Economics Business Profits Quiz

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Questions and Answers

What condition must a competitive firm meet to continue operating in the short run?

P < ATC

P < AVC

MR > AVC (correct)

MR > MC

Which decision relates to the initiation or expansion of a business?

Investment decision (correct)

Profit maximization decision

Output decision

Production decision

What type of decision is Microsoft making when considering the construction of a new factory?

Short-run decision that may enhance its profit

Long-run decision that will definitely enhance its profit

Short-run decision that will definitely enhance its profit

Long-run decision that may enhance its profit (correct)

Which factor would change the optimal rate of output for a firm?

Property taxes Signup and view all the answers

Which of the following changes impacts both marginal and average total cost curves in the short run?

A change in payroll taxes Signup and view all the answers

In a perfectly competitive market, what is true for each individual T-shirt shop?

Is a price taker Signup and view all the answers

What distinguishes GM's decision to idle plants from Dell's decision to close a manufacturing plant?

GM's was a short-run shutdown; Dell's was a long-run market exit Signup and view all the answers

What is the primary reason individuals typically own small businesses?

The expectation of profit Signup and view all the answers

Which of the following actions is least likely to be encouraged by the profit motive?

Maximize social welfare Signup and view all the answers

Which statement best describes explicit costs?

They represent actual monetary payments for resources used Signup and view all the answers

How is economic profit calculated?

Total revenues minus total economic costs Signup and view all the answers

Which of the following is not accounted for when calculating accounting profit?

The return on the next best alternative investment Signup and view all the answers

If an entrepreneur has an accounting profit of $1000 and could have earned $2000 elsewhere, what can be inferred?

Their economic profit is negative $1000. Signup and view all the answers

In the scenario where Adam Weed has explicit costs of $175,000 and total revenue of $250,000, what is his accounting profit?

$75,000 Signup and view all the answers

Given Adam Weed's explicit costs and alternative job offer of $75,000, what is his economic profit?

Negative $100,000 Signup and view all the answers

What are the annual economic costs for the firm described above?

$450,000 Signup and view all the answers

Which statement about entrepreneurship is true?

Can result in economic losses. Signup and view all the answers

Which of the following is not a characteristic of a perfectly competitive market structure?

Large advertising budgets. Signup and view all the answers

In which type of market does a single firm have the most market power?

Monopoly. Signup and view all the answers

Why can't competitive firms individually affect market price?

Their individual production is insignificant relative to the production of the industry. Signup and view all the answers

What is the shape of the demand curve for each perfectly competitive firm?

Horizontal. Signup and view all the answers

Which of the following reflects a production decision?

How much output the firm should produce in the long run. Signup and view all the answers

What does the upward-sloping straight line of a perfectly competitive firm's total revenue curve imply?

Product price is constant at all levels of output. Signup and view all the answers

A firm maximizes total profit when:

Total revenue exceeds total cost by the greatest amount. Signup and view all the answers

If diminishing returns exist, then:

Each unit produced will cost incrementally more. Signup and view all the answers

The shape of the total revenue curve indicates that the price of this good:

Stays the same as output rises. Signup and view all the answers

For perfectly competitive firms, price:

Is equal to marginal revenue. Signup and view all the answers

If a perfectly competitive firm is producing at a rate where MC exceeds price, then the firm:

Can increase its profit by decreasing output. Signup and view all the answers

The profit-maximizing quantity of output for a perfectly competitive firm is indicated by:

Point C. Signup and view all the answers

If the market price is $10 for a perfectly competitive firm, then:

The firm should produce 31 units. Signup and view all the answers

The law of diminishing returns takes effect at an output of:

<ol start="31"> <li></li> </ol> Signup and view all the answers

Study Notes

Multiple Choice Review Questions

Question 1: Individuals own small businesses primarily due to the expectation of profit, not because they can't find work elsewhere or for gaining experience.
Question 2: The profit motive encourages businesses to maximize social welfare, but it can also lead to restricting competition and polluting the environment.
Question 3: Explicit costs are the actual monetary payments made for resources used to produce a good, including payments to entrepreneurs.
Question 4: Economic profit is the difference between total revenues and total economic costs, which encompass both explicit and implicit costs.
Question 5: The return on the next best alternative investment opportunity should not be included when calculating accounting profit.
Question 6: Accounting profit is the difference between total revenue (4,000)andtotalexplicitcosts(4,000) and total explicit costs (4,000)andtotalexplicitcosts(1,200 + 750+750 + 750+250 + 200+200 + 200+600 + 75).Thisequals75). This equals 75).Thisequals1,525.
Question 7: Adam Weed's accounting profit is 250,000−250,000 - 250,000−175,000 which equals 75,000.Hiseconomicprofitiscalculatedbysubtractingoutthe75,000. His economic profit is calculated by subtracting out the 75,000.Hiseconomicprofitiscalculatedbysubtractingoutthe75,000 he could be earning elsewhere which equals a negative $0 economic profit.
Question 8: The firm's total economic costs are 90,000plus90,000 plus 90,000plus200000 + 75000+75000 + 75000+30000 + 35000whichequals35000 which equals 35000whichequals450,000.
Question 10: Perfectly competitive markets are characterized by low barriers to entry, many firms, and identical products. Large advertising budgets are not characteristic.
Question 11: Monopolies have the most market power of the given options.
Question 12: In a competitive market, no single firm can affect the market price because their output is insignificant compared to the overall market.
Question 13: The demand curve for a perfectly competitive firm is horizontal because a firm can sell any amount at a given market price.
Question 14: Production decisions involve determining the quantity of output, not choosing to enter/exit the market or merging with competitors.
Question 15: In a perfectly competitive market, the price is constant at all output levels, meaning the total revenue curve is a straight line with a positive slope.
Question 16: A firm maximizes profit by setting output where marginal revenue (MR) equals marginal cost (MC).
Question 17: Diminishing returns cause each additional unit produced to cost increasingly more.
Question 18: A rising total revenue curve implies a constant price; as output increases, Total Revenue also increases in proportion to quantity.
Question 19: Price equals marginal revenue in a perfectly competitive market.
Question 20: If marginal cost exceeds price, a perfectly competitive firm should reduce output to increase profit.
Question 21: The profit-maximizing quantity of output for a perfectly competitive firm occurs at the point where marginal cost (MC) equals price.
Question 22: If the market price is 10andaveragevariablecost(AVC)isbelow10 and average variable cost (AVC) is below 10andaveragevariablecost(AVC)isbelow10, the firm should continue operating if the price covers its variable costs to minimize losses.
Question 23: The law of diminishing returns typically takes effect at an output quantity near the midpoint of the relevant range.
Question 24: In the short run a perfectly competitive firm should continue operating as long as price exceeds average variable cost.
Question 25: Production/investment decision is about expansion/start up decisions.
Question 26: A long-run decision is a business investment such as a new factory.
Question 27: Changes in profit taxes, payroll taxes, and inflation will impact the optimal level of output.
Question 28: Changes in property, profit or payroll taxes directly impact costs and both average and marginal costs.
Question 29: Firms in a competitive market are price takers and accept the market price, facing a horizontal demand curve.
Question 30: General Motors' decision to halt car production at certain plants was a short-run shutdown decision, unlike Dell's production plant closure which signified a long-run exit from the market.

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Description

Test your understanding of key concepts related to business profits and economic theories in this multiple-choice quiz. Explore topics such as explicit costs, economic profit, and the effects of the profit motive on social welfare. Perfect for students in economics courses!