Download Economics 1 - Bakersfield College

Economics 1 Unit 2 Test
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Part A. Answer the following 7 questions in the space provided. Each question is worth 4
points.
1. Draw a diagram illustrating the case of a perfectly competitive business firm making a loss.
Label the demand curve D, the marginal revenue curve MR, the marginal cost curve MC, and
the average total cost curve ATC. Show the quantity the firm will choose to produce and the
price it will charge and mark those Q1 and P1 respectively.
2. Draw a diagram for the short-run showing the typical marginal product of labor and label it
MPL and the average product of labor curve and label it APL. Mark the specialization of
labor region and the diminishing marginal returns region on your diagram. Mark the
horizontal axis as N for number of workers and the vertical axis as output.
3. Draw a supply and demand diagram showing the effect of an increase in demand in the longrun for a decreasing cost industry. Label the starting price and quantity P1 and Q1 and the
ending price and quantity P2 and Q2. Be sure to label the axis of the diagram and any lines
you draw on the diagram also.
4. A. List the 3 attributes or properties of perfect competition.
(1)
(2)
(3)
B. Circle the correct answer. A firm that raises has its total revenue stay exactly the same. What is
the elasticity of demand for its product?
0
0.1
0.5
1
2
10
infinity
5. A grocery store has noticed that when they raise the price of a bottle of ketchup from $6 to
$14, the number of bags of French fries they sell falls from 16 to 14. Answer the following 2
questions.
a. What is the cross-price elasticity of French fries with respect to the price of ketchup?
This part of the question is worth 2 points.
b. What does the number you found for answer a mean? This question is worth 2 points.
6. A. List the 2 main problems that price solves for a market economy. (Hint 1: both answers
start with the litter “I”. Hint 2: The answer is not the invisible hand, but the answers were
given during the discussion of the invisible hand.) (2 points)
.
1. _________________________
2. _________________________
B. List a good with an externality. State both the good and what the externality is. (2 points)
7. A. List 2 of the 3 factors that will cause elasticity to be lower. (2 points)
(1)
(2)
B. Fill in the missing numbers in the following table. (2 points). Do not fill in where there is
an X.
Q
FC
VC
TC
MC
0
___
___
X
N/A
1
$30
___
___
$25
Part B. Mark the letter of the correct answer on your scantron. Each question is worth 1 point.
1. The law of increasing opportunity cost:
a. makes average total cost rise in the short-run.
b. makes ATC fall in the short-run.
c. makes ATC rise in the long-run.
d. makes ATC fall in the short-run.
2. A firm in perfect competition is losing money in the short-run. It should:
a. raise its price.
b. lower its price.
c. shut down production so it loses no money.
d. none of the above.
3. Which of the following is most likely a variable cost for a business?
a. The lease agreement for the factory.
b. The materials the product is made out of.
c. Labor.
d. Both b and c.
4. When a firm has economies of scale, their average cost of production as they make more of
the good is:
a. rising.
b. falling.
c. staying the same.
d. could be any of the above.
5. A reason that average total cost might be falling in the long-run is:
a. diminishing marginal returns.
b. the law of increasing opportunity cost (the workers are getting worse).
c. mass production assembly line techniques.
d. all of the above.
6. How much more you make doing one thing rather than the next best thing is called:
a. accounting profit.
b. economic profit.
c. total revenue.
d. total cost.
7. A reason that marginal cost might be falling in the short-run is:
a. specialization of labor.
b. command and control problems.
c. diminishing marginal returns.
d. both b and c.
8. When a factory goes from having 1 worker to 2 workers, its total production rises from 20 to
70. What is the marginal product of labor of worker 2?
a. 20.
b. 50.
c. 70.
d. 120.
9. If a firm in the short-run is losing money and does not expect business to improve in the
future, it should shut down:
a. immediately in all cases.
b. only if P < AVC (TR < TVC).
c. only if P < ATC (TR < TC).
d. only when it gets to the long-run, and never shut down in the short-run.
10. A firm has a price of $7, an ATC of $8, and an AVC of $6.
a. This firm is making money and should keep operating.
b. This firm is losing money but should keep operating.
c. This firm is losing money and should shut-down.
11. A firm can overcrowd the factory with too many workers:
a. only in the short-run.
b. only in the long-run.
c. in both the short-run and the long-run.
d. in neither the short-run nor the long-run.
12. For a firm in perfect competition, the owner has real control which of the following?
a. Both the price he charges and the quantity of product he makes.
b. The price he charges, but not the quantity.
c. The quantity he makes, but not the price.
d. Neither the price he charges or the quantity of product he makes.
