Economics Quiz on Revenue and Costs

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Questions and Answers

What was the initial justification for the college's preference for mailings over phone calls?

  • The cost of making a call was considered the same as mailing a letter.
  • The cost of making a call was lower than the cost of mailing a letter.
  • The phone call system was completely broken.
  • The cost of making a call was believed to be $1, while the cost of mailing a letter was $0.50. (correct)

The college correctly calculated the cost of a phone call by considering the marginal cost of each call.

False (B)

What was the main factor that the college failed to include in their calculation of call costs, causing an inaccurate cost assessment?

marginal cost

The total revenue of a firm is calculated by multiplying the _________ by the quantity of goods sold.

<p>price</p> Signup and view all the answers

Match the following terms with their definitions:

<p>Revenue = The amount of money a firm brings in from the sale of its outputs Marginal cost = The cost incurred by producing one additional unit of a good or service. Quantity sold = Amount of a given product sold Price = The monetary value of a product.</p> Signup and view all the answers

What is the formula to calculate Total Revenue?

<p>Total revenue = Price * Quantity sold (B)</p> Signup and view all the answers

If the marginal cost of making a call is lower than the cost of mailing a letter, the college should prefer making phone calls.

<p>True (A)</p> Signup and view all the answers

What is the term used for the amount of money a company brings in from the sale of its products?

<p>revenue</p> Signup and view all the answers

What is the term used to describe agents in a perfectly competitive market who have no control over the market price?

<p>Price-takers (C)</p> Signup and view all the answers

In a perfectly competitive market, a single seller's decision to alter production significantly affects the overall market price.

<p>False (B)</p> Signup and view all the answers

Besides buying, what other role is a price-taker expected to play in the market?

<p>selling</p> Signup and view all the answers

The assumption of free entry and exit in a market has important consequences for the market as a ______

<p>whole</p> Signup and view all the answers

What is the primary goal of a seller in a market?

<p>To maximize net benefits or profits (A)</p> Signup and view all the answers

A single farmer's decision to grow corn instead of soybeans will cause significant price fluctuations in the global market.

<p>False (B)</p> Signup and view all the answers

Give one example of a market that allows sellers to enter and exit as they please.

<p>eBay / online auctions</p> Signup and view all the answers

Match the following market characteristics with their definitions:

<p>Free entry and exit = Firms can easily enter or leave the market Price-taker = Accepts the market price as given Profit maximization = Seller's goal to maximize net benefits Small seller size = An individual seller's output is small relative to the whole market</p> Signup and view all the answers

When should a firm shut down in the short run?

<p>When price is less than average variable cost (C)</p> Signup and view all the answers

A firm can still achieve positive revenue if it produces while its total costs exceed total revenues.

<p>True (A)</p> Signup and view all the answers

What is the optimization rule regarding variable costs and shutdown?

<p>If revenues do not cover all of the variable costs, then shutdown is optimal in the short run.</p> Signup and view all the answers

The Cheeseman pays labor $0.06 more than it receives in __________ revenue.

<p>marginal</p> Signup and view all the answers

Match the components with their descriptions:

<p>AVC = Average Variable Cost Total Cost = Sum of fixed and variable costs Price = Amount received per unit sold Marginal Revenue = Additional revenue from selling one more unit</p> Signup and view all the answers

What does it mean when supply is described as elastic?

<p>Quantity supplied is responsive to price changes. (A)</p> Signup and view all the answers

A perfectly inelastic supply curve means that quantity supplied changes with price changes.

<p>False (B)</p> Signup and view all the answers

Provide an example of a situation with perfectly inelastic supply.

<p>Oil refinery operating at full capacity.</p> Signup and view all the answers

A _______ supply curve leads to an infinite change in quantity supplied with a small change in price.

<p>perfectly elastic</p> Signup and view all the answers

Match the type of supply with its description:

<p>Perfectly elastic = Any small price change causes infinite quantity change Perfectly inelastic = Quantity supplied is constant regardless of price Unit elastic = Percentage change in price equals percentage change in quantity Elastic = Quantity supplied changes significantly with price changes</p> Signup and view all the answers

How does a steeper supply curve affect sensitivity to price changes?

<p>Less sensitivity to price changes (D)</p> Signup and view all the answers

Inelastic supply means that changes in price lead to significant changes in quantity supplied.

<p>False (B)</p> Signup and view all the answers

An oil refinery operating at full capacity cannot increase production in the _______.

<p>short run</p> Signup and view all the answers

What is the profit when selling 500 units at $10 per unit?

