Download Econ 101, Test 3 Name__________________ ISU

Econ 101, Test 3
Name__________________
ISU ID________________
Date________________
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____
1.
(2 points) If
a consumer allocates her income between two goods, x and y, then she will be in equilibrium when
MUx/Px = MUy/Py and she is below her budget constraint
MUx = MUy and she has spent all of her income
MUx/MUy > Px/Py and all of her income is spent
MUx/Px = MUy/Py and all of her income is spent
MUx = MUy and she is below her budget constraint
(2 points) If a person could increase total utility by purchasing more candy and fewer apples, then the
a. total utility from candy must exceed the total utility from apples
b. marginal utility of candy must exceed the marginal utility of apples
c. marginal utility per dollar spent on candy must exceed the marginal utility per dollar spent
on apples
d. total utility per dollar spent on candy must exceed the total utility per dollar spent on
apples
e. marginal utility per dollar spent on candy must be less than the marginal utility per dollar
spent on apples
(2 points) The income effect of a lower price for good A
a. invariably leads a consumer to buy more of good A, because the combination of
unchanged money income and lower price raises that consumer's real income or
purchasing power
b. invariably leads a consumer to buy less of good A because the combination of unchanged
money income and lower price encourages that consumer to buy more of other goods
c. may lead to a larger, smaller, or even an unchanged quantity of good A demanded; it all
depends on the nature of the good itself
d. creates a change in the good's relative price and, therefore, causes the consumer to
substitute good A in place of other goods
e. causes a parallel outward shift of the budget line, enabling the consumer to buy more of all
goods than before
(2 points) A decrease in the price of a good or service
a. causes the budget line to rotate inward
b. causes a parallel outward shift of the budget line
c. means that less of the good can be purchased with a given income
d. causes the budget line to rotate outward
e. causes a parallel inward shift of the budget line
(2 points) Biscuits are an inferior good for Aster, then if their price falls, she
a. will definitely buy more biscuits
b. will definitely buy fewer biscuits
c. may buy more biscuits
d. will buy fewer biscuits if the substitution effect is larger than the income effect
e. will buy more biscuits if the substitution effect is larger than the income effect
(2 points) The market demand curve for a good is found by
a. adding up the quantities demanded by all consumers at different prices of that good
b. adding up the quantities demanded by all consumers at different incomes
a.
b.
c.
d.
e.
____
2.
____
3.
____
4.
____
5.
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6.
____
____
____
c. adding up the maximum price each consumer is willing to pay for each possible quantity
of the good
d. varying consumers' total income and determining what prices they are willing to pay
e. vertically summing the individual consumers' demand curves
7. (2 points) The short run for Barbara's Bakery is defined as
a. one year
b. one month
c. the period of time during which all inputs are variable
d. the period of time during which at least one input is fixed
e. the time needed for a transaction to occur
8. (2 points) Consider a firm that needs one day to hire more labor, one week to increase its purchases of raw
materials, and three months to change the amount of its capital. This firm's long run is
a. three months
b. one week
c. one day
d. three months plus eight days
e. three months plus one week
9. (2 points) Marginal product is the change in output divided by the change in the amount of an input used.
a. True
b. False
Figure 6-2
Quantity
of Labor
0
10
20
30
40
50
____ 10.
(2 points) Figure
Total
Product
0
100
230
340
410
460
6-2 shows a firm's short-run production function. What is the marginal product of labor
between 20 and 30 units of labor?
a. 340 units
b. 220 units
c. 11 units
d. 110 units
e. 34 units
____ 11. (2 points) Figure 6-2 shows a firm's short-run production function. What is the average product of labor when
20 units of labor are employed?
