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Econ 101(6)
Fall 2006
Exam 2
Version 1
Choose the single best answer for each question. Each question is worth 2.5 points.
1. A consumer's budget line shows
a. the utility that an individual would receive from consuming various combinations of two
goods
*. the combinations of two goods that an individual is able to purchase, given prices and
income
c. how income is influenced by prices of goods
d. how changes in income affect utility
e. the relationship between prices and income
2. A family on a trip budgets $800 for sit-down restaurant meals and fast food. If the price of a fast food
meal for the family is $20, how many such meals can the family buy if they do not eat at
restaurants?
a. 8
b. 15
c. 20
*. 40
e. 160
3. Suppose that a consumer's original budget line was AB in Figure 5-4, but it has now changed to line
AC. Which of the following must have occurred?
a. The price of good X must have risen.
b. The price of good Y must have risen.
c. The price of good Y must have fallen.
*. The price of good X must have fallen.
e. The consumer's income must have risen.
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4. Marginal utility
a. increases as more of a good is consumed
b. increases as the total utility of consuming a good increases
c. is the same as the utility of consuming a good
*. is the same as the utility of consuming an additional unit of a good
e. is the same for all units of a good, but varies from one consumer to another
Figure 5-6
Quantity of
Apples
0
1
2
3
4
Total
Utility
0
20
34
44
50
5. Figure 5-6 shows the total utility that Jerry receives from consuming different numbers of apples per
week. What is his marginal utility from the fourth apple ?
a. 20
*. 6
c. 34
d. 14
e. 10
6.
Figure 5-6 shows the total utility that Jerry would receive from consuming several different
quantities of apples per week. What can be said about Jerry's utility schedule for apples?
a. It conforms to the law of supply.
b. Marginal utility rises as consumption rises.
c. Average utility rises as consumption rises.
*. It conforms to the law of diminishing marginal utility.
e. The marginal and total utility lines cross at four apples.
7. The Jones family is going to Disney World and has set a budget of $2000 for food and souvenirs. If
Mr. Jones finds a $50 bill on the ground during their trip and uses it to purchase additional
souvenirs, then
*. souvenirs are a normal good
b. food is an inferior good
c. the budget line has shifted to the left
d. the slope of the budget line has changed
e. souvenirs are an inferior good
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8. A decrease in the price of a good or service
a. causes the budget line to rotate inward
b. causes a parallel outward shift of the budget line
c. means that less of the good can be purchased with a given income
*. causes the budget line to rotate outward
e. causes a parallel inward shift of the budget line
9. The substitution effect of a decrease in the price of an inferior good encourages the consumer to
purchase more of the good while the income effect encourages the consumer to purchase less of
it.
*. True
b. False
10.
Samantha has been working for a law firm and earning an annual salary of $90,000. She decides
to open her own practice. Her annual expenses will include $15,000 for office rent, $3,000 for
equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a
secretary/bookkeeper. Samantha will cover her start-up expenses by cashing in a $20,000
certificate of deposit on which she was earning annual interest of $1,000. Assuming that there are
no additional expenses, Samantha's annual implicit costs will equal
a. $55,200
b. $221,400
*. $91,000
d. $146,200
e. $145,200
11.
In the short run, costs that arise from resources that cannot vary in quantity are known as
____________, whereas costs from inputs that can vary in quantity are known as ____________.
*. fixed costs; variable costs
b. explicit costs; implicit costs
c. opportunity costs; variable costs
d. fixed costs; opportunity costs
e. variable costs; fixed costs
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Figure 6-6
12.
Tons
Output (Q)
Cost (TC)
0
$1,000
1
$1,400
2
$2,000
3
$2,400
4
$2,600
5
$2,700
Figure 6-6 shows the total cost for six different levels of output for a particular firm. What is the
average total cost (ATC) of producing four units of output?
a. $2,600
b. $200
*. $650
d. $50
e. $10,400
13. Figure 6-6 shows the total cost for six different levels of output for a particular firm. What is the
marginal cost (MC) of the last unit of output listed in the table (i.e., the fifth unit of output)?
a. $2,700
b. $540
*. $100
d. $90
e. $500
14. Figure 6-6 shows the total cost for six different levels of output for a particular firm. Total fixed
cost (TFC) if five units of output are produced is
a. $1,700
b. $540
*. $1,000
d. $100
e. $2,700
15.
Which of the following is true about the relationships among various cost curves?
*. When MC exceeds ATC, ATC must be rising.
b. When MC exceeds ATC, ATC could be rising or falling.
c. When ATC is falling, MC must exceed ATC.
d. When TC is rising, MC must exceed TC.
e. TC falls when AFC falls.
16. The behavior of firms is best understood by focusing on
a. money profit
*. economic profit
c. accounting profit
d. economic profit minus implicit costs
e. money profit minus explicit costs
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17. William quits his job where he earns an annual salary of $75,000 and opens a management
consulting business, charging an hourly rate of $120. He works out of his home, converting a
storeroom into an office. (Zoning restrictions prevent William from renting out the room.) Startup costs are financed by selling $15,000 worth of bonds he inherited that were earning annual
interest payments of $900. During his first year, William incurs expenses for supplies and utilities
that total $3,500. If William bills 500 hours of consulting time in the first year, he earns an
economic profit equal to
a. $55,600
b. -$15,000
*. -$19,400
d. -$34,400
e. $41,500
18. Under the total revenue and total cost approach to profit maximization,
a. firms equate total variable cost to total revenue in order to maximize profit
b. profit is maximized when fixed cost falls to zero
*. firms choose the level of output at which total revenue is the greatest distance above total
cost when the firm earns an economic profit
d. firms choose the level of output at which the changes in revenue and cost both equal zero
e. total revenue is maximized when profit is zero
19. If a firm is producing the level of output at which the total cost curve intersects the total revenue
curve,
a. profit is positive
b. profit is maximized
*. profit is zero
d. costs are minimized
e. average revenue is maximized
Figure 7-11
Output
0
1
2
3
4
5
20.
Total
Revenue
0
$ 90
$160
$210
$240
$250
Total
Cost
$100
$150
$190
$215
$250
$300
Consider the firm in Figure 7-11. The marginal cost of producing the fifth unit of output is
a. $300
b. $1,500
*. $50
d. $40
e. $60
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21.
To maximize profits or minimize losses in the short run, the firm in Figure 7-11 should produce
an output of
a. 0
b. 1
c. 2
*. 3
e. 4
22.
If the firm in Figure 7-11 sells five units of output, then the price must equal
a. $60
b. $10
c. $250
d. $90
*. $50
23.
When a firm incurs losses in the short run, the most important consideration in determining
whether to continue producing is whether
a. marginal cost equals marginal revenue
b. average total cost is at its minimum
c. average variable cost is at its minimum
*. revenues cover some of its fixed costs and all of its variable cