Download Which of the following is an implicit cost

ETP Economics Final Examination
1. Which of the following is an implicit cost?
(i) the owner of a firm forgoing an opportunity to earn a large salary working
for a Wall Street brokerage firm
(ii) interest paid on the firm’s debt
(iii) rent paid by the firm to lease office space
a. (ii) and (iii)
b. (i) and (iii)
c. (i) only
d. All of the above are correct.
2. Consider the following information about baseball production at Bob’s Baseball
Factory:
Worker
Marginal Product
1
3
2
5
3
8
4
10
5
7
6
4
7
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Bob pays all his workers the same wage and labor is his only variable cost. From
this information we can conclude that Bob’s average variable cost decreases
a. as output rises from 0 to 10, but rises after that.
b. as output rises from 0 to 26, but rises after that.
c. as output rises from 0 to 33, but increases after that.
d. continually as output rises.
3. “Constant returns to scale” refers to a situation in which, for a firm,
a. all of the firm’s short-run average total cost curves are horizontal.
b. short-run average total cost does not change as the quantity of output changes.
c. long-run average total cost does not change as the quantity of output changes.
d. All of the above are correct.
4. Which of the following statements about costs is correct?
a. When marginal cost is less than average total cost, average total cost is rising.
b. The total cost curve is U-shaped.
c. As the quantity of output increases, marginal cost eventually rises.
d. All of the above are correct.
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Farmer Jack is a watermelon farmer. If Jack plants no seeds on his farm, he gets no
harvest. If he plants 1 bag of seeds, he gets 30 watermelons. If he plants 2 bags of
seeds, he gets 50 watermelons. If he plants 3 bags of seeds he gets 60 watermelons. A
bag of seeds costs $100, and the costs of seeds are his only costs.
5. Which of the following statements is (are) true?
(i) Farmer Jack experiences decreasing marginal product.
(ii) Farmer Jack’s production function is nonlinear.
(iii) Farmer Jack’s total cost curve is linear.
a. (i) only
b. (i) and (ii)
c. (ii) only
d. (i) and (iii)
Quantity
0
1
2
3
4
5
6
7
8
9
Total Revenue Total Cost
$0
$ 10
9
14
18
19
27
25
36
32
45
40
54
49
63
59
72
70
81
82
6. At a production level of 4 units which of the following is true?
a. Marginal cost is $6.
b. Total revenue is greater than variable cost.
c. Marginal revenue is less than marginal cost.
d. All of the above are correct.
7.
If this firm chooses to maximize profit it will choose a level of output where
marginal cost is equal to
a. 6.
b. 7.
c. 8.
d. 9.
8.
If the firm finds that its marginal cost is $11, it should
a. increase production to maximize profit.
b. increase the price of the product to maximize profit.
c. advertise to attract additional buyers to maximize profit.
d. None of the above are correct.
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9. When price is below average variable cost, a firm in a competitive market will
a. shut down and incur fixed costs.
b. shut down and incur both variable and fixed costs.
c. continue to operate as long as average revenue exceeds marginal cost.
d. continue to operate as long as average revenue exceeds average fixed cost.
A firm in a competitive market has the following cost structure:
Output
0
1
2
3
4
5
Total Cost
$5
$10
$12
$15
$24
$40
10. If the market price is $4, this firm will
a. produce two units in the short run and exit in the long run.
b. produce three units in the short run and exit in the long run.
c. produce four units in the short run and exit in the long run.
d. shut down in the short run and exit in the long run.
11. A competitive market is in long-run equilibrium. If demand decreases, we can
be certain that price will
a. fall in the short run. All firms will shut down and some of them will exit the
industry. Price will then rise.
b. fall in the short run. No firms will shut down, but some of them will exit the
industry. Price will then rise.
c. fall in the short run. All, some, or no firms will shut down, and some of them
will exit the industry. Price will then rise.
d. not fall in the short run because firms will exit to maintain the price.
12. When entry and exit behavior of firms in an industry does not affect a firm’s
cost structure,
a. the long-run market supply curve must be horizontal.
b. the long-run market supply curve must be upward-sloping.
c. the long-run market supply curve must be downward-sloping.
d. we can’t tell anything about the shape of the long-run market supply curve.
13. For a monopolist, marginal revenue is
a. positive when the demand effect is greater than the supply effect.
b. positive when the monopoly effect is greater than the competitive effect.
c. negative when the price effect is greater than the output effect.
d. negative when the output effect is greater than the price effect.
