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Technology is best defined as:

a) all production methods and processes that increase a firm's profit.
b) the body of knowledge that exists about production and its processes.
c) the purchase of new machinery and equipment to replace old machinery and
d) new machinery and processes that cause the disappearance of old machinery and
Which of the following is not the feature of perfectly competitive market?
a) Many sellers and many buyers
b) Close substitutes are not available
c) Firms in perfect competition are price takers
d) no barriers to entry and/or exit
e) All players are well informed on prices



The monthly payment that a business makes on a building it has leased for the next five

Is variable cost
is a fixed cost.
Is a sunk cost that need not be paid if the business produces nothing.
is a long-run cost since the building has been leased for five years.
all of the above.

The total cost of producing three units of output is ________ and the marginal cost is

a) $12; $76
b) $36; $48
c) $106; $18
d) $108; 48

BUS700 Economics

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Economics (BUS700)


In a perfectly competitive market, a firm maximises its profit by producing the quantity of output
at which:
a) Market price equals average fixed cost.
b) Market price equals marginal cost.
c) Market price is greater than marginal cost.
d) Market price equals minimum average variable cost.
If a firm faces a perfectly elastic demand for its product, then:
a) It will always make zero profit.
b) Its marginal revenue curve is horizontal at the market price.
c) It will want to raise its price to increase total revenue.
d) It will want to lower its price to increase sales.


Explain the following economic terms in relation to production of output in the short run:
(a) sunk cost

(b) Shut down point and its relationship with the firm and market supply curve


Suppose firm A in a competitive industry somehow develops a new technology which

enables it alone to completely eliminate diseconomies of scale. no matter how large a
factory it builds. What would its long run average total cost curve look like then? What
would eventually happen to its competitors?

The firm would continue to experience economies of scale and, overtime, end up as the only firm in
the industry. Other producers would have had higher average costs and, therefore, would not have
been able to match firm As.

9. Assume that the iron-mining industry is competitive.

a. Illustrate a long-run equilibrium using diagrams for the iron market and for a
representative iron mine.
b. Suppose that an increase in steel demand induces a surge in the demand for iron. Using
your diagrams, show what happens in the short run to the iron market and to each existing
iron mine.
c. If the demand for iron remains high, what would happen to the price over time?
Specifically, would the new long-run equilibrium price be above, below or equal to the
short-run equilibrium price in part (b)?

BUS700 Economics

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