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Exam
N ame___________________________________
M U LTIPLE C H O IC E. Choose the one alternative that best completes the statement or answers the question.
1) In the short run, w hen capital is a fixed factor, a rise in the cost of labour
A) leaves the M C curve unchanged.
B) shifts the marginal cost curve up wards.
C) shifts the total product curve down wards.
D) leaves the A TC curve unchanged.
E) shifts the AVC curve dow n.
A nswer: B
2) A limited partnership differs from an ordinary partnership by
A) having limited liability of all partners.
B) including some partners w hose liability is restricted to the amount that they invested in the firm.
C) having a limited number of partners, each w ith limited liability.
D) having a limited number of partners.
E) having unlimited liability for all partners.
A nswer: B
The table below provides information on output per month and short - run costs for a firm producing outdoor wooden lounge chairs.
Q
5
10
15
20
25
30
TFC
200
200
200
200
200
200
TVC
200
220
240
260
350
810
TC
400
420
440
460
550
1010
T A BLE 7-4
3) Refer to Table 7- 4. A t w hat level of output is this firm at its capacity?
A) 15 chairs
B) 30 chairs
C) 25 chairs
D) 10 chairs
A nswer: C
Economics 208A , November 13, 2008......page 1
E) 20 chairs
The table below shows output, marginal cost, and average variable cost for the production of pairs of shoes. All costs are in dollars.
O utput
50
70
90
110
130
150
170
190
210
230
M argi nal Cost
60
45
35
30
35
60
105
180
230
290
A verage
V ariab le Cost
140
115
95
80
65
60
65
75
90
110
T A BLE 7-5
4) Refer to Table 7- 5. If the firm produces 130 pairs of shoes, and the fixed cost is $550, then the firm’s total cost is
A) $12 000.
B) $7000.
C) $8000.
D) $10 000.
E) $9000.
A nswer: E
5) The period of time over which at least one factor of production is fixed is called the
A) very - short run.
B) short run.
C) long run.
D) very - long run.
E) none of the above.
A nswer: B
6) Which of the follow ing items is N O T a characteristic of a corporation?
A) It has the right to sue and be sued.
B) It is an entity separate from the individuals w ho ow n it.
C) It is legally obliged to distribute all profits to shareholders.
D) It can enter into contracts.
E) It can incur debt that is an obligation of the corporation but not of its individual owners.
A nswer: C
7) Jodi recently went into business producing w idgets. W hich of the follow ing would be a fixed cost for her firm?
1. labour costs are $1000 per month
2. ra w material costs are $5000 per month
3. a one - year lease on a building is $12 000
A) 1 only
B) 2 only
C) 3 only
D) 1 and 2 only
A nswer: C
Economics 208A , November 13, 2008......page 2
E) 2 and 3 only
8) If increasing quantities of a variable factor are applied to a given quantity of fixed factors, then the la w of
diminishing returns tells us that
A) the marginal product w ill eventually decrease w ith constant a verage product.
B) total product w ill eventually begin to fall.
C) the average product will eventually decrease w ith constant marginal product.
D) the average product w ill eventually decrease, but only if total product is held constant.
E) the marginal product and the average product of the variable factor w ill eventually decrease.
A nswer: E
The table below provides the annual revenues and costs for a family - owned firm producing catered meals.
Total Revenues ($)
500 000
T otal C osts ($)
- wages and salaries
- risk - free return of 6% on ow ners' capital of 250 000
- rent
- depreciation of capital equipment
- risk premium of 8% on owners' capital of 250 000
- intermediate inputs
- forgone wages of owners in alternative employment
- interest on bank loan
200 000
15 000
105 000
25 000
20 000
150 000
80 000
10 000
T A BLE 7-1
9) Refer to Table 7- 1. The accounting profits for this family - ow ned firm are
A) $0
B) $10 000
C) - $15 000
D) $500 000
A nswer: B
10) Consider a firm in the short run. If total product is at its maximum, then
A) average product must be rising and must lie above marginal product.
B) average prod uct must be falling an d be equal to zero.
C) marginal product must be greater than zero and must be falling.
D) average product must equal marginal product.
