Econ 2106 Principles of Microeconomics

Sample Exam 2

 

____               1.     Explicit costs

a.

require an outlay of money by the firm.

b.

include all of the firm's opportunity costs.

c.

include income that is forgone by the firm's owners.

d.

Both b and c are correct.

 

____               2.     Which of the following is an implicit cost?

(i)

the owner of a firm forgoing an opportunity to earn a large salary working for a Wall Street brokerage firm

(ii)

interest paid on the firm's debt

(iii)

rent paid by the firm to lease office space

 

a.

(ii) and (iii)

b.

(i) and (iii)

c.

(i) only

d.

(iii) only

 

____               3.     Economic profit

a.

will never exceed accounting profit.

b.

is most often equal to accounting profit.

c.

is always at least as large as accounting profit.

d.

is a less complete measure of profitability than accounting profit.

 

____               4.     The marginal product of labor is equal to the

a.

incremental cost associated with a one unit increase in labor.

b.

incremental profit associated with a one unit increase in labor.

c.

increase in labor necessary to generate a one unit increase in output.

d.

increase in output obtained from a one unit increase in labor.

 

Figure 13-2

The figure below depicts a total cost function for a firm that produces cookies.

 

____               5.     Refer to Figure 13-2. Which of the following statements best captures the nature of the underlying production function?

a.

Output increases at a decreasing rate with additional units of input.

b.

Output increases at an increasing rate with additional units of input.

c.

Output decreases at a decreasing rate with additional units of input.

d.

Output decreases at an increasing rate with additional units of input.

Table 13-2

 

Number of Workers

Output

0

    0

1

  50

2

110

3

180

4

260

5

330

 

____               6.     Refer to Table 13-2. At which number of workers does diminishing marginal product begin?

a.

2

b.

3

c.

4

d.

5

 

Table 13-3

 

Number

of

Workers

 

Number

of

Machines

Output

(corks produced

per hour)

 

Marginal Product of Labor

 

 

Cost of Workers

 

 

Cost of Machines

 

 

Total

Cost

 1

 2

 5

 

 

 

 

 2

 2

 10

 

 

 

 

 3

 2

 20

 

 

 

 

 4

 2

 35

 

 

 

 

 5

 2

 55

 

 

 

 

 6

 2

 70

 

 

 

 

 7

 2

 80

 

 

 

 

 

____               7.     Refer to Table 13-3. Assume Gallo's currently employs 5 workers. What is the marginal product of labor when Gallo's adds a 6th worker?

a.

5 corks per hour

b.

15 corks per hour

c.

25 corks per hour

d.

70 corks per hour

 

____               8.     If a firm produces nothing, which of the following costs will be zero?

a.

total cost

b.

fixed cost

c.

opportunity cost

d.

variable cost

 

____               9.     Average total cost equals

a.

change in total costs divided by quantity produced.

b.

change in total costs divided by change in quantity produced.

c.

(fixed costs + variable costs) divided by quantity produced.

d.

(fixed costs + variable costs) divided by change in quantity produced.

 

____               10.  If marginal cost is rising,

a.

average variable cost must be falling.

b.

average fixed cost must be rising.

c.

marginal product must be falling.

d.

marginal product must be rising.

 

____               11.  Which of the following statements about costs is correct?

a.

When marginal cost is less than average total cost, average total cost is rising.

b.

The total cost curve is U-shaped.

c.

As the quantity of output increases, marginal cost eventually rises.

d.

All of the above are correct.

 

____               12.  Which of the following must always be true as the quantity of output increases?

a.

Marginal cost must rise.

b.

Average total cost must rise.

c.

Average variable cost must rise.

d.

Average fixed cost must fall.

 

Figure 13-8

The figure below depicts average total cost functions for a firm that produces automobiles.

 

 

____               13.  Refer to Figure 13-8. This firm experiences diseconomies of scale at what output levels?

a.

output levels above N

b.

output levels between M and N

c.

output levels below M

d.

All of the above are correct, if the firm is operating in the long run.

 

____               14.  The fundamental reason that marginal cost eventually rises as output increases is because of

a.

economies of scale.

b.

diseconomies of scale.

c.

diminishing marginal product.

d.

rising average fixed cost.

 

____               15.  Which of the following statements best reflects a price-taking firm?

a.

If the firm were to charge more than the going price, it would sell none of its goods.

b.

The firm has an incentive to charge less than the market price to earn higher revenue.

c.

The firm can sell only a limited amount of output at the market price before the market price will fall.

d.

Price-taking firms maximize profits by charging a price above marginal cost.

 

____               16.  Suppose a firm in a competitive market received $1,000 in total revenue and had a marginal revenue of $10 for the last unit produced and sold. What is the average revenue per unit, and how many units were sold?

a.

$5 and 50

b.

$5 and 100

c.

$10 and 50

d.

