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Test III Practice Problems

# Test III Practice Problems - Test III Practice Problems...

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Test III Practice Problems Short Answer 1. What are opportunity costs? How do explicit and implicit costs relate to opportunity costs? 2. A key difference between accountants and economists is their different treatment of the cost of capital. Does this cause an accountant's estimate of total costs to be higher or lower than an economist's estimate? Explain. 3. The production function depicts a relationship between which two variables? Also, draw a production func- tion that exhibits diminishing marginal product. 4. How would a production function that exhibits decreasing marginal product affect the shape of the total cost curve? Explain or draw a graph. 5. What effect, if any, does diminishing marginal product have on the shape of the marginal cost curve? 6. Bob Edwards owns a bagel shop. Bob hires an economist who assesses the shape of the bagel shop's average total cost (ATC) curve as a function of the number of bagels produced. The results indicate a U-shaped aver- age total cost curve. Bob's economist explains that ATC is U-shaped for two reasons. The first is the existence of diminishing marginal product, which causes it to rise. What would be the second reason? Assume that the marginal cost curve is linear. (Hint: The second reason relates to average fixed cost) 7. If the average total cost curve is falling, what is necessarily true of the marginal cost curve? If the average total cost curve is rising, what is necessarily true of the marginal cost curve? 8. According to the mathematical laws that govern the relationship between average total cost and marginal cost, where must these two curves intersect? 9. Describe the difference between average revenue and marginal revenue. Why are both of these revenue meas- ures important to a profit-maximizing firm? 10. List and describe the characteristics of a perfectly competitive market. 11. Why would a firm in a perfectly competitive market always choose to set its price equal to the current market price? If a firm set its price below the current market price, what effect would this have on the market?

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Test III Practice Problems - Test III Practice Problems...

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