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14. Supply curves tell us how much producers are willing to supply at any given
price. Hence, monopoly firms have
a. vertical supply curves.
b. steeper supply curves than competitive firms
c. flatter supply curves than competitive firms.
d. no supply curves.
15. For a monopoly firm, the level of output at which marginal revenue equals zero
is also the level of output at which
a. average revenue is zero.
b. profit is maximized.
c. total revenue is maximized.
d. marginal cost is zero.
16. Which of the following statements is correct?
a. The benefits that accrue to a monopoly firm’s owners are equal to the costs
that are incurred by consumers of that firm’s product.
b. The deadweight loss that arises in monopoly stems from the fact that the
profit-maximizing monopoly firm produces a quantity of output that exceeds
the socially-efficient quantity.
c. The deadweight loss caused by monopoly is similar to the deadweight loss
caused by a tax on a product.
d. The main social problem caused by monopoly is monopoly profit.
17. To maximize total surplus, a benevolent social planner would choose which of
the following outcomes?
a. 100 units of output and a price of $10 per unit
b. 150 units of output and a price of $10 per unit
c. 150 units of output and a price of $15 per unit
d. 200 units of output and a price of $10 per unit
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18. The monopolist’s maximum profit
a. is $800.
b. is $1,000.
c. is $1,250.
d. cannot be determined from the diagram.
19. The deadweight loss caused by a profit-maximizing monopoly amounts to
a. $150.
b. $200.
c. $250.
d. $300.
20. Since natural monopolies have a declining average cost curve, regulating natural
monopolies by setting price equal to marginal cost would
a. cause the monopolist to operate at a loss.
b. result in a less than optimal total surplus.
c. maximize producer surplus.
d. All of the above are correct.
21. As the number of firms in an oligopolistic market grows larger, the price
approaches
a. zero.
b. marginal cost.
c. infinity.
d. the monopoly price.
22. The prisoners’ dilemma provides insights into the
a. difficulty of maintaining cooperation.
b. benefits of avoiding cooperation.
c. benefits of government ownership of monopoly.
d. ease with which oligopoly firms maintain high prices.
23. What happens when the prisoners’ dilemma game is repeated numerous times in
an oligopoly market?
(i) The firms may well reach the monopoly outcome.
(ii) The firms may well reach the competitive outcome.
(iii) Buyers of the oligopolists’ product will likely be worse off as a result.
a. (i) and (ii)
b. (ii) and (iii)
c. (i) and (iii)
d. All of the above are correct.
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24. Two suspected drug dealers are stopped by the highway patrol for speeding. The
officer searches the car and finds a small bag of marijuana, and arrests the two.
During the interrogation, each is separately offered the following: "If you
confess to dealing drugs and testify against your partner, you will be given
immunity and released while your partner will get 10 years in prison. If you both
confess, you will each get 5 years." If neither confesses, there is no evidence of
drug dealing, and the most they could get is one year each for possession of
marijuana. If each suspected drug dealer follows a dominant strategy, what
should he/she do?
a. confess regardless of the partner's decision
b. confess only if the partner confesses
c. refrain from confessing regardless of the partner's decision
d. refrain from confessing only if the partner refrains from confessing
25. George and Jerry are competitors in a local market. Each is trying to decide if it
is better to advertise on TV, on radio, or not at all. If they both advertise on TV,
each will earn a profit of $3,000. If they both advertise on radio, each will earn a
profit of $5,000. If neither advertises at all, each will earn a profit of $10,000. If
one advertises on TV and the other advertises on radio, then the one advertising
on TV will earn $4,000 and the other will earn $2,000. If one advertises on TV
and the other does not advertise, then the one advertising on TV will earn $8,000
and the other will earn $5,000. If one advertises on radio and the other does not
advertise, then the one advertising on radio will earn $9,000 and the other will
earn $6,000. If both follow their dominant strategy, then George will
a. advertise on TV and earn $3,000.
b. advertise on radio and earn $5,000.
c. advertise on TV and earn $8,000.
d. not advertise and earn $10,000.
26. A profit-maximizing firm in a monopolistically competitive market differs from
a firm in a perfectly competitive market because the firm in the monopolistically
competitive market
a. is characterized by market share maximization.
b. has no barriers to entry.
c. faces a downward-sloping demand curve for its product.
d. faces a horizontal demand curve at the market clearing price.
27.
