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business
essentials of economics

Questions and Answers of Essentials of Economics

4. When making decisions, which of the following costs should be ignored?a. average costsb. total costsc. marginal costsd. sunk costse. None of the above—no costs should be ignored.
3. Which of the following statements is generally correct?I. The long-run average total cost curve is U-shaped.II. The short-run average total cost curve is U-shaped.III. Firms tend to experience
2. Which of the following is always considered the long run?a. 1 monthb. 1 yearc. 5 yearsd. 10 yearse. none of the above
1. In the long run,a. all inputs are variable.b. all inputs are fi xed.c. some inputs are variable and others are fi xed.d. a fi rm will go out of business.e. fi rms increase in size.
2. In each of the following cases, explain whether the fi rm is likely to experience economies of scale or diseconomies of scale and why.a. an interior design fi rm in which design projects are based
1. The accompanying table shows three possible combinations of fi xed cost and average variable cost. For each choice, average variable cost is constant (it does not vary with the quantity of output
???? Describe how a firm can enjoy economies of scale
???? Explain why a firm’s costs may differ between the short run and the long run
2. Draw a correctly labeled graph showing a firm with a realistic “swoosh-shaped” MC curve and ATC, AVC, and AFC curves with their usual shapes.(6 points)
1. Use the information in the table below to answer the following questions.Quantity Variable cost Total cost 0 $0 $40 1 20 60 2 50 90 3 90 130 4 140 180 5 200 240a. What is the firm’s level of
5. Quantity Variable cost Total cost 0 $0 $40 1 20 60 2 50 90 3 90 130 4 140 180 5 200 240 On the basis of the data in the table above, what is the marginal cost of the third unit of output?a. 40b.
4. The slope of the total cost curve equalsa. variable cost.b. average variable cost.c. average total cost.d. average fi xed cost.e. marginal cost.
3. Which of the following is correct?a. AVC is the change in total cost generated by one additional unit of output.b. MC = TC/Qc. The average cost curve crosses at the minimum of the marginal cost
2. Which of the following statements is true?I. Marginal cost is the change in total cost generated by one additional unit of output.II. Marginal cost is the change in variable cost generated by one
1. When a fi rm is producing zero output, total cost equalsa. zero.b. variable cost.c. fi xed cost.d. average total cost.e. marginal cost.
1. Alicia’s Apple Pies is a roadside business. Alicia must pay $9.00 in rent each day. In addition, it costs her $1.00 to produce the fi rst pie of the day. The additional cost of each subsequent
???? Explain how a firm’s costs generate marginal cost curves and average cost curves
???? Describe the various types of cost a firm faces, including fixed cost, variable cost, and total cost
2. Use the data in the table below to graph the production function and the marginal product of labor. Do the data illustrate diminishing returns to labor? Explain.Quantity of labor Quantity of
1. Draw a correctly labeled graph of a production function that exhibits diminishing returns to labor. Assume labor is the variable input and capital is the fixed input.Explain how your graph
5. Historically, the limits imposed by diminishing returns have been alleviated primarily bya. investment in capital.b. increases in the population.c. discovery of more land.d. Thomas Malthus.e.
4. When the returns to an input are diminishing and a profit-maximizing firm chooses to hire more of the input, the total product curve has what kind of slope?a. negative decreasingb. positive
3. The slope of the total product curve is also known as thea. marginal product.b. marginal cost.c. average product.d. average revenue.e. profit.
2. Which of the following defines the short run?a. less than a yearb. when all inputs are fixedc. when no inputs are variabled. when only one input is variablee. when at least one input is fixed
1. A production function shows the relationship between inputs anda. fixed costs.b. variable costs.c. total revenue.d. output.e. profit.
1. Bernie’s ice-making company produces ice cubes using a 10-ton machine and electricity (along with water, which we will ignore as an input for simplicity). The quantity of output, measured in
???? Explain why production is often subject to diminishing returns to inputs
???? Discuss the importance of the firm’s production function, the relationship between the quantity of inputs and the quantity of output
2. Use a graph to illustrate the typical shape of the two curves used to find a firm’s profit-maximizing level of output on the basis of the optimal output rule. Assume all units of output can be
5. A firm earns a normal profit when itsa. accounting profit equals 0.b. economic profit is positive.c. total revenue equals its total costs.d. accounting profit equals its economic profit.e.
