The substitution effect indicates that a profit-seeking firm will use: a) more of an input whose...
Question:
The substitution effect indicates that a profit-seeking firm will use:
a) more of an input whose price has fallen and less of other inputs in producing a given output.
b) more of all inputs if production costs fall.
c) more of those inputs whose marginal productivity is the greatest.
d) less of an input whose price has fallen and more of other inputs in producing a given output.
Substitution Effect:
Substitution effect refers to the decrease of product sales due to consumers switching to cheaper products as the price of a specific product rises. When a company increases the prices of its products, the consumer will move to the alternative commodities, which serve the same purpose but are far cheaper. This is strong for the products with close substitutes in a perfectly competitive market. For instance, if the price of coffee increases, the consumers will move to cheaper products such as tea or cocoa drinks.
Answer and Explanation: 1
Become a Study.com member to unlock this answer! Create your account
View this answerThe correct answer is a) more of the input whose price has fallen and less of other inputs producing a given product.
For a profit-seeking firm, it...
See full answer below.
Ask a question
Our experts can answer your tough homework and study questions.
Ask a question Ask a questionSearch Answers
Learn more about this topic:
Get access to this video and our entire Q&A library
The Substitution Effect in Macroeconomics: Definition & Example
from
Chapter 3 / Lesson 17
21K
Explore the substitution effect. Learn the definition of the substitution effect and how it differs from the income effect. See examples of the substitution effect.
Related to this Question
- Marginal cost represents the: 1) additional cost of hiring one more unit of input 2) the amount of output we get when spending $1 more on inputs 3) additional cost of producing one more unit of output. 4) change in total cost divided by the change
- If price is greater than marginal, a perfectly competitive firm should increase output because: 1. marginal cost are increasing 2. additional units of output will add to the firm's profits (or reduc
- The change in output with one additional unit of input is A. marginal revenue product B. marginal cost C. marginal physical product D. marginal input output
- With one variable input, marginal cost is increasing when: 1) marginal product is rising. 2) the firm experiences diminishing marginal returns to the variable input. 3) total cost is increasing at decreasing rate. 4) average cost above marginal cos
- In the short-run, when some inputs are fixed, why must marginal costs rise as the firm's output increases? A) The prices the firm pays for labor, material, and other variable inputs will increase. B)
- Diminishing marginal returns to the variable inputs causes the total cost curve to: a) get steeper as output increases. b) have a negative slop. c) get flatter as output increase. d) be horizontal.
- If marginal revenue exceeds marginal cost, a competitive firm can increase profit by: A. Increasing output. B. Decreasing output. C. Making no change in output. D. Raising its price
- Marginal cost is A. all the costs of production of goods. B. all the costs of the fixed inputs. C. the change in the total cost resulting from a one-unit change in output. D. all the costs that vary with output.
- A firms' marginal cost of production is the: a) Change in total variable cost that results from producing each additional unit of output b) Change in total cost that results from producing each additi
- Marginal cost eventually increases as output increases due to the effect of [{Blank}]. a. economies of scale, b. increasing average cost, c. increasing total cost, d. diminishing marginal product of inputs, e. constant fixed cost.
- In monopolistic competition, profits in the short-run lead to firm.........., shifting other firms' ........... curve to the left until P=ATC. a) entry, marginal cost b) entry perceived demand c)
- With one variable input, marginal cost is increasing when: 1) marginal product is rising. 2) the firm experiences diminishing marginal returns to the variable input. 3) total cost is increasing at decreasing rate. 4) average cost above marginal cost. 5)
- Marginal cost is _____. a. a small cost that does not affect a firm's profit significantly b. the cost of increasing the margin between cost and price c. the cost of producing one additional unit of output d. None of the above.
- A firm's marginal cost of production is the: a. change in total variable cost that results from producing each additional unit of output. b. change in total cost that results from producing each additional unit of output. c. change in total fixed cost tha
- An increase in marginal cost causes a profit-maximizing, monopolistically competitive firm to: a. keep price and output the same. b. raise price and decrease output. c. lower price and increase output. d. raise price and raise output.
