Dr. Moskalev - ECA 111 (The Price System) Review Questions PDF

Dr. Moskalev - ECA 111 (The Price System) Chapter 8 Review Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is the best explanation for why individuals own small 1) busine...

Dr. Moskalev - ECA 111 (The Price System) Chapter 8 Review Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is the best explanation for why individuals own small 1) businesses? A) Because they cannot earn a living working for corporate America. B) The expectation of profit. C) To gain experience for their next job. D) To provide a product consumers want. 2) The profit motive can encourage businesses to do all of the following except 2) A) Restrict competition. B) Maximize social welfare. C) Provide unsafe working conditions. D) Pollute the environment. 3) Explicit costs 3) A) Include only payments to entrepreneurship. B) Are the total opportunity costs of resources used to produce a good. C) Include the market value of all resources used to produce a good. D) Are the sum of actual monetary payments made for resources used to produce a good. 4) Economic profit is the difference between 4) A) Total revenues and total economic costs. B) Total costs and total economic costs. C) Accounting profit and explicit costs. D) Accounting profits and external costs. 5) Which of the following should not be included when calculating accounting profit? 5) A) The cost of utilities. B) The cost of taxes. C) The cost of rent. D) The return on the next best alternative investment opportunity. 1 6) 6) Suppose the entrepreneur could earn $1,000 as an employee elsewhere. This means the accounting profit is A) -$1,000. B) -$75. C) $925. D) $1,525. 7) Adam Weed is the owner/operator of a flower shop. Last year he earned $250,000 in 7) 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 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? A) Accounting profit = $75,000; economic profit = negative $100,000. B) Accounting profit = $0; economic profit = negative $75,000. C) Accounting profit = $75,000; economic profit = $0. D) Accounting profit = $175,000; economic profit = $75,000. 8) Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in 8) materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What are the annual economic costs for the firm described above? A) $90,000. B) $120,000. C) $360,000. D) $450,000. 9) Entrepreneurship 9) A) Can result in economic losses. B) Cannot earn an economic profit. C) Always involves greater rewards than risks. D) Occurs in small businesses, but not large corporations. 2 10) The perfectly competitive market structure includes all of the following except 10) A) Low entry barriers. B) Many firms. C) Large advertising budgets. D) Identical products. 11) In which of the following types of markets does a single firm have the most market 11) power? A) Monopolistic competition. B) Oligopoly. C) Monopoly. D) Perfect competition. 12) Competitive firms cannot individually affect market price because 12) A) Their individual production is insignificant relative to the production of the industry. B) The government exercises control over the market power of competitive firms. C) There is an infinite demand for their goods. D) Demand is perfectly inelastic for their goods. 13) The demand curve for each perfectly competitive firm is 13) A) Upward-sloping. B) Vertical. C) Downward-sloping. D) Horizontal. 14) Which of the following is a production decision? 14) A) How much output the firm should produce in the long run. B) Whether the firm should exit or enter the market. C) Whether the firm should merge with one of its rivals. D) Whether the firm should shut down or produce. 15) The fact that a perfectly competitive firm's total revenue curve is an upward-sloping 15) straight line implies that A) Product price decreases as output increases, and demand is elastic. B) Product price increases at all output levels. C) The total profit curve is also an upward-sloping straight line. D) Product price is constant at all levels of output. 16) A firm maximizes total profit when 16) A) Total revenue exceeds total cost by the greatest amount. B) Total revenues are maximized. C) Total costs exceed total revenue by the largest amount. D) Marginal costs are greater than marginal revenues. 17) If diminishing returns exist, then 17) A) The total cost curve will be negatively sloped. B) The total cost curve will be flat. C) Each unit produced will cost incrementally more. D) Each unit produced will cost incrementally less. 3 18) 18) Refer to the data in Figure 22.1. The shape of the total revenue curve indicates that the price of this good A) Stays the same as output rises. B) Rises as output rises. C) Falls at first as output rises, but then rises as output rises. D) Falls as output rises. 19) For perfectly competitive firms, price 19) A) Is less than marginal revenue. B) Is greater than marginal revenue. C) Is equal to marginal revenue. D) And marginal revenue are not related. 20) If a perfectly competitive firm is producing a rate of output at which MC exceeds price, 20) then the firm A) Can increase its profit by decreasing output. B) Must have an economic loss. C) Can increase its profit by increasing output. D) Is maximizing profit. 4 21) 21) Refer to Figure 22.2 for a perfectly competitive firm. The profit-maximizing quantity of output is A) B. B) C. C) E. D) D. 5 22) 22) Refer to Figure 22.3 for a perfectly competitive firm. If the market price is $10, A) The firm will shut down in the short run. B) The firm should produce 31 units. C) An economic loss will occur. D) The firm will earn normal profits. 6 23) 23) Refer to Figure 22.3 for a perfectly competitive firm. The law of diminishing returns takes effect at an output of A) 31. B) 13. C) 39. D) 25. 24) A competitive firm should always continue to operate in the short run as long as 24) A) MR > MC. B) P < ATC. C) MR > AVC. D) P < AVC. 25) The decision to start or expand a business is known as the 25) A) Production decision. B) Investment decision. C) Profit maximization decision. D) Output decision. 26) If Microsoft is thinking about building a new factory, it is making a 26) A) Long-run decision that will definitely enhance its profit. B) Short-run decision that may enhance its profit. C) Short-run decision that will definitely enhance its profit. D) Long-run decision that may enhance its profit. 27) A change in which of the following will change the optimal rate of output? 27) A) Property taxes. B) Inflation taxes. C) Payroll taxes. D) Profit taxes. 7 28) Which of the following affects both the marginal and average total cost curves of a firm 28) in the short run? A) A change in property taxes. B) A change in payroll taxes. C) A change in profit taxes. D) A change in consumer income. 29) An In the News article, "Too Many Sellers: The Woes of T-Shirt Shops," states that if 29) T-shirt shops are perfectly competitive firms, then each shop A) Is a price taker. B) Has market power. C) Confronts a downward-sloping demand curve for its own output. D) Is a price setter. 30) One In the News feature reports that General Motors planned to essentially quit making 30) cars and trucks in the United States for nine weeks from mid-May through July 2009 and Dell planned to close one of its Texas computer-manufacturing plants. Based on these particular news clips, what is the difference between GM's and Dell's decisions? A) There is no difference between GM's and Dell's decisions; both were trying to get rid of excess inventory. B) GM was trying to maximize profits while Dell was trying to minimize losses. C) Dell was trying to get rid of excess inventory, and GM was trying to become more efficient. D) GM's decision to idle plants was a short-run shutdown decision. Dell, by contrast, made a long-run decision to exit a specific market. 8 Answer Key Testname: UNTITLED3 1) B 2) B 3) D 4) A 5) D 6) C 7) C 8) D 9) A 10) C 11) C 12) A 13) D 14) D 15) D 16) A 17) C 18) A 19) C 20) A 21) D 22) C 23) B 24) C 25) B 26) D 27) C 28) B 29) A 30) D 9