Download Economics 1 - Bakersfield College

Economics 1 Unit 2 Test
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Part A. Answer the following 6 questions in the space provided. Each question is worth 4
points.
1. Draw a diagram for the short-run showing the typical marginal product of labor and label it
MPL and the average product of labor curve and label it APL. Mark the specialization of
labor region and the diminishing marginal returns region on your diagram. Mark the
horizontal axis as N for number of workers and the vertical axis as output.
2. Draw a diagram illustrating the case of a perfectly competitive business firm making a profit.
Label the demand curve D, the marginal revenue curve MR, the marginal cost curve MC, and
the average total cost curve ATC. Show the quantity the firm will choose to produce and the
price it will charge and mark those Q1 and P1 respectively.
3. Draw a supply and demand diagram showing the effect of an increase in demand in the longrun for a constant cost industry. Label the starting price and quantity P1 and Q1 and the
ending price and quantity P2 and Q2. Be sure to label the axis of the diagram and any lines
you draw on the diagram also.
4. A. List the 3 attributes or properties of perfect competition.
(1)
(2)
(3)
B. Circle the word that goes in the blank. Firms in perfect competition are price ________.
makers
takers
setters
5. A. Suppose the price of a donut is $2 and the price of an orange is $3. Also suppose that a
shopper has a current marginal utility of donuts equal to 8 utils and a marginal utility of
oranges equal to 9 utils. Would the shopper chose to buy a donut or an orange? Show
your work. This question is worth 3 points.
B. Suppose that for whichever you answered above (orange or donut), the shopper has an
allergy to that food. Would it be possible then that they would buy the other item even
with the marginal utilities above? Answer yes or no and explain why. This question is
worth 1.5 points.
6. A. The invisible hand uses price to solve two major problems in the working of a large
complex economy. List them both below. Hint – both words start with the letter ‘I’.
1. _________________________
2. _________________________
B. List a good with an externality below, and then list the externality.
Part B. Mark the letter of the correct answer on your scantron. Each question is worth 1 point.
1. A firm in perfect competition loses money when its price is lower than:
a. its average variable cost.
b. its average total cost.
c. its demand curve.
d. its fixed cost.
2. A firm in perfect competition is losing money in the short-run. It should:
a. raise its price.
b. lower its price.
c. shut down production so it loses no money.
d. none of the above.
3. Which of the following is most likely a fixed cost for a business?
a. The lease agreement for the factory.
b. Electricity.
c. Labor.
d. Both a and c.
4. When a firm has increasing returns to scale, their average cost of production as they make more of
the good is:
a. rising.
b. falling.
c. staying the same.
d. could be any of the above.
5. A reason that average total cost might be rising in the long-run is:
a. specialization of labor.
b. use of bigger assembly line machines.
c. diminishing marginal returns.
d. none of the above.
6. A reason that average total cost might be rising in the long-run is:
a. command and control problems.
b. diminishing marginal returns.
c. specialization of labor.
d. all of the above.
7. A reason that marginal cost might be rising in the short-run is:
a. specialization of labor.
b. use of bigger assembly line machines.
c. diminishing marginal returns.
d. none of the above.
8. When a factory goes from having 1 worker to 2 workers, its total production rises from 20 to
50. What is the marginal product of labor of worker 2?
a. 20.
b. 50.
c. 30.
d. 70.
9. If a firm in the short-run is losing money and does not expect business to improve in the
future, it should shut down:
a. immediately in all cases.
b. only if P < AVC (TR < TVC).
c. only if P < ATC (TR < TC).
d. only when it gets to the long-run, and never shut down in the short-run.
10. A firm's factory is assumed to be the best size factory for making the amount of output it is
producing:
a. only in the short-run.
b. only in the long-run.
c. in both the short-run and the long-run.
d. in neither the short-run nor the long-run.
11. For a firm in perfect competition, the owner has real control which of the following?
a. Both the price he charges and the quantity of product he makes.
b. The price he charges, but not the quantity.
c. The quantity he makes, but not the price.
d. Neither the price he charges or the quantity of product he makes.
12. In which case below will the long-run supply curve be downward sloping?
a. An increasing cost industry.
b. A decreasing cost industry.
c. A constant cost industry.
13. What is the rule about how much of its product a firm in perfect competition should produce?
a. Where marginal revenue is as high above marginal cost as possible.
b. Where marginal revenue is equal to marginal cost.
c. Where the average total cost is equal to the demand curve.
d. Where marginal cost is as high above marginal revenue as possible.
14. What is the cost of producing zero units in the short-run?
a. Zero.
b. Whatever the variable cost of producing zero is.
c. Whatever the fixed cost is.
d. Whatever the total revenue is.
15. Diminishing marginal returns is a reason that cost may rise:
a. in both the short-run and the long-run.
b. only in the short-run.
c. only in the long-run.
d. In neither the short-run or the long-run.