- A firms marginal cost of production is the: i. change in total variable cost that results from producing each additional unit of output ii. change in total cost that results from producing each addi
- The optimal input mix implies: a. That all output is increasing at an increasing rate. b. That the marginal product of the inputs divided by their prices are equal. c. That the marginal cost of the inputs is declining at a declining rate. d. That increasi
- If the marginal revenue product of an input exceeds the marginal factor cost of the input, the firm A - should hire less of the input. B - should increase its use of the input. C - is not on its marginal cost curve. D - is maximizing profit.
- The Law of Diminishing Returns states that: 1) as the amount of input is increased, holding all else constant, the marginal product of the increasing input will eventually fall. 2) as output is increased, the marginal cost of additional output will event
- If a profit-maximizing firm in a competitive market discovers that at its current level of production, price is less than marginal cost, it should: A. exit the industry B. increase its output C. keep output the same D. reduce its output
- Marginal factor cost is a. the change in total costs due to a one-unit change in the quantity of the good produced b. the change in total costs due to a one-unit increase in the variable input. c. the change in the price of an input when an additional
- Marginal Cost a. rises after the law of diminishing returns sets in. b. is equal to the change in total cost divided by the change in quantity. c. is all of the other choices. d. is the extra cost of producing one additional unit. e. is equal to the
- A perfectly competitive firm's marginal revenue exceeds its marginal cost at its current output. To increase its profit, the firm will A. lower its price. B. raise its price. C. decrease its output. D. increase its output.
- An increase in output would result in no change in long-run average costs when there are: A. constant returns to scale B. diminishing marginal product C. diminishing returns to scale. D. economies of
- In an increasing-cost industry, the entry of new firms results in which of the following? a. an increase in input prices b. an increase in economic profits c. a decrease in demand d. a decrease in supply
- The marginal rate of technical substitution measures: A. the rate at which one factor input can be substituted for another at a given level of output. B. the rate that output changes as a result of more factors being used. C. the rate at which costs cha
- Short-run cost curves are eventually upward-sloping because of the effects of: a. the increasing price of variable inputs. b. diminishing marginal product. c. increasing fixed costs. d. increasing marginal productivity of the variable inputs. e. decreasin
- If the variable costs of a profit-maximizing pure monopolist decline, the firm should: a. raise both output and price. b. produce more output and charge a lower price. c. produce more output and charge a higher price. d. reduce both output and price.
- For a perfectly competitive firm, as its output increases, its marginal revenue {Blank} and its marginal cost {Blank}. A. changes; changes B. changes; does not change C. does not change; changes D. does not change; does not change
- What is the difference between the substitution and output effect called? A. marginal revenue product B. output effect C. factor market D. marginal productivity theory E. net effect F. contribution margin G. marginal factor cost
- What occurs when a decrease in costs causes an increase in Qd due to price sensitivity? A. marginal revenue product B. net effect C. contribution margin D. marginal factor cost E. output effect F. marginal product of capital G. derived demand H. substitut
- _____ occur when the marginal gain in output diminishes as each additional unit of input is added. a) Diminishing variable returns b) Diminishing marginal returns c) Diminishing marginal costs d) Diminishing average returns
- Ultimately, short-run supply curves are upward sloping because of: a. the irrelevance of fixed costs to the firm's decision-making. b. the factor-price effect. c. diminishing marginal returns to the variable inputs. d. the equality of demand and marginal
- Any cost that remains unchanged as output changes represents a firm's: A. marginal cost. B. opportunity cost. C. fixed cost. D. variable cost.
