A small business owner earns $60,000 in revenue annually. The explicit annual costs equal $10,000. The owner could work for someone else and earn $25,000 annually. The owner’s accounting profit is ________ and owner’s economic profit is ________. A) $20,000; $5,000 B) $50,000; $25,000 C) $25,000; -$5,000 D) $45,000; -$5,000 ANSWER B
As other firms enter a monopoly’s market, the monopoly’s market power A) is unaffected. B) declines. C) increases. D) increases according to the Lerner Index but decreases according to the price/marginal cost ratio. ANSWER B
A monopoly sets a price of $50 per unit for an item that has a marginal cost of $10. Assuming profit maximization, the implicit demand elasticity is A) -0.2. B) -0.8. C) -1.25. D) -5.0. ANSWER C
If a firm is operating at an output level where losses are minimized, the firm A) has no incentive to stay in the industry. B) is better off exiting the industry. C) is maximizing profits. D) will shut down. ANSWER C
The more elastic the demand curve, a monopoly A) will have a larger Lerner Index. B) will face a lower marginal cost. C) will earn more profit. D) will lose more sales as it raises its price. ANSWER D
If transaction costs are high, then it is more likely a firm’s demand curve is downward sloping. Indicate whether the statement is true or false ANSWER True . Transaction costs increase the costs for consumers to find a new firm. Thus, high transaction costs allow a firm to charge more than others.
If a firm makes zero economic profit, then the firm A) has total revenues greater than its economic costs. B) must shut down. C) can be earning positive business profit. D) must have no fixed costs. ANSWER C
The introduction of satellite television systems would cause the demand curve for cable television to be A) more elastic. B) less elastic. C) perfectly inelastic. D) unchanged. ANSWER A
If a monopoly can produce a good at zero marginal cost, then its Lerner Index is A) zero. B) one. C) infinity. D) undetermined. ANSWER B
A small business owner earns $50,000 in revenue annually. The explicit annual costs equal $30,000. The owner could work for someone else and earn $25,000 annually. The owner’s business profit is ________ and the economic profit is ________. A) $20,000; $5,000 B) $20,000; -$5,000 C) $25,000; -$5,000 D) $45,000; -$5,000 ANSWER B
