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true

Implicit costs are considered as economic costs.

true

Fixed costs are those that remain constant in total over a given range of output.

true

Marginal cost is the increase in total cost resulting from the production of one more unit of output.

false

Marginal revenue and marginal cost will always be equal.

false

The law of diminishing marginal productivity is applicable only to the use of labor as a factor of production.

true

Average product can be defined as the output per unit of input.

false

Implicit costs are recognized by accountants as part of the real cost of production.

false

Implicit costs involve a direct cash payment for the use of a resource.

false

All other things constant, higher implicit costs result in lower accounting profit.

true

If all my savings are invested in my consulting company, an increase in interest rates increases implicit costs.

false

The graph of average fixed cost is a horizontal line.

true

In the long run, all of a firm's inputs are variable.

false

In the short run, all costs are fixed.

true

In the long run, all inputs are variable.

true

The marginal cost curve intersects the average variable cost curve at its minimum.

false

If a firm experiencing "economies of scale" decreases its output, its long-run average cost will decrease.

true

If a firm is experiencing diseconomies of scale, its long-run marginal cost curve is upward sloping.

false

Profits are maximized where average cost and average revenue are equal.

true

Since all costs are variable in the long run period, the firm must cover all costs to stay in business.

false

An individual seller or buyer can influence the market price under conditions of pure competition.

true

Pure profits tend to be a temporary phenomenon under conditions of pure competition.

false

If marginal cost is less than marginal revenue, an expansion of output will decrease profit.

true

Under pure competition, average revenue and marginal revenue will always be equal.

true

The marginal cost curve should cross the AVC and the ATC curves at their lowest points.

true

Under conditions of pure competition, price eventually will equal cost at the lowest point of the long-run ATc curve at the optimum scale of operation.

false

The short-run price in pure competition is generally considered a stable price because all firms can at least break even.

true

Profits are dynamic in pure competition insofar as they are constantly changing in amount and among firms.

true

When a firm has reached the optimum scale of operation, no further cost advantages arise from the greater size.

true

One of the disadvantages of pure competitioon is the possible waste associated with the duplication of plant and equipment.

true

An equilibrium price results in the "clearing of the market."

false

Perfect competition is characterized by a large number of differentiated products.

true

Average variable cost will drop, reach a minimum, and begin to rise with increasing output.

true

A necessary condition associated with the law of diminishing marginal productivity is that only one factor should be varied.

true

Profit maximization for a firm depends upon demand conditions, as well as upon productivity and costs.

true

An industry consists of all firms that supply output to a particular market.

false

Perfectly competitive firms are sometimes called price makers because they have significant control over product price.

false

In perfect competition, each firm's output is a large fraction of total market supply.

false

Because it is small relative to the market, a perfectly competitive firm faces an inelastic demand curve for its output.

true

If a perfectly competitive firm raises its price, its sales decreases to zero.

true

For a perfectly competitive firm, price is identical to marginal revenue at every quantity.

true

Marginal revenue is the change in total revenue from selling one more unit of output.

true

A firm with positive accounting profit may be suffering an economic loss.

true

If a perfectly competitive firm shuts down in the short run, its variable cost equals zero.

false

When marginal revenue equals marginal cost, the firm just "breaks even."

false

In the long run in perfect competition, no firm can earn a normal profit.

false

After an increase in demand in a constant-cost industry, firms will find themselves with higher average cost curves.

true

If, as a result of a change in demand in a perfectly competitive increasing-cost industry, price and quantity rise, demand must have risen.

true

A market is said to be allocatively efficient when the marginal cost of producing each good equals the marginal benefit that consumers derive from that good.

accounting profit

a firm's total revenue minus its explicit costs

average total cost

total cost divided by output, or ATC = TC/q; the sum of average fixed cost and average variable cost, or ATC = AFC + AVC

average variable cost

variable cost divided by output, or AVC = VC/q

constant long-run average cost

a cost that occurs when, over some range of output, long-run average cost neither increases nor decreases with changes in firm size

diseconomies of scale

forces that may eventually increase a firm's average cost as the scale of operation increases in the long run

economic profit

a firm's total revenue minus its explicit and implicit costs

economies of scale

forces that reduce a firm's average cost as the scale of operation increases in the long run

explicit cost

opportunity cost of resources employed by a firm that takes the form of cash payments

fixed cost

any production cost that is independent of the firm's rate of output

fixed resource

any resource that cannot be varied in the short run

implicit cost

a firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment

increasing marginal returns

the marginal product of a variable resource increases as each additional unit of that resource is employed

law of diminishing marginal returns

as more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative

long run

a period during which all resources under the firm's control are variable

long-run average cost curve

a curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve

marginal cost

the change in total cost resulting from a one-unit change in output; the change in total cost divided by the change in output, or MC = Δ TC/Δq

marginal product

the change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant

minimum efficient scale

the lowest rate of output at which a firm takes full advantage of economies of scale

normal profit

the accounting profit earned when all resources earn their opportunity cost

production function

the relationship between the amount of resources employed and a firm's total product

short run

a period during which at least one of a firm's resources is fixed

total cost

the sum of fixed cost and variable cost, or TC = FC + VC

total product

a firm's total output

variable cost

any production cost that changes as the rate of output changes

variable resource

any resource that can be varied in the short run to increase or decrease production

allocative efficiency

the condition that exists when firms produce the output most preferred by consumers; marginal benefit equals marginal cost

average revenue

total revenue divided by quantity, or AR = TR/q; in all market structures, average revenue equals the market price

commodity

a standardized product, a product that does not differ across producers, such as bushels of wheat or an ounce of gold

constant-cost industry

an industry in which each firm's long-run average cost curve does not shift up or down as industry output changes

golden rule of profit maximization

to maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equals marginal cost; this rule holds for all market structures

increasing-cost industries

industries in which firms encounter higher average costs as industry output expands in the long run

long-run industry supply curve

a curve that shows the relationship between price and quantity supplied by the industry once firms adjust in the long run to any change in market demand

marginal revenue (MR)

the firm's change in total revenue from selling an additional unit; a perfectly competitive firm's marginal revenue is also the market price

market structure

important features of a market, such as the number of firms, product uniformity across firms, firm's ease of entry and exit, and forms of competition

perfect competition

a market structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run

price taker

a firm that faces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive firm that decides to produce must accept, or take, the market price

producer surplus

a bonus for producers in the short run; the amount by which total revenue from production exceeds variable cost

productive efficiency

the condition that exists when production uses the least-cost combination of inputs; minimum average cost in the long run

short-run firm supply curve

a curve that shows how much a firm supplies at each price in the short run; in perfect competition, that portion of a firm's marginal cost curve that intersects and rises above the low point on its average variable cost curve

short-run industry supply curve

a curve that indicates the quantity supplied by the industry at each price in the short run; in perfect competition, the horizontal sum of each firm's short-run supply curve

social welfare

the overall well-being of people in the economy; maximized when the marginal cost of production equals the marginal benefit to consumers

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