E) marginal product must be falling and be equal to zero.
A nswer: E
11) T he point of diminishing marginal producti vity is the point where
A) marginal product has reached its maximum.
B) average product has reached its maximum.
C) the marginal product curve lies below the average product curve.
D) the total product begins to fall.
E) the marginal product begins to fall at an increasing rate.
A nswer: A
Economics 208A , November 13, 2008......page 3
E) $30 000
12) Suppose a firm is producing 100 units of output, incurring a total cost of $10 000 and total variable cost of $6000.
It can be conclu ded that average fixed cost is
A) $40.
B) $60.
C) $100.
D) $160.
E) $4000.
A nswer: A
The table below shows output, marginal cost, and average variable cost for the production of pairs of shoes. All costs are in dollars.
O utput
50
70
90
110
130
150
170
190
210
230
M argi nal Cost
60
45
35
30
35
60
105
180
230
290
A verage
V ariab le Cost
140
115
95
80
65
60
65
75
90
110
T A BLE 7-5
13) Refer to Table 7- 5. The firm’s marginal product of its variable factor is maximized w hen it prod uces ________
units of output.
A) 100
B) 110
C) 90
D) 170
E) 50
A nswer: B
14) The opportunity cost to a firm of using an asset is zero if
A) the asset w as given to the firm for free.
B) no money was spent to acquire the asset.
C) the asset is already ow ned by the firm.
D) the asset has no alternative uses.
E) the asset has zero sunk costs associated w ith it.
A nswer: D
15) Consider a firm in the short run. W hen the total - product curve is increasing at an increasing rate
A) marginal product is positive but declining.
B) average prod uct is zero.
C) the marginal- product curve lies below the average - product curve.
D) average product is falling.
E) marginal product is positive and increasing.
A nswer: E
Economics 208A , November 13, 2008......page 4
The diagram below shows the short - run cost curves for 3 perfectly competitive firms in the same industry.
FI G U RE 9-6
16) Refer to Figure 9- 6. If Firms A, B and C are in the same industry, is this industry in long - run equilibri um?
A) N o, because if the industry w ere in equilibrium, all 3 firms would be earning zero economic profits.
B) N o, because Firm A is not producing at a profit - maximizing level of output.
C) Yes, because all 3 firms are producing at their minimum average total cost.
D) Yes, because each of the 3 firms is operating at its minimum efficient scale.
E) Yes, because P = M C = MR for each of the 3 firms.
A nswer: A
17) T he demand curve facing a perfectly competitive firm depends on
A) market demand and the market sup ply curv e.
B) market demand alone.
C) the marginal cost of the firm.
D) market demand and the firm's supply curve.
E) market supply alone.
A nswer: A
Economics 208A , November 13, 2008......page 5
Consider the following total cost schedule for a perfectly competitive firm producing ball - point pens.
O utp ut per period
0
10
20
30
40
50
T V C ($)
0
2
3
6
10
15
T F C ($)
5
5
5
5
5
5
T A BLE 9-2
18) Refer to Table 9- 2. If this firm were prod ucing at an output level of 30 units, the A FC would be ________ and
the A V C would be ________.
A) $6; $5
B) $0.17; $0.20
C) $0.10; $0.30
D) $5; $6
E) $0.20; $0.17
A nswer: B
19) Which of the follow ing conditions are N O T true of a perfectly competitive firm when the industry is in
long - run equilibri um?
A) Price equals marginal revenue.
B) Price equals minimum short- run and long- run average total cost.
C) Economic profits are greater than zero.
D) Price equals marginal cost.
E) Economic profits are zero.
A nswer: C
20) When economists say that a perfectly competiti ve firm is a "quantity adjuster", they mean that
A) it is not concerned w ith cost factors.
B) changing the output level does not affect the costs of production.
C) its marginal - cost curve coincides with its ow n demand curve.
D) it can vary its output by an infinite amount.
E) it is a price taker.
A nswer: E
Economics 208A , November 13, 2008......page 6
Consider the following cost curves for Firm X, a perfectly competitive firm.
FI G U RE 9-3
21) Refer to Figure 9- 3. A t output Q 1 and price P1 ,
A) there is no lower - cost scale of plant w hich could be built by Firm X.
