Chapter 21: Theory of Consumer Choice Section A
Chapter 21: Theory of Consumer Choice Section A
Chapter 21: Theory of Consumer Choice Section A
Section A
1. The theory of consumer choice examine
a. the determination of output in competitive markets.
b. the tradeoffs inherent in decisions made by consumers.
c. how consumers select inputs into manufacturing production processes.
d. the determination of prices in competitive markets.
30
20
10
10 20 30 40 50 60 70 80 90 x
5. Karen, Tara, and Chelsea each buy ice cream and paperback novels to enjoy on hot
summer days. Ice cream costs $5 per gallon, and paperback novels cost $8
each. Karen has a budget of $80, Tara has a budget of $60, and Chelsea has a
budget of $40 to spend on ice cream and paperback novels. Who can afford
to purchase 8 gallons of ice cream and 5 paperback novels?
9. Suppose a consumer spends her income on two goods: iTunes music downloads
and books. The consumer has $100 to allocate to these two goods, the price of a
downloaded song is $1, and the price of a book is $20. What is the maximum
number of books the consumer can purchase?
a. 100
b. 20
c. 10
d. 5
Section A
1. Ah Cheong wants to start his own business. The business he wants to start will
require that he purchase a factory that costs $400,000. Ah Cheong currently has
$500,000 in the bank earning 3 percent interest per year.
If Ah Cheong purchases the factory with his own money, what is the annual
implicit opportunity cost of purchasing the factory?
a. $0
b. $3,000
c. $12,000
d. $15,000
3. Siva Kamesh used to work as a telemarketer, earning $25,000 per year. She gave
up that job to start a catering business. In calculating the economic profit of her
catering business, the $25,000 income that she gave up is counted as part of the
catering firm's
a. total revenue.
b. implicit costs.
c. explicit costs.
d. marginal costs.
5.
6. The short run total cost curve gets steeper as output increases due to
a. diseconomies of scale.
b. economies of scale.
c. diminishing marginal product.
d. increasing returns to scale.
7. A certain firm produces and sells staplers. Last year, it produced 7,000 staplers and
sold each stapler for $6. In producing the 7,000 staplers, it incurred variable costs
of $ 28,000 and a total cost of $ 45,000.
11. When marginal cost (MC) is greater than the average total cost (ATC)
a. MC is falling
b. MC is less than average variable cost
c. ATC is falling
d. ATC is rising
12. Which of the following never rises as output increases?
a. Short run average total cost.
b. Long run average total cost.
c. Short run average variable cost.
d. Short run average fixed cost.
18. Suppose that for a particular business, there are no implicit opportunity costs. Then
a. accounting profit will be greater than economic profit.
b. accounting profit will be the same as economic profit.
c. accounting profit will be less than economic profit.
d. the relationship between accounting profit and economic profit cannot be
determined since the amount of explicit opportunity costs is not given.
19. A firm’s average total cost is $60, its average variable cost is $30, and its total
fixed cost is $600. Its output is
a. 20 units.
b. 30 units.
c. 40 units.
d. 50 units.
Section B
Question 1
What are diseconomies of scale? How do they arise?
Diseconomies of scale the property whereby long-run average total cost rises as the quantity of
output increases
Question 2
What are implicit costs? How are they different from explicit costs?
Implicit costs input costs that do not require an outlay of money by the firm
On the other hand, Explicit Cost is the cost which is actually incurred by the organization, during
production.
Question 3
Consider the table below which shows the total fixed costs (TFC) and variable costs (TVC) for
producing dog kennels in a small factory with a fixed amount of capital.
a) Compute the average fixed cost (AFC), average variable cost (AVC), marginal cost (MC) and
average total cost (ATC) for each level of output.
b) Explain the relationship between the between marginal cost and average variable cost.
Question 3:
a)
Output TFC TVC AFC AVC ATC MC
30
20
10
4 200 100 50 25 75
10
5 200 110 40 22 62
20
30
40
8 200 200 25 25 50
50
60
10 200 310 20 31 51
70
b)
The relationship between marginal cost and average variable cost: the difference in variable cost per
unit is marginal cost
Chapter 14
Question 1.
The main characteristics of a competitive market:
- There are many buyers and many sellers in the market
- The goods offered by the various sellers are largely the same
Question 5.
Condition under which a firm decide to exit the market: the revenue it would get from producing is
less than its total cost