<p>$5,000 (C)</p> Signup and view all the answers

Selling at $8 per unit with 1,000 units sold results in less profit compared to selling at $10 per unit with 500 units sold.

<p>False (B)</p> Signup and view all the answers

What is the relationship between market price and output in a competitive firm?

<p>Market price determines the firm's output.</p> Signup and view all the answers

The rule that links market price to marginal cost is referred to as MR = ____.

<p>MC</p> Signup and view all the answers

If The Cheeseman experiences an increase in packaging costs to $1.41 per box, what is expected to happen?

<p>Increase quantity supplied (D)</p> Signup and view all the answers

Total profits can be significantly affected when translating numbers across several plants and over several years.

<p>True (A)</p> Signup and view all the answers

Match the profit amount with the corresponding units sold and price per unit:

<p>500 units, $10/unit = $5,000 profit 1,000 units, $8/unit = $8,000 profit 500 units, $8/unit = $4,000 profit 1,000 units, $10/unit = $10,000 profit</p> Signup and view all the answers

The profit of _____ is achieved when profits are optimized.

<p>$245</p> Signup and view all the answers

What are sunk costs?

<p>Costs that are already committed and cannot be recovered (C)</p> Signup and view all the answers

The Cheeseman should make future production decisions based on sunk costs.

<p>False (B)</p> Signup and view all the answers

Why might The Cheeseman continue production even when losing money?

<p>To cover some fixed costs.</p> Signup and view all the answers

Sunk costs are costs that, once committed, can never be __________.

<p>recovered</p> Signup and view all the answers

What portion of the marginal cost curve represents the short-run supply curve for The Cheeseman?

<p>The portion above average variable cost (A)</p> Signup and view all the answers

Fixed costs can affect the relative costs of current and future production decisions.

<p>True (A)</p> Signup and view all the answers

What is the significance of covering fixed costs when continuing production?

<p>It helps mitigate losses.</p> Signup and view all the answers

Match the following terms related to costs.

<p>Sunk Costs = Cannot be recovered once incurred Fixed Costs = Do not vary with production level Variable Costs = Change with production levels Marginal Costs = Cost of producing one additional unit</p> Signup and view all the answers

Flashcards

Price-taker

A market where individual firms have no influence on the market price and can sell as much as they want at the prevailing price.

Free Entry and Exit

The ability of firms to freely enter or leave an industry based on profit opportunities.

Net Benefits (or Profits)

The difference between a seller's total revenue and total cost.

Seller's Output Decision

The amount of output a seller chooses to produce to maximize profits.

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Market Price Determination

The combined impact of many individual sellers' decisions on the market price.

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Negligible Market Impact (Individual Seller)

A situation where an individual firm's production decision has no significant impact on the overall market price. The firm's output is too small to matter in the grand scheme of things.

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Market Equilibrium (Entry and Exit)

The overall result of numerous individual sellers entering or exiting a market. It's the market's response to profit opportunities.

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Seller's Goal: Profit Maximization

The seller's goal is to maximize profits by producing the optimal amount of output to achieve the largest difference between total revenue and total cost.

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Revenue

The total amount of money a firm receives from selling its products.

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Marginal Cost

The cost of producing one additional unit of a good or service.

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Profit

The difference between the revenue received and the cost of producing a good or service.

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Fixed Cost

A cost that does not change with the quantity of output produced.

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Variable Cost

A cost that changes with the quantity of output produced.

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Marginal Cost of a Call

The cost of making one additional call.

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Donation Rate over the Phone

The rate at which donations are received through phone calls.

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Donation Rate from Mailings

The rate at which donations are received through mail.

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Marginal Revenue (MR)

The change in total revenue from selling one additional unit of output.

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Marginal Cost (MC)

The change in total cost from producing one additional unit of output.

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Profit Maximizing Output

The point where a firm maximizes its profits by producing the quantity where marginal revenue equals marginal cost (MR = MC).

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Firm's Supply Curve

The relationship between a firm's output and the price of its product, showing how much the firm will supply at different prices.

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MR = MC Rule

The point where a firm's marginal revenue equals its marginal cost (MR = MC), indicating the profit-maximizing output level.

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Short-Run Output Adjustment

The ability of a firm to adjust its output in response to changing market conditions.

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Net Profit

The difference between a firm's total revenue and total cost, representing the firm's profit.

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Total Revenue

The total income generated by a firm from selling its output.

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Shutdown Rule

In the short run, a firm should shut down production if the price of its product is less than its average variable cost (AVC). This means the firm cannot cover its per-unit variable costs, even though it may cover some of its fixed costs.