$10 and 100

 

 


Scenario 14-1

 

As part of an estate settlement Mary received $1 million. She decided to use the money to purchase a small business in Anywhere, USA. If Mary would have invested the $1 million in a risk-free bond fund she could have made $100,000 each year. She also quit her job with Lucky.Com Inc. to devote all of her time to her new business; her salary at Lucky.Com Inc. was $75,000 per year.

 

____               17.  Refer to Scenario 14-1. At the end of the first year of operating her new business, Mary's accountant reported an accounting profit of $150,000. What was Mary's economic profit?

a.

$25,000 loss

b.

$50,000 loss

c.

$25,000 profit

d.

$150,000 profit

 

____               18.  When a competitive firm triples the amount of output it sells,

a.

its total revenue triples.

b.

its average revenue triples.

c.

its marginal revenue triples.

d.

its profit must increase.

 

____               19.  If the market elasticity of demand for potatoes is -0.3 in a perfectly competitive market, then the individual farmer's elasticity of demand

a.

will also be -0.3.

b.

depends on how large a crop the farmer produces.

c.

will range between -0.3 and -1.0.

d.

will be infinite.

 

Figure 14-1

 

The graph below depicts the cost structure for a firm in a competitive market.

 

 

____               20.  Refer to Figure 14-1. When price falls from P3 to P1, the firm finds that

a.

fixed cost is higher at a production level of Q1 than it is at Q3.

b.

it should produce Q1 units of output.

c.

it should produce Q3 units of output.

d.

it should shut down immediately.

 

____               21.  Refer to Figure 14-1. When price rises from P3 to P4, the firm finds that

a.

fixed costs are lower at a production level of Q4.

b.

it can earn a positive profit by increasing production to Q4.

c.

profit is still maximized at a production level of Q3.

d.

average revenue exceeds marginal revenue at a production level of Q4.

 

 


____               22.  Which of the following statements best reflects the production decision of a profit-maximizing firm in a competitive market when price falls below the minimum of average variable cost?

a.

The firm will continue to produce to attempt to pay fixed costs.

b.

The firm will immediately stop production to minimize its losses.

c.

The firm will stop production as soon as it is able to pay its sunk costs.

d.

The firm will continue to produce in the short run but will likely exit the market in the long run.

 

Figure 14-4

The figure below depicts the cost structure of a firm in a competitive market.

 

 

____               23.  Refer to Figure 14-4. Firms would be encouraged to enter this market for all prices that exceed

a.

P1.

b.

P2.

c.

P3.

d.

None of the above is correct.

 

____               24.  A competitive firm has been selling its output for $10 per unit and has been maximizing its profit. Then, the price rises to $14 and the firm makes whatever adjustments are necessary to maximize its profit at the now-higher price. Once the firm has adjusted, which of the following statements is correct?

a.

The firm's marginal revenue is lower than it was previously.

b.

The firm's marginal cost is lower than it was previously.

c.

The firm's quantity of output is higher than it was previously.

d.

All of the above are correct.

 

____               25.  Mrs. Smith is operating a firm in a competitive market. The market price is $6.50.  At her profit-maximizing level of output, her average total cost of production is $7.00 and her average variable cost of production is $6.00.

a.

Mrs. Smith is earning a loss and should shutdown in the short run.

b.

Mrs. Smith is earning a loss but should continue to operate in the short run.

c.

Mrs. Smith is earning a profit since the price is above the average variable cost.

d.

Without knowing Mrs. Smith's marginal cost we cannot determine whether she should stay in business or shut down.

 

____               26.  Cold Duck Airlines flies between Tacoma and Portland. The company leases planes on a year-long contract at a cost that averages $600 per flight. Other costs (fuel, flight attendants, etc.) amount to $550 per flight. Currently, Cold Duck's revenues are $1,000 per flight. All prices and costs are expected to continue at their present levels. If it wants to maximize profit, Cold Duck Airlines should

a.

drop the flight immediately.

b.

continue the flight.

c.

continue flying until the lease expires and then drop the run.

d.

drop the flight now but renew the lease if conditions improve.

 

 


____               27.  Joe's Garage operates in a perfectly competitive market. At the point where marginal cost equals marginal revenue, ATC = $20, AVC = $15, and the price per unit is $10. In this situation,

a.

Joe's Garage is earning a positive economic profit.

b.

Joe's Garage should shut down immediately.

c.

Joe's is losing money in the short run, but should continue to operate.

d.

the market price will rise in the short run to increase profits.

 

____               28.  When new firms have an incentive to enter a competitive market, their entry will

a.

increase the price of the product.

b.

drive down profits of existing firms in the market.

c.

shift the market supply curve to the left.

d.

increase demand for the product.

 

____               29.  When new firms enter a perfectly competitive market,

a.

demand increases.

b.

the short-run market supply curve shifts right.

c.

the short-run market supply curve shifts left.

d.

existing firms will increase prices to keep the new firms from entering.

 

____               30.  A natural monopoly occurs when

a.

the product is sold in its natural state (such as water or diamonds).

b.

there are economies of scale over the relevant range of output.

c.

the firm is characterized by a rising marginal cost curve.

d.

production requires the use of free natural resources, such as water or air.

 

____               31.  A fundamental source of monopoly market power arises from

a.

perfectly elastic demand.

b.

perfectly inelastic demand.

c.

barriers to entry.

d.

availability of "free" natural resources, such as water or air.

 

____               32.  When an industry is a natural monopoly,

a.

it is characterized by constant returns to scale.

b.

it is characterized by diseconomies of scale.

c.

a larger number of firms may lead to a lower average cost.

d.

a larger number of firms will lead to a higher average cost.

 

____               33.  When a firm operates under conditions of monopoly, its price is

a.

not constrained.

b.

constrained by marginal cost.

c.

constrained by demand.

d.

constrained only by its social agenda.

 

____               34.  Which of the following statements is true?

(i)

When a competitive firm sells an additional unit of output, its revenue increases by an amount less than the price.

(ii)

When a monopoly firm sells an additional unit of output, its revenue increases by an amount less than the price.

(iii)

Average revenue is the same as price for both competitive and monopoly firms.

 

a.

(ii) only

b.

(iii) only

c.

(i) and (ii)

d.

(ii) and (iii)

 

____               35.  In a competitive market, a firm's supply curve dictates the amount it will supply. In a monopoly market the

a.

same is true.

b.

supply curve conceptually makes sense, but in practice is never used.

c.

supply curve will have limited predictive capacity.

d.

decision about how much to supply is impossible to separate from the demand curve it faces.

 

____               36.  A monopolist can sell 200 units of output for $36.00 per unit. Alternatively, it can sell 201 units of output for $35.80 per unit. The marginal revenue of the 201st unit of output is

a.

$-4.20.

b.

$-0.20.

c.

$4.20.

d.

$35.80.

 

____               37.  If a monopoly lowers its price, its

a.

total revenue must increase.

b.

total revenue must decrease.

c.

marginal revenue must increase.

d.

marginal revenue must decrease.

 

____               38.  The following table shows quantity, price, and marginal cost information for a monopoly. What price should the firm charge to maximize its profit?

 

Q

P

MC

0

10

--

1

  9

3

2

  8

4

3

  7

5

4

  6

6

5

  5

7

6

  4

8

 

a.

$4

b.

$5

c.

$6

d.

$7

 

____               39.  A monopolist produces

a.

more than the socially efficient quantity of output, but at a higher price than in a competitive market.

b.

less than the socially efficient quantity of output, but at a higher price than in a competitive market.

c.

the socially efficient quantity of output, but at a higher price than in a competitive market.

d.

possibly more or possibly less than the socially efficient quantity of output, but definitely at a higher price than in a competitive market.

 

____               40.  Since natural monopolies have a declining average cost curve, regulating natural monopolies by setting price equal to marginal cost would

a.

cause the monopolist to operate at a loss.

b.

result in a less than optimal total surplus.

c.

maximize producer surplus.

d.

result in higher profits for the monopoly.

 

 

____               41.  A perfectly price-discriminating monopolist is able to

a.

maximize profit and produce a socially-optimal level of output.

b.

maximize profit, but not produce a socially-optimal level of output.

c.

produce a socially-optimal level of output, but not maximize profit.

d.

exercise illegal preferences regarding the race and/or gender of its employees.

 

____               42.  Perfect price discrimination describes a situation in which the monopolist

a.

knows the exact willingness to pay of each of its customers.

b.

charges exactly two different prices to exactly two different groups of customers.

c.

maximizes consumer surplus.

d.

experiences a zero economic profit.

 

 


Answer Section

 

              1.       ANS:         A          

              2.       ANS:         C          

              3.       ANS:         A          

              4.       ANS:         D          

              5.       ANS:         A          

              6.       ANS:         D          

              7.       ANS:         B          

              8.       ANS:         D          

              9.       ANS:         C          

              10.    ANS:         C          

              11.    ANS:         C          

              12.    ANS:         D          

              13.    ANS:         A          

              14.    ANS:         C          

              15.    ANS:         A          

              16.    ANS:         D          

              17.    ANS:         A          

              18.    ANS:         A          

              19.    ANS:         D          

              20.    ANS:         D          

              21.    ANS:         B          

              22.    ANS:         B          

              23.    ANS:         C          

              24.    ANS:         C          

              25.    ANS:         B          

              26.    ANS:         C          

              27.    ANS:         B          

              28.    ANS:         B          

              29.    ANS:         B          

              30.    ANS:         B          

              31.    ANS:         C          

              32.    ANS:         D          

              33.    ANS:         C          

              34.    ANS:         D          

              35.    ANS:         D          

              36.    ANS:         A          

              37.    ANS:         D          

              38.    ANS:         D          

              39.    ANS:         B          

              40.    ANS:         A          

              41.    ANS:         A          

              42.    ANS:         A