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Eco 202
Exam 2
Spring 2013
Due No Later Than Midnight Sunday April 14
(5 point per day reduction for late submissions)
Name ______________________
Multiple Choice: Each of the following questions or incomplete statements is followed by a series
of suggested answers or completions. Select the one best response for each question. (1 point
each) [This exam has a maximum possible point value of 100 – 44 of these points come from the
multiple choice questions, 9 points from fill-in-the-blank questions and 47 of these points come
from the essay questions.]
1.
Which of the following is a long run adjustment?
A. A farmer applies extra fertilizer on his corn crop.
B. An American watch manufacturer leaves the watch industry.
C. A supermarket hires four additional workers.
D. A local bakery lets two of its current employees go. (i.e., reduces its workforce)
2. It is easiest for new firms to enter which of the following market structures?
A. pure competition
B. monopolistic competition
C. oligopoly
D. pure monopoly
3. In the short run a firm’s output
A. cannot be increased or decreased.
B. may be altered by changing the size of its plant and equipment.
C. can vary as a result of new firms entering or leaving the industry.
D. can vary as a result of using a fixed amount of plant and equipment more or less
intensely.
E. both B and C are correct.
4. The long-run average total cost curve for some industries, like the U.S. apparel industry, have
an extended range of constant returns to scale. This implies that
A. neither economies of scale nor diseconomies of scale exist in this industry.
B. the U.S. apparel industry is comprised of a very large number of small firms.
C. the U.S. apparel industry is comprised of a very small number of very large firms.
D. both relatively small and relatively large firms coexist in the U.S. apparel industry.
5.
Suppose the total revenue for a firm is $15,000. Explicit costs are $12,000 and normal profit
is $4,000. Which of the following is correct?
A. Accounting and economic profit both equal $3,000.
B. Accounting profit equals $3,000 while economic profit equals $4,000.
C. Accounting profit equals -$1,000 while economic profit equals -$5,000.
D. Accounting profit equals $3,000 while economic profit equals -$1,000.
E. Accounting and economic profit both equal $3,000.
6. Normal profits
A. are greater than the opportunity cost to the firm.
B. are zero under pure competition in the long run.
C. are necessary to keep a firm in the industry in the long run.
D. are not included in the firm’s economic costs of production.
7. A business firm has moved its offices to a new location. It must continue to pay $3,000 a
month rent for the old office space for six months as long as it remains un-rented; after that its
lease will expire and it will not be required to pay any rent. If the firm succeeds in renting the
old office before the six months is up, it will not have to pay rent, but it will have to pay
$1,000 a month for local utility services. If the firm wants to lose as little as possible (or make
as much money as possible), it should rent the old office space for as much as the market will
bear provided the monthly rent is above
A. $1,000.
B. $3,000.
C. $4,000.
D. $5,000.
8. Marginal product
A. is always less than average product.
B. diminishes continuously as a firm increases production.
C. may initially increase, then diminish, but never becomes zero as a firm increases
production.
D. may increase, then diminish, and ultimately become negative as a firm increases
production.
9.
When a purely competitive firm produces 10 units of output, its average total cost is $20
and its average variable cost is $15. From this information it can be concluded that
A. this firm’s average fixed cost for 10 units is $5.
B. this firm’s total fixed cost for 12 units is $50
C. this data is valid in the short run.
D. All of the above are correct.
10. A purely competitive firm’s short-run supply curve is
A. perfectly elastic at minimum average total cost.
B. upward sloping and equal to the portion of the marginal cost curve which lies
between the average variable cost curve and the average total cost curve.
C. upward sloping and equal to the portion of the marginal cost curve which lies above
the average total cost curve.
D. upward sloping and equal to the portion of the marginal cost curve which lies above
the average variable cost curve.
11. Diseconomies of scale arise primarily because
A. the short-run average total cost curve rises when marginal product is increasing.
B. beyond some point marginal product declines as additional units of a variable
resource (e.g., labor) are added to a fixed resource (e.g., capital).
