Ch9 Long Run Costs and Output Decisions

Principles of Microeconomics, 11e -TB1 (Case/Fair/Oster)
Chapter 9 Long-Run Costs and Output Decisions
Refer to the information provided in Figure 9.1 below to answer the questions that
follow.
Figure 9.1
24) Refer to Figure 9.1. For this farmer to maximize profits he should produce ________
bushels of wheat.
A) 6
B) 9
C) 12
D) 16
Answer: C
Diff: 2
Topic: Short-Run Conditions and Long-Run Directions
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-2
25) Refer to Figure 9.1. If this farmer is maximizing profits, his total costs will be
A) $11.
B) $66.
C) $90.
D) $132.
Answer: D
Diff: 2
Skill: Analytical
26) Refer to Figure 9.1. If this farmer is maximizing his profits, his TVC is
A) $24.
B) $42.
C) $108.
D) $255.
Answer: C
Diff: 2
Skill: Analytical
27) Refer to Figure 9.1. This farmer's fixed costs are

A) $0.
B) $24.
C) $45.
D) indeterminate unless we know the level of output the firm is producing.
Answer: B
Diff: 2
Skill: Analytical
28) Refer to Figure 9.1. If this farmer is maximizing profits, his total revenue will be
A) $90.
B) $135.
C) $180.
D) $240.
Answer: C
Diff: 2
Skill: Analytical
29) Refer to Figure 9.1. If this farmer is maximizing profits, his profit will be
A) -$24.
B) $45.
C) $48.
D) $72.
Answer: C
Diff: 2
Skill: Analytical
30) Refer to Figure 9.1. If this farmer is maximizing profit, his profit (or loss) is
A) -$24.
B) $48.
C) $72.
D) $156.
Answer: B
Diff: 2
Skill: Analytical
31) Refer to Figure 9.1. This farmer would be breaking even if price was
A) $7.
B) $9.
C) $10.
D) $11.
Answer: C
Diff: 2
Skill: Analytical
32) Refer to Figure 9.1. This farmer would earn a zero economic profit if price was
A) $7.
B) $9.
C) $10.
D) $11.
Answer: C
Diff: 2
Skill: Analytical
33) Refer to Figure 9.1. This farmer's shutdown point is at a price of

A) $0.
B) $4.
C) $7.
D) $10.
Answer: C
Diff: 2
Skill: Analytical
51) A firm will choose to operate rather than shut down as long as
A) price is greater than or equal to AFC.
B) AFC is greater than AVC.
C) price is greater than or equal to AVC.
D) AVC is greater than MC.
Answer: C
Diff: 1
Skill: Conceptual
AACSB: Reflective Thinking
52) Economic profit is

A) (P‐ATC)q.
B) (P+ATC)q.
C) P(q-ATC).
D) Pq/ATC.
Answer: A
Diff: 3
Skill: Conceptual
53) A firm suffering economic losses decides whether or not to produce in the short run
on the basis of whether
A) revenues cover variable costs.
B) revenues from operating are sufficient to cover fixed costs.
C) revenues from operating are sufficient to cover fixed plus variable costs.
D) Firms suffering economic losses will always shut down.
Answer: A
Diff: 1
Skill: Conceptual
55) You are hired as an economic consultant to The Pampered Pet Shop. The Pampered
Pet Shop operates in a perfectly competitive industry. This firm is currently producing at
a point where market price equals its marginal cost. The market price is less than its
average variable cost. You should advise the firm to
A) cease production immediately because it is not covering its variable costs of
production.
B) lower its price so that it can sell more units of output.
C) produce in the short run to minimize its loss, but exit the industry in the long run.
D) raise its price until it breaks even.
Answer: A
Diff: 3
Skill: Conceptual
56) A firm will shut down in the short run if

A) it is suffering a loss.
B) fixed costs exceed revenues.
C) variable costs exceed revenues.
D) total costs exceed revenues.
Answer: C
Diff: 3
Skill: Conceptual
57) The shutdown point for a perfectly competitive firm is the

A) lowest point on the ATC curve.
B) point at which a firm's long-run supply curve ends.
C) lowest point on the AVC curve.
D) lowest point on the marginal cost curve.
Answer: C
Diff: 1
Skill: Conceptual
58) A firm that is earning positive profits in the short run has an incentive to ________ its
scale of operation in the long run.
A) expand
B) contract
C) not change
D) encourage another firm to expand
Answer: A
Diff: 1
Skill: Conceptual
59) If revenues exceed ________, profit is ________.