13. In which case below will the long-run supply curve be a horizontal line (straight flat across)?
a. An increasing cost industry.
b. A decreasing cost industry.
c. A constant cost industry.
d. There is no case in which this happens.
14. What is the rule about how much of its product a firm in perfect competition should produce?
a. Where marginal revenue is as high above marginal cost as possible.
b. Where marginal revenue is equal to marginal cost.
c. Where the average total cost is equal to the demand curve.
d. Where marginal cost is as high above marginal revenue as possible.
15. Which of the following is true about the total cost of producing 0 units?
a. In both the short-run and long-run, the cost of producing 0 is $0.
b. Cost is $0 in the short-run, but a positive number in the long-run.
c. Cost is a positive number in the short-run, but $0 in the long run.
d. Cost is above $0 in both the short and long-run.
16. Diminishing marginal returns is a reason that cost might rise:
a. in both the short-run and the long-run.
b. only in the short-run.
c. only in the long-run.
d. In neither the short-run or the long-run.
17. In the long-run for firms in perfect competition:
a. profits never go to zero.
b. profits rarely go to zero.
c. profits often go to zero.
d. profits always go to zero.
18. Which of the following is a good example of perfect competition?
a. Wheat farming when there are many wheat farmers.
b. Restaurants, when there are many restaurants.
c. One electric company which powers a whole town.
d. The breakfast cereal industry.
19. If the elasticity of a good is 4.0, then if the price is lowered, total revenue will:
a. rise.
b. fall.
c. stay the same.
d. there is not enough information to tell.
20. Cross price elasticity between two goods is 2. These goods are:
a. substitutes.
b. complements.
c. normal.
d. inferior.
21. Which of the following is a public good?
a. Cars.
b. Roads.
c. McDonald’s hamburgers.
d. Both a and b.
22. If the price is raised on a good with elasticity of 0.7, then total revenue will:
a. rise.
b. fall.
c. stay the same.
d. it might be any of the above, there is not enough information to tell.
23. Pepsi has an elasticity of 2. This means:
a. if it raises its price $1, it sells 2 less cans.
b. if it raises its price $2, it wells 1 less can.
c. if it raises its price 1%, it sells 2% less cans.
d. if it raises its price 2%, it sells 1% less cans.
24. The tragedy of the commons is that a fishing area that is open to use to everybody with no
restrictions will often:
a. not be used at all.
b. be fished to extinction.
c. be kept secret to all but a few.
d. be the source of fierce fights between the users.
25. A public good is:
a. easily excludable.
b. not easily excludable.
c. one produced by the government.
d. both a and c.
26. By the logic of the invisible hand, who wins in the trade between buyer and seller of money for
goods?
a. The seller, because he now has more money than before.
b. Whoever is smarter, and thus can take advantage of the other person.
c. The buyer, as the seller must sell eventually or he will go out of business.
d. both.
27. The phrase “the invisible hand” refers to the idea that:
a. businessmen will exploit their customers with low quality goods to make money.
b. the government must have anti-pollution laws to prevent pollution.
c. businessmen who best supply what customers want the most will make the most money.
d. sometimes people want goods that will actually make their lives worse.
28. What is true about a good with zero elasticity?
a. Zero people buy the good.
b. If price is increased, the business loses all its customers.
c. Revenue will stay the same if the store raises the price of the good.
d. None of the above.
29. According to the average-marginal rule, if the current average cost of making radios is $40 and you
make one more radio which cost $50 to make; then the new average cost per radio including this
additional radio will be:
a. higher than $40.
b. lower than $40.
c. stay at $40.
d. there is not enough information to say.
30. A person who attempts to get a public good without paying is called:
a. a thief.
b. a customer.
c. marginal guy.
d. a free rider.
31. If there is a decrease in demand that causes the price of wheat to fall significantly and wheat farms
in the U.S. have the market structure of perfect competition, then wheat farms in the U.S. will:
a. have losses in the short-run, but not the long-run.
b. have losses in the long-run, but not the short-run.
c. have losses in both the short-run and long-run.
d. not have losses in either the short-run nor long-run.
32. What is the relationship between productivity (as measured by MPL) and cost (as measured
by MC)?
a. When productivity goes up, cost goes up.
b. When productivity goes up, cost goes down.
c. At first, as productivity goes up, cost goes up; but later as productivity goes up, cost goes down.
d. There is no stable relationship between the two.