C. of the difficulties involved in managing and coordinating a large business enterprise.
D. firms must be large both absolutely and relative to the market in order to employ the
most efficient productive techniques available.
12. The basic characteristic of the short run is that
A. it is no more than two years in duration.
B. the firm does not have sufficient time to reduce its output to zero.
C. the firm does not have sufficient time to change the size of its plant.
D. the firm does not have sufficient time to change the amounts of any resources it
employs.
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13. “I’m losing money, but with my investment in equipment I can’t afford to shut down at this
time.” If this entrepreneur is attempting to maximize profits/minimize losses, his behavior is
A. rational if the firm is covering all its fixed costs.
B. rational if the firm is covering all its variable costs.
C. irrational since closing the plant is necessary to eliminate all losses.
D. irrational since fixed costs are eliminated when a firm closes down.
14. Marginal cost
A. declines as long as output increases.
B. is defined as the difference between total cost and total variable cost. .
C. intersects both the average variable cost and the average total cost curves at their
minimum points.
D. initially rises as output is increased, but then begins to decline when the point of
diminishing returns is reached.
15. The market demand “curve” for a purely competitive industry/market is ____________
while the demand “curve” for the purely competitive firm is ____________.
A. perfectly inelastic; downward sloping
B. downward sloping; perfectly elastic
C. downward sloping; perfectly inelastic
D. perfectly elastic; downward sloping
16. An industry which consists of 75 firms, none of which has more than 0.5 percent of total
market sales, and produces a differentiated product is operating in
A. pure competition.
B. monopolistic competition.
C. oligopoly.
D. pure monopoly.
17. Assume that a purely competitive firm is producing where MR = MC = $14. Additionally,
data for this firm shows that MC = AVC at $16 and MC = ATC at $20. On the basis of this
information, this firm should
A. realize an economic profit of $6 per unit of output.
B. maximize economic profits by producing in the short run.
C. minimize economic losses by producing in the short run.
D. close down in the short run to minimize losses.
18. If a firm’s average total costs of production decrease as the firm increases its output in the
long run, we can conclude that
A. the firm is in the stage of increasing returns.
B. the firm is in the stage of diminishing returns.
C. economies of scale are being encountered.
D. diseconomies of scale are being encountered.
19. The change in total cost resulting from producing one more unit of output is called
A marginal cost.
B. fixed cost.
C. total cost.
D. average cost.
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20. The American restaurant industry would be described as ____________ while the restaurant
industry in the single-diner town of Timbuktu would be described by the economist as
___________.
A. purely competitive; monopolistically competitive.
B. a pure monopoly; monopolistically competitive.
C. monopolistically competitive; a pure monopoly.
D. monopolistically competitive; purely competitive.
21. Price is constant or “given” to the individual firm selling in a purely competitive market
because
A. there are no good substitutes for this firm’s product.
B. each seller supplies a negligible fraction of the differentiated product sold in this
market.
C. each seller supplies a negligible fraction of the standardized (homogeneous) product
sold in this market.
D. each purely competitive firm extensively advertises, thus the consumer has perfect
knowledge of this market.
22. If economic losses are being incurred in a purely competitive industry in the short-run, which
of the following will occur in the long run?
A. the economic losses will continue to exist.
B. new firms will enter the industry and the economic losses will be eliminated.
C. existing firms will leave the industry and economic losses will be eliminated.
D. the firms in this industry will increase their output in order to lessen their economic
losses.
