Download Econ 101 – Kong CMP final review session

Econ 101 – Kong
CMP final review session - solution
2014 – fall
Benji Huang
practice – monopoly 1
A monopoly ________ make positive economic profit in the long
run because ________.
A) can; barriers to entry prevent other firms from entering the
market and sharing the profit
B) cannot; eventually demand will decrease and prices will fall
C) cannot; other firms will enter the market until all firms are
making zero economic profit
D) can; new technology constantly lowers costs for the monopoly
firm and for its competitors
E) can; demand constantly increases and price constantly rises
2013 sample final, reproduced with permission from Wai Ching Kong
practice – monopoly 2
When perfect price discrimination occurs, which one of the
following statements is false ?
A) Buyers cannot resell the product.
B) The firm can distinguish between buyers.
C) The firm sets prices.
D) The firm captures consumer surplus.
E) The outcome is less efficient than with single-price monopoly.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – monopoly 3
Which area in figure indicates the deadweight loss from a perfect
price-discriminating monopoly?
A) EACF
B) ACD
C) ABD
D) BCD
E) None of the above.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – monopoly 4
Refer to table. If a perfect price-discriminating monopoly faces the
demand schedule shown in Table 13.4.1 and if marginal cost is
constant at $3, output is
A) 2 units.
B) 3 units.
C) 4 units.
D) 5 units.
E) 6 units.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – monopoly 5
Table shows the demand schedule faced by a monopoly. If the
monopoly is a perfect price-discriminating monopoly the marginal
revenue from the sale of the 3rd unit of output is
A) $2.
B) $6.
C) $4.
D) $3.
E) $5.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – monopoly 6
Table shows the demand schedule faced by a monopoly. If the
monopoly is a perfect price-discriminating monopoly the marginal
revenue from the sale of the 3rd unit of output is
A) $2.
B) $6.
C) $4.
D) $3.
E) $5.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – monopoly 7
What quantity will TransCanada produce and what is the price of
natural gas if TransCanada is
a. Regulated to make zero economic profit? (2 points)
If TransCanada is regulated to make zero economic profit, it
produces the output at which price equals average total cost—at
the intersection of the demand curve and the LRAC curve.
TransCanada will produce 3 million cubic metres a day and charge
4 cents a cubic metre.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – monopoly 7
What quantity will TransCanada produce and what is the price of
natural gas if TransCanada is
b. Regulated to be efficient? (2 points)
If the firm is regulated to be efficient, it will produce the quantity
at which price (marginal social benefit) equals marginal social
cost—at the intersection of the demand curve and the marginal
cost curve. TransCanada will produce 4 cubic metres a day and
charge 2 cents a cubic metre.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – monopoly 8
Briefly explain whether the following statements are true or false.
a. “Because they can control product price, monopolists are always
assured of profitable production by simply charging the highest
price consumers will pay.” (1 point)
The statement is false. If the monopolist charged the highest price
consumers would pay, it would sell precisely one unit!
(Conceivably, it might sell a little more than one if more than one
consumer made matching bids for the first unit offered.) It is
highly unlikely that the sale of one unit (or a very few) would
cover the very high AFC of one or a very few units. And even a
monopolist that does produce sensibly where MR = MC may still
suffer a loss: P can be below ATC at all levels.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – monopoly 8
Briefly explain whether the following statements are true or false.
b. “The monopolist seeks the output that will yield the greatest
per-unit profit.” (1 point)
The statement is false. The monopolist seeks the output that will
yield the greatest profit. The profit equation is Q(P - ATC). It is not
(P - ATC). If the monopolist sells one unit for $100 when ATC is
$60, then its profit per unit and total profit is $40 (= $100 - $60).
Nice, but if the same monopolist can sell 1,000 units for $40 when
ATC is $39, then, though its per unit profit is a mere $1 (=
$40 - $39), its total profit is $1,000 [= 1,000($40 - $39)]. And this is
much better than $40.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – monopoly 8
Briefly explain whether the following statements are true or false.
c. “An excess of price over marginal cost is the market’s way of
signalling the need for more production of a good.” (1 point)
The statement is true. Price is the value society sets on the last
item produced. Marginal cost is the value to society of the
alternative production forgone when the last item is produced.
When P>MC, society is willing to pay more than the opportunity
cost of the last item’s production.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 1
A firm will want to increase its scale of plant if
A) it is persistently producing on the upward-sloping part of its
short-run average total cost curve.
B) it is persistently producing on the downward-sloping part of its
short-run average total cost curve.
C) it is producing below minimum efficient scale.
D) marginal cost is below average total cost.
E) marginal cost is below average variable cost.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 2
The long-run average cost curve is the relationship between the
lowest attainable average total cost and output, when plant size is
________ and labour is ________. The long-run average cost curve
is made up of the segments of individual average ________ cost
curves with the lowest average ________ cost for a given output.
