Practice question for Exam III Windsor sec1 PDF

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Practice question for Exam III

1. The Three Amigo’s company produced and sold 500 dog beds. The average cost of production per dog bed was $50. Each dog be sold for a price of $65. The Three Amigo’s total costs are

a. $7,500. b. $25,000. c. $32,500. d. $67,500.

ANSWER:

b

2. Bubba is a shrimp fisherman who used $2,000 from his personal savings account to buy a boat and equipment for his shrimp business. The savings account paid 2% interest. What is Bubba’s annual opportunity cost of the financial capital that he invested in his business?

a. $20 b. $40 c. $200 d. $400

ANSWER:

b

3. Pete owns a shoe-shine business. His accountant most likely includes which of the following costs on his financial statements? (i) (ii)

shoe polish rent on the shoe stand

(iii)

wages Pete could earn delivering newspapers

(iv)

interest that Pete’s money was earning before he spent his savings to set up the shoe

shine business a. (i) only b. (i) and (ii) only c. (iii) and (iv) only

d. (i), (ii), (iii), and (iv) ANSWER:

b

4. Pete owns a shoe-shine business. Which of the following costs would be implicit costs? (i)

shoe polish

(ii)

rent on the shoe stand

(iii)

wages Pete could earn delivering newspapers

(iv)

interest that Pete’s money was earning before he spent his savings to set up the shoeshine business

a. (i) and (ii) only b. (iv) only c. (iii) and (iv) only d. (i), (ii), (iii), and (iv) ANSWER:

c

5. Jacqui decides to open her own business and earns $50,000 in accounting profit the first year. When deciding to open her own business, she turned down three separate job offers with annual salaries of $30,000, $40,000, and $45,000. What is Jacqui's economic profit from running her own business?

a. $-55,000 b. $-5,000 c. $5,000 d. $20,000

ANSWER:

c

6. 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. d

ANSWER:

7. Let L represent the number of workers hired by a firm, and let Q represent that firm's quantity of output. Assume two points on the firm's production function are (L = 12, Q = 122) and (L = 13, Q = 130). Then the marginal product of the 13th worker is a. 8 units of output. b. 10 units of output. c. 122 units of output. d. 132 units of output. ANSWER:

a

8. On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires 2 workers. He is able to produce 4,400 bushels of wheat when he hires 3 workers. Which of the following possibilities is consistent with the property of diminishing marginal product?

a. The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers. b. The farmer is able to produce 5,400 bushels of wheat when he hires 4 workers. c. The farmer is able to produce 5,200 bushels of wheat when he hires 4 workers. d. Any of the above could be correct. ANSWER:

d

9. As Bubba's Bubble Gum Company adds workers while using the same amount of machinery, some workers may be underutilized because they have little work to do while waiting in line to use the machinery. When this occurs, Bubba’s Bubble Gum Company encounters a. economies of scale. b. diseconomies of scale. c. increasing marginal product. d. diminishing marginal product. ANSWER:

d

10. The length of the short run a. is different for different types of firms. b. can never exceed 3 years. c. can never exceed 1 year. d. is always less than 6 months. ANSWER:

a

11. A local playground equipment company plans to operate out of its current factory, which is estimated to last 30 years. All cost decisions it makes during the 30-year period a. are long-run decisions. b. are short-run decisions. c. involve only maintenance of the factory. d. are zero because the cost decisions were made at the beginning of the business. ANSWER:

b

12. In the long run a company that produces and sells candy bars incurs total costs of $1,200 when output is 2,400 candy bars and $1,400 when output is 2,900 candy bars. The candy bar company exhibits a. diseconomies of scale because total cost is rising as output rises. b. diseconomies of scale because average total cost is rising as output rises. c. economies of scale because total cost is rising as output rises. d. economies of scale because average total cost is falling as output rises. ANSWER:

d

Figure 13-9 The figure below depicts average total cost functions for a firm that produces automobiles.