23. Farmer Jones produces and sells soy beans in a purely competitive market. If there is no
change in his costs of production and the price of soy beans falls, in the short run Farmer
Jones should
A. increase production to offset the decrease in price.
B. stop producing soy beans if the new price is less than marginal revenue.
C. continue growing soy beans only if the new price covers average fixed costs.
D. continue growing soy beans only if the new price covers average variable costs.
E. continue growing soy beans only if the new price covers average total costs.
24. Individual firms in a purely competitive industry do not advertise because
A. these firms do not make long-run profits.
B. the market demand curve cannot be increased.
C. the quantity of the product demanded is very large.
D. they produce a standardized (homogeneous) product.
E. None of the above – purely competitive firms advertise extensively.
25. If a purely competitive firm closes down and produces zero output in the short run
A. its losses will be zero.
B. it will earn a normal profit.
C. it will take a loss equal to its variable costs.
D. it will realize a loss equal to its marginal cost.
E. it will take a loss equal to its fixed costs.
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26. An example of an implicit cost to a farmer growing wheat on 100 acres of land that he owns
(and has been in his family for 50 years) is the amount of money he
A. spends on fuel (gasoline or diesel fuel) for his farm equipment.
B. must pay a trucking company to transport his harvested wheat to the market.
C. must pay a part-time farm worker who is not a family member.
D. would receive if he rented the land to someone else.
E. All of the above are examples of implicit costs.
27. The most important goal of the purely competitive firm is to
A. minimize costs.
B. maximize total revenue.
C. maximize average (per unit) profits.
D. maximize total normal profits.
E. maximize total economic profits.
28. One of the economies of scale experienced by the Mauna Loa Macadamia Nut Farm is
A. use of nut shells as fuel.
B. the small size of their farm.
C. production of a large output.
D. good weather on the Big Island.
E. managerial inefficiencies because of its large size.
29. The basic difference between the "short run" and the "long run" is that:
A. all costs are fixed in the short run, but all costs are variable in the long run.
B. economies of scale are present in the short run, but not in the long run.
C. the law of diminishing returns applies in the long run, but not in the short run.
D. at least one resource is fixed in the short run, while all resources are variable in
the long run.
E. at least one resource is variable in the short run, while all resources are fixed in
the long run.
30. Which of the following is correct?
A. There is no relationship between Marginal Product (MP) and Marginal Cost (MC).
B. When Average Product (AP) is rising MC is falling, and when AP is falling MC is
rising.
C. When MP is rising MC is rising, and when MP is falling MC is falling.
D. When MP is rising MC is falling, and when MP is falling MC is rising.
31. “As a result of recent high coffee prices, the demand for tea has increased giving tea
producers economic profits at the present time.” If the tea industry is a purely competitive
industry, in the long run what would you expect to happen the tea industry’s
OUTPUT
PRICE
ECONOMIC PROFIT
A. increase
decrease
increase
B. decrease
increase
increase
C. increase
decrease
disappear
D. decrease
increase
disappear
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32. When technology advances, thus improving the purely competitive firm’s productivity,
the firm will most likely experience
A. a decrease in average fixed costs.
B. an increase in average variable costs.
C. a decrease in marginal costs and an increase in supply.
D. an increase in marginal costs and an increase in supply.
33. If a firm must always sell its product at the market price and wants to earn as much profit as
possible, it should
A. produce the quantity of output at which marginal cost is minimized.
B. keep marginal cost lower than price, so profits will be greater than zero.
C. produce the quantity of output at which marginal cost has risen to equality with price.
D. try to sell all the output it can produce so that its fixed costs are spread across the largest
possible number of units.
34. Costs that must be paid in the short run even when no output is produced are called
A. total costs (TC).
B. total fixed costs (TFC).
C. total variable costs (TVC).
D. marginal costs (MC).
35. The defining characteristics of a monopoly market are
A. many suppliers, unique product, and easy entry.
B. many suppliers, identical products, and easy entry.
C. single supplier, product with close substitutes, and barriers to entry.
D. single supplier, unique product, and barriers to entry.
36. All of the following are examples of barriers to entry except
A. patents and copyrights.
B. government franchises and licenses.
C. constant returns to scale.
D. sole ownership of key resources.
37. Marginal product is
A. the change in total output when the firm employs an additional unit of a fixed resource.
B. the change in total output when the firm employs an additional unit of one of its variable
resources.
C. the increase in total output when the firm employs fewer resources.
D. the change in the physical appearance of a product when a new model of the
product is developed.