a. 230 units
b. 11.5 units
c. 130 units
d. 6.5 units
e. 110 units
____ 12. (2 points) Sunk costs should be ignored in decision making because they
a. increase the cost of the transaction
b. lead to an increase in the opportunity cost of any decision
c. are unavoidable
____ 13.
____ 14.
____ 15.
____ 16.
____ 17.
____ 18.
d. often exceed marginal and average costs
e. are usually negligible when compared with the explicit costs of decisions
(2 points) Samantha has been working for a law firm and earning an annual salary of $90,000. She decides to
open her own practice. Her annual expenses will include $15,000 for office rent, $3,000 for equipment rental,
$1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a secretary/bookkeeper. Samantha will cover
her start-up expenses by cashing in a $20,000 certificate of deposit on which she was earning annual interest
of $1,000. Assuming that there are no additional expenses, Samantha's total annual cost of production will
equal
a. $55,200
b. $221,400
c. $91,000
d. $146,200
e. $145,200
(2 points) If a firm increases its output level in the short run, then
a. variable cost rises but fixed cost remains unchanged
b. both variable cost and fixed cost rise
c. variable cost rises, but fixed cost fall
d. both variable cost and fixed cost fall
e. variable cost remains unchanged, but fixed cost rises
(2 points) Figure 6-8 shows three different cost curves, labeled A, B, and C. Which of these curves is most
likely to represent marginal cost?
a. curve A
b. curve B
c. curve C
d. neither A, B, nor C
e. cannot be determined without more information
(2 points) Which of the following is true about the relationships among various cost curves?
a. When MC exceeds ATC, ATC must be rising.
b. When MC exceeds ATC, ATC could be rising or falling.
c. When ATC is falling, MC must exceed ATC.
d. When TC is rising, MC must exceed TC.
e. TC falls when AFC falls.
(2 points) If a firm experiences constant returns to scale at all output levels, then its long-run average total cost
curve would
a. slope downward
b. be horizontal
c. slope upward
d. slope downward for low output levels and upward for high output levels
e. slope upward for low output levels and downward for high output levels
(2 points) The demand curve facing a firm
a. indicates the amount of raw materials and other inputs the firm will purchase, at various
prices
b. indicates the amount of the good demanded from that firm by a particular consumer, at
various prices
c. indicates the amount of output that customers will purchase from the firm, at various
prices
d. shows the minimum price at which the firm can sell any given quantity of output
e. is horizontal in the long run, but upward sloping in the short run
____ 19.
(2 points) Which
of the following determines the maximum price a firm may charge for a particular quantity of
output?
a. the firm's supply curve
b. opportunity costs
c. explicit and implicit costs of production
d. the minimum point of the average total cost curve
e. the demand curve facing the firm
____ 20. (2 points) A firm's total cost of production
a. always increases as it produces more output
b. can increase or decrease as it produces more output
c. increases at a decreasing rate as long as it produces more output
d. is fixed in the short run, because inputs are fixed in the short run
e. can be minimized by producing where the firm's demand curve crosses the horizontal axis
____ 21. (2 points) Under the total revenue and total cost approach to profit maximization,
a. firms equate total variable cost to total revenue in order to maximize profit
b. profit is maximized when fixed cost falls to zero
c. firms choose the level of output at which total revenue is the greatest distance above total
cost when the firm earns an economic profit
d. firms choose the level of output at which the changes in revenue and cost both equal zero
e. total revenue is maximized when profit is zero
____ 22.
(2 points) Consider
a.
b.
c.
d.
e.
the firm shown in Figure 7-6. If there is an increase in fixed cost, then
the TR curve will rotate upward
the TR curve will shift to the right
the TR curve will be unaffected
the TC curve will shift downward
profits will rise
____ 23.
____ 24.
____ 25.
____ 26.
____ 27.
(2 points) Assume
all of a firm's costs are positive and consider the total revenue curve depicted in Figure 7-7.
