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AP Economics
Quiz 04: Theory of the Firm 01
Name: ______________________
Date: _______________________
____1. Normal profit is
a. determined by subtracting implicit costs from total revenue
b. determined by subtracting explicit costs from total revenue
c. the return to the entrepreneur when economic profits are at zero to keep him/her engaged in the
business
d. the average profitability of an industry over the preceding 10 years
____2. Economic profits are calculated by subtracting
a. explicit costs from total revenue
b. implicit costs from total revenue
c. implicit costs from normal profits
d. explicit and implicit costs from total revenue
____3. Marginal cost
a. intersects both AVC and ATC at their minimum points
b. is defined as the difference between total cost and total variable costs
c. rises for a time, but then begins to decline when the point of diminishing returns is reached
d. declines so long as output increases
____4. On a per unit basis economic profit can be determined as the difference between:
a. marginal revenue and product price.
b. product price and average total cost.
c. marginal revenue and marginal cost.
d. average fixed cost and product price.
____ 5. Refer to the following:
At P2, this firm will:
a. produce 44 units and
realize an economic
profit.
b. produce 44 units and
earn only a normal
profit.
c. produce 66 units and
earn only a normal
profit.
d. shut down in the
short run.
Purpura
AP/IB Economics
Sem 01, Yr 01
____6. Which of the following is not characteristic of pure competition?
a. price strategies and advertising by firms
b. a standardized product
c. no barriers to entry
d. a larger number of sellers
____7. In the long run a purely competitive firm that seeks to maximize profit will produce:
a. where the demand and the AVC curves intersect.
b. where total revenue exceeds total cost by the maximum amount.
c. that output where economic profits are zero.
d. at any point where the total revenue and total cost curves intersect.
____8. The vertical distance between a firm's ATC and AVC curves represents:
a. AFC, which increases as output increases.
b. AFC, which decreases as output increases.
c. marginal costs, which decrease as output decreases.
d. marginal costs, which increase as output increases.
_____ 9. The law of diminishing returns indicates that
a. as extra units of a variable resource are added to a fixed resource the extra or
marginal product will decline beyond some point
b. a competitive firm’s long-run average cost curve will be U-shaped
c. the demand for goods produced by purely competitive industries is downsloping
d. beyond some point the extra utility derived from additional units of a product will
yield the consumer smaller and smaller extra amounts of satisfaction
_____ 10. Marginal product is
a. the increase in total output attributable to the employment of one more worker
b. the increase in total revenue attributable to the employment of one more worker
c. the increase in total cost attributable to the employment of one more worker
d. total product divided by the number of workers employed
_____ 11. If a firm decides to produce no output in the short run, its costs would be
a. its marginal costs
b. its fixed costs
c. its fixed plus its variable costs
d. zero
_____ 12. If technological advances increase a firm’s labor productivity, we would expect its:
a. average cost curve to rise
b. average cost to fall
c. total cost curve to rise
d. average cost curve to be unaffected
Purpura
AP/IB Economics
Sem 01, Yr 01
Answer the next five questions on the basis of the following diagram
P/C
D
C
B
A
O
The curves are not
labeled intentionally,
but you might want to
label them to answer
the questions.
E
F
Quantity
Q
_____ 13. At output level 0Q total variable cost is
a. 0BEQ
b. BCDE
c. 0CDQ
_____ 14. At output level 0Q total fixed costs is
a. 0BEQ
b. BCDE
c. 0BEQ plus BCDE
d. 0AFQ
d. 0AFQ plus BCDE
_____15. At output level 0Q average variable cost:
a. the price associated with vertical distance EF
b. the price associated with vertical distance QE
c. is measured by both the price associated with vertical distance QF and the price
associated with vertical distance ED
d. cannot be determined from the information given
_____16. The rectangle which represents total revenue is
a. 0BEQ
b. BCDE
c. 0CDQ
d. 0AFQ
_____ 17. This firm at output level OQ
a. earns an economic profit
b. sustains an economic loss
c. closes down
d. earns only a normal profit
Purpura
AP/IB Economics
Sem 01, Yr 01
___18. Which of the following is always true of the relationship between average and
marginal costs?
(a)
Average total costs are increasing when marginal costs are increasing.
(b)
Marginal costs are increasing when average variable costs are higher than
marginal costs.
(c)
Average variable costs are increasing when marginal costs are increasing.
(d)
Average variable costs are increasing when marginal costs are higher than
average variable costs.
(e)
Average total costs are constant when marginal costs are constant.
___19. If the current price for the perfectly
competitive firm represented in the graph
(left) is $10.00, and the firm is producing
10 units, what should the firm do?
a.
b.
c.
d.
e.
raise prices
decrease prices
increase production
decrease production
leave everything the same
__20. When the firm produces 25 units, the
firm will be:
a.
making a loss
b.
earning a normal profit
c.
earning an economic profit
d.
shutting down
e.
operating in the long-run but not
the short-run
Purpura
AP/IB Economics
10
25
Sem 01, Yr 01
21.
Using a “two-paned” analysis of a perfectly competitive firm operating in a perfectly competitive
market, show what happen when a firm earns a loss. Explain the impact on both the firm and the
market. Discuss the final result on both the firm and the market. (8 points)
1 point for showing a correctly labeled market
1 point for showing a correctly labeled firm
1 point for showing a firm earning a loss
1 point for showing a decrease in the supply curve in the industry
1 point for showing the firm earning normal profits as a result of a new, higher market price
1 point for explaining that the firm will earn a loss and continue to produce OR go out of business
1 point for explaining that supply will decrease in the market as a result of firms leaving the
industry
1 point for explaining that the firms that stay in the industry will earn normal profits in the long
run
Purpura
AP/IB Economics
Sem 01, Yr 01