E. Both A and B are correct.
38. If all firms producing a product in a perfectly competitive market are required to adopt
antipollution devices that increase their costs of production, one would expect
A. the market demand for the product to fall.
B. the market supply curve to shift to the left.
C. the long run economic profits of the individual firms to fall.
D. the short run economic profits of the individual firms to remain unchanged.
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39. The purely competitive firm faces a demand schedule that is
A. perfectly inelastic because there are no good substitutes for the firm's product.
B. perfectly elastic because each seller supplies a negligible fraction of total supply.
C. of unit elasticity throughout since a standardized product is being produced..
D. downward sloping and product differentiation is reinforced by extensive
advertising
40. The implicit economic, or opportunity, cost of attending school
A. is the same for all people.
B. is higher for people with greater earnings potential.
C. is higher for teenagers than for people in their 30s.
D. depends only on the amount of tuition charged by the school.
41. An oligopolistic industry is one in which
A. a large number of small firms sell differentiated products.
B. a large number of small firms sell a homogeneous product.
C. a few large firms dominate the market for a standardized product.
D. a few large firms dominate the market for a differentiated product.
E. a few large firms dominate the market for a standardized or a differentiated
product.
42. Product differentiation can be
A. an actual difference in one product versus another.
B. due to consumers’ perception of product differentiation due to brand names.
C. both A and B.
D. None of the above – all products are identical.
43. Fixed costs
A. exist even if the firm produces zero output.
B. are equal to total variable costs minus total costs.
C. decrease continuously as the firm produces more output.
D. increase continuously as the firm produces more output.
44. In pure competition, the marginal revenue of a firm always equals
A. marginal cost.
B. average total cost.
C. average variable cost.
D. the price of the product.
E. None of the above.
(Fill-In-The-Blank and Essay Questions Are on the Next Pages)
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Fill- In-The-Blank: In the space provided to the left of each description place the name of the
concept being described. There is only one correct response for each description. (1.5 points each)
_________________ 1. Cause of increasing short-run marginal cost
_________________ 2. Fire Insurance Premiums
_________________ 3 Total Revenue - (Explicit + Implicit Costs)
_________________ 4. Market structure where the firm and the industry are synonymous
_________________ 5. The amount the entrepreneur could earn elsewhere
_________________ 6. Change in total variable cost as output changes by one unit
ESSAYS: Answer the following 3 essay questions. Answer all parts to each question, and answer
each question as fully and carefully as you can. Use complete sentences and a logical economic
thought process in each of your answers. These questions are not so much essay questions as
they are a series of short answer questions. Thus, you may feel more comfortable answering each
part separately rather than trying to create one single essay answer. (Question 1 = 11 points;
question 2 = 17 points; question 3 = 19 points)
1.
Output
0
1
2
3
4
5
Total
Variable
Cost
$ 0
Average
Variable
Cost
-12.00
Total Cost
$ 24.00
Average
Total Cost
-$ 36.00
20.00
12.00
60.00
16.20
105.00
56.00
20.00
20.00
Marginal
Cost
-$ 12.00
8.00
20.00
A. Complete the above cost schedule. (3 points)
B. Sam Student believes the above data is long-run cost data. Do you agree with him? Why or
why not? Explain fully. How do you know if this is short run data or long run data? (4 points)
C. Suppose that the firm for which the above data exists represents the “average” firm in this
industry. Furthermore, suppose that the “average” firm in this industry has a minimum
efficient scale (MES) which represents 25 percent of the total sales in this market.
 What does minimum efficient scale (MES) mean? (2 points)
 In which of the four market structures do you think an industry with an MES of 25 will
operate? Why? (2 points)
(ESSAY QUESTIONS #2 AND #3 ARE ON THE FOLLOWING PAGES)
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2.
A. Introductory economics students often contend that the concept of Increasing Marginal
Returns is the same as the concept of Economies of Scale and that the concept of Decreasing
Marginal Returns is the same as the concept of Diseconomies of Scale. Do you agree or
disagree?
