Changes

1.  The term "scarcity" in economics would include all of the following EXCEPT:

1.  The term "scarcity" in economics would include all of the following EXCEPT:

(a) gold

:(a) gold

<br>(b) pennies

:(b) pennies

<br>(c) paper clips

:(c) paper clips

<br>(d) salt water at the ocean

:(d) salt water at the ocean

<br>(e) pencils

:(e) pencils

''Answer'':  Our test-taking tips encourage us to eliminate wrong answers before trying to select the correct answer.  Gold is not scarce under any meaning of the word.  Knock it out as an answer.

''Answer'':  Our test-taking tips encourage us to eliminate wrong answers before trying to select the correct answer.  Gold is not scarce under any meaning of the word.  Knock it out as an answer.

2.  Imagine a firm in perfect competition, and in long-run equilibrium.  Which of the following statements is true?

2.  Imagine a firm in perfect competition, and in long-run equilibrium.  Which of the following statements is true?

(a) the total revenue of the firm cannot be increased

:(a) the total revenue of the firm cannot be increased

<br>(b) AVC > MC

:(b) AVC > MC

<br>(c) MC is at its average

:(c) MC is at its average

<br>(d) marginal revenue is at its maximum

:(d) marginal revenue is at its maximum

<br>(e) the average total cost is at its minimum

:(e) the average total cost is at its minimum

''Answer'':  Again, our test-taking tips encourage us to eliminate wrong answers before trying to select the correct answer.  Let's look at answer choice (a):  the total revenue of the firm cannot be increased.  That is wrong because if we increase our output, we could increase our total revenue, even though we may lose money on that additional unit.  For example, if we sold chocolate candy bars for $1, we could always increase revenue by selling another one for the below-market-price of 50 cents.  We'd lose money on that additional bar, but we'd increase our overall revenue.

''Answer'':  Again, our test-taking tips encourage us to eliminate wrong answers before trying to select the correct answer.  Let's look at answer choice (a):  the total revenue of the firm cannot be increased.  That is wrong because if we increase our output, we could increase our total revenue, even though we may lose money on that additional unit.  For example, if we sold chocolate candy bars for $1, we could always increase revenue by selling another one for the below-market-price of 50 cents.  We'd lose money on that additional bar, but we'd increase our overall revenue.

3. Suppose a firm has "economies of scale"?  What happens when it increases output?

3. Suppose a firm has "economies of scale"?  What happens when it increases output?

(a) its average total costs increase

:(a) its average total costs increase

<br>(b) its revenue decreases

:(b) its revenue decreases

<br>(c) its marginal cost increases

:(c) its marginal cost increases

<br>(d) its average total costs decrease

:(d) its average total costs decrease

<br>(e) its costs remain constant.

:(e) its costs remain constant.

''Answer'':  Think back to what "economies of scale" means.  It refers to whether the firm has better efficiency at a bigger size, or better "returns to scale" as the size of a firm increases.  We talked about "increasing" returns to scale and "decreasing" returns to scale.  The "economies of scale" suggests that the firm can operate more "economically" if it has larger "scale" or size.  In other words, "economies of scale" means "increasing returns to scale."

''Answer'':  Think back to what "economies of scale" means.  It refers to whether the firm has better efficiency at a bigger size, or better "returns to scale" as the size of a firm increases.  We talked about "increasing" returns to scale and "decreasing" returns to scale.  The "economies of scale" suggests that the firm can operate more "economically" if it has larger "scale" or size.  In other words, "economies of scale" means "increasing returns to scale."