In order to maximize profit, or minimize loss, the firm
a. should produce 100 units of output
b. should produce 200 units of output
c. should produce less than 100 units of output
d. should produce between 100 and 200 units of output
e. cannot close
(2 points) When marginal revenue is positive, total revenue must rise as output increases.
a. True
b. False
(2 points) If a firm faces a horizontal demand curve, marginal revenue
a. is constant regardless of how much output the firm produces
b. decreases as the firm produces more output
c. increases as the firm produces more output
d. decreases if the firm produces less output
e. is less than price at most possible output levels
(2 points) If a firm faces a downward-sloping demand curve, its marginal revenue is
a. less than its marginal cost
b. greater than price
c. less than price
d. equal to price
e. equal to its total revenue
(2 points) If a firm shuts down in the short run,
a. it exits the industry
b. losses would equal its variable costs
c. losses would equal its fixed costs
d. profits would be zero
e. losses would equal to zero
____ 28.
(2 points) Assume
that a firm is able to cover its variable costs if it operates in the short run. If marginal cost
equals $0 for all output levels, then the firm's profit-maximizing output level occurs where
a. total cost is minimized
b. marginal revenue is maximized
c. marginal revenue is minimized
d. marginal revenue equals $0
e. total revenue is minimized
____ 29.
(2 points) Figure
7-14 shows a firm's total variable cost and total revenue curves. In the short run, this firm
a. should shut down
b. should produce all units of output for which marginal cost exceeds marginal revenue
c. should produce at the output level where the marginal cost curve crosses the marginal
revenue curve from below
d. should produce at the output level where the marginal cost curve crosses the marginal
revenue curve from above
e. needs additional information in order to decide whether to operate
____ 30. (2 points) Which of the following formulas is not correct?
a. ATC = AVC + (TFC/Q)
b. TVC = TC/Q
c. TC = TFC + TVC
d. AFC = TFC/Q
e. TVC = AV  Q
Short Answer
31.
(1)
(2)
(20 points)
(5 points) What are the two assumptions about consumer preference?
(5 points) What are the two conditions for optimal consumption bundle?
(3)
(10 points) Explain why the consumer needs to equal marginal utility per dollar between two goods.
Use the logic that if he gives up one unit of good x, what will happen to his total utility.
32.
(20 points)
The following data are price/quantity/cost combinations for Titan Industry mainframe computer division:
Price per
Unit
Above
$225,000
Total
Cost
$200,000
1
$225,000
$250,000
2
$175,000
$275,000
3
$150,000
$325,000
4
$125,000
$400,000
5
$90,000
$500,000
Quantity
0
(1) (7 points)What is the marginal revenue if output rises from 2 to 3 units? (Hint: Calculate total revenue
at each output level first.) What is the marginal cost if output rises from 4 to 5 units?
(2) (7 points)What quantity should Titan produce to maximize total revenue? Total profit?
(3) (6 points) What is Titan’s fixed cost? How does Titan’s marginal cost behave as output increases?
test 3
Answer Section
MULTIPLE CHOICE
1. ANS:
NAT:
TOP:
2. ANS:
NAT:
TOP:
3. ANS:
NAT:
TOP:
4. ANS:
NAT:
TOP:
5. ANS:
NAT:
TOP:
6. ANS:
NAT:
TOP:
7. ANS:
NAT:
TOP:
8. ANS:
NAT:
TOP:
9. ANS:
NAT:
TOP:
10. ANS:
NAT:
TOP:
11. ANS:
NAT:
TOP:
12. ANS:
NAT:
TOP:
13. ANS:
NAT:
TOP:
14. ANS:
NAT:
TOP:
15. ANS:
D
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
Combining the Budget Constraint and Preferences
C
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
Combining the Budget Constraint and Preferences
C
PTS: 2
DIF: 3
financial theories, analysis, reporting, and markets
Changes in Income
D
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
Changes in Price
E
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
Income and Substitution Effects
A
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
The Individual's Demand Curve Consumers in Markets
D
PTS: 2
DIF: 1
financial theories, analysis, reporting, and markets
The Short Run and the Long Run
A
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
The Short Run and the Long Run
A
PTS: 2
DIF: 1
financial theories, analysis, reporting, and markets
Production in the Short Run
C
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
Production in the Short Run
B
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
