Costs and Price

Week I Quiz Results/Answers ECO561 1. Revenue increases when * producer surplus increases 2. An increase in the price of an inelastic good * increases revenues 3. Price elasticity of Demand increases when * people become less price sensitive over time 4. The purpose of a market in a market system is to * bring buyers and sellers into contact 5. By specializing in the production of one good, a company is able to benefit from economies of scale which increases its revenue. Which of the following is an attribute of specialization? * Saving time by allowing a worker to focus on one task . The market system promotes progress by * providing incentive for technological advances 7. Productive efficiency is achieved when * the best technology is used 8. The market is said to be in equilibrium when * neither a shortage nor a surplus exists 9. The market will move to a higher equilibrium price if * the increase in demand is greater than the increase in supply 10. The intersection of supply and demand will be at a lower equilibrium price but a higher equilibrium quantity if * demand is constant and supply increases 11. When a price ceiling occurs the market price will be lower than the equilibrium price 12. Because the goals of firms, entrepreneurs, and workers have different incentives, which of the following principles applies? * Self-interest Week 2 Quiz Results/Answers ECO561 1. Purely competitive firms increase total revenue by * increasing production (To increase revenue, firms look to increase price or quantity, as price multiplied by quantity equals total revenue. Purely competitive firms can sell as much as they want at the market price. Adding additional units of the product does not result in a change in the market price.

Therefore, since purely competitive firms do not influence price, they increase total revenue by increasing quantity). 2. What are two ways for a competitive firm to determine the optimal level of production, that is, the level of production that will maximize profit or minimize losses? * Comparing total revenue to total cost or marginal revenue to marginal costs (A firm can look at two factors when considering whether it is maximizing profit or minimizing losses. First, it can find the maximum difference between total revenue and total cost.

Second, a firm can look at the additional revenue gained from selling one more unit and at the additional cost from producing that additional unit. As long as the additional revenue from selling one more unit is greater than the cost of producing that unit, the firm will continue to increase its revenue. If the additional cost of producing another unit is greater than the additional revenue generated by selling that additional unit, the firm takes away from its total profit; this is the difference between revenue and cost.

Thus, a firm maximizes its profit by producing at the point where marginal revenue equals marginal cost. Before that, additional profit can be generated, while after that, the firm reduces it overall profit). 3. Suppose that a firm determines that its marginal revenue is greater than its marginal cost, it would be better to * increase production (Inelastic goods are necessities that consumers continue to purchase even when the price increases. This increases the revenue, as more is paid for each good. The percentage change in price increases faster than the change in quantity, which may remain constant.

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When more is paid for a good or a service, revenue increases). 4. It is profitable for a firm to continue employing additional resources as long as * Marginal Revenue Product >= Marginal Resource Cost (As with the optimal level of production for a good, the optimal usage of a resource is determined by ensuring that the revenue from that resource is at least equal to the marginal cost of that resource) 5. As additional units are produced, the marginal revenue product falls for all firms because marginal product decreases.

For firms operating in industries that are not perfectly competitive, marginal revenue product also falls because * product price falls as output increases (While perfectly or purely competitive firms must accept the price set by supply and demand in the market, firms facing other market structures have some control over the price they set for their products. However, to increase the quantity demanded of their product, they must decrease their price. In doing so, while some firms may have the ability to set different prices for different groups, called price discriminating, most firms cannot.

As a result, the firm must lower the price on that good for all consumers; therefore, the product price falls as output increases) 6. All things being equal, an increase in demand for a product… * increases demand for the resources used in its production (When a firm sees an increase in the demand for its product, it will increase its production. In doing so, the firm increases the demand for the resources it uses to produce its product. An increase in demand for a product does increase the quantity supplied. The firm sees that it can increase the price on each unit to address the shortage that emerges, so there is more sold.

This does not mean that the firm changes the amount of production at the original price) 7. Marginal cost can be defined as the addition to _____ of one more unit of output. * total variable costs (Marginal cost measures the cost of producing the next unit. Because fixed costs do not change with additional output, they do not add to total fixed costs. In addition, while average costs—both total and fixed—change with additional levels of output, as average costs are divided by the quantity produced, they do not reflect the full addition to the cost.

Thus, the cost of producing an additional unit reflects the additional cost of inputs needed for production (variable costs). 8. If a firm starts small and, over time, builds successively larger plant sizes or adds additional work space in an office, average total costs are most likely to * initial decrease then increase 9. Demand for resources, including labor, depend on its * productivity While being profitable, available, and accessible are relevant to the demand for resources, the productivity of the resource in question determines how profitable the good or service will be. 0. The primary difference between increasing- and decreasing-cost industries lies in * the fact that the average total cost (ATC) of firms in increasing-cost industries will first decline and then eventually increase with output, while decreasing-cost firms experience progressively lower ATC with increased output (By definition, an increasing-cost industry experiences a rising ATC as output increases, while a decreasing-cost industry enjoys a lower ATC as output increases. 11. When adding labor or other factors of production, businesses may see their total product rise, but see their per-unit increase in return for each additional unit diminish. This phenomenon * is known as diminishing marginal product and has general market application (The diminishing marginal product theory states that the marginal product decreases as a firm, introduces one new input into production while holding all other inputs fixed. ) 12.

In the short run, firms should shut down if The correct answer is A. AVC > P. In the long term, a firm wants to receive a price greater than the cost of production per unit: average total cost. In the short term, a firm may have bills, regardless of whether it is producing anything. For example, a firm may have signed a long-term lease or may have other contracts it is obligated to pay. These costs are generally fixed costs that do not vary with the level of production.

However, firms also have a variety of other costs that are only incurred if the firm is producing: variable costs. Thus, in the short term, a firm should determine how to minimize the costs it will face, such as closing down and only paying the fixed costs or continuing to operate and incurring both the fixed costs and variable costs but offsetting the variable costs and some of the fixed costs with the revenues earned from production.

If the price is less than the average variable cost, then only some of the variable costs will be covered and all of the fixed costs are incurred; therefore, the firm is spending more by continuing to operate rather than shutting down. 13. When you are considering the value of a resource in its next best use, you are considering its * opportunity cost Opportunity cost is defined as the value of the next best use of the resources. In economic terms, opportunity costs include both the explicit costs of production and the implicit costs of production. 14.

Of the four major market structures—perfectly competitive, monopolistic competition, oligopoly, monopoly— reducing variable costs of production * enhance profit per-unit, because profit equals revenue minus cost (Under all market structures, the profit maximization rule stays the same, that is MC = MR. A cost reduction in all cases reduces the MC and increases the profit margin. ) Week Three Quiz Results ECO561 1. | Answered| | 2. | Answered| | 3. | Answered| | 4. | Answered| | 5. | Answered| | 6. | Answered| | 7. | Unanswered| | 8. | Unanswered| | 9. | Unanswered| | 10. Unanswered| | 11. | Unanswered| | 12. | Unanswered| | 13. | Unanswered| | 14. | Unanswered| | ————————————————- Top of Form Bottom of Form 1. | Answered| | 2. | Answered| | 3. | Answered| | 4. | Answered| | 5. | Answered| | 6. | Answered| | 7. | Unanswered| | 8. | Unanswered| | 9. | Unanswered| | 10. | Unanswered| | 11. | Unanswered| | 12. | Unanswered| | 13. | Unanswered| | 14. | Unanswered| | ————————————————- Top of Form 7. Marginal cost can be defined as the addition to _____ of one more unit of output. Bottom of Form

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