Scenario 13-2: Principles of Economics Problem Set 5 Due Date
Scenario 13-2: Principles of Economics Problem Set 5 Due Date
Scenario 13-2: Principles of Economics Problem Set 5 Due Date
PROBLEM SET 5
Due date:
1. Which of the following is an implicit cost?
(i) the owner of a firm forgoing an opportunity to earn a large salary working for a Wall Street brokerage
firm
(ii) interest paid on the firm's debt
(iii) rent paid by the firm to lease office space (explicit)
a. (ii) and (iii)
b. (i) and (iii)
c. (i) only
d. (iii) only
Scenario 13-2
Zach took $400,000 out of the bank and used it to start his new cookie business. The bank account pays 3
percent interest per year. During the first year of his business, Zach sold 6,000 boxes of cookies for $2.50 per
box. Also, during the first year, the cookie business incurred costs that required outlays of money amounting to
$9,000.
2. Refer to Scenario 13-2. Zach's accounting profit for the year was
a. $-494,000.
b. $-6,000.
c. $6,000.
d. $12,000.
3. Refer to Scenario 13-2. Zach's economic profit for the year was
a. $-506,000.
b. $-6,000.
c. $3,000.
d. $6,000.
4. On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires 2 workers. He
is able to produce 4,400 bushels of wheat when he hires 3 workers. Which of the following possibilities is
consistent with the property of diminishing marginal product?
a. The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers.
b. The farmer is able to produce 5,800 bushels of wheat when he hires 4 workers.
c. The farmer is able to produce 6,000 bushels of wheat when he hires 4 workers.
d. All of the above are correct.
Figure 13-6
5. Refer to Figure 13-6. Which of the curves is most likely to represent the average total cost?
a. A
b. B
c. C
d. D
6. Refer to Figure 13-6. Which of the curves is most likely to represent average variable cost?
a. A
b. B
c. C
d. D
7. Refer to Figure 13-6. Which of the curves is most likely to represent marginal cost?
a. A
b. B
c. C
d. D
Table 13-7
Teacher's Helper is a small company that has a subcontract to produce instructional materials for disabled
children in public school districts. The owner rents several small rooms in an office building in the suburbs
for $600 a month and has leased computer equipment that costs $480 a month.
0 1,080
1 1,080 400 1,480 400
2 965 450
3 1,350 2,430
4 1,900 475
5 2,500 216
6 4,280 700
7 4,100
8 5,400 135
9 7,300
10 10,880 980
8. Refer to Table 13-7. What is the marginal cost of creating the tenth instructional module in a given
month?
a. $900
b. $1,250
c. $2,500
d. $3,060
9. Refer to Table 13-7. What is the average variable cost for the month if six instructional modules are
produced?
a. $180.00
b. $533.33
c. $700.00
d. $713.33
10. Refer to Table 13-7. What is the average fixed cost for the month if nine instructional modules are
produced?
a. $108.00
b. $120.00
c. $150.00
d. $811.11
11. Refer to Table 13-7. How many instructional modules are produced when marginal cost is $1,300?
a. 4
b. 5
c. 7
d. 8
12. Refer to Table 13-7. One month, Teacher's Helper produced 18 instructional modules. What was the
average fixed cost for that month?
a. $60
b. $108
c. $811
d. It can't be determined from the information given.
Figure 13-9
13. Refer to Figure 13-9. The three average total cost curves on the diagram correspond to three different
a. time horizons.
b. products.
c. firms.
d. factory sizes.
14. Refer to Figure 13-9. The firm experiences economies of scale if it changes its level of output
a. from Q1 to Q2.
b. from Q2 to Q3.
c. from Q3 to Q4.
d. from Q4 to Q5.
15. Refer to Figure 13-9. The firm experiences diseconomies of scale if it changes its level of output
a. from Q1 to Q2.
b. from Q2 to Q3.
c. from Q3 to Q4.
d. from Q4 to Q5.
16. Some reasons that firms may experience diseconomies of scale include that
a. the firm is too small to take advantage of specialization.
b. large management structures may be bureaucratic and inefficient.
c. if there are too many employees, the work place becomes crowded and people become less
productive.
d. average fixed costs begin to rise again.
Figure 14-1
The graph below depicts the cost structure for a firm in a competitive market.
17. Refer to Figure 14-1. When price rises from P2 to P3, the firm finds that
a. marginal cost exceeds marginal revenue at a production level of Q2.
b. if it produces at output level Q3 it will earn a positive profit.
c. expanding output to Q4 would leave the firm with losses.
d. it could increase profits by lowering output from Q3 to Q2.
18. Refer to Figure 14-1. When price falls from P3 to P1, the firm finds that
a. fixed cost is higher at a production level of Q1 than it is at Q3.
b. it should produce Q1 units of output.
c. it should produce Q3 units of output.
d. it should shut down immediately.
19. Refer to Figure 14-1. When price rises from P3 to P4, the firm finds that
a. fixed costs are lower at a production level of Q4.
b. it can earn a positive profit by increasing production to Q4.
c. profit is still maximized at a production level of Q3.
d. average revenue exceeds marginal revenue at a production level of Q4.
20. A profit-maximizing firm in a competitive market will always make marginal adjustments to production
as long as
a. average revenue is greater than average total cost.
b. average revenue is equal to marginal cost.
c. marginal cost is greater than average total cost.
d. price is above or below marginal cost.
21. The short-run supply curve for a firm in a perfectly competitive market is
a. horizontal.
b. likely to slope downward.
c. determined by forces external to the firm.
d. the portion of its marginal cost curve that lies above its average variable cost.
22. When price is below average variable cost, a firm in a competitive market will
a. shut down and incur fixed costs.
b. shut down and incur both variable and fixed costs.
c. continue to operate as long as average revenue exceeds marginal cost.
d. continue to operate as long as average revenue exceeds average fixed cost.
Figure 14-4
The figure below depicts the cost structure of a firm in a competitive market.
23. Refer to Figure 14-4. When market price is P5, a profit-maximizing firm's profits can be represented by the
area a. P5 Q3.
b. (P5 - P3) Q2.
c. (P5 - P4) Q3.
d. When market price is P5 there are no profits.
24. Refer to Figure 14-4. Firms would be encouraged to enter this market for all prices that exceed
a. P1.
b. P2.
c. P3.
d. None of the above is correct.
25. Refer to Figure 14-4. When market price is P2, a profit-maximizing firm's losses can be represented by
the area
a. (P3 - P2) Q2.
b. (P2 - P1) Q2.
c. At a market price of P2, the firm does not have losses.
d. At a market price of P2 the firm has losses, but the reference points in the figure don't identify the
losses.