J/02/3/10
1 A firm earns supernormal profit when its profit is above that A earned by competing firms.
B needed to cover its fixed costs.
C needed to keep the firm in production in the short run.
D required to keep its resources in their present use.
N/02/3/10
2 Which of the following items would not appear in a firm‟s financial accounts but would be included in an economist‟s calculation of the cost incurred by the firm?
A interest on bank loans used to purchase assets that have no alternative uses B interest forgone on finance provided by the firm‟s owner
C depreciation
D rent
J/03/3/08
3 An economist calculates that a firm has incurred the following costs over the course of a year.
$(000)
wages and salaries 150
opportunity cost of owner‟s time 40
materials 80
rent 30
marketing fees 20
interest on bank loans 25
interest forgone on finance provided by owner 15
depreciation 20
What would an accountant calculate to be the total cost incurred by the firm?
A $275 000 B $305 000 C $325 000 D $340 000 J/03/3/13
4 A firm produces both X and Y in fixed proportions. A permanent increase in demand for X occurs.
The entrepreneur will increase output of X as long as
A the addition to revenue in the X and Y markets combined is greater than the addition to costs.
B the cost of producing more X is offset by a decrease in the cost of producing Y.
C the marginal cost of X is less than the marginal cost of Y.
D there is a fall in average costs of production.
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Understanding Economics 103 6
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Economist’s Vs Accountant’s definition of CostsN/03/3/09
5 An entrepreneur takes out a $500 000 loan at a rate of interest of 10 %, and invests a further $500 000 of his own funds to set up a new firm.
In the first year he pays himself a salary of $40 000.
The rate of interest he could have obtained by investing his funds elsewhere is 8%, and the wage he could have earned in alternative employment is $30 000.
By how much will an economist‟s calculation of the firm‟s first year costs exceed an accountant's calculation?
A $20 000 B $30 000 C $40 000 D $50 000
N/03/3/15
6 The diagram shows how a firm's average profit and marginal profit vary at differing levels of output.
At which level of output does the firm maximise total profit?
0
A B C D output
profit
marginal profit
average profit N/03/3/16
7 When will a firm in a perfectly competitive industry cease to produce in the short run?
A if it earns less than normal profits
B if total revenue is less than the total cost of production
C if marginal revenue is less than the average total cost of production D if total revenue is less than the total variable cost of production N/05/3/09
8 Which item would not appear in a firm‟s financial accounts but would be included in an economist‟s calculation of the costs incurred by the firm?
A interest on bank loans used to purchase assets that have no alternative uses B interest forgone on finance provided by the firm‟s owner
C depreciation
D rent
J/06/3/07
9 What is included in an economist‟s definition of costs but not an accountant‟s?
A advertising expenditure B depreciation
C insurance D normal profit
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Understanding Economics 104 6
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Economist’s Vs Accountant’s definition of CostsJ/07/3/10
10 The table shows data for an owner-managed firm for a particular year.
$
total revenue 250 000
raw material costs 30 000
wages and salaries 110 000
salary that the owner could have
earned elsewhere 40 000
interest paid on bank loan 30 000 interest forgone on owner's capital 50 000 What is the firm‟s profit according to an economist?
A –$10 000 B $40 000 C $80 000 D $100 000 J/07/3/12
11 A firm earns supernormal profit when its profit is A above that earned by competing firms.
B above that needed to cover its fixed costs.
C above that needed to keep the firm in production in the short run.
D above that required to keep its resources in their present use in the long run.
J/09/3/05
12 An economist calculates that a firm has incurred the following costs over the course of a year.
$(000)
wages and salaries 150
opportunity cost of owner‟s time 40
materials 80
rent 30
marketing fees 20
interest on bank loans 25
interest forgone on finance provided by owner 15
By how much does total cost as defined by an economist exceed the total cost as define by an accountant?
A $15 000 B $40 000 C $55 000 D $85 000
J/09/3/12
13 In which circumstance will a firm cease production in the short run?
A It makes a profit that is less than its total variable costs.
B It makes a profit that is less than its total fixed costs.
C Its average revenue is less than its average cost.
D Its average revenue is less than its average variable cost.
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Understanding Economics 105 6
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Economist’s Vs Accountant’s definition of CostsJ/10/3/10
14 The table shows information about a profit-maximising firm.
output 17 000 units
price per unit $1.75
fixed costs $10 000
variable costs per unit $1.70 What should the firm do?