A) varied; varied; variable; variable
B) varied; varied; total; total
C) varied; held constant; variable; variable
D) held constant; varied; total; total
E) held constant; varied; variable; variable
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 3
Refer to Figure which shows the total product curves for four
different plant sizes as Tania varies the quantity of capital and
workers. The curve that represents the plant using the largest
amount of capital is
A) plant A.
B) plant B.
C) plant C.
D) plant D.
E) all curves because each
plant uses the same number
of machines, just different
amounts of labour.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 4
Refer to Figure which illustrates the total product curves for four
different plant sizes. One of the fundamental technological facts
reflected in the shape of each of the total product curves is the
A) price of the inputs.
B) price of the output.
C) law of diminishing marginal
returns.
D) law of economies of scale.
E) fact that capital and
labour cannot be substituted
for each other.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 5
For perfect competition to arise, it is necessary that market demand
be
A) inelastic.
B) elastic.
C) perfectly elastic.
D) large relative to the minimum efficient scale of a single firm.
E) small relative to the minimum efficient scale of a single firm.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 6
Suppose a firm is trying to decide whether or not to temporarily
shut down to minimize total loss. If price equals average variable
cost, then
A) total revenue equals total fixed cost, and the loss equals total
variable cost.
B) total revenue equals total variable cost, and the loss equals
total fixed cost.
C) total fixed cost is zero.
D) total variable cost equals total fixed cost.
E) total cost equals total variable cost.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 7
Refer to Table, which represents Swanky's production possibilities as
the firm varies the quantities of knitting machines and workers per
day. If Swanky increases the number of knitting machines from 2 to
3 and increases the number of workers employed from 2 to 3, the
factory experiences
A) economies of scale.
B) constant returns to scale.
C) diseconomies of scale.
D) constant marginal product.
E) minimum efficient scale.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 8
Refer to Table, which represents Swanky's production possibilities as
the firm varies the quantities of knitting machines and workers per
day. If Swanky increases the number of knitting machines from 1 to
2 and increases the number of workers employed from 1 to 2, the
factory experiences
A) economies of scale.
B) constant returns to scale.
C) diseconomies of scale.
D) constant marginal product.
E) minimum efficient scale.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 9
If price falls below minimum average variable cost, the best a firm
can do is
A) increase production and incur a loss equal to total variable cost.
B) increase production and incur a loss equal to total fixed cost.
C) stop production and incur a loss equal to total fixed cost.
D) stop production and incur a loss equal to total variable cost.
E) stay at the same production level and incur a loss equal to the
difference between total cost
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 10
Refer to Figure, which shows a perfectly competitive firm's total
revenue and total cost curves. answer question on next slide
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 10
Refer to Figure in previous slide, which shows a perfectly
competitive firm's total revenue and total cost curves. Which one of
the following statements is false?
A) Economic profit is the vertical distance between the total
revenue curve and the total cost curve.
B) At an output of Q1 units a day, the firm makes zero economic
profit.
C) At an output greater than Q3 units a day, the firm incurs an
economic loss.
D) At an output of Q2 units a day, the firm incurs an economic loss.
E) At an output less than Q1 units a day, the firm incurs an economic
loss.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 11
If a profit-maximizing firm in a perfectly competitive market is
incurring an economic loss, then it must be producing a level of
output where
A) price is greater than marginal cost.
B) price is greater than marginal revenue.
C) marginal cost is greater than marginal revenue.
D) average total cost is greater than marginal cost.
E) average total cost is less than marginal cost.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 12
Technological change spreads through a perfectly competitive
industry. Choose the statement that is incorrect.
A) The market price falls and the equilibrium quantity increases.
B) The technological change brings permanent gains for consumers
and producers.
C) Firms that do not change to the new technology will incur an
economic loss and eventually go out of business.
D) Firms that are quick to adopt to the new technology will make
economic profits initially, but in the long run they will make zero
economic profit.
E) Average cost will fall for firms who adopt the new technology.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 13
Average variable cost is at a minimum at the same output at which
A) average product is at a maximum.
B) average product is at a minimum.
C) marginal product is at a maximum.
D) marginal product is at a minimum.
E) marginal cost is at a minimum.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 14
Refer to Figure, which illustrates short-run average and marginal
cost curves. Which one of the following statements is false?
A) Average fixed cost decreases
with output.
B) The vertical gap between curves
B and C is equal to average
variable cost.
C) Line B comes closer to line C as
output increases because of a
decrease in average fixed cost.
D) Curve D is the marginal cost curve.
E) The vertical gap between curves
B and C is equal to average fixed cost.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 15
Which of the following quotes best illustrates the idea of marginal
product?
A) "If I have 10 workers on my assembly line, I can produce 13 tables
a day."
B) "If I add an 11th worker, I can produce 1 extra table a day."
