Economics Chapter 15 Quiz

Questions and Answers

How much economic profit or loss does Malia earn after starting her company?

$19,000

The formula for calculating accounting profit is total revenue minus _____ costs.

explicit financial

What are the two main types of implicit opportunity costs?

forgone wages and forgone interests

A firm with economic profits will also have accounting profits.

True Signup and view all the answers

Because ___ profit is calculated based on _ costs, it allows firm owners to make better decisions about ___.

economic; total; entering and exiting a market Signup and view all the answers

In which situation does Mario's company definitely have economic losses?

total costs exceeds total revenue Signup and view all the answers

As output rises, average fixed costs _____.

fall Signup and view all the answers

What is the profit margin for the firm if it produces a quantity of six?

$3 Signup and view all the answers

Should Adhika start the company to produce step stools if he expects that the price will exceed his average cost?

yes Signup and view all the answers

What happens to existing sellers when new sellers enter a market?

have less market power Signup and view all the answers

What happens when firms in a market with free entry and exit experience economic losses?

some sellers will exit the market Signup and view all the answers

When the typical seller in a market has economic profits, what do new sellers do?

new sellers will enter the market Signup and view all the answers

Which of the following is NOT a strategy used by a company to 'lock-in' customers to ensure demand for its product?

Pressuring the government to require a license for entry into the market Signup and view all the answers

Sellers try to avoid the entry of new rivals through the use of demand-side strategies. Which of the following is NOT included?

Raising the market demand for the product Signup and view all the answers

What does it mean if a seller can create switching costs for its product?

It is difficult or costly for the customers to switch to another seller of the product Signup and view all the answers

What happens when market leaders produce on a mass scale?

new entrants have a hard time competing Signup and view all the answers

How does Michelle's large flower order impact potential new entrants?

New florists will be discouraged from entering the market because of the difficulty of competing on cost Signup and view all the answers

What happens when government regulations are influenced by lobbyists for the producers in a market?

make it difficult for new producers to enter the market Signup and view all the answers

The toothpaste aisle at a large store that sells personal care products contains many versions of toothpaste produced by a small number of sellers. This indicates that toothpaste producers are engaging in _ to _.

brand proliferation; deter new entrants Signup and view all the answers

What is the major reason that most markets are imperfectly competitive?

the strong incentive of sellers to deter the entry of new sellers Signup and view all the answers

Study Notes

Economic Profit and Costs

Malia earns a salary of $130,000 and $1,000 in interest annually; her economic profit from starting a company is $19,000 after accounting for implicit and explicit costs.
Economic profit is determined by total revenue minus total costs, incorporating both explicit financial costs and implicit opportunity costs like forgone wages and interest.

Profit Calculations

Accounting profit is calculated as total revenue minus explicit financial costs.
A firm with economic profits also reports accounting profits.

Market Dynamics

Economic profit plays a crucial role in market entry and exit decisions for entrepreneurs.
Companies incur economic losses when total costs exceed total revenue, prompting some sellers to exit, which reduces average losses in the market.

Competitive Landscape

As market output rises, average fixed costs diminish.
When firms with economic profits attract new sellers, existing sellers may face reduced market power.

Barriers to Entry

Strategies to "lock-in" customers do not include government pressure for licensing; rather, companies focus on creating switching costs, making it difficult for customers to switch to competitors.
Demand-side strategies to deter new entrants exclude raising overall market demand for the product.

Market Competition and Pricing

Leaders in mass production create significant barriers for new entrants by making competition difficult.
A dominant seller, like Michelle in the florist industry, can secure lower prices due to order volume, discouraging new competitors because of cost disadvantages.

Regulatory Influence

Government regulations, influenced by producer lobbyists, often hinder new entrants into the market, promoting an imperfectly competitive environment.

Brand Strategy

Brand proliferation by established producers in categories like toothpaste serves to deter potential market entrants by creating a crowded marketplace, raising barriers through consumer loyalty and recognition.
Sellers' incentives to prevent new entry contribute to the imperfection of most competitive markets.

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Description

Test your understanding of entry, exit, and long-run profitability concepts with this quiz. Analyze Malia's economic situation to determine her profit or loss after launching her business. Engage with practical examples and deepen your grasp of economic profit calculations.