13. Refer to Figure 13-9. Which of the curves is most likely to characterize the short-run average total cost curve of the smallest factory? a. ATCA b. ATCB c. ATCC d. ATCD ANSWER:

a

14. Refer to Figure 13-9. The firm experiences economies of scale at which output levels? a. b. c. d. ANSWER:

output levels less than M output levels between M and N output levels greater than N All of the above are correct as long as the firm is operating in the long run. a

15. A market is competitive if (i)

firms have the flexibility to price their own product.

(ii)

each buyer is small compared to the market.

(iii)

each seller is small compared to the market.

a. (i) and (ii) only b. (i) and (iii) only c. (ii) and (iii) only d. (i), (ii), and (iii) c

ANSWER:

16. Which of the following is not a characteristic of a perfectly competitive market? a. Firms are price takers. b. Firms have difficulty entering the market. c. There are many sellers in the market. d. Goods offered for sale are largely the same. b

ANSWER:

17. When a competitive firm doubles the quantity of output it sells, its a. total revenue doubles. b. average revenue doubles. c. marginal revenue doubles. d. profits must increase.

18. When a certain competitive firm produces and sells 100 units of output, marginal revenue is $80. When the same firm produces and sells 200 units of output, what is average revenue? a. $40 b.

$80

c.

$160

d. This cannot be determined from the given information.

ANSWER:

b

19. Which of the following statements regarding a competitive firm is correct? a. Because demand is downward sloping, if a firm increases its level of output, the firm will have to charge a lower price to sell the additional output.

b. If a firm raises its price, the firm may be able to increase its total revenue even though it will sell fewer units. c. By lowering its price below the market price, the firm will benefit from selling more units at the lower price than it could have sold by charging the market price. d. For all firms, average revenue equals the price of the good.

d

ANSWER:

20. For a firm in a perfectly competitive market, the price of the good is always a. equal to marginal revenue. b. equal to total revenue. c. greater than average revenue. d. equal to the firm’s efficient scale of output. a

ANSWER:

21. Suppose a firm in a competitive market produces and sells 8 units of output and has a marginal revenue of $8. What would be the firm's marginal revenue if it instead produced and sold 4 units of output? a. $2 b. c.

$8 $32

d.

$64 b

ANSWER:

22. For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $7 and a marginal cost of $10. It follows that the

a.

production of the 100th unit of output increases the firm's profit by $3.

b. c.

production of the 100th unit of output increases the firm's average total cost by $7. firm's profit-maximizing level of output is less than 100 units.

d.

production of the101st unit of output must increase the firm’s profit by more than $3.

ANSWER:

c

23. For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $11 and a marginal cost of $10. It follows that the a. production of the 100th unit of output increases the firm's profit by $1. b. production of the 100th unit of output increases the firm's average total cost by $1. c. firm's profit-maximizing level of output is less than 100 units. d. production of the 101st unit of output must increase the firm’s profit by more than $1. ANSWER:

a

24. In the long run, all of a firm's costs are variable. In this case the exit criterion for a profitmaximizing firm is to shut down if a. price is less than average total cost. b. price is greater than average total cost. c. average revenue is greater than average fixed cost. d. average revenue is greater than marginal cost. ANSWER:

a

Figure 14-3 Suppose a firm operating in a competitive market has the following cost curves:

25. Refer to Figure 14-3. If the market price is $10, what is the firm’s shortrun economic profit? a.

$9 b. $15 c. $30 d. $50

ANSWER:

b

Figure 14-2 Suppose a firm operating in a competitive market has the following cost curves:

26. Refer to Figure 14-2. If the market price is Pa, in the short run the firm will earn a. positive economic profits. b. negative economic profits but will try to remain open. c. negative economic profits and will shut down. d. zero economic profits.