4. A firm should continue to produce in the long run if itsa. total revenue is less than its total costs.b. total revenue is greater than its total explicit costs.c. accounting profit is greater than
3. At what level of output is profit maximized?a. 0b. 1c. 3d. 5e. 7
2. What is the marginal cost of the first unit of output?a. $0b. $14c. $16d. $18e. $30
1. What is the marginal revenue of the third unit of output?a. $8b. $14c. $18d. $44e. $54
2. Use the data from Question 1 to graph the firm’s marginal cost and marginal revenue curves and show the profit-maximizing level of output.
1. Suppose a firm can sell as many units of output as it wants for a price of $15 per unit and faces total costs as indicated in the table below. Use the optimal output rule to determine the
???? Determine the profit-maximizing level of output using the optimal output rule
2. Sunny owns and operates Sunny’s Sno Cone Stand. Use the data in the table provided to answer the questions below.Sunny’s Sno Cone Stand: January Price of Sno Cone $2 Sno Cones sold 2,000
1. Your firm is selling 10,000 units of output at a price of$10 per unit. Your firm’s total explicit cost is $70,000.Your firm’s implicit cost of capital is $10,000, and your opportunity cost is
5. You sell T-shirts at your school’s football games. Each shirt costs $5 to make and sells for $10. Each game lasts two hours and you sell 100 shirts per game. You could always be earning $8 per
4. Which of the following is considered when calculating economic profit but not accounting profit?a. implicit costb. explicit costc. total revenued. marginal coste. All of the above are considered
3. Which of the following is the best definition of accounting profit? Accounting profit equals total revenue minus depreciation and totala. explicit cost only.b. implicit cost only.c. explicit cost
2. Which of the following is an implicit cost of attending college?a. tuitionb. booksc. laptop computerd. lab feese. forgone salary
1. Which of the following is an example of an implicit cost of going out for lunch?a. the amount of the tip you leave the waiterb. the total bill you charge to your credit cardc. the cost of gas to
2.a. Suppose you are in business earning an accounting profit of $25,000. What is your economic profit if the implicit cost of your capital is $2,000 and the opportunity cost of your time is $23,000?
1. Karma and Don run a furniture-refinishing business from their home. Which of the following represent an explicit cost of the business and which represent an implicit cost?a. supplies such as paint
???? Describe the different types of profit, including accounting profit, economic profit, and normal profit
???? Explain the difference between explicit and implicit costs and their importance in decision making
c. Suppose you have accurate information about the pharmaceutical company’s fixed cost. How could you use price regulation of the pharmaceutical company, combined with a subsidy to the company, to
b. On another diagram, show the lowest price that the regulator can enforce that would still induce the pharmaceutical company to develop the vaccine. Label it P*. Show the deadweight loss that
a. Draw a diagram that shows the price for the vaccine that would arise if the company is unregulated, and label it PM.What is the efficient price for the vaccine? Show the deadweight loss that
17. In developing a vaccine for a dangerous new strain of flu virus a pharmaceutical company incurs a very high fixed cost. The marginal cost of delivering the vaccine to patients, however, is
c. On your diagram from partb, indicate the optimal Pigouvian tax/subsidy (as the case may be). Explain how this moves the market to the optimal outcome.
b. What type of externality is generated by planting a tree? Draw a diagram that shows the optimal number of trees planted. How does this differ from the market outcome?
a. Assume that the marginal cost of producing a tree for planting is constant at $20. Draw a diagram that shows the market equilibrium quantity and price for trees to be planted.
16. Planting a tree improves the environment: trees transform greenhouse gases into oxygen, improve water retention in the soil, and improve soil quality. Assume that the value of this environmental
d. What kind of environmental policy does the 33/50 program most closely resemble? What is the main shortcoming of such a policy? Compare it to two other types of environmental policy discussed in
c. Suppose the plants whose marginal benefit curves you depicted in part a were participants in the 33/50 program.In a replica of your graph from parta, mark targeted levels of pollution in 1995 for
b. Do you expect the total quantity of pollution before the program was put in place to have been less than or more than the optimal quantity of pollution? Why?
15. Voluntary environmental programs were extremely popular in the United States, Europe, and Japan in the 1990s. Part of their popularity stems from the fact that these programs do not require
c. Consider the optimal number of street cleanings. The last street cleaning of that number costs $9. Is Tanisha willing to pay for that last cleaning on her own? Is Ari willing to pay for that last
b. Calculate the marginal social benefit of street cleaning.What is the optimal number of street cleanings?
a. If Tanisha had to pay for street cleaning on her own, how many street cleanings would there be?