B) Firm X is producing at its minimum efficient scale.
C) new firms have a profit incentive to enter the industry, building larger plants.
D) Firm X is at its long - run profit- maximizing position.
E) there are profits to induce increases in output by Firm X, using its existing plant.
A nswer: C
22) A perfectly competiti ve firm maximizes its profits by
A) pricing slightly under its competitors.
B) maximizing total revenue.
C) choosing the optimal level of output.
D) choosing the optimal price.
E) maximizing total sales.
A nswer: C
23) A verage revenue ( AR) for an individual firm equals
A) !(p × q)/!q.
B) !p × !q.
C) !q/!p.
D) (p × q)/q.
A nswer: D
Economics 208A , November 13, 2008......page 7
E) p × q.
24) If firms in a competitive industry are suffering economic losses, then one would expect that in the long run
A) the demand curve for the product w ill shift to the left, causing equilibrium output and price to decline.
B) the supply curve for the product w ill shift to the right as individual firms lower their prices to increase
their sales.
C) there would be no change in the number of firms in the industry as long as firms are covering their
average variable costs.
D) each firm would raise its price u ntil it was breaking even.
E) the supply curve for the product w ill shift to the left as firms leave the industry, causing industry output
to fall and price to rise.
A nswer: E
Consider the following total cost schedule for a perfectly competitive firm producing ball - point pens.
O utp ut per period
0
10
20
30
40
50
T V C ($)
0
2
3
6
10
15
T F C ($)
5
5
5
5
5
5
T A BLE 9-2
25) Refer to Table 9- 2. A s this firm increases output from 40 units to 50 units per period, its marginal cost rises to
A) $0.10
B) $0.17
C) $0.375
D) $0.40
A nswer: E
26) N atural barriers to entry include
A) increasing- cost production.
B) control or ow nership of the entire supply of an essential raw material.
C) large economies of scale in the industry.
D) an government - awarded franchise.
E) a patent w hich allows production by only the patent holder.
A nswer: C
27) If a monopolist is practicing perfect price discrimination, then the following equation is true:
A) MR = P for all units.
B) MR = 1/2 P for any unit.
C) AR = A TC at the profit- maximizing level of output.
D) M C = 1/2 MR at the profit - maximizing level of output.
E) both A and C are correct.
A nswer: A
Economics 208A , November 13, 2008......page 8
E) $0.50
Consider the following AR and M R curves for a single - price monopolist.
F I G UR E 10-1
28) Refer to Figure 10- 1. If marginal costs were positi ve and constant but less than A , the profit- maximizing output
for a single- price monopolist would be
A) Q 2 .
B) greater than zero, but less than Q 2 .
C) greater than zero, but less than Q 1 .
D) 0.
E) none of the above.
A nswer: B
Economics 208A , November 13, 2008......page 9
The diagram below shows a pharmaceutical firm's demand curve and marginal cost curve for a new heart medication for which the firm
holds a 20 - year patent on its production.
F I G UR E 10-4
29) Refer to Figure 10- 4. A ssume this pharmaceutical firm is practicing perfect price discrimination among its
bu yers. A t its profit- maximizing level of output, it w ill generate a dead weight loss to society represented by
A) areas I+J+K.
B) areas H +I+J+ K.
C) it is not possible to determine w ith the information provided.
D) there is no dead weight loss generated.
E) areas H +I.
A nswer: D
30) Refer to Figure 10- 4. A ssume this pharmaceutical firm charges a single price for its drug. A t its
profit- maximizing level of output it w ill produce
A) Q 1 units and charge a price greater than its average total variable cost.
B) Q 0 units and charge a price of p0 .
C) Q 0 units and charge a price of p2 .
D) Q 0 units and charge the perfectly competitive price.
E) Q 1 units and charge a price of p1 .