ANSWER:

a

Figure 14-1 Suppose that a firm in a competitive market has the following cost curves:

27. Refer to Figure 14-1. The firm’s shortrun supply curve is its marginal cost curve above a. $1. b. $3. c. c. $4.50. d. d. $6.30.

ANSWER:

c

28. When determining whether to shut down in the short run, a competitive firm should ignore (i)

fixed costs.

(ii)

variable costs.

(iii)

sunk costs.

a. (iii) only b. (i) and (iii) only c. (ii) only

d. (i), (ii), and (iii) ANSWER:

29.

b

In a competitive market the current price is $5. The typical firm in the market has ATC = $5.50 and AVC = $4.50. a. In the short run firms will shut down, and in the long run firms will leave the market. b. In the short run firms will continue to operate, but in the long run firms will leave the market. c. New firms will likely enter this market to capture any remaining economic profits. d. The firm will earn zero profits in both the short run and long run.

ANSWER:

a

30. In a market with 1,000 identical firms, the short-run market supply is the a. marginal cost curve above average variable cost for a typical firm in the market. b. quantity supplied by the typical firm in the market at each price. c. sum of the prices charged by each of the 1,000 individual firms at each quantity. d. sum of the quantities supplied by each of the 1,000 individual firms at each price. ANSWER:

d

31. In a competitive market with identical firms, a. an increase in demand in the short run will result in a new price above the minimum of average total cost, allowing firms to earn a positive economic profit in both the short run and the long run. b. firms cannot earn positive economic profit in either the short run or long run. c. firms can earn positive economic profit in the long run if the long-run market supply curve is upward sloping. d. free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run. ANSWER:

d

32. Suppose a competitive market is comprised of firms that face identical cost curves. The firms experience an increase in demand that results in positive profits for the firms. Which of the

following events are then most likely to occur? (i) New firms will enter the market. (ii) In the short run, price will rise; in the long run, price will rise further. (iii)

In the long run, all firms will be producing at their efficient scale (minimum Average cost).

a. (i) and (ii) only b. (i) and (iii) only c. (ii) and (iii) only d. (i), (ii) and (iii) ANSWER:

b

33. 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. ANSWER:

b

Figure 14-14

34. Refer to Figure 14-14. When the market is in long-run equilibrium at point W in panel (b), the firm represented in panel (a) will

a. have a zero economic profit. b. have a negative accounting profit. c. exit the market. d. choose to increase production to increase profit. ANSWER:

a

35. For the two statements below, explain why you agree or disagree with the statement. 1) (5 points) In the short-run, a firm with fixed costs will choose to shut down whenever the market price is below the minimum of the firm’s average total cost curve. This statement is false. In the short-run, a firm will shut down whenever the market price is below the minimum of the firm’s average variable cost curve (this is the “shut down price”). In the short-run, a firm may continue to operate at a price below the minimum of the ATC (and incur negative profits); as long as P > AVC, the firm is able to cover some portion of its fixed cost and incur less of a loss than it would if it shut down. 36. Marginal revenue is less than price for a single-price monopolist because the A) firm's output decisions do not affect the selling price. B) firm must lower its price for all units if it wants to sell more of the product. C) monopolist charges a price higher than the unit production cost. D) monopolist must worry about how its price setting will lead to entry by other firms. E) monopolist has achieved economies of scale. Answer: B 37. At the profit-maximizing level of output for a single-price monopolist, price A) always exceeds average total cost. B) equals marginal cost. C) exceeds marginal cost. D) equals marginal revenue. E) is below marginal revenue. Answer: C 38. If a single-price monopolist's price equals marginal cost, the firm A) could increase its profits by lowering output and raising price. B) should maintain its current price because it is a price taker. C) will find it more profitable to produce a greater output. D) is producing where MR = MC and thus is maximizing profits. E) should definitely shut down. Answer: A (Notice price will be at the intersection between Demand and MC if the monopoly

sets the price equals marginal cost.)

