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UNIVERSITY OF PITTSBURGH
COLLEGE OF GENERAL STUDIES
BUSECON 1010
Stanko Racic
PRACTICE EXAM
This examination is worth a total of 100 points. Please write your answers to the multiple choice
questions in the provided answer sheet. Please write your answers to the problems on the exam
itself. Please write legibly and show work for partial credit. If I cannot read it, it is wrong.
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There are 35 multiple choice questions worth 2 points each for a total of 70 points.
1.
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In long run equilibrium, a competitive firm will always have
a. zero economic profit.
b. positive economic profit.
c. either a profit or a loss.
d. either zero economic profit or a loss.
2.
A competitive firm's short-run supply curve is represented by
a. the falling portion of its marginal cost curve.
b. the rising portion of its marginal cost curve.
c. the rising portion of its marginal cost curve above average variable cost.
d. the rising portion of its marginal cost curve below average variable cost.
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Which of the following statements is true?
a. A monopolist may restrict output.
b. Price is always greater than marginal cost under monopoly.
c. Price is always greater than marginal revenue under monopoly.
d. All of the above.
The marginal revenue of a firm in perfect competition which produces 150 units of output
and charges a $10 price is
a. S1,500.
b. $10.
c. indeterminate.
d. $15.
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For a firm in perfect competition, when marginal revenue, marginal cost, and average
variable cost equal $15, $15, and $12, respectively, the firm should
a. continue its operation.
b. exit out of the market.
c. shut down.
d. raise its price.
A monopolist's marginal revenue curve is always
a. above its demand curve.
b. below its demand curve.
c. the same as its demand curve.
d. upward sloping.
For a monopoly, the firm's demand curve is
a. determined by the producer.
b. totally elastic.
c. the same as the market demand curve.
d. less horizontal than the marginal revenue curve.
For a perfectly competitive firm, if P = $4 and the firm's total costs are given by TC = 10 +
2Q + Q2, the profit maximizing rate of output in the short run will be
a. 1
b. 8
c. 0
d. 4
A monopolist will earn economic profits only if
a. it practices price discrimination.
b. it faces an inelastic demand curve.
c. its marginal revenue exceeds its marginal cost.
d. its price exceeds its average cost.
A firm uses two inputs, capital and labor. The price of capital is $5; the price of labor is $7.
The marginal product of capital is 15. If the marginal product of labor is 20, the firm
a. is maximizing profit.
b. is minimizing cost.
c. is producing inefficiently.
d. cannot still be in business.
The optimal transfer price of an intermediate product with a perfectly competitive external
market is
a. less than the competitive price.
b. equal to the competitive price.
c. greater than the competitive price.
d. equal to the average cost to the firm.
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In general, with price discrimination, the profit maximizing price to a customer increases as
a. demand becomes more elastic.
b. costs decrease.
c. demand becomes less elastic.
d. markets are no longer separable.
Collective bargaining can be thought of as a bilateral monopoly, in which the firms acts as
a(n)
and the union acts as a(n)
a. oligopolist, competitor.
b. monopolist, oligopolist.
c. monopsonist, competitor.
d. monopsonist, monopolist.
If the prices of capital and labor are $5 and $7 and the marginal products of capital and
labor are 15 and 21, the firm
a. is not maximizing profit.
b. is minimizing cost.
c. is producing inefficiently.
d. cannot still be in business.
Product differentiation allows a firm to
a. gain monopoly control over their market.
b. gain some control over their market.
c. gain no control over their market.
d. none of the above.
Which of the following is a characteristic of monopolistic competition?
a. Few sellers.
b. A homogeneous product.
c. Relatively easy entry into the market.
d. All of the above.
In a monopolistically competitive industry, the demand curve faced by the firm
a. is perfectly elastic.
b. is downward sloping.
c. and the marginal revenue curve are the same.
d. is inelastic.
In monopolistic competition in the long run,
a. price equals average cost.
b. price equals marginal cost.
c. average cost equals marginal cost.
d. firms earn economic profit.
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Product differentiation
a. is observed only in perfectly competitive markets.
b. is wasteful.
c. is associated with non-price competition.
d. is a requirement for monopoly and oligopoly.
Entry barriers to oligopoly include all of the following except
a. control over scarce inputs.
b. product differentiation.
c. legal factors.
d. the production of a homogeneous product.
The kinked demand curve model
a. seeks to explain the price rigidity often found in oligopolistic markets.
b. implies that oligopolists recognize their interdependence.
c. does not imply collusion on the part of the oligopolists.
d. all of the above.
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The kinked demand curve results from the assumption that
a. competitors match price cuts but not price increases.
b. competitors match price increases but not price cuts.
c. there is product differentiation.
d. there are no cost changes.
23.
The marginal revenue curve corresponding to a kinked demand curve is
a. vertical.
b. horizontal.
c. continuous.
d. discontinuous at the kink.
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The Cournot model is somewhat unrealistic because it implicitly assumes that
a. there is no technical inefficiency.
b. collusion has no benefit to the firms.
c. demand curves are horizontal.
d. firms don't learn from past experience.
With dominant firm price leadership, the large firm
a. sets the price and determines how much output it will produce.
b. sets the price and supplies the residual demand.
c. sets a price that is lower than would result from active competition in the industry.
d. is essentially a price taker.