- If a perfectly competitive firm finds that it is producing an output level where price is above average variable cost but less than marginal cost, it should [{Blank}] A. increase its output B. shut down. C. decrease its price. D. increase its price. E
- The more volume of output produced will spread the _ costs and create a lower _ _ costs? Variable costs increase directly with _ produced? Neither _ costs or AFC can be zero? The marginal profit earne
- A firm realizes the least cost in production if it substitutes the factors until their: a. prices are equal. b. marginal physical product to the factor price ratio is equal for all factor inputs. c. marginal physical products are equal to zero. d. margina
- If a profit-maximizing firm in a competitive market discovers that, at its current level of production, price is greater than marginal cost, it should: A. increase its output. B. reduce its output bu
- 1 For a price-taking firm, marginal revenue a. Is the addition to total revenue from producing one more unit of output. b. Decreases as the firm produces more output. c. Is equal to price at any le
- A monopolist is currently producing at an output level where marginal cost is $30 and marginal revenue is $40. As a profit maximizer, will this firm expand or reduce output?
- When a single-price monopolist maximizes profits, price is greater than marginal cost. In other words, buyers are willing to pay more for additional units of output than the units cost to produce. Given this situation, why doesn't the monopolist produce
- If marginal revenue is less than marginal costs A. Production should be decreased. B. Production should be decreased and profits will grow. C. Production should be decreased and losses will decrease
- In the long run, a perfectly competitive market with economic losses will experience: A. an increase in equilibrium price as firms exit B. an increase in equilibrium quantity as firms exit C. the entry of firms until economic profits are zero D. no change
- If fixed cost falls: a. the firm's profit maximizing level of output does not change in the short run b. the firm's profit maximizing level of output rises in the short run c. there is an uncertain effect on the firms profit maximizing level of output in
- If the firm is producing at a quantity of output where marginal cost exceeds marginal revenue, then Blank. a. the firm should reduce production. b. each marginal unit adds profit by bringing in more revenue than its cost. c. the firms perceived demand w
- The price of a competitive firm's product is $50 per unit. The firm currently has marginal cost equal to $40. To maximize profit, this firm ____. a. should increase its output b. should reduce its output c. should keep its output the same d. needs more
- Profit maximization - A profit-maximizing firm will use less of an input as long as: a. The extra cost of using a unit of the input is greater than the marginal revenue product (MRP) of the input. b
- Consider two firms, A and B, that are producing the same product but with different marginal costs. In this case, A) a reallocation of output between the firms can lower the industry's total cost. B) neither firm is producing its output at the lowest at
- What is the additional cost of one more or one fewer factor inputs called? A. marginal revenue product B. output effect C. factor market D. marginal productivity theory E. net effect F. contribution margin G. marginal factor cost
- Marginal cost equals 1) the variable cost of the additional unit of production minus the variable cost of the previous unit produced 2) the change in variable costs divided by the change in output
- When a single-price monopolist maximizes profits, the price is greater than the marginal cost. In other words, buyers are willing to pay more for additional units of output than the units cost to produce. Given this situation, why doesn't the monopolist p
- When a single-price monopolist maximizes profits, the price is greater than marginal cost. In other words, buyers are willing to pay more for additional units of output than the units cost to produce. Given this situation, why doesn't the monopolist produ
- The marginal rate of substitution is: a. used to determine the least-cost combination of inputs when set equal to the price ratio of the inputs. b. the slope of the isoquant curve. c. equal to the ratio of the marginal physical products of the inputs. d.
