output.
21-16. A competitive firm maximizes total profit
(minimizes losses) at the output rate where MC is equal to
MR. If at that output level the price (or MR) is less than
ATC but greater than AVC, then a perfectly competitive
firm is losing less than its fixed costs and should continue
producing in the short run in order to minimize its losses.
21-17. Refer to Figure 21.2 for a perfectly competitive
firm. If the market price is $15:
The firm should produce 39 units.
The firm should shut down.
The firm will have above normal profits.
→ Economic profits will be zero.
21-18. Refer to Figure 21.2 for a perfectly competitive
firm. If the market price is $23:
The firm should produce 31 units.
Economic profits are zero.
The firm should produce 25 units.
→ The firm will have above normal profits.
21-19. Refer to Figure 21.2 for a perfectly competitive
firm. This firm should shutdown at any price below:
$4.
→ $10.
$15.
$23.
Refer to Figure 21.2 for a perfectly competitive firm. At a
market price of $23, total profits are maximized at an
output of:
→ 39.
31.
25.
13.
Refer to Figure 21.2 for a perfectly competitive firm. The
law of diminishing returns takes effect at an output of:
39.
31.
25.
→ 13.
21-17. When the market price is $15, the profit
maximization output is 31 units. At that point price is
equal to ATC and profits will be zero.
21-18. When the market price is $23, the profit
maximization output is 39 units. At that point price is
greater than ATC and economic profits will be greater
than zero (above normal).
21-19. A firm should shut down only if the losses from
continuing production exceed fixed costs. This happens
when total revenue is less than total variable cost or price
is less than average variable cost.
21-20. Total profit is maximized at the output level where
price is equal to MC, 39.
21-21. The best estimate of where diminishing marginal
returns begins is 13 because that is the output level where
the marginal cost curve is begins to increase.
21-22. Refer to Figure 21.3 for a perfectly competitive
firm. The profit per unit is the highest at a rate of output
of:
A.
B.
→ C.
D.
21-23. Refer to Figure 21.3 for a perfectly competitive
firm. To maximize total profits, this firm should produce at
a rate of output of:
A.
B.
C.
→ D.
21-22. The profit per unit is at its highest at the ATC
minimum point, point C.
21-23. Total profit is maximized at the output level where
price (MR) is equal to MC, point D.