14. The accompanying table shows Tanisha’s and Ari’s individual marginal benefit of different amounts of street cleanings per month. Suppose that the marginal cost of street cleanings is constant
d. If the residents act together, how many security guards will they hire?
c. If an individual resident were to decide about hiring and paying for security guards on his or her own, how many guards would that resident hire?
b. Calculate the marginal cost, the individual marginal benefit for each resident, and the marginal social benefit.
a. Explain why the security service is a public good for the residents of the community.
13. A residential community has 100 residents who are concerned about security. The accompanying table gives the total cost of hiring a 24-hour security service as well as each individual
d. What is the total cost to the two companies of the pollution controls under this voucher system?
c. Who will sell vouchers and who will buy them? How many vouchers will be traded?
b. How much is each pollution voucher worth to College Cleaners? to Big Green Cleaners? (That is, how much would each company, at most, be willing to pay for one more voucher?)
9. The two dry-cleaning companies in Collegetown, College Cleaners and Big Green Cleaners, are a major source of air pollution. Together they currently produce 350 units of air pollution, which the
6. Education is an example of an activity that generates a positive externality: acquiring more education benefits the individual student and having a more highly educated workforce is good for the
5. Smoking produces a negative externality because it imposes a health risk on others who inhale second-hand smoke.Cigarette smoking also causes productivity losses to the economy due to the shorter
d. What is the optimal Pigouvian tax to remedy the problem created by the negative externality?
c. What is the socially optimal quantity of steel production?
b. What is the market equilibrium quantity of steel production?
a. Calculate the marginal revenue per ton of steel and the marginal cost per ton of steel to steel producers. Then calculate the marginal social cost per ton of steel.
c. The college imposes a Pigouvian tax of $3 per decibel of music played. From your diagram, determine the volume of music the sorority will now choose.
b. Only the members of the sorority benefit from the music and they bear none of the cost. Which volume of music will they choose?
a. Draw the marginal social benefit curve and the marginal social cost curve. Use your diagram to determine the socially optimal volume of music.
4. The accompanying table shows the total revenue and the total cost that accrue to steel producers from producing steel.Producing a ton of steel imposes a marginal external cost of$60 per ton.
b. Suppose some dairy farmers have lower costs of transforming methane into electricity than others. Explain how this system leads to an efficient allocation of emissions reduction among farmers.
a. Explain how the ability to earn money from capturing and transforming methane gas behaves like a Pigouvian tax on methane gas pollution and can lead dairy farmers to emit the efficient amount of
3. Many dairy farmers in California are adopting a new technology that allows them to produce their own electricity from methane gas captured from animal wastes. (One cow can produce up to 2
2. The loud music coming from the sorority next to your dorm is a negative externality that can be directly quantified. The accompanying table shows the marginal social benefit and the marginal
11. One rationale for the presence of government is that it allows citizens to tax themselves in order to provide public goods. Governments use cost-benefit analysis to determine the efficient
10. A public good is nonexcludable and nonrival in consumption. In most cases a public good must be supplied by the government. The marginal social benefit of a public good is equal to the sum of the
9. When goods are nonexcludable, there is a free-rider problem: consumers will not pay for the good, leading to inefficiently low production. When goods are nonrival in consumption, they should be
8. Free markets can deliver efficient levels of production and consumption for private goods, which are both excludable and rival in consumption. When goods are nonexcludable, nonrival in
7. Goods may be classified according to whether or not they are excludable and whether or not they are rival in consumption.
6. When only the original good or activity can be controlled, government policies are geared to influencing how much of it is produced. When there are external costs from production, the marginal
5. When a good or activity yields external benefits, such as technology spillovers, the marginal social benefit of the good or activity is equal to the marginal benefit accruing to consumers plus its
4. Governments often deal with pollution by imposing environmental standards, a method, economists argue, that is usually an inefficient way to reduce pollution.Two efficient (cost -minimizing)
3. According to the Coase theorem, individuals can find a way to internalize the externality, making government intervention unnecessary, as long as transaction costs—the costs of making a
2. The costs to society of pollution are an example of an external cost; in some cases, however, economic activities yield external benefits. External costs and benefits are jointly known as
1. When pollution can be directly observed and controlled, government policies should be geared directly to producing the socially optimal quantity of pollution, the quantity at which the marginal
d. What do your results tell you about the likelihood of cheating on such agreements?
c. What if Perrier increases production by 3 million liters?Evian doesn’t change its production. What would its output and profits be relative to those in part b?

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