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Contribution Margin

The difference between total revenue and total variable cost represents a firm's contribution margin. If this margin is positive, the firm is covering its variable costs and contributing towards its fixed costs. A negative contribution margin means the firm is losing money on each unit it produces.

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Elastic Supply

A supply curve where any percentage change in price results in a larger percentage change in quantity supplied. This means sellers are very responsive to price changes.

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Inelastic Supply

A supply curve where any percentage change in price results in a smaller percentage change in quantity supplied. Sellers are not very responsive to price changes.

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Perfectly Elastic Supply

A supply curve where even the smallest price change leads to an infinite change in quantity supplied. It's a theoretical extreme case.

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Perfectly Inelastic Supply

A supply curve where no matter the price, the same quantity is supplied. Sellers cannot change their output, regardless of price changes.

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Unit-Elastic Supply

A supply curve where quantity supplied is equally sensitive to price changes. A specific percentage change in price leads to the same percentage change in quantity supplied.

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Supply Elasticity

Indicates how responsive quantity supplied is to price changes. It can be elastic, inelastic, or perfectly elastic/inelastic.

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Steeper Supply Curve

The steeper the supply curve, the less sensitive quantity supplied is to price changes. This means the elasticity of supply is lower.

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Typical Supply Curve

A supply curve that is upward-sloping, indicating that as price increases, more quantity is supplied.

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Sunk Costs

Costs that have already been incurred and cannot be recovered, like the rent on a building, regardless of whether the business continues to operate.

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Shut Down Point

The point at which a firm covers all its variable costs and a portion of its fixed costs.

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Short-Run Supply Curve

A firm's short-run supply curve is the portion of its marginal cost curve that lies above the average variable cost curve.

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Average Variable Cost

The total cost of production divided by the total number of units produced.

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Study Notes

Sellers and Incentives

  • Sellers and buyers exist in all markets, including service markets
  • Sellers optimize by making decisions at the margin to maximize profits
  • Supply curves show seller's willingness to sell at different price levels
  • Producer surplus is the difference between market price and marginal cost.
  • Firms enter and exit markets based on profit opportunities.
  • Perfectly competitive markets have three key conditions: no single buyer or seller influences price; sellers produce identical goods; free entry and exit.
  • Sellers in perfectly competitive markets are price takers.
  • Sellers, like buyers, optimize using marginal thinking.

The Seller's Problem

  • Profit maximization is the central goal of a seller.
  • The seller's problem involves three main components: production, costs, and revenues.
  • Making goods involves understanding how different inputs combine to produce outputs.
  • Costs involve the price of inputs (labor, machinery, etc.).
  • Revenues are determined by selling price and quantity.

From the Seller's Problem to the Supply Curve

  • Market price determines a firm's output in the short run.
  • The firm's supply curve shows output at various price levels.
  • A change in market price leads to a change in the firm's quantity supplied.
  • Price elasticity of supply measures how responsive quantity supplied is to price changes.

Producer Surplus

  • Producer surplus measures the difference between market price and marginal cost.
  • Graphically, producer surplus is the area above the marginal cost curve and below the market price.
  • Total producer surplus is calculated by adding up the surplus from all units sold.

From the Short Run to the Long Run

  • In the short run, some inputs (like physical capital) are fixed whereas others can change.
  • In the long run, all inputs are variable, meaning firms can enter or exit the market based on profitability.
  • Short-run cost curves (like ATC, AVC) are above the long-run cost curve because options are limited in the short run.
  • Economies of scale exist when ATC falls as output increases; diseconomies of scale exist when ATC rises as output increases.
  • Exit is a long-run decision to leave a market; it occurs when price is less than average total cost.
  • Entry is a long-run decision to enter a market when price is greater than average total cost.
  • In the long run in a competitive market, all firms will make zero economic profits.

From the Firm to the Market: Long-Run Competitive Equilibrium

  • In a perfectly competitive market, the number of firms can change in the long run.
  • Firms enter the market when there are positive economic profits (price is greater than average total cost).
  • Firms exit when there are negative economic profits (price is less than average total cost).
  • Free entry and exit drive long-run economic profits to zero.
  • The long-run supply curve is horizontal at the minimum average total cost.

Evidence-Based Economics

  • Subsidies can affect ethanol production, driving changes in the number of producers and overall quantity.
  • The effect can vary in the short run vs. the long run due to firm entry/exit responsiveness.
  • Data on ethanol plant numbers and construction show trends related to government subsidies.
  • Experimental studies can be used to isolate the impacts of subsidies in artificial markets.

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