Practice Test – Chapters 9, 11, 12, 13
Professor Lehrer Econ 120
1. Jennifer owns a small lemonade stand. Variable costs for her business in the short run would include:
a. the costs of lemons and sugar
b. the cost of building the lemonade stand
c. the cost of the blender used to make lemonade
d. the cost of hiring an artist to design a logo for her sign
e. all of the above
Answer:
2. Malthus’ very pessimistic predictions
a. were based on the assumption that the MPL would shift out as technology improves
b. have become true throughout the world
c. were based on the assumption that technology does not improve over time and the MPL curve does not shift outward
d. were based on the assumption that the size of the population does not change much over time e. were based on the assumption that wages would be stabilized at a high level, far above that
needed for subsistence
Answer:
3. Which of the following statements is true about Marginal Cost?
a. Marginal cost is equal to total cost divided by output
b. Marginal cost is the addition to cost associated with hiring one more worker c. Marginal cost is always equal to total variable costs
d. The marginal cost curve eventually slopes upward because of the law of diminishing
marginal returns
e. Marginal cost can be calculated as the slope of the Total Product curve
Answer:
4. The long-run average cost curve will be upward sloping when the firm is experiencing a. increasing returns to scale
b. decreasing returns to scale
c. constant returns to scale
d. economic profits at all levels of output e. economic losses at all levels of output
Answer:
Questions 5 and 6 are based on the following information:
Barton is self-employed in the computer software business; his annual total revenues are $100,000 and his annual out-of-pocket expenses are $40,000. His office is in a small building that he owns. If he were to sell the building and equipment, he could get $100,000 and earn 2% at a bank, i.e., $2,000. In his best alternative employment, he could work for Dell and make an annual salary of $45,000.
5. Barton’s total costs in his computer software business are:
a. $40,000
b. $45,000
c. $ 2,000
d. $87,000
e. $185,000
Answer:
6. In his current computer software business, Barton’s economic profits are:
a. $60,000; he should stay in this business
b. $13,000; he should go work for Dell
c. $13,000; he should stay in this business
d. $-13,000; he should go work for Dell
e. $-85,000; he should go work for Dell
Answer:
7. A firm has a certain TP curve, showing the relationship between the number of workers and the level of output. If the amount of capital the firm has increases,
a. the TP curve will shift up
b. the TP curve will shift down
c. there will be movement downward along the TP curve d. there will be movement upward along the TP curve
e. the corresponding marginal product of labor curve will shift down
Answer:
8. The region in which MC is increasing corresponds to the region
a. in which MPL is a vertical curve
b. of diminishing marginal returns
c. where division of labor and specialization cause MPL to rise d. in which TFC are rising
e. where the marginal productivity of workers has become negative
Answer:
Questions 9 and 10 pertain to the following Total Product schedule
L Q
3 70
4 90
5 100
6 107
7 110
8 105
9. The marginal product of the fourth worker is:
a. 7 b. 10 c. 20 d. 90 e. 100
Answer:
10. Negative marginal returns begin when the a. fourth worker is added
b. fifth worker is added c. sixth worker is added
d. seventh worker is added e. eighth worker is added
Answer:
11. Tammy owns a firm in a perfectly competitive industry, and she is currently maximizing profits. Her landlord announced to her a substantial increase in the monthly rent for the building. In order to continue maximizing profits, Tammy should
a. increase the price she charges for her product b. decrease the price she charges for her product c. decrease the level of output
d. increase the level of output
e. leave the level of output unchanged
Answer:
12. The AFC curve a. is horizontal
b. is vertical
c. always slopes upward
d. always slopes downward e. is U-shaped
Answer:
Questions 13 and 14 pertain to the graph below, which shows two plant sizes available to Mr. Merryman, a producer of children’s toys. At present, the firm has the small plant.
$ AC BIG
C1 ACSMALL
C2
C3
C4
Q Qa Qb Qc
13. Suppose that consumer demand is such that the firm wishes to produce Qa units. In the short run, the lowest average cost at which this can be done is:
a. 0
b. C1
c. C2 d. C3 e. C4
Answer:
14. Suppose that consumer demand expands considerably, and Mr. Merryman expects that this increased demand will be permanent. He now plans to produce Qc units. Then he should
a. keep the small plant; his ATC will be C1 b. keep the small plant; his ATC will be C4 c. get the large plant; his ATC will be C1
d. get the large plant; his ATC will be C3 e. get the large plant; his ATC will be C4
Answer:
15. At present, a perfectly competitive firm facing a market price of P1 is producing qa units.
$ MC
P1 D
Q
qa
We can tell that this is not the profit maximizing level of output, because at qa
a. price is less than ATC
b. price is greater than ATC
c. MR = MC d. MR > MC e. MR < MC
Answer:
16. For a firm in a perfectly competitive industry, the demand curve a. is downward sloping
b. is vertical
c. is horizontal and equal to the MR curve d. is horizontal and above the MR curve
e. is horizontal and below the MR curve
Answer:
17. Microsoft and its Windows operating system are often cited as an example of a company that has been able to retain its status as near monopolist through:
a. sole ownership of key resources b. patents
c. copyrights
d. increasing returns to scale
e. network externalities
Answer:
Questions 18 and 19 pertain to the information below, describing the short run situation of a firm.