39. Suppose a single-price monopolist calculates that at its present output, marginal revenue is $2 and marginal cost is $1. If the price of the product is $3, the monopolist could maximize its profits by A) lowering price and raising output. B) lowering price and leaving output unchanged. C) raising price and leaving output unchanged. D) doing nothing. E) shutting down. Answer: A (Notice that MR > MC, the firm could increase profit by increasing outputs, which entails lower price.) 40. Economic profit for a monopolistic firm will equal zero when A) average total cost is minimized. B) marginal revenue equals marginal cost. C) marginal revenue equals price. D) price equals marginal cost. E) average total cost equals price. Answer: E (always remember profit = (p – ATC) * q; when p = ATC, profit equals zero) 41. Suppose a monopolist faces the demand curve and cost curves shown below.

FIGURE 10-5

Refer to Figure 10-5. A profit-maximizing single-price monopolist would produce the quantity A) Q0. B) Q1. C) Q2. D) Q3. E) Q4. Answer: A 42. Suppose a monopolist faces the demand curve and cost curves shown below.

FIGURE 10-5 Refer to Figure 10-5. The average per unit profit earned by this profit-maximizing single-price monopolist is A) P4 - P0. B) P4 - P1. C) P4 - P2. D) P4 - P3. E) P3 - P2. Answer: C

43. Suppose a single-price monopolist knows the following information: Price Quantity $10.00

1500

TR

MR $7.00

Fixed Cost $6000

TC

ATC

MC

$5.00 $5.00

The monopolist could maximize profits by A) staying at the current price and output. B) lowering price and increasing output. C) lowering price and leaving output unchanged. D) raising price and leaving output unchanged. E) producing zero output. Answer: B (Notice here MR > MC, so increasing output. Because the monopoly is subject to the constraint of the demand curve, increasing output means lowering price) 44. Suppose a monopolist faces the demand curve and cost curves shown below.

FIGURE 10-5 Refer to Figure 10-5. If this single-price monopolist is producing at the profit-maximizing level of output, its total profit is represented by the area

A) 0P4aQ0. B) P4abP2. C) P3ceP2. D) 0P2bQ0. E) 0P0fQ0. Answer: B (Recall profit = (p – ATC) *q, the monopoly will choose P4 as the price and produce at Q0) 45. Which of the following statements describes a major difference between monopoly and perfect competition? A) Monopolistic firms emphasize cost minimization whereas perfectly competitive firms emphasize profit maximization. B) Perfectly competitive firms can never earn economic profits; monopolistic firms always earn economic profits. C) Perfectly competitive firms cannot maintain positive economic profits in the long run, whereas monopolists can. D) Monopolists do not consider consumer demand when choosing price and output levels. E) Monopolistic firms tend to maximize revenue while perfectly competitive firms maximize profit. Answer: C 46. A firm is best described as a natural monopoly if A) there are no competing firms. B) its ATC curve is upward sloping. C) its MC curve is downward sloping. D) it can supply the entire market while minimizing its average costs. Answer: E (the feature of natural monopoly is that the average cost of providing a good or service is lowest if there is only one firm providing it. This is because economies of scale in its production process. The average cost of producing this good or service is decreasing as output increases) 47. When a country allows trade and becomes an importer of a good, 

domestic producers gain and domestic consumers lose.



domestic producers lose and domestic consumers gain.



domestic producers and domestic consumers both gain.



domestic producers and domestic consumers both lose. Answer: B

48. Trade enhances the economic well-being of a nation in the sense that a. both domestic producers and domestic consumers of a good become better off with trade, regardless of whether the nation imports or exports the good in question.

b. the gains of domestic producers of a good exceed the losses of domestic consumers of a good, regardless of whether the nation imports or exports the good in question. c. trade results in an increase in total surplus. d. trade puts downward pressure on the prices of all goods. Answer: C

49. When a country allows trade and becomes an importer of a good, a. everyone in the country benefits. b. the gains of the winner...