A nswer: B
Economics 208A , November 13, 2008......page 10
Your food - services company has been awarded an exclusive right to provide meals at a small university. The cost and demand schedules
are:
Sold
per
Day
0
100
200
300
400
500
600
700
Price
per
M eal
$3.50
$3.25
$3.00
$2.75
$2.50
$2.25
$2.00
$1.75
Total
Fixed
Cost
$150
$150
$150
$150
$150
$150
$150
$150
Total
V ariable
Cost
0
$300
$500
$650
$750
$830
$905
$995
Total
Revenue
0
$325
$600
$825
$1000
$1125
$1200
$1225
T A BLE 10-2
31) Refer to Table 10- 2, and suppose that the firm is a single - price monopolist. A t the profit - maximizing level of
output, the firm's total profit per day w ill be
A) $75.
B) $100.
C) $145.
D) $150.
A nswer: C
32) Real capital includes
A) corporate bonds.
B) corporate stock.
C) a firm's balance in its bank account.
D) a firm's physical assets.
E) ow ner's equity.
A nswer: D
33) W hich of the following is an example of an input that is an intermediate product?
A) capital
B) a product produced by another firm
C) land
D) money
E) labour
A nswer: B
34) The opportunity cost of any factor of production is
A) its explicit cost.
B) the benefit forgone by not using it in its best alternative.
C) the money actually paid to the factors of production.
D) the benefit forgone by not using it in its worst alternative.
E) its accounting cost.
A nswer: B
Economics 208A , November 13, 2008......page 11
E) $295.
The diagram below shows some short - run const curves for a firm.
FI G U RE 7-2
Economics 208A , November 13, 2008......page 12
35) Refer to Figure 7- 2. W hich of the following choices correctly identifies the cost curves in part (ii) of the figure?
A) C urve 4 is the marginal cost curve.
C urve 5 is the average fixed cost curve.
C urve 6 is the average variable cost curve.
C urve 7 is the average total cost curv e.
B) C urve 4 is the average total cost curv e.
C urve 5 is the marginal cost curve.
C urve 6 is the average variable cost curve.
C urve 7 is the average fixed cost curve.
C) C urve 4 is the average fixed cost curve.
C urve 5 is the average total cost curv e.
C urve 6 is the marginal cost curve.
C urve 7 is the average variable cost curve.
D) C urve 4 is the marginal cost curve.
C urve 5 is the average variable cost curve.
C urve 6 is the average fixed cost curve.
C urve 7 is the average total cost curv e.
E) C urve 4 is the marginal cost curve.
C urve 5 is the average total cost curv e.
C urve 6 is the average variable cost curve.
C urve 7 is the average fixed cost curve.
A nswer: E
Economics 208A , November 13, 2008......page 13
FI G U RE 9-1
36) Refer to Figure 9- 1. The diagram shows cost curves for a perfectly competitive firm. If the market price is P2,
the profit - maximizing firm in the short run should
A) produce output B.
B) produce output C.
C) produce output D.
D) produce output E.
E) shut dow n, as it is incurring losses.
A nswer: D
Economics 208A , November 13, 2008......page 14
Consider the following cost curves for a perfectly competitive firm.
FI G U RE 9-2
37) Refer to Figure 9- 2. The short - run supply curve for this perfectly competitive firm is its
A) SRA VC curve at and above $1.50.
B) entire marginal cost curve.
C) marginal cost curve at an d above $3.
D) marginal cost curve at and above $1.50.
E) SRA TC curve at and above $3.
A nswer: D
38) Total revenue ( TR ) for an individual firm equals
A) !q/!p.
B) !(p × q)/!q.
C) (p × q)/q.
D) !p × !q.
E) p × q.
A nswer: E
39) A single- price monopolist is currently producing an output level w here P = $20, MR = $13, A TC = $15, and M C
= $14. In order to maximize profits, this monopolist should
A) increase production and reduce price.
B) not change his output level, because he is currently at the profit - maximizing output level.
C) decrease prod uction and increase price.
D) shut dow n.
E) there is insufficient information to make a recommendation.
A nswer: C
Economics 208A , November 13, 2008......page 15
The diagram below shows total revenue for a single - price monopolist.
F I G UR E 10-2
40) Refer to Figure 10- 2. The profit - maximizing outp ut for the single- price monopolist is
A) 0.
B) Q 1 .
C) Q 2 .
D) Q 3 .
E) not determinable from the diagram.
