1. Firms generally face increasing marginal cost because of the diminishing marg
ID: 1190707 • Letter: 1
Question
1. Firms generally face increasing marginal cost because of the diminishing marginal productivity of variable inputs. True or False
2. Either a rise in marginal cost or a drop in marginal revenue or both would cause a firm to reduce its output. True or False
3. Consider a perfectly competitive firm with MC = 10 + q. If the market demand is Q = 100 – P and the current industry output is 80 units, then the firm will produce
a. zero units
b. 10 units
c. 20 units
d. The answer cannot be determined without knowing what the supply curve is
4. If a farmer rents land from Miss. Gulch for $300 per acre and the lease clearly states that the land cannot be subleased to anyone else, because of this, the rent is considered to be a/an
a.
avoidable fixed cost.
b.
variable cost.
c. sunk cost. - once paid can not be recovered
d. both (a) and (c).
5. Other factors being constant, what would happen to a firm’s revenue if they raised their price
a.Revenue would increase
b.
Revenue would decrease.
c.
Revenue would remain unchanged.
d.
Revenue could increase, decrease, or remain unchanged.
6. The output level that maximizes profit is the output level where per-unit, or average, profit is maximized.
True
False
7. Jane owns her own business and is doing an economic analysis of her business for the year 2008. She generated $700,000 revenue through the year. The cost of goods sold was $200,000. Jane maintains a $100,000 inventory. Utilities and other like expenses were $25,000. Jane owns the building that her business is in. She could rent her building for $30,000 per year if she didn’t use it. She inherited the building from her parents, so she has no intentions of selling it. Suppose the value of the building at the beginning of the year was $250,000. At the end of the year it was worth $260,000. Around the beginning of 2008 Jane was offered $80,000 to come to work for an acquaintance in another business. Jane feels this is as much as she could get if she weren’t in business for herself. Jane paid out $160,000 for employees. The sum of all other out-of-pocket expenses totaled $140,000. Five years ago Jane purchased a bunch of equipment for her business. It cost her $220,000 then. At the beginning of 2008 the equipment had a market value of $150,000. At the end of the year it was worth $130,000. Assume Jane could have earned 5 percent on the money she had tied up in her business. There would have to be $142,500 in Jane’s pocket after all is said and done, so-to-speak, for Jane to have realized a zero economic profit.
True
False
7. Refer back to question 6. The economic profit Jane actually ends up earning is $32,500.
True
False
8. Assume a firm only has one variable input. If it is better for the firm to produce than it is to temporarily shut down, the firm will increase the employment of the variable input at least up to the point
a.
of diminishing marginal productivity.
b.
where the average productivity of the variable input is maximum.
c.
where the marginal productivity of the variable input is zero.
d.
of maximum average productivity of the fixed inputs.
a.
avoidable fixed cost.
b.
variable cost.
Explanation / Answer
1.) True
2.) Traditionally True (for a set-up of small firms size).
But in a large set-up, it will be false.
Reason, there the only crietria in a Large Production unit is Output / Productivity / Systematised Outputs / Quality.
3.) d. The answer cannot be determined without knowing what the supply curve is.
4.) d.) both (a) & (c)
5.) a) Revenue would increase.
6.) True
7.) ---
8) b) where the average productivity of the variable input is maximum.
8) b) where the average productivity of the variable input is maximum.
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