A) total cost; negative
B) fixed cost; positive
C) variable cost; negative
D) total cost; positive
Answer: D
Diff: 1
Skill: Conceptual
60) If revenues exceed ________, economic profit is ________.

A) total cost; negative
B) total cost; positive
C) variable cost; negative
D) variable cost; positive
Answer: B
Diff: 1
Skill: Conceptual
61) If a firm shuts down in the short run, then

A) its economic profits are zero.
B) its losses are equal to its fixed costs.
C) its fixed costs are greater than its variable costs.
D) it must be the case that its revenues from operating were less than its total costs.
Answer: B
Diff: 2
Skill: Conceptual
62) A firm can minimize its losses by shutting down when ________ are less than
________ costs.
A) variable costs; fixed
B) fixed costs; variable
C) revenues; variable
D) operating profits; sunk
Answer: C
Diff: 1
Skill: Conceptual
63) As long as price is sufficient to cover ________, the firm is better off by operating
rather than by shutting down.
A) marginal cost
B) average fixed cost
C) average variable cost
D) marginal revenue
Answer: C
Diff: 1
Skill: Conceptual
64) The Taste Freeze Ice Cream Company is a perfectly competitive firm producing
where MR = MC. The current market price of an ice cream sandwich is $5.00. Taste
Freeze sells 200 ice cream sandwiches. Its AVC is $8.00 and its AFC is $3.00. What
should Taste Freeze do?
A) Continue to produce because price exceeds AFC.
B) Shut down and produce zero sandwiches because price is less than AVC.
C) Decrease production so that AVC will decrease.
D) Increase production so that AFC will decrease.
Answer: B
Diff: 2
Skill: Analytical
65) The Taste Freeze Ice Cream Company is a perfectly competitive firm producing
where MR = MC. The current market price of an ice cream sandwich is $5.00. Taste
Freeze sells 200 ice cream sandwiches. Its AVC is $4.00 and its AFC is $3.00. What
should Taste Freeze do?
A) Continue to produce because price exceeds AVC.
B) Shut down and produce zero sandwiches because price is less than ATC.
C) Decrease production so that AVC will decrease.
D) Increase production so that AFC will decrease.
Answer: A
Diff: 2
Skill: Analytical
Refer to the data provided in Table 9.1 below to answer the questions that follow.
Table 9.1
74) Refer to Table 9.1. If the market price is $10, then for this firm to maximize profits it
should produce ________ unit(s) of output.
A) zero
B) one
C) two
D) three
Answer: A
Diff: 2
Skill: Analytical
75) Refer to Table 9.1. If the market price is $42, then for this firm to maximize profits it
should produce ________ units of output and its profits will be ________.
A) five; $70
B) six; $70
C) six; $120
D) seven; $58
Answer: B
Diff: 2
Skill: Analytical
76) Refer to Table 9.1. If the market price is $42, then in the long run the firm will
A) operate and expand.
B) operate but not expand.
C) shut down, but not go out of business.
D) go out of business.
Answer: A
Diff: 2
Skill: Analytical
77) Refer to Table 9.1. If the market price is $17, then in the long run the firm will
Answer: D
Diff: 2
Skill: Analytical
78) Refer to Table 9.1. If the market price is $17, then in the short run the firm will
Answer: B
Diff: 2
Skill: Analytical
79) Refer to Table 9.1. If the market price is $15, this firm should produce ________
units of output to maximize profits.
A) three
B) four
C) five
D) six
Answer: A
Diff: 2
Skill: Analytical
80) Refer to Table 9.1. The shutdown point for this firm is a price of
A) $0.
B) $10.
C) $15.
D) $28.
Answer: C
Diff: 2
Skill: Analytical
81) Refer to Table 9.1. The lowest output this firm would produce before shutting down
is ________ unit(s).
A) 1
B) 2
C) 3
D) 4
Answer: C
Diff: 2
Skill: Analytical
82) Refer to Table 9.1. In the long run, if cost conditions do not change, this firm will
earn a zero economic profit if price is
A) $10.
B) $15.
C) $20.
D) $28.
Answer: D
Diff: 2
Skill: Analytical
83) A firm stands to gain by operating instead of shutting down as long as ________
sufficiently covers ________.
A) price; average variable cost
B) price; average fixed cost
C) total revenue; total fixed costs
D) operating profit; economic profit
Answer: A
Diff: 2
Skill: Conceptual
D) long run supply curve.