A nswer: E
41) The equation Q = 0.5K L - (0.4)L + 2L 2 is an example of
A) an economic input function.
B) a production function.
C) a factor of production equation.
D) an arithmetic expression of output quantities.
E) a technological change equation.
A nswer: B
42) If a perfectly competitive firm is producing a level of output for w hich price equals average total cost, and
average total cost is less than marginal cost, the firm should
A) not change its output.
B) reduce its output.
C) expand its output.
D) shut dow n.
E) increase the market price.
A nswer: B
Economics 208A , November 13, 2008......page 16
The table below shows the demand schedule for a product produced by a monopolist.
Price
$8
Q uantity 5
$7
6
$6
7
$5
8
$4
9
$3
10
$2
1
T A BLE 10-1
43) Refer to Table 10- 1. For a single - price monopolist producing and selling 9 units, the marginal revenue earned
by selling the 9th unit is
A) - 2.
B) 0.
C) - 4.
D) 4.
E) 2.
A nswer: C
44) Short - run cost curves are eventually up ward - sloping because of the effects of
A) increasing marginal productivity of the variable inputs.
B) the increasing price of variable inputs.
C) decreasing total product.
D) diminishing marginal product.
E) increasing fixed costs.
A nswer: D
Assume the following total cost schedule for a perfectly competitive firm.
O utput
0
1
2
3
4
5
6
TVC
0
40
70
120
180
250
330
TFC
100
100
100
100
100
100
100
T A BLE 9-1
45) Refer to Table 9- 1. The competitive firm's break - even price is
A) $40.
B) $70.
C) $145.
D) $220.
E) $430.
A nswer: B
46) Each point on a supply curve shows the ________ acceptable price to firms for selling that unit; this price
reflects ________ to firms from prod ucing that unit.
A) maximum; the additional value
B) minimum; the additional value
C) minimum; the equilibrium price
D) maximum; the additional cost
E) minimum; the additional cost
A nswer: E
Economics 208A , November 13, 2008......page 17
47) If 10 000 snow tires are produced and purchased in the month of N ovember, we can say that economic surplus
is
A) the net value to those consumers w ho purchased the 10 000 snow tires.
B) the number of snow tires that are produced in excess of the equilibriu m quantity.
C) the net value that society as a w hole receives by producing and consuming those 10 000 snow tires.
D) the price at w hich the tires are sold multiplied by 10 000.
E) the profit earned by the producers of those 10 000 snow tires.
A nswer: C
FI G U RE 5-5
48) Refer to Figure 5- 5. Suppose this market for gardening services is in a free - market equilibrium. If the
government then imposes a price floor of $50 per hour for gardening services, the result would be
A) a loss of economic surplus of the areas 1, 2, 3, and 4.
B) a loss of economic surplus of the areas 2 and 6.
C) a loss of economic surplus of the areas 6 and 7.
D) a loss of economic surplus of the area 1.
E) a loss of economic surplus of the areas 2, 3, 4, 6, an d 7.
A nswer: C
49) Dead weight loss represents
A) the total market value of the goods no longer produced w hen quantity exchanged is below the equilibrium
quantity.
B) the loss of consumption that occurs w hen a binding price floor or ceiling is imposed.
C) the loss of production that occurs w hen a binding price floor or ceiling is imposed.
D) the overall loss of economic surplus to society that occurs when markets are inefficient.
E) the loss of economic surplus to consumers.
A nswer: D
Economics 208A , November 13, 2008......page 18
FI G U RE 5-7
50) Refer to Figure 5- 7. The market for good X is in equilibrium at P0 and Q 0 . N ow suppose the government
imposes a ________ at P2 . O ne result would be ________.
A) price floor; a dead weight loss represented by area 8.
B) price floor; a dead w eight loss represented by areas 5 and 6.
C) price floor; an increase in economic surplus represented by area 1.
D) price ceiling; a dead weight loss represented by areas 5 and 6.
E) price ceiling; an increase in economic surplus represented by areas 2 and 5.
A nswer: B
51) A n economy w ill be allocati vely efficient if
A) the economy's resources are fully employed.
B) all firms are breaking even.
C) price equals marginal cost for all products.