A close down immediately because it is not covering its fixed costs B close down immediately because it is not covering its average costs C close down immediately because it is not covering its total costs
D continue production in the short run because it is covering its variable costs J/12/32/8
15 An economist calculates that a firm has incurred the following costs over the course of a year.
$(000) wages and salaries
opportunity cost of owner‟s time materials
rent
marketing fees interest on bank loans
interest forgone on finance provided by owner
150 35 80 30 20 25 10
By how much does total cost as defined by an economist exceed the total cost as defined by an accountant?
A $75 000 B $45 000 C $35 000 D $10 000
N/12/32/08
16 An economist calculates that an owner-managed firm has incurred the following costs over the course of a year.
$(000)
wages of two employees 150
fee paid to wife for secretarial services 20
opportunity cost of owner‟s time 30
Materials 80
Rent 30
marketing fees 20
interest on bank loans 25
interest forgone on finance provided by owner 15
By how much does total cost as defined by an economist exceed the total cost as defined by an accountant?
A $15 000 B $30 000
C $45 000 D $65 000
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Understanding Economics 106 6
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Economist’s Vs Accountant’s definition of CostsJ/13/32/06
17 A fashion model is paid $100 000 a year.
The next best paid job she could get is as a teacher at $60 000 a year.
What are her transfer earnings and her economic rent?
transfer earnings $ economic rent $
A 60 000 zero
B 60 000 40 000
C 100 000 zero
D 100 000 40 000
J/13/32/07
18 An economist calculates that a firm has incurred the following costs over the course of the year.
$(000)
wages and salaries 150
opportunity cost of owner‟s time 40
materials 80
rent of buildings 30
marketing fees 20
interest on bank loans 25
interest forgone on finance provided by owner 15
depreciation of equipment 20
By how much would the economist‟s calculation of the total cost incurred by the firm exceed an accountant‟s calculation of the firm‟s total cost?
A $15 000 B $40 000 C $55 000 D $75 000
N/14/32/04
19 A worker is considering accepting a job she has been offered. She draws up a list of the annual monetary values she places on the advantages and disadvantages of the job.
advantages and
disadvantages of the job
value ($) income
dangerous working conditions long working hours
high prestige of the job cost of providing own uniform opportunity for travel
short holidays
750 500 250 200 150 100 50 What can be concluded from the table?
A She values the pecuniary advantages more highly than the non-pecuniary advantages.
B She would take the job even if it had none of the non-pecuniary advantages.
C The job has no pecuniary disadvantages.
D The non-pecuniary advantages outweigh the non-pecuniary disadvantages.
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Understanding Economics 107 6
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Economist’s Vs Accountant’s definition of CostsN/14/32/13
20 The diagram shows how a firm‟s average profit and marginal profit vary at differing levels of output.
If the firm produces output OQ, which statement is correct?
A The firm is earning a zero profit.
B The firm is making a normal profit.
C The firm is maximising its profit.
D The firm is producing above its profit-maximising output.
J/15/32/13
21 The table shows information about a profit-maximising firm.
price per unit $1.70
fixed costs $10 000
variable costs per unit $1.75 What can be concluded about the firm‟s behaviour?
A It should close down immediately because it is not covering its average costs.
B It should close down immediately because it is not covering its variable costs.
C It should continue production in the long-run because it is covering its total costs.
D It should continue production in the short-run because it is covering its fixed costs.
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Understanding Economics 108 7
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Market StructuresSection: 7 Market Structures
It is hard to imagine a firm that operates successfully without having any clue as to who its customers and competitors are, their relative size and the decisions they undertake. A successful firm ought to be well informed about the market environment it functions in. This is exactly why studying market structures is important. The motivation to study them stems from three important sources: their usefulness in depicting firm behavior, in revealing pricing and output decisions and lastly, in functioning as an evaluative space, allowing firms to know where they stand in terms of profits and efficiency.
It is needless to mention that firms operate differently in different market situations. The structure of a market is explained by many factors, such as the number of buyers and sellers, nature of the product, the degree of freedom of entry and exit, and the nature of information. The four market structures are Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly. The characteristics of these market structures are briefly given in the following table:
Table 7.1
Type No. of firms
Size of firms
Nature of the product
Entry &
Exit
Price Control of a firm
Nature of information