Chapter 7 Microeconomics

A small farmer, who produces only lemons, is selling 20 cartons at the industry price of $4.90 per carton.  The farmer's average variable cost of producing 20 cartons is $4.00; this is also the farmer's minimum average variable cost. Is the farmer recovering her variable costs of production? Explain your answer.

The farmer is recovering her variable costs of production as she is making more total revenue than it costs her to produce the 20 cartons. $4.90 x 20 = $98. $4.00 x 20 = $80. $98-$80= $18 

Suppose lemons and limes are good substitutes for consumers. Assume the market price of limes decreases. Explain the impact of this change on the lemon farmer's short run profits. 

Since the price of limes drop and are a suitable substitute for consumers then we can assume that demand for lemons will drop and the demand for limes will rise. The sale of lemons will fall resulting in less revenue if prices are not lowered. If the lemons are sold for less than the average variable cost then the farmer will not recover the average variable cost and if the the price of lemons are less than the average cost then the farmer won't make enough revenue to recover all costs and end up getting negative profits. In other words the farmer will lose money.

A small farmer, who produces only lemons, is selling 20 cartons at the industry price of $4.90 per carton.  The farmer's average variable cost of producing 20 cartons is $4.00; this is also the farmer's minimum average variable cost. At what price point would you recommend this lemon farmer leave the market? Explain your answer.

If at any point the market price of lemons drop below the average cost then it will result in negative average profit. I would recommend the farmer to leave the market if the market price of lemons fall below the average cost of producing the lemons, which is $4.00.

The ______________ of all firms can be broken down into some common underlying patterns.

 cost structure

______________ include all of the costs of production that increase with the quantity produced.

 Variable costs

_____________ is calculated by taking the quantity of everything that is sold and multiplying it by the sale price.

Total revenue

The graph above illustrates the total cost function for GoodieCookie Co. How are the company's fixed costs represented in this graph?

as the point where the total cost curve touches the vertical axis

A firm's ___________ consist of expenditures that must be made before production starts that typically, over the short run, _______________ regardless of the level of production.

fixed costs; do not change,

_____________________ help to explain why every economy, as it develops, has an increasing proportion of its population living in urban areas.

 Agglomeration factors

Which of the following should typically be ignored because spending has already been made and cannot be changed?

 sunk costs

If this information were used to create a total cost graph, the curve should

begin at 40 on the vertical axis and slope upward. And. become steeper as quantity increases. And. become steeper due to diminishing returns.

A situation where the level of output, scale and average costs are all rising is called

decreasing returns to scale and diseconomies of scale

If a firm is experiencing _____________________, then as the quantity of output rises, the average cost of production rises.

 decreasing returns to scale

The graph above illustrates the total cost function for GoodieCookie Co. The changing slope of the total cost curve reflects this company's

 decreasing marginal costs.

The _____________________ curve will always lie below the curve for average cost because average cost includes _____________ in the numerator of the calculation.

 average variable cost; fixed costs

Approximately what percentage of the US labor force is employed by firms that have fewer than 100 employees?

 35%

The economies-of-scale curve is a long-run average cost curve because

 it allows all factors of production to change.

The term "constant returns to scale" describes a situation where

 expanding all inputs does not change the average cost of production.

_______________ occur when the marginal gain in output diminishes as each additional unit of input is added.

 Diminishing marginal returns

In economics, a firm that faces no competitors is referred to as _________________.

a monopoly

When __________________ exist, doubling of all inputs will result in more than doubling output, which means _______________

economies of scale; a larger factory can produce at a lower average cost than a smaller company.

In the US economy, nearly half of all the workers employed by private firms work at

 18,000 large firms that employ more than 500 workers

Refer to the diagram above. Based on the information illustrated in the graph, which of the following is correct?

 the transition point between where MC is pulling down and pulling up AC always occurs at the minimum point of the AC curve

I'MaGadgetCo. produces and sells widgets. Last year, it produced 9,000 widgets and sold each one for $8. To produce the 9,000 widgets, the company incurred variable costs of $27,000 and a total cost of $36,000. I'MaGadgetCo's average fixed cost to produce 9,000 widgets was

 $1.00

If the firm produces 5 units that it sells for $39.00 each, what will its profits or losses equal?

 profits equal $30

If the firm sells 5 units at a price of $30 each, then the marginal unit produced

 is subtracting from profits.

Why would labor be treated as a variable cost?

 producing larger quantities of a good or service generally requires more workers

The marginal cost curve is generally ______________, because diminishing marginal returns implies that additional units are _______________

 upward-sloping; more costly to produce

A situation known as _____________________ occurs when all production inputs are allowed to expand, but that expansion does not result in much of a change in the average cost of production.

 constant returns to scale

Economies of scale may arise from all but one of the following. Which one is it?

 government economic subsidies protect firms from competition to avoid losses.

If a paper mill shuts down its operations for three months so that it produces nothing, its __________________ will be reduced to zero.

 variable costs

___________ include all spending on labor, machinery, tools, and supplies purchased from other firms.

 Total costs

The term _____________ is used to describe the additional cost of producing one more unit.

 marginal cost

If a solar panel manufacturer wants to look at its total costs of production in the short run, which of the following would provide a useful starting point?

 divide total costs into two categories: fixed costs that can't be changed in the short run and variable costs that can be

If a comparison between average cost and price reveals whether a firm is earning profits, then a comparison between average variable cost and price reveals

 whether the firm is earning profit if fixed costs are left out of the calculation.

The table below sets out cost information for the production of volley balls. Some values are missing. Which of the following statements is correct?

A = 42, E = 12

In order to determine ____________, the firm's total costs must be divided by the quantity of its output.

 average cost

Fixed costs are important because, at least in the ___________, the firm _______________.

 short run; cannot alter them

If I'maJuiceCo. establishes a bottling plant in Delaware, it will most likely

 use production technologies that conserve on the number of workers.

In microeconomics, the term ___________________ is synonymous with decreasing returns of scale.

 diseconomies of scale

In microeconomics, the term _____________________ is synonymous with economies of scale.

 increasing returns to scale

Marcella operates a small, but very successful art gallery. All but one of the following can be classified as a variable cost arising from the physical inputs Marcella requires to operate her business. Which is it?

 physical space for the gallery

If the firm produces 5 units that it sells at a price of $30.00 each, what will its profits or losses equal?

 losses equal $15

I'MABigCorp. produces and sells kitchen wares. Last year, it produced 7,000 can openers and sold each one for $6. To produce the 7,000 can openers, the company incurred variable costs of $28,000 and a total cost of $45,000. I'MABIGCorp.'s average fixed cost to produce the 7,000 can openers was

 $2.43

In order to calculate marginal cost, the change in ______________ is divided by the amount of change in quantity.

 either total cost or variable cost