Q TFC TVC TC
0 110
1 13
2 49
3 109
18. We can tell that if Q = 0, TC is
a. $ 110
b. $ 123
c. $ 159
d. $209
e. $ 0
Answer:
19. Marginal cost between 0 and 1 units of output is
a. $110 b. $123 c. $13 d. $ 36
e. equal to the slope of the TP curve between 0 and 1 workers
Answer:
20. Consider the ATC and MC curves shown below:
MC
$
ATC
Z
Q
At any output level to the left of Z,
a. MC < ATC and ATC is falling b. MC > ATC and ATC is rising c. MC < ATC and ATC is rising d. MC > ATC and ATC is falling
e. MC = ATC and ATC is constant
Answer:
Questions 21 -23 are based on the following information for Firm A, a firm that produces wheat, in a perfectly competitive industry.
Q TR MR TC MC Profits
1 10 14
4 40 38
5 50 50
6 60 68
21. We can infer that the price of wheat is:
a. $1 b. $10 c. $20 d. $25 e. $30
Answer:
22. Focusing on the TR and TC columns, we can see that profits are at a maximum when the firm is producing
a. 2 units b. 3 units c. 4 units d. 5 units e. 6 units
Answer:
23. The same conclusion could be obtained via marginal analysis, i.e., continuing production as long as an extra unit
a. has a zero MC
b. has a positive MC
c. has a negative MC
d. adds more to revenues than to costs
e. makes a positive contribution to revenues
Answer:
24. In a perfectly competitive industry,
a. each firm makes decisions regarding the optimal price to charge b. each firm produces a standardized product
c. firms cannot easily enter d. firms cannot easily exit
e. each firm has market power
Answer:
25. The short-run supply curve for a perfectly competitive firm is
a. the ATC curve above the break-even price b. the AVC curve above the break-even price c. the MC curve above the break-even price
d. the MC curve above the point where the MC and AVC curves intersect
e. the entire MC curve
Answer:
26. A perfectly competitive firm that is making losses should continue production in the short run if a. P < AVC
b. TR > TVC
c. TR < TVC d. TR < TFC e. TR > TFC
Answer:
27. Significant barriers to entry are a reason a monopoly
a. can earn economic profits in the long run
b. produces at the minimum average total cost curve c. produces with no fixed costs in the long run
d. maximizes its profits by producing where P = MC
e. faces a horizontal demand curve
Answer:
28. Which of the following statements about the differences between monopoly and perfect competition is incorrect?
a. A monopolist has market power, while a perfect competitor does not
b. Unlike a perfectly competitive firm, a monopoly can make positive economic profits in the long run c. A monopoly will charge a higher price and produce a smaller quantity than a competitive market
with the same demand and cost structure
d. Monopoly profits can continue to exist in the long run because the monopoly produces more and charges a higher price than a comparable perfectly competitive industry
e. In monopoly there are barriers to entry, in perfect competition there are no barriers to entry
Answer:
Questions 29-30 are based on the following information:
Wendy has a monopoly on the sale of packages of snacks at an isolated beach in a tropical island. She can sell 5 packages each morning at $10. If she wants to sell 6 packages, she can charge only $9.
29. The quantity effect of selling the sixth package is:
a. $10 b. $ 9 c. $ 5 d. $ 6 e $ 0
Answer:
30. The price effect of selling the sixth package is:
a. – $10 b. – $ 8 c. – $ 5 d. – $ 4 e. -$ 1
Answer:
31. To practice effective price discrimination, a firm must a. be able to estimate the cost functions of competitors
b. be able to avoid detection by government regulatory agencies
c. make sure that resale of the good or service is not possible among groups of buyers
d. be a price taker
e. aim to please customers by allowing them to have as much consumer surplus as possible
Answer:
32. Price discrimination leads to a higher price for those consumers with a. a more elastic demand
b. a perfectly elastic demand
c. a horizontal demand
d. a more inelastic demand
e. little interest on the good in question
Answer:
33. The demand curve for a monopolist a. coincides with its MR curve
b. is always below its MR curve
c. is downward sloping d. is upward sloping
e. is vertical
Answer: