Question 1

Gideon's Shoe Repair also produces custom-made shoes. When Gideon produces 12 pairs a week, the marginal cost (MC)  of the twelfth pair is R840, and the marginal revenue (MR)  of that unit is R700. What would you advise Gideon to do?

Accepted Answer

A)   Shut down.
B)   Produce more custom-made shoes.
C)   Decrease the price.
D)   Produce fewer custom-made shoes.E) A) and D)
F) All of the above

Question 2

The long-run market supply curve

Accepted Answer

A)   is always more elastic than the short-run market supply curve.
B)   is always perfectly elastic.
C)   has the same elasticity as the short-run market supply curve.
D)   is always less elastic than the short-run market supply curve.E) A) and C)
F) C) and D) A

Question 3

The short-run market supply curve is more elastic than the long-run market supply curve.

Accepted Answer

A) True 
 B)False

Question 4

A key difference between accountants and economists is their different treatment of the cost of capital. Does this cause an accountant's estimate of total costs to be higher or lower than an economist's estimate? Explain.

Accepted Answer

An accountant would not include the forg...

Question 5

If a production function exhibits diminishing marginal product, its slope

Accepted Answer

A)   is linear (a straight line) .
B)   becomes steeper as the quantity of the input increases.
C)   could be any of these answers.
D)   becomes flatter as the quantity of the input increases.E) C) and D)
F) A) and B)

Question 6

Economic profit is equal to total revenue minus

Accepted Answer

A)   variable costs.
B)   implicit costs.
C)   explicit costs.
D)   marginal costs.
E)   implicit and explicit costs.F) A) and C)
G) A) and D)

Question 7

Describe the difference between average revenue and marginal revenue. Why are both of these revenue measures important to a profit-maximising firm?

Accepted Answer

Average revenue is total revenue divided by the quantity of output. Marginal revenue is the change in total revenue from the sale of each additional unit of output. Marginal revenue is used to determine the profit-maximising level of production, and average revenue is used to help determine the level of profits. Note that for all firms, price equals average revenue because AR=(PxQ)/Q=P. But only for a firm operating in a perfectly competitive industry does price also equal marginal revenue.

Question 8

If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal cost curve will

Accepted Answer

A)   be flat (horizontal) .
B)   slope upward.
C)   slope downward.
D)   be U-shaped.E) A) and D)
F) None of the above

Question 9

The production process described above exhibits

Accepted Answer

A)   constant marginal product of labour.
B)   diminishing marginal product of labour.
C)   increasing returns to scale.
D)   increasing marginal product of labour.
E)   decreasing returns to scale.F) A) and B)
G) A) and C)

Question 10

In long-run equilibrium in a competitive market, firms are operating at

Accepted Answer

A)   the minimum of their average-total-cost curves.
B)   all of these answers are correct.
C)   their efficient scale.
D)   zero economic profit.
E)   the intersection of marginal cost and marginal revenue.F) D) and E)
G) C) and D)

Question 11

Nicole owns a small pottery factory. She can make 1 000 pieces of pottery per year and sell them for R100 each. It costs Nicole R20 000 for the raw materials to produce the 1 000 pieces of pottery. She has invested R100 000 in her factory and equipment: R50 000 from her savings and R50 000 borrowed at 10 per cent. (Assume that she could have loaned her money out at 10 per cent, too.)  Nicole can work at a competing pottery factory for R40 000 per year. The accounting profit at Nicole's pottery factory is:

Accepted Answer

A)   R30 000.
B)   R35 000.
C)   R70 000.
D)   R75 000.
E)   R80 000.F) D) and E)
G) A) and C)

Question 12

A firm maximises profit when it produces output up to the point where marginal cost equals marginal revenue.

Accepted Answer

A) True 
 B)False

Question 13

If the long-run market supply curve for a good is perfectly elastic, an increase in the demand for that good will, in the long run, cause

Accepted Answer

A)   an increase in the number of firms in the market but no increase in the price of the good.
B)   an increase the price of the good and an increase in the number of firms in the market.
C)   an increase the price of the good but no increase in the number of firms in the market.
D)   no impact on either the price of the good or the number of firms in the market.E) None of the above
F) A) and B)

Question 14

If total revenue is R100, explicit costs are R50, and implicit costs are R30, then accounting profit equals R50.

Accepted Answer

A) True 
 B)False

Question 15

If there are implicit costs of production,

Accepted Answer

A)   accounting profit will exceed economic profit.
B)   economic profit will always be zero.
C)   economic profit will exceed accounting profit.
D)   accounting profit will always be zero.
E)   economic profit and accounting profit will be equalF) A) and B)
G) B) and D)

Question 16

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

Accepted Answer

A)   All of these answers are characteristics of a competitive market.
B)   There are many buyers and sellers in the market.
C)   The goods offered for sale are largely the same.
D)   Firms generate small but positive economic profits in the long run.
E)   Firms can freely enter or exit the market.F) B) and C)
G) A) and B)

Question 17

For a competitive firm, marginal revenue is

Accepted Answer

A)   total revenue divided by the quantity sold.
B)   equal to the quantity of the good sold.
C)   average revenue divided by the quantity sold.
D)   equal to the price of the good sold.E) None of the above
F) A) and C)

Question 18

At its current level of production a profit-maximising firm in a competitive market receives R12.50 for each unit it produces and faces an average total cost of R10. At the market price of R12.50 per unit, the firm's marginal cost curve crosses the marginal revenue curve at an output level of 1 000 units. What is the firm's current profit? What is likely to occur in this market and why?