Production in the Short Run
C
PTS: 2
DIF: 3
financial theories, analysis, reporting, and markets
Thinking about Costs
D
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
Explicit Versus Implicit Costs
A
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
Costs in the Short Run
B
PTS: 2
DIF: 2
LOC: Utility and consumer choice
LOC: Utility and consumer choice
LOC: Utility and consumer choice
LOC: Utility and consumer choice
LOC: Utility and consumer choice
LOC: Supply and demand
LOC: Costs of production
LOC: Costs of production
LOC: Costs of production
LOC: Costs of production
LOC: Costs of production
LOC: Costs of production
LOC: Costs of production
LOC: Costs of production
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
NAT:
TOP:
ANS:
NAT:
TOP:
ANS:
NAT:
TOP:
ANS:
NAT:
TOP:
ANS:
NAT:
TOP:
ANS:
NAT:
TOP:
ANS:
NAT:
TOP:
ANS:
NAT:
TOP:
ANS:
NAT:
TOP:
ANS:
NAT:
TOP:
ANS:
NAT:
TOP:
ANS:
NAT:
TOP:
ANS:
NAT:
TOP:
ANS:
NAT:
TOP:
ANS:
NAT:
TOP:
ANS:
NAT:
TOP:
financial theories, analysis, reporting, and markets
Explaining the Shape of the Marginal Cost Curve
A
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
The Relationship Between Average and Marginal Cost
B
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
Constant Returns to Scale
C
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
The Demand Constraint
E
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
The Demand Constraint
A
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
The Cost Constraint
C
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
The Total Revenue and Total Cost Approach
C
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
The Total Revenue and Total Cost Approach
C
PTS: 2
DIF: 3
financial theories, analysis, reporting, and markets
The Total Revenue and Total Cost Approach
A
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
The Marginal Revenue and Marginal Cost Approach
A
PTS: 2
DIF: 3
financial theories, analysis, reporting, and markets
The Marginal Revenue and Marginal Cost Approach
C
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
The Marginal Revenue and Marginal Cost Approach
C
PTS: 2
DIF: 1
financial theories, analysis, reporting, and markets
Dealing with Losses
D
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
Dealing with Losses
A
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
Dealing with Losses
B
PTS: 2
DIF: 2
financial theories, analysis, reporting, and markets
Costs in the Short Run
SHORT ANSWER
LOC: Costs of production
LOC: Costs of production
LOC: Costs of production
LOC: Marginal costs and benefits
LOC: Marginal costs and benefits
LOC: Marginal costs and benefits
LOC: Marginal costs and benefits
LOC: Marginal costs and benefits
LOC: Marginal costs and benefits
LOC: Marginal costs and benefits
LOC: Marginal costs and benefits
LOC: Marginal costs and benefits
LOC: Marginal costs and benefits
LOC: Marginal costs and benefits
LOC: Marginal costs and benefits
LOC: Costs of production
31. ANS:
(1) The more the better. Rational Preference
(2) All the money will be spent on the goods. Marginal utility per dollar should be equal between two goods.
MUx/x=MUy/y
(3)If MUx/Px>MUy/Py, then the consumer could increase the total utility by switching money from good x to
good y. If he gives up one unit of good x, he can get Px in cash. With this money, he could purchase Px/Py
units of good y. So, this consumer gives up MUx utility by giving up one unit consumption of good x, but he
will be compensated by Px/Py*MUy utility from more consumption of good y. Because MUx/Px>MUy/Py, this
will be an increase to the total utility.
PTS: 20
32. ANS:
To answer this question, it helps to first construct the following table:
Quantity
0
Total
Revenue
0
Marginal
Revenue
Total
Cost
$200,000
$225,000
1
$225,000
$350,000
$275,000
$450,000
$500,000
5
$450,000
$75,000
$50,000
$325,000
$50,000
4
–$25,000
$25,000
$100,000
3
Total
Profit
–$200,000
$50,000
$250,000
$125,000
2
Marginal
Cost
$125,000
$75,000
$400,000
–$50,000
$100,000
$100,000
$500,000
–$50,000
(1). From the table, marginal revenue of increasing output from 2 to 3 units is $100,000;
marginal cost of the fifth unit produced is $100,000.
(2). To maximize total revenue, Titan should produce 4 units of output. To maximize total
profit, Titan should produce 3 units of output.
(3). Titan’s fixed cost is $200,000. Marginal cost first declines and then increases as output
increases.
PTS: 20