- When a firm can increase its output with a less than proportional increase in total costs, which of the following is true? 1) The firm has economies of scale. 2) The firm's average cost is decreasing with output. 3) The firm's marginal cost is less th
- When a firm can increase its output with a less than proportional increase in total costs, which of the following is true? 1) The firm has economies of scale. 2) The firm's average cost is decreasing with output. 3) The firm's marginal cost is less tha
- If marginal cost is greater than marginal revenue, then profit maximization demands that a company does which of the following? a. increase its output b. decrease its output only if the company is perfectly competitive c. decrease its output d. decrease i
- Other things equal, if the prices of a firm's variable inputs were to fall: a) one could not predict how unit costs of production would be affected. b) marginal cost, average variable cost, and average fixed cost would all fall. c) marginal cost, average
- A fixed cost is a. the cost of any input with a fixed price per unit. b. a cost that increases in a fixed proportion as output increases. c. a cost the firm must pay even if the output is zero. d. a cost that does not vary with the amount of good or servi
- A firm would find it profitable to increase its production when: a. Its marginal revenue exceeds its marginal cost, b. Its fixed costs decrease, c. Higher resource costs raise its marginal costs, d. New competitors reduce the demand for the firm's product
- In a perferctly competitive market if a company is producing at an output level where price is greater than marginal cost, then the company can raise profit by: Question 8 options: making no change in
- When marginal cost curve is below an average cost curve, average cost is A. increasing with output. B. declining with output. C. not varying with output. D. none of the statements associated with
- The demand for the good the input produces and the productivity of the factor input determine the input's. A. marginal revenue product B. net effect C. contribution margin D. marginal factor cost E. output effect F. marginal product of capital G. derived
- An implicit cost is: A. a cost that changes as output changes. B. a nonmonetary opportunity cost. C. a cost that remains constant as output changes. D. the highest-valued alternative that must be given up to engage in an activity. E. a cost incurred in th
- The marginal cost curve is generally upward-sloping because: a) diminishing marginal returns implies that additional units are more costly to produce. b) the costs of materials increase per unit as you buy larger quantities. c) since a firm will hire chea
- If a perfectly competitive firm's marginal revenue is less than its marginal cost, the firm: A) should decrease its output to increase economic profit. B) should increase its output to increase economic profit. C) must be making an economic profit. D)
- Marginal cost tells us the: a. Value of all resources used in a production process, b. Marginal increment to profitability when the price is constant, c. Amount by which total cost rises when output is increased by one unit, d. Amount by which output rise
- Once a firm is forced to consider an external cost, the price of its product will: a. increase and output will decrease b. increase and output will increase c. decrease and output will decrease d. decrease and output will increase
- If a firm's marginal cost exceeds its marginal revenue, then: a. The firm's profit is negative, b. The firm should shut down its operations, c. Cutting back production will increase the firm's profit, d. The firm should reduce its per-unit cost by increas
- If a firm is producing a quantity along the upward sloping portion of its marginal cost curve at which marginal cost exceeds price and is earning positive economic profits, it should: a. continue to produce this quantity. b. decrease the quantity produced
- If at the current output of X the PX less than MCX (the price of X is smaller than the marginal cost of X), then society gains by: a. producing more X. b. producing less X. c. lowering the price of X. d. increasing the cost of producing X.
- If the firm is producing at a quantity of output where marginal revenue exceeds marginal cost, then _. Choose all that apply. - the excess profit would attract additional competition - each marginal
- If the productivity of variable factors is decreasing in the short-run: a. Marginal cost must increase as output increases. b. Average cost must decrease as output increases. c. Average cost must increase as output increases. d. Marginal cost must be decr
- The difference between a monopolist's marginal expenditure and that of a price taker is: a. the marginal cost of the input b. the input expansion effect c. the price increase effect d. B and C
- Ceteris paribus, if all inputs increase by 10 percent and output increases by less than 10 percent, then: a) average total cost is decreasing. b) average total cost is increasing. c) the LRAC curve is horizontal. d) there are economies of scale. e) there
- In the short run,....... do not increase with the quantity of output being produced. a. Variable costs b. Fixed costs c. Marginal costs d. Implicit costs
- The law of diminishing marginal returns A. applies eventually when larger amounts of a variable input are combined with fixed inputs B. causes an increase in the marginal cost of production C. Both of the above D. Neither of the above
- Marginal cost equal: a. the variable cost of the additional unit of production minus the variable cost of the previous unit produced. b. the change in variable costs divided by the change in output. c. the change in total cost divided by the change in ou
- A firm is producing where its marginal costs are at the lowest level. What can one most likely infer from this? a. there is either lost opportunity for further profits by producing more, or the firm should shut-down if it is competitive and price is at t
- A firm is producing where its marginal costs are at the lowest level. What can one most likely infer from this? a. There is either lost opportunity for further profits by producing more, or the firm should shut down if it is competitive and the price is a
- Suppose a perfectly competitive firm is in long-run equilibrium and there is a decrease in demand. Suppose also that the firm operates in an industry in which the prices of productive inputs vary with the level of output, increasing when output increases
- ..................... occur when the marginal gain in output diminishes as each additional unit of input is added. a) diminishing variable returns b) diminishing average returns c) diminishing marginal costs d) diminishing marginal returns
- Economies of scale can: A. prevent the entry of new firms into a market. B. result in an increasing cost industry. C. cause input prices to drop. D. reduce the rate of return that the firm may earn.