 Compare and contrast Increasing Marginal Returns and Economies of Scale concentrating
on: (6 points)
o when each occurs,
o what causes each to occur, and
o how each affects a firm’s cost curves (and what cost curves each affects).
(Do not simple list the causes of each, but explain why those factors cause Increasing
Marginal Returns or Economies of Scale.)

Compare and contrast Decreasing (Diminishing) Marginal Returns and Diseconomies of
Scale concentrating on: (6 points)
o when each occurs,
o what causes each to occur,
o and how each affects a firm’s cost curves (and what cost curves each affects).
(Do not simple list the causes of each, but explain why those factors cause Decreasing
(Diminishing) Marginal Returns or Diseconomies of Scale.)
B. Economists and accountants view costs of production somewhat differently. Compare and
contrast these two views of costs in the following scenario.
Cinderella has been offered an executive position in a shoe factory at a salary of $130,000 per
year.
Currently Cinderella has her own business producing and selling glass slippers. Her total
revenues for the past year were $260,000. Her production costs included $50,000 for labor,
$10,000 for rent, $30,000 for materials, and $10,000 for utilities. She has also used $100,000
of her own money to start her business. She was earning 5% interest per year on this money in
a money market account.
 Calculate Cinderella’s accounting profit (loss) and explain how you determined her
accounting profit (loss). (To receive credit for your answer you must show your work.)
 Calculate Cinderella’s economic profit (loss) and explain how you determined her
economic profit (loss). (To receive credit for your answer you must show your work.)
 Based on your calculations, would you advise Cinderella to continue making her own
glass slippers or to go to work for the shoe company? Why?
Explain your answer to each part fully in terms of logical economic thought. (5 points)
(ESSAY QUESTION #3 IS ON THE FOLLOWING PAGE)
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3. Answer the following questions using the cost data below. The data is for a single firm in a
purely competitive industry and is valid in the short-run. Explain all of your answers fully.
TOTAL
OUTPUT
0
1
2
3
4
5
6
7
8
AVERAGE
FIXED
COST
-$ 60.00
30.00
20.00
15.00
12.00
10.00
8.57
7.50
AVERAGE
VARIABLE
COST
-$ 40.00
38.00
36.00
35.00
35.00
36.00
37.43
39.00
AVERAGE
TOTAL
COST
-$ 100.00
68.00
56.00
50.00
47.00
46.00
46.00
46.50
MARGINAL
COST
-$ 40.00
36.00
32.00
32.00
35.00
41.00
46.00
50.00
A. Assume that the market price for this firm’s product is $47.00and that the firm is currently
producing 6 units of output. Is this firm maximizing its profits (minimizing its losses) by
producing 6 units of output? If so why and what amount of profit is it earning (loss is it
incurring)? If 6 units is not the profit maximizing output for this firm, what output does yield
maximum profit (minimum loss) and what will its total economic profit or loss be? (To
receive credit you must use the marginal revenue-marginal cost analysis and show your
calculations.) (4 points)
B. If the market price for this firm’s product decreases $36.00 to, will it be advantageous for this
firm to produce in the short-run? Why or why not? If it will produce, what amount of output
will the firm produce? What will its total economic profit or loss be? (To receive credit you
must use the marginal revenue-marginal cost analysis and show your calculations.) (4 points)
C. What is this firm’s short-run supply schedule? (You may use a chart relating possible prices
to quantities supplied; you may use a graph highlighting the supply schedule; or you may
verbally explain what the firm’s short-run supply schedule is.) (3 points)
D. Suppose that in the short-run the price of this firm’s product is $55.00. What series of actions
will take place in the long run in this industry? How much economic profit (or loss) will the
average purely competitive firm earn in the long run? Why? (4 points)
E. The purely competitive market structure is the only market structure to achieve both allocative
efficiency and productive efficiency.
 What is allocative efficiency and when is it achieved? (2 points)
 What is productive efficiency and when is it achieved? (2 points
Explain your answer to each part fully in terms of logical economic thought.
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