D) the price equals average cost for all goods.
E) the average cost of production is the lowest possible for all goods produced.
A nswer: C
52) We can safely say that each point on a country's production possibilities boundary (PPB) is
A) productively efficient.
B) not productively efficient.
C) allocatively efficient.
D) one at which P = M C for all goods.
E) Pareto optimal.
A nswer: A
Economics 208A , November 13, 2008......page 19
Consider three firms, A, B and C, all producing kilos of potatoes (per year) in a perfectly competitive market. The diagrams below show
marginal cost curves for each of the three firms.
F I G UR E 12-1
53) Refer to Figure 12- 1. Suppose each of Firms A, B, and C are producing 500 kilos of potatoes. Is this in dustry
productively efficient?
A) N o, because marginal costs are not equated for all firms.
B) Yes, because output is equated for all firms.
C) N o, because the marginal cost curve for each firm has a different slope.
D) N o, because each firm could easily produce more than 500 kilos.
E) It is not possible to say w hether this industry is productively efficient because we do not kno w the market
price of the product.
A nswer: A
Economics 208A , November 13, 2008......page 20
The production possibilities boundary shows possible combinations of guns and butter that can be produced by a country. The lower
diagram shows demand and supply for butter.
F I G UR E 12-2
54) Refer to Figure 12- 2. Suppose demand and supply for butter are show n by D and S, respectively. A nd suppose
the economy is at point (a) on the production possibilities boundary. Is this output of guns and butter
allocatively efficient?
A) N o, because the marginal cost to producers of the butter produced is more than the marginal value to
consumers.
B) Yes, because the marginal cost of producing the butter equals the marginal value of consuming the butter.
C) Yes, because all points on the production possibilities boundary are allocatively efficient.
D) N o, because the marginal costs for guns and butter are not equated.
E) N o, because the marginal value to consumers of the butter produced is greater than the marginal cost to
producers.
A nswer: E
Economics 208A , November 13, 2008......page 21
55) W hen comparing a perfectly competitive firm and a monopolist, a major difference is that
A) the perfect competitor produces w here P = M C, but the monopolist does not.
B) the perfect competitor achieves productive efficiency, but the monopolist does not.
C) the monopolist produces w here M R = M C, but the perfect competitor does not.
D) the monopolist achieves allocative efficiency but the perfect competitor does not.
E) none of the above
A nswer: A
The diagram below shows supply, demand, and quantity exchanged of Monday matinee movie tickets. Assume it is a perfectly
competitive market.
F I G UR E 12-3
56) Refer to Figure 12- 3. W hat is the total economic surplus generated in this market at the allocatively efficient
level of output?
A) $250
B) $5
C) $125
D) $500
A nswer: A
Economics 208A , November 13, 2008......page 22
E) $10
The diagram below shows the demand and supply curves in a perfectly competitive market.
F I G UR E 12-5
57) Refer to Figure 12- 5. In the free - market equilibrium, producer surplus is show n by the area
A) P3 P2 E.
B) P1 P3 E.
C) 1 + 2 + 3 + 4.
D) 1 +2.
A nswer: E
58) T he "informal defense" of free markets includes the argument that competitive markets
A) lead to allocative efficiency.
B) provide automatic coordination of the actions of decentralized decision makers.
C) provide a stimulus to innovation and economic growth because of the pursuit of profits.
D) permit a decentralization of economic power.
E) B, C and D, but not A .
A nswer: E
59) It may be said that the price system
A) depends on planned coordination between firms and governments.
B) is automatic and functions perfectly in reallocating economic resources.
C) is the only feasible method of allocating resources.
D) is automatic, although it does not function perfectly.
E) operates only in a laissez - faire economy.
A nswer: D
Economics 208A , November 13, 2008......page 23
E) P1 P2 E.
60) T he "informal defense" of free markets includes the argument that markets
A) provide automatic coordination of the actions of decentralized decision makers.
B) permit a centralization of economic power.
C) lead to prod uctive efficiency.
D) achieve the maximum feasible rate of economic growth.
E) lead to allocative efficiency.
A nswer: A
Economics 208A , November 13, 2008......page 24