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Price discrimination occurs anytime that
a. price differences correspond to variation in costs.
b. cost differences correspond to variation in costs.
c. price differences do not correspond to differences in costs.
d. cost differences correspond to variation in costs.
In general, an input should be employed until
a. there is no more input available.
b. demand is satisfied.
c. its marginal revenue product equals its cost.
d. its marginal product equals its cost.
Firms that are perfectly competitive in input markets face
a. an upward sloping input demand curve.
b. an upward sloping input supply curve.
c. a downward sloping input supply curve.
d. a horizontal input supply curve.
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Under perfect competition, the supply of an input to an individual firm is
a. perfectly elastic.
b. completely inelastic.
c. relatively, but not perfectly elastic.
d. relatively, but not completely inelastic.
30.
A profit maximizing monopolist will employ inputs such that
a. the marginal product of each input is equal.
b. the marginal product of each input is zero.
c. the input price equals the input's marginal product divided by the firm's marginal revenue.
d. the input price equals the input's marginal revenue product.
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31.
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If management is in the stronger position in a collective bargaining process, then
a. the outcome will be similar to the monopsony result.
b. workers will be paid a wage equal to their marginal revenue product.
c. more workers will be employed than if the union is in the stronger position.
d. worker exploitation will be eliminated.
32.
In the analysis of transfer pricing, the term "net marginal revenu" is used to:
a. indicate the revenue generated from sales of the transfer product to outside firms.
b. indicate the revenue generated by the final product, net of all marginal costs but that of
the transfer product.
c. determine the network of revenues between inside and outside firms.
d. indicate the difference between marginal revenue of the transfer product and that of the
final product.
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Monopsonists face
a. an upward sloping input demand curve.
b. an upward sloping input supply curve.
c. a downward sloping input supply curve.
d. a horizontal input supply curve.
A monopsonist is
a. a competitive purchaser of an input.
b. the only supplier of an input.
c. a competitive seller of an output.
d. the only purchaser of an input.
Which of the following statements is true?
a. the more elastic the demand, the higher is the profit-maximizing markup.
b. the more elastic the demand, the lower is the profit-maximizing markup.
c. the higher the marginal cost, the lower the profit-maximizing price.
d. the higher the average cost, the lower the profit-maximizing price.
II. (10 points) Determine whether the following perfectly competitive firm should produce output
in the short run or temporary shut down, given:
P = $250
and
TC = 5,250 +100Q + 2.5Q2.
If the firm does not operate, it loses TFC = 5,250.
If it produces where MR = P = 250 = 100 + 5Q = MC =>
Q = 30.
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AVC = (100Q + 2.5Q ) / Q = 100 + 2.5Q = 100 + 2.5(30) = 175 < 250 = P.
Therefore, firm should produce.
b. What profit or loss will the firm have if it operates where MR = MC? Does this profit or loss
check with your decision on whether to produce or temporary shut down?
T = TR - TC = 250(30) - 5,250 -100(30) - 2.5(30)2 = - 3,000.
Yes, because the loss is less than the fixed cost, and therefore the firm will lose more
money if it shut down and paid just its fixed cost.
III. (10 points) A large firm that is a price leader in an industry characterized also by many small
competing firms estimated the market demand for its product:
QM =
40,300 - 150P,
where QM is units per month. It expects the small firms in the industry to
supply output according to the following function:
QS = 300 + 50P.
The large firm's total cost function is :
TCL = 350,000 + 50QL + 0.0025QL2.
a. What quantity will large firm sell?
It will sell where
MRL = MCL.
Large firm's demand: QL = QM - QS = 40,300 - 150P - 300 - 50P = 40,000 - 200P
Inverse demand:
P = 200 - 0.005QL
MRL = 200 - 0.01QL = 50 + 0.005QL = MCL =>
QL = 10,000.
b. What price will the large firm set?
P = 200 - 0.005QL = 200 - 0.005(10,000) = 150.
c. What quantity will the small firm sell?
QS = 300 + 50P = 300 + 50(150) = 7,800.
d. What quantity will the industry sell? Does this check with parts b. and c.?
QM = 40,300 - 150P = 43,00 - 150(150) = 17,800.
Yes, since QL + QS = 10,000 + 7,800 = 17,800.
IV. (10 points) The ATS Railroad runs a freight train daily between Chicago and St Louis. Two
major customers use this service: Chicago Beef Distributors and Canadian
Gypsum Company. The demand for freight cars is given by the following
equations:
Qb = 50 - 0.125Pb
for Chicago Beef Distributors, and
Qg = 60 - 0.2Pg for Canadian Gypsum Company.
ATS Railroad's cost function is given as: TC = 5,000 + 80Q.
a. Whit price discrimination what will be the quantity demanded by each customer?
Max  where MC = MRb = MRg.
Inverse demand:
Pb = 400 - 8Qb
MRb = 400 - 16Qb = 80 = MC =>
Pg = 300 - 5Qg
MRg = 300 - 10Qb = 80 = MC =>
b. What prices will be charged each customer?
Pb = 400 - 8Qb = 400 - 8(20) = 240.
Pg = 300 - 5Qg = 300 - 5(22) = 190.
c. What will be ATS Railroad's total profit?
T = TR - TC = Pb Qb + Pg Qg - 5,000 - 80(Qb + Qg)
= 240(20) + 190(22) - 5,000 - 80(20 + 22) = 620.
Qb = 20.
Qg = 22.