16. In the long-run for firms in perfect competition:
a. profits never go to zero.
b. profits rarely go to zero.
c. profits often go to zero.
d. profits always go to zero.
17. Which of the following is a good example of perfect competition?
a. Wheat farming when there are many wheat farmers.
b. Restaurants, when there are many restaurants.
c. One electric company which powers a whole town.
d. The breakfast cereal industry.
18. How does a price of $6.41 for a bushel come to be?
a. The government set it.
b. The Wall Street Journal set it, in consultation with the Chicago Board of Trade.
c. It is at that price that all individual farmers will grow an individual amount of wheat which will
add up to the total amount of wheat customers want to buy at that price.
d. The farmers thought that was a fair price to set, as it covered all their costs of production plus left
them with a small profit left over.
19. Which of the following is most likely true of heroin addicts?
a. They never get tired of taking heroin, so the law of diminishing marginal utility probably does
not apply to them.
b. The law of diminishing marginal utility does apply to them, they just have a very fast 'reset' time
for heroin.
c. They are crazy anyway, so there is no explaining their behavior.
d. Each heroin addict is different, so nothing can be said that would apply to all of them, or even
most of them.
20. If the marginal utility of the last dollar spent on good A is twice that of the marginal utility of the last
dollar spent on good b, the shopper should:
a. buy more good A and less good B.
b. buy more good B and less good A.
c. buy this combination of good A and B.
21. If the marginal utility of an apple is higher than the marginal utility of a banana, then which
of the following is true?
a. The consumer will necessarily buy the apple.
b. The consumer will necessarily buy the banana.
c. The consumer doesn't care if he buys the apple or the banana.
d. There is not enough information to know if the consumer will buy the apple or banana.
22. Which of the following is true about the theory of declining marginal utility of money with
no other factors considered?
a. It explains buying insurance but not gambling.
b. It explains gambling but not buying insurance.
c. It explains neither gambling nor buying insurance.
d. It explains both gambling and buying insurance.
23. A person buys insurance even if he expects to lose money on it because:
a. he is an idiot.
b. with the diminishing marginal utility of money, there comes a point where more money makes
him less happy.
c. no one actually does this.
d. he will pay low utility dollars to the insurance company when things are good in order to get
back high utility dollars when things are bad.
24. A customer will most likely choose to not buy any of most of the items available in the store. Why?
a. They have negative marginal utility for him.
b. They have negative total utility for him.
c. Even the first dollar spent buying that good will bring less utils than the dollars spent buying the
things he actually buys.
25. When you have bought the combination of goods that will make you as happy as possible, which of
the following is true?
a. MUA = MUB = MUC = …
b. MUA/PA =MUB/PB = MUC/PC = ….
c. The total utility received from every item you buy will be the same.
d. The marginal utility of each item you buy will have reached zero.
26. The tragedy of the commons is that a fishing area that is open to use to everybody with no
restrictions will often:
a. not be used at all.
b. be fished to extinction.
c. be kept secret to all but a few.
d. be the source of fierce fights between the users.
27. Which of the following is a public good?
a. A city road.
b. A car.
c. A polluting factory.
d. A Wendy’s Pretzel Pub Chicken Sandwich.
28. What is the main way that businesses know what customers want?
a. Customer surveys.
b. What customers are willing to pay for.
c. The government tells them.
d. Advertising.
29. What is the main way that customers know when the business has more of the good to sell than
usual?
a. The price goes down.
b. They receive a newsletter from the business.
c. The government tells them.
d. Word of mouth from fellow customers.
30. When the productivity of workers goes up, the cost of what they are making:
a. goes up.
b. goes down.
c. stays the same.
31. When a business owner has an economic profit of $10,000 this means that:
a. his accountant is reporting a profit of $10,000 to the I.R.S.
b. he made $10,000 more running this business than he would have made doing his next best thing.
c. he actually lost money, all things considered.
d. He would have made $10,000 dollars doing something else.
32. According to the average-marginal rule, if the current average cost of making radios is $25 and you
make one more radio which cost $30 to make; then the new average cost per radio including this
additional radio will be:
a. higher than $25.
b. lower than $25.
c. stay at $25.
d. there is not enough information to say.
33. A person who attempts to get a public good without paying is called:
a. a thief.
b. a customer.
c. marginal guy.
d. a free rider.
34. An economy is operating efficiently when:
a. it is producing efficiently.
b. its good are distributed well.
c. it is producing goods that its people strongly desire.
d. all of the above.
35. If there is an increase in demand that causes the price of wheat to rise significantly and wheat farms
in the U.S. have the market structure of perfect competition, then wheat farms in the U.S. will:
a. make profits in the short-run, but not the long-run.
b. make profits in the long-run, but not the short-run.
c. make profits in both the short-run and long-run.
d. not make profits in either the short-run nor long-run.
36. If a firm is breaking even, then it is the case that:
a. its ATC > P.
b. its ATC < P.
c. its ATC = P.
d. it could be any of the above.