spartan1

Which of the following two factors are most likely to be considered variable during the short run?

A) Labor and raw materials.

B) Labor and technology.

C) Raw materials and technology.

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Of the sets of factors listed, the two that are typically considered variable in the short run are labor and raw materials.

spartan1

Which of the following statements about the short-run and long-run decision time frames is most accurate?

A) In the long run, quantities of some resources are fixed.

B) In the short run, technology of production is variable.

C) In the long run, a firm can adjust its input quantities, production methods, and plant size.

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In the short run, quantities of some resources, including technology of production, are fixed. Typically, economists treat labor and raw materials as variable, holding plant size, the amount of capital equipment, and technology constant. In the long run, all factors of production are assumed to be variable.

spartan1

A firm can determine its profit-maximizing quantity of output by producing up to the quantity at which:

A) total revenue equals total cost.

B) marginal revenue equals marginal cost.

C) average revenue equals average total cost.

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At the profit-maximizing quantity of output, marginal revenue equals marginal cost. The quantity for which total revenue equals total cost, or average revenue equals average total cost, is the firm’s breakeven point.

spartan1

Which of the following most accurately describes economies of scale? Economies of scale:

A) increase at a decreasing rate.

B) occur when long-run unit costs fall as output increases.

C) are dependent on short-run average costs.

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Economies of scale occur when the percentage increase in output is greater than the percentage increase in the cost of all inputs. Economies of scale occur over the range where the long-run average cost curve slopes downward.

spartan1

The upward sloping segment of a long-run average total cost curve represents the existence of:

A) economies of scale.

B) efficiencies of scale.

C) diseconomies of scale.

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Diseconomies of scale occur along the upward sloping segment of the long-run average total cost curve where costs rise as output increases. The flat portion at the bottom of the long-run average total costs curve represents constant returns to scale.

spartan1

John Klement is a soybean farmer who harvests 125,000 bushels of soybeans annually. Klement’s fixed costs are $200,000 and his variable costs are $5 per bushel. Soybeans are currently priced at $5.35 per bushel. Based on his estimates, Klement sees soybean prices being relatively stable for the next two years, then increasing to $7.00 per bushel due to increased demand from Japan. What action should Klement take? Klement should:

A) continue operating his business as usual.

B) cut his production by 50% for the next two years and then resume full production.

C) shut down for two years and then restart his business.

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Since Klement is selling soybeans, a common commodity, he is a price taker and therefore can not adjust the price. He should continue operating his business as normal as he is currently covering variable costs and part of fixed costs. In two years from now, he will be able to cover both fixed and variable costs and be able to make a substantial profit.

spartan1

A firm in a perfectly competitive industry that seeks to maximize profit is most likely to continue production in the short run as long which of the following conditions exists? Price is equal to or greater than:

A) average variable costs.

B) average fixed cost.

C) marginal cost.

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If a firm is covering its average variable costs, it will continue to operate in the short run since it is covering some portion of its fixed costs.

spartan1

In the long run, if price is below average total cost (ATC) the firm will:

A) keep running.

B) cover its variable costs.

C) shut down.

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If the price is below ATC then the firm is losing money. If the firm believes the price will never exceed ATC the only way to eliminate fixed costs is to go out of business.

spartan1

In the short run, if price is below average total cost (ATC) the firm will:

A) raise prices.

B) keep running as long as it is covering its variable costs.

C) produce more.

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In the short run, if the firm is covering its average variable costs and some of its fixed costs it will continue to operate as long as the situation is temporary.

spartan1

Suppose a price-taker firm produces baseball bats that sell at a price of $100 each. This firm’s average total cost at the current level of production is $150 per bat, and the average fixed cost is $40 per bat. Which of the following statements is most accurate regarding this firm? They should:

A) continue producing baseball bats because they are covering their fixed costs.

B) shut down in the short run because their average total cost is greater than their price.

C) shut down in the short run because their average variable cost is greater than their price.

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Variable costs = $150 (ATC) − $40 (AFC) = $110 (AVC). At a selling price of $100 the firm is not covering its variable costs and will have losses greater than its fixed costs if it stays in business.