If firms in a monopolistically competitive market are incurring economic losses,
which of the following scenarios would best reflect the change facing incumbent
firms (who are able to stay in the market) as the market adjusts to its new
equilibrium?
a. a downward shift in their marginal cost curve
b. an upward shift in their marginal cost curve
c. a decrease in demand
d. an increase in demand
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28. The free entry and exit of firms in a monopolistically competitive market
guarantees that
a. both economic profits and economic losses can persist into the long run.
b. both economic profits and economic losses disappear in the long run.
c. economic profits can persist into the long run, but not economic losses.
d. economic losses can persist into the long run, but not economic profits.
29. A firm in a monopolistically competitive market operates
a. where marginal revenue is zero.
b. where marginal revenue is negative.
c. on the rising portion of its average-total-cost curve.
d. on the declining portion of its average-total-cost curve.
30.
In the long run, a monopolistically competitive firm produces a quantity that is
a. equal to the efficient scale.
b. less than the efficient scale.
c. greater than the efficient scale.
d. consistent with diseconomies of scale.
31. A monopolistically competitive firm has the following cost structure:
Output
Total Cost($)
1
30
2
32
3
36
4
42
5
50
6
63
7
77
9
5
7
6
4
7
The firm faces the following demand curve:
Price ($)
Quantity
20
1
18
2
15
3
12
4
If the government forces this firm to produce at its efficient scale, it will
a. produce 3 units and make $9.
b. produce 4 units and make $6
c. produce 5 units and lose $5.
d. produce 7 units and lose $49.
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32. A monopolistically competitive firm faces the following demand curve for its
product:
Price ($)
Quantity
10
2
9
4
8
6
7
8
6
10
5
12
4
14
3
16
2
18
1
20
The firm has total fixed costs of $20 and a constant marginal cost of $5 per unit.
The firm will
a. produce two units; firms will exit the market in the long run.
b. produce four units; firms will exit the market in the long run.
c. produce six units; firms will exit the market in the long run.
d. produce eight units; firms will enter the market in the long run.
33. Olga consumes two normal goods, X and Y, and is currently at an optimum. If
the price of good X falls, we can predict with certainty that Olga’s real income
will rise
a. and she will therefore consume more of both goods.
b. but the substitution effect will insure that she consumes more X and less Y.
c. so she will consume more of good X, but she might consume more, less, or
the same of good Y.
d. but the substitution effect will negate the positive effect of the rise.
34. Goods X and Y are perfect complements. If the price of good Y falls, then the
substitution effect by itself will
a. cause consumers to buy more of good Y and less of good X.
b. cause consumers to buy more of good X and less of good Y.
c. not affect the amount of goods X and Y that consumers buy.
d. All of the above are correct.
35. When the price of pizza falls, the income effect, for normal goods Pepsi and
pizza, causes a
a. shift to a lower indifference curve so the consumer buys more Pepsi.
b. shift to a higher indifference curve so the consumer buys more Pepsi.
c. movement along the indifference curve so the consumer buys more Pepsi.
d. movement along the indifference curve so the consumer buys less Pepsi.
36. When a consumer experiences a price increase for an inferior good, it is possible
that the income effect is
a. greater than the substitution effect and the demand curve will be downward
sloping.
b. greater than the substitution effect and the demand curve will be upward
sloping.
c. less than the substitution effect and the demand curve will be upward sloping.
d. less than the substitution effect but the substitution effect is positive and the
demand curve will be upward sloping.
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37. Assume that the consumer depicted in the figure has an income of $100 and
currently optimizes at point A. When the price of marshmallows decreases to $5,
the optimizing consumer will choose to purchase how many units of
marshmallows?
a. 20
b. 10
c. 9
d. 4
38.
In the figure, if point B is the consumer’s optimum and the price of Chocolate
Chips is $3 per bag, what is the price of a bag of Marshmallows?
a. $3
b. $6
c. $1.50
d. None of the above are correct.
Given a firm’s current situations:
Total revenue=$30,000,
Quantity=10,000,
Total Fixed Cost=$20,000,
Average variable cost=$2,
ATC is at minimum.
39. If this firm is a perfectly competitive firm, what would you recommend it to do in
the short run?
a. Increase output level
b. Decrease output level
c. Do nothing
d. Increase the price
e. Shut down immediately
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40. If this firm is a monopoly firm, what would you recommend it to do in the short
run?
a. Increase output level and decrease price
b. Decrease output level and increase price
c. Do nothing
d. Increase output level and increase price
e. Shut down immediately
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