Accepted Answer

Profit per unit can be calculated as (P-...

Question 19

Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are experiencing economic losses. Identify costs, revenue, and the economic losses on your graph. Using your graph, determine whether an individual firm will shut down in the short run, or choose to remain in the market. Explain your answer.

Accepted Answer

The losses and revenues are identified on the individual firm's graph. Total cost is equal to the sum of the losses and revenue (because profit/loss=TR-TC, so TC=TR + profit/loss). The decision about whether this firm shuts down or remains in the market depends upon the position of average variable cost. If average variable cost is below P0 at output level Q0, the firm will remain in the market. If average variable cost is above P0 at output level Q0 the firm will shut down in the short run.

Question 20

A grocery store should close at night if the

Accepted Answer

A)   variable costs of staying open are less than the total revenue due to staying open.
B)   total costs of staying open are less than the total revenue due to staying open.
C)   variable costs of staying open are greater than the total revenue due to staying open.
D)   total costs of staying open are greater than the total revenue due to staying open.E) None of the above
F) All of the above

Exam 6: Background to Supply: Firms in Competitive Markets

Gideon's Shoe Repair also produces custom-made shoes. When Gideon produces 12 pairs a week, the marginal cost (MC) of the twelfth pair is R840, and the marginal revenue (MR) of that unit is R700. What would you advise Gideon to do?

Correct Answer
verified

The long-run market supply curve

Correct Answer
verified
A

The short-run market supply curve is more elastic than the long-run market supply curve.

Correct Answer
verified

A key difference between accountants and economists is their different treatment of the cost of capital. Does this cause an accountant's estimate of total costs to be higher or lower than an economist's estimate? Explain.

Correct Answer
verified
An accountant would not include the forg...
View Answer

If a production function exhibits diminishing marginal product, its slope

Correct Answer
verified

Economic profit is equal to total revenue minus

Correct Answer
verified

Describe the difference between average revenue and marginal revenue. Why are both of these revenue measures important to a profit-maximising firm?

If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal cost curve will

Correct Answer
verified

The production process described above exhibits

Correct Answer
verified

In long-run equilibrium in a competitive market, firms are operating at

Correct Answer
verified

Correct Answer
verified

A firm maximises profit when it produces output up to the point where marginal cost equals marginal revenue.

Correct Answer
verified

If the long-run market supply curve for a good is perfectly elastic, an increase in the demand for that good will, in the long run, cause

Correct Answer
verified

If total revenue is R100, explicit costs are R50, and implicit costs are R30, then accounting profit equals R50.

Correct Answer
verified

If there are implicit costs of production,

Correct Answer
verified

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

Correct Answer
verified

For a competitive firm, marginal revenue is

Correct Answer
verified

Correct Answer
verified
Profit per unit can be calculated as (P-...
View Answer

A grocery store should close at night if the

Correct Answer
verified

Exam 6: Background to Supply: Firms in Competitive Markets

Gideon's Shoe Repair also produces custom-made shoes. When Gideon produces 12 pairs a week, the marginal cost (MC) of the twelfth pair is R840, and the marginal revenue (MR) of that unit is R700. What would you advise Gideon to do?

Correct AnswerverifiedShow Answer

The long-run market supply curve

Correct AnswerverifiedA

The short-run market supply curve is more elastic than the long-run market supply curve.

Correct AnswerverifiedShow Answer

A key difference between accountants and economists is their different treatment of the cost of capital. Does this cause an accountant's estimate of total costs to be higher or lower than an economist's estimate? Explain.

Correct AnswerverifiedAn accountant would not include the forg...View AnswerShow Answer

If a production function exhibits diminishing marginal product, its slope

Correct AnswerverifiedShow Answer

Economic profit is equal to total revenue minus

Correct AnswerverifiedShow Answer

Describe the difference between average revenue and marginal revenue. Why are both of these revenue measures important to a profit-maximising firm?

If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal cost curve will

Correct AnswerverifiedShow Answer

The production process described above exhibits

Correct AnswerverifiedShow Answer

In long-run equilibrium in a competitive market, firms are operating at

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A firm maximises profit when it produces output up to the point where marginal cost equals marginal revenue.

Correct AnswerverifiedShow Answer

If the long-run market supply curve for a good is perfectly elastic, an increase in the demand for that good will, in the long run, cause

Correct AnswerverifiedShow Answer

If total revenue is R100, explicit costs are R50, and implicit costs are R30, then accounting profit equals R50.

Correct AnswerverifiedShow Answer

If there are implicit costs of production,

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

For a competitive firm, marginal revenue is

Correct AnswerverifiedShow Answer

Correct AnswerverifiedProfit per unit can be calculated as (P-...View AnswerShow Answer

A grocery store should close at night if the

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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A

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Correct Answer
verified
An accountant would not include the forg...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified
Profit per unit can be calculated as (P-...
View Answer

Correct Answer
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