C) "Each worker produces 2 tables a day."
D) "I find if I add an extra shift at night, table production only rises
by 80 percent because I need more maintenance time on the
assembly line."
E) "If I double workers and double the assembly line, I can make 120
percent more tables."
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 16
Which one of the following statements is true?
A) All technologically efficient methods are also economically
efficient.
B) All economically efficient methods are also technologically
efficient.
C) Technological efficiency changes with changes in relative input
prices.
D) Technologically efficient firms will be more likely to survive than
economically efficient firms.
E) none of the above
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 17
A firm that uses the latest technology ________ technologically
efficient because ________.
A) is not necessarily; the firm might not use the least amount of
inputs to produce a given output
B) is not necessarily; new technology is more expensive than old
technology
C) is; efficiency is about costs rather than when the technology was
developed
D) is; new technology isn't developed unless it is efficient
E) is; most consumers want access to the latest technology
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 18
A subsidy
A) raises marginal social benefit above marginal social cost.
B) makes marginal social cost equal marginal social benefit.
C) results in efficient production.
D) raises marginal social cost above marginal social benefit.
E) makes world prices higher than domestic prices.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 19
Choose the correct statement.
A) When marginal product of labour is greater than average
product of labour and marginal product is either increasing or
decreasing average product of labour is increasing.
B) When total product is increasing average product of labour and
marginal product of labour are both increasing.
C) When marginal product of labour is greater than or equal to
average product of labour, average product of labour is increasing.
D) When marginal product of labour is increasing, average product
of labour is greater than marginal product of labour.
E) When total product is increasing, average product of labour is
decreasing and marginal product of labour is increasing.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 20
The price of gasoline rises by 25 percent and remains fixed at the
new higher level. Choose the correct statement.
A) The demand for gasoline will increase after consumers adjust
their consumption behaviour to the new higher price.
B) The demand for gasoline will decrease after consumers adjust
their consumption behaviour to the new higher price.
C) Initially after the price change, the price elasticity of demand
will be less elastic than it will be a few years after the price
change.
D) The price elasticity of demand for gasoline will decrease in the
future.
E) Initially after the price change, the price elasticity of demand will
be more elastic than it will be a few years after the price change.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 21
If the demand for a good is unit elastic, then a 5 percent increase in
price results in
A) a 5 percent increase in total revenue.
B) a 5 percent decrease in total revenue.
C) no change in total revenue.
D) an increase in total revenue greater than 5 percent.
E) an increase in total revenue less than 5 percent.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 22
A production possibilities table for two products, corn and paper, is
found below. Usual assumptions regarding production possibilities
are implied. Corn is measured in tons, and paper is measured per
unit.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 22
a. What is the opportunity cost of producing the first unit of paper?
(1 point) 3 corns
b. What is the opportunity cost of producing the fourth unit of
paper? (1 point) 12 corns
c. Explain how increasing opportunity costs are reflected in the
production possibilities curve. (1 point)
Producing the 1st unit of paper requires the sacrifice of 3 units of
corns, while producing the 4th unit of paper requires the sacrifice
of 12 units of corns. We are giving up more and more corns to
produce a given amount of paper (1st vs 4th) as we produce more
and more paper.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 23
Harvey quit his job where he earned $45,000 a year. To start the business, he
cashed in $100,000 in bonds that earned 10 percent interest annually to buy a
software company, Extreme Gaming. In the first year, the firm sold 11,000 units
of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of
production, packaging, marketing, employee wages and benefits. His company
rented a building for $200,000 per year. Harvey also required a normal profit of
$50,000 a year. Explain whether Harvey has made a good decision. (2 points)
Total revenue = 11000*75 = 825000
Total opportunity cost = 910000
Economic profit = -85000
Harvey did not make a good decision because he is making less
money than working.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 24
Briefly discuss the three factors that influence the elasticity of
demand. (3 points)
1) More substitutes, more elastic.
2) The greater the proportion of income consumers spent on a
good, the larger is its elasticity of demand.
3) The more time consumers have to adjust to a price change, or
the longer that a good can be stored without losing its value, the
more elastic is the demand for that good.
2013 sample final, reproduced with permission from Wai Ching Kong
practice – past material 25
Business people speak about price elasticity of demand without
using the actual term. Which one of the following statements
reflects inelastic demand for a good?
A) "A price cut won't help me. It won't increase sales, and I'll just get
less money for each unit."
B) "I don't think a price cut will make any difference to my bottom line.
What I may gain from selling more I would lose on the lower price."
C) "My customers are real bargain hunters. Since I set my prices just a few
cents below my competitors, customers have flocked to the store, and
sales are booming."
D) "With the recent economic recovery, people have more income to
spend and sales are booming, even at the previous prices."
E) both A and B
2013 sample final, reproduced with permission from Wai Ching Kong