- A firm in a perfectly competitive industry is producing a quantity where price exceeds marginal cost. It follows that producing one more unit of output will cause the firm's: a. total cost to decrease. b. profits to increase. c. profits to decrease. d. pr
- The decrease(s) as the firm increases production. a. explicit costs b. implicit costs c. fixed cost d. variable cost e. average fixed cost f. average total cost g. marginal cost h. diminishing marginal product of labor i. increasing marginal product of la
- If a competitive firm is producing at an output level for which price less than marginal cost, the firm: Select one: a. Can increase profits by decreasing output. b. Can increase profits by increasing output. c. Has maximized profit. d. Must be earni
- As a firm continues to produce additional output, which of the following will continue to decline as output expands? A) average total costs B) marginal costs C) average fixed costs D) opportunity costs
- If a monopolistically competitive firm?s marginal cost increases, then in order to maximize profits, the firm will: A. Reduce output and increase price. B. Increase output and decrease price. C. Incre
- Profit maximization occurs when: a. a firm expands output until marginal revenue is exceeded by marginal cost. b. a firm expands output until marginal revenue is equal to marginal cost. c. the price in the market is equal to the firm's marginal revenue. d
- Which of the following will result in a firm increasing its level of production: a. An increase in its Marginal Costs, b. A decrease in its Marginal Revenue, c. An increase in its Fixed Costs, d. An increase in the price of its product.
- What are Total Variable costs?: a) are not affected by diminishing marginal returns; b) are costs that change as the level of output changes; c) decline monotonically as the level of output increase;
- If a perfectly competitive firm finds that it is producing an amount of output, such that MR > MC and P > AVC, it will: a. increase its output because each additional output brings more revenue than it costs to produce b. leave the industry because its c
- Suppose the cost function for your firm is: C = 10 +2Q + 5Q^2. If the firm sells output in a perfectly competitive market and other firms in the industry sell output at a price of $35. What level of output should the firm produce to maximize profits or mi
- Marginal cost increases as the quantity of output increases. This reflects the property of: a. Increasing total cost, b. Diminishing total cost, c. Increasing marginal product, d. Diminishing marginal product.
- The value of the slope of a society's production possibility frontier is called its a. marginal rate of transformation. b. diminishing opportunity cost of capitalization. c. marginal rate of substitution. d. value of diminishing efficiency.
- Experience of Diminishing Marginal Returns by a firm is possible because: a) All factors are fixed. b) At least one factor of production is variable. c) All factors are variable. d) Total cost is increasing.
- With no barriers to entry or exit and when firms in a market are operating at a loss, we can expect other firms to exit, causing the [{Blank}] curve to shift to the [{Blank}] and making the equilibrium price [{Blank}] and the equilibrium quantity [{Blank}
- A multi-product monopolist produces two products that are substitutes. The demand for a product depends on both the price of the goods and the price of the other product. Demand functions are: q_1 = 100 - 2p_1+p_2 q_2 = 100 - 2p_2+p_1 The marginal cost
- If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then A) one-unit decrease in output would increase the firm's profit B) Average revenu
Explore our homework questions and answers library
Browse
by subject