Answer: C
Diff: 1
Skill: Conceptual
85) If TR > TC, a firm would ________ in the short run and ________ in the long run.
A) operate; expand
B) operate; contract
C) shut down; expand
D) shut down; contract
Answer: A
Diff: 2
Skill: Analytical
86) If TR < TC, a firm would ________ in the short run and ________ in the long run.
A) either operate or shut down; contract
B) operate; contract
D) shut down; contract
Answer: A
Diff: 2
Skill: Analytical
87) If TR > TVC but TR < TC, a firm would ________ in the short run and ________ in
the long run.
A) operate; expand
B) operate; exit the industry
D) shutdown; exit the industry
Answer: B
Diff: 2
Skill: Analytical
99) Refer to Figure 9.2. This firm's short-run supply curve is the firm's
A) AVC curve to the right of Point B.
B) marginal cost curve above Point A.
C) marginal cost curve above Point B.
D) marginal cost curve above Point D.
Answer: C
Diff: 2
Skill: Analytical
100) Refer to Figure 9.2. This firm will continue to operate in the short run, but incur an
economic loss if price is
A) between $0 and $4.
B) between $4 and $7.
C) between $7 and $13.
D) above $13.
Answer: C
Diff: 2
Skill: Analytical
101) Refer to Figure 9.2. This firm will earn a zero economic profit if price is
A) $0.
B) $4.
C) $7.
D) $13.
Answer: D
Diff: 2
Skill: Analytical
102) The best explanation for the shape of a short run marginal cost schedule is
A) increasing returns to scale.
B) decreasing returns to scale.
C) there is no fixed factor of production.
D) a fixed factor causes diminishing returns to other factors.
Answer: D
Diff: 2
Skill: Conceptual
103) A perfectly competitive firm will be operating at its shutdown point if it operates
A) where P = MC.
B) at the minimum point on its average variable cost curve.
C) at the minimum point on its average total cost curve.
D) at the minimum point on its marginal cost curve.
Answer: B
Diff: 3
Skill: Conceptual
104) The short-run industry supply curve for a perfectly competitive industry is the
A) horizontal sum of the individual firms' marginal cost curves above AVC.
B) vertical sum of the individual firms' marginal cost curves above AVC.
C) horizontal sum of the individual firms' marginal cost curves above ATC.
D) vertical sum of the individual firms' marginal cost curves above ATC.
Answer: A
Diff: 2
Skill: Conceptual
Refer to the information provided in Figure 9.4 below to answer the

question that follows.
Figure 9.4
109) Refer to Figure 9.4. From the diagram, existing firms in this industry make
________ economic profits, and as long as this continues, ________.
A) negative; new firms will not enter it and existing firms will leave it.
B) zero; new firms will not enter it and existing firms will not leave it either.
C) positive; new firms will enter the industry and existing firms will not leave it.
D) positive; the industry supply curve will shift to the left.
Answer: C
Diff: 2
Skill: Analytical
110) If price falls below the minimum point on the AVC curve, in the short run the firm
should ________, and in the long run the firm should ________.
A) produce where MC = MR; exit the industry
B) shut down; exit the industry
C) produce where MC = MR; expand
D) shut down; expand
Answer: B
Diff: 3
Skill: Conceptual
111) Billy Bob's Fertilizer Engineers, a perfectly competitive firm, is incurring a loss, but
the price is still above minimum average variable cost. Then in the short run this firm
should ________, and in the long run, if there is no change in economic conditions, this
firm should ________.
A) shut down; exit the industry
B) shut down; expand
C) produce where MR = MC; exit the industry
D) produce where MR = MC; expand
Answer: C
Diff: 3
9.2 Long-Run Costs: Economies and Diseconomies of Scale
1) In the short run average costs eventually increase because of ________, and in the long
run average costs eventually increase because of ________.
A) diminishing returns; diseconomies of scale
B) diseconomies of scale; diminishing returns
C) constant returns to scale; decreasing returns to scale
D) increasing returns to scale; diseconomies of scale
Answer: A
Diff: 3
Topic: Long-Run Costs: Economies and Diseconomies of Scale
Skill: Conceptual
2) Engineers for the Off Road Skateboard Company have determined that a 10% increase
in all inputs will cause output to increase by 5%. Assuming that input prices remain
constant, you correctly deduce that such a change will cause ________ as output
increases.
A) total cost to decrease
B) average costs to increase
C) average costs to decrease
D) average fixed costs to increase
Answer: B
Diff: 3
Skill: Conceptual
3) Engineers for The All-Terrain Bike Company have determined that a 15% increase in
all inputs will cause a 15% increase in output. Assuming that input prices remain
constant, you correctly deduce that such a change will cause ________ as output
increases.
A) average costs to increase
B) average costs to decrease
C) average costs to remain constant
D) marginal costs to increase
Answer: C
Diff: 3
Skill: Conceptual
4) Engineers for The Giffen Record Company have determined that a 35% increase in all
compact disc inputs will cause a 45% increase in output. Assuming that input prices
remain constant, you correctly deduce that such a change will cause ________ as output
increases.
A) average costs to increase
B) average costs to decrease
C) average costs to remain constant
D) marginal costs to increase
Answer: B
Diff: 3
Skill: Conceptual
14) Every point on a U‐shaped long-run average cost curve represents

A) the minimum cost at which the associated output level can be produced when the scale
of plant can be changed.
B) the minimum point of the associated short-run average cost curve.
C) the minimum cost at which the associated output level can be produced when the scale
of plant cannot be changed.
D) both A and B
Answer: A
Diff: 2
Skill: Conceptual
15) Suppose Heidi's Ice Cream experiences economies of scale up to a certain point and
diseconomies of scale beyond that point. Its long-run average cost curve is most likely to
be
A) upward sloping to the right.
B) downward sloping to the right.
C) horizontal.
D) U-shaped.
Answer: D
Diff: 2
Skill: Conceptual
16) Internal economies of scale occur at the ________ levels.

A) plant and firm
B) plant and industry
C) firm and industry
D) plant, firm, and industry
Answer: A
Diff: 2
Skill: Conceptual
17) For constant returns to scale, a(n) ________ in a firm's scale of production leads to
________ average total cost.
A) increase; lower
B) increase; higher
C) decrease; a change in
D) decrease; no change in
Answer: D
Diff: 2
Skill: Analytical
18) The smallest size plant size at which the long-run average cost curve is at its
minimum is called the
A) envelope.
B) profit maximizing scale of production.
C) minimum efficient scale.
D) shut down point.
Answer: C
Diff: 1
Skill: Definition
19) Over all levels of output, if a firm's long-run average cost curve declines as output
increases, then
A) small firms and large firms will have identical average costs.
B) there should be a large number of firms in the industry.
C) small firms would have lower average costs of production than large firms.
D) there should be only one firm in the industry.
Answer: D
Diff: 3
Skill: Conceptual
9.3 Long-Run Adjustments to Short-Run Conditions
1) Industries in which firms are suffering losses are likely to ________ in the long run.
A) expand
B) contract
C) neither expand nor contract, as firms must earn an economic profit to stay in business
D) expand or contract depending on the normal rate of return
Answer: B
Diff: 2
Topic: Long-Run Adjustments to Short-Run Conditions
Skill: Conceptual
2) Industries in which firms are enjoying positive profits are likely to ________ in the
long run.
A) expand
B) contract
C) neither expand nor contract, as firms must earn an economic profit to stay in business
D) expand or contract depending on the normal rate of return
Answer: A
Diff: 2
Skill: Conceptual
3) For a perfectly competitive industry, an improvement in technology will cause

A) a movement up the short-run industry supply curve.
B) a movement down the short-run industry supply curve.
C) the industry short-run supply curve to shift to the right.
D) the industry short-run supply curve to shift to the left.
Answer: C
Diff: 2
Skill: Conceptual
4) Which of the following is the set of conditions necessary for long-run equilibrium for a
perfectly competitive firm?
A) P = SRMC < SRAC = LRAC
B) P > SRMC = SRAC = LRAC
C) P = SRMC = SRAC > LRAC
D) P = SRMC = SRAC = LRAC
Answer: D
Diff: 3
Skill: Conceptual

Ch9 Long Run Costs and Output Decisions

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Principles of Microeconomics, 11e -TB1 (Case/Fair/Oster)

Chapter 9 Long-Run Costs and Output Decisions

27) Refer to Figure 9.1. This farmer's fixed costs are

33) Refer to Figure 9.1. This farmer's shutdown point is at a price of

52) Economic profit is

56) A firm will shut down in the short run if

57) The shutdown point for a perfectly competitive firm is the

59) If revenues exceed , profit is .

60) If revenues exceed , economic profit is .

61) If a firm shuts down in the short run, then

D) long run supply curve.

Refer to the information provided in Figure 9.4 below to answer the

14) Every point on a U‐shaped long-run average cost curve represents

16) Internal economies of scale occur at the ________ levels.

9.3 Long-Run Adjustments to Short-Run Conditions

3) For a perfectly competitive industry, an improvement in technology will cause

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