A) Rent for office space.
B) Salaries of permanent employees.
C) Raw materials used in production.
D) Interest payments on loans.
Variable costs change with the level of output. Raw materials are a variable cost because their use increases as production increases.
A) Firms can raise prices without losing customers.
B) Price increases are matched by competitors, but price decreases are not.
C) Price decreases are matched by competitors, but price increases are not.
D) The demand curve is perfectly elastic.
In a kinked demand curve model, firms in an oligopoly match price decreases to avoid losing customers but do not match price increases, leading to price rigidity.
A) Greater than the market equilibrium level.
B) Less than the market equilibrium level.
C) Equal to the market equilibrium level.
D) Determined by consumer preferences only.
A negative externality, like pollution, means that the private cost of production is lower than the social cost. The socially optimal level of production is lower than the market equilibrium to account for the external costs.
A) It is U-shaped.
B) It is upward-sloping.
C) It declines as output increases.
D) It is constant.
Average fixed cost is calculated by dividing total fixed costs by output. As output increases, AFC decreases because fixed costs are spread over a larger number of units.
A) It occurs when adding more labor always increases output at an increasing rate.
B) It occurs in the short run when at least one input is fixed.
C) It occurs only in the long run when all inputs are variable.
D) It indicates that the marginal cost of production is decreasing.
Diminishing returns to labor occur when adding more units of labor to a fixed input (e.g., capital) results in a smaller increase in output. This happens in the short run when at least one input is fixed.
A) Perfectly inelastic.
B) Relatively inelastic.
C) Unit elastic.
D) Relatively elastic.
When a good has many substitutes, consumers can easily switch to alternatives if the price rises, making demand more sensitive to price changes (i.e., relatively elastic).
A) Perfect competition.
B) Monopolistic competition.
C) Monopoly.
D) Oligopoly.
Monopolies often have significant barriers to entry, such as legal restrictions, high startup costs, or control of essential resources, preventing new firms from entering the market.
A) Substitutes.
B) Complements.
C) Unrelated.
D) Inferior goods.
A negative cross-price elasticity indicates that an increase in the price of one good leads to a decrease in the demand for the other. This relationship is typical for complementary goods like cars and fuel.
A) Equal to the price of the good.
B) Greater than the price of the good.
C) Less than the price of the good.
D) Independent of the price of the good.
A monopolist’s marginal revenue is less than the price because to sell additional units, the monopolist must lower the price for all units sold, reducing revenue from previously sold units.
A) Accounting profit includes implicit costs, while economic profit does not.
B) Economic profit includes both explicit and implicit costs, while accounting profit includes only explicit costs.
C) Accounting profit is always greater than economic profit.
D) Economic profit includes only explicit costs.
Economic profit accounts for both explicit costs (direct payments) and implicit costs (opportunity costs), while accounting profit considers only explicit costs.
A) Downward-sloping.
B) Vertical.
C) Horizontal.
D) Upward-sloping.
In perfect competition, a firm faces a horizontal demand curve because it is a price taker. The market price is constant, and the firm can sell any quantity at this price.
A) It is the change in total cost resulting from producing one additional unit of output.
B) It is always decreasing as output increases.
C) It equals total cost divided by the quantity of output.
D) It is irrelevant for decision-making.
Marginal cost represents the additional cost of producing one more unit. It plays a key role in profit-maximizing decisions as firms compare marginal cost to marginal revenue.
A) The change in consumption resulting from a change in income.
B) The change in consumption resulting from a change in the price of a good.
C) The change in income resulting from a change in the price of a good.
D) The impact of advertising on income levels.
The income effect measures how changes in a consumer’s purchasing power (due to income changes) affect the quantity demanded of goods and services.
A) Convex to the origin.
B) Concave to the origin.
C) Straight lines.
D) L-shaped.
For perfect substitutes, the consumer is willing to trade one good for another at a constant rate. This results in linear indifference curves with a constant slope.
A) Maximize revenue.
B) Maximize sales volume.
C) Maximize profit.
D) Maximize market share.
In perfect competition, firms aim to maximize profit by producing at the level where marginal revenue equals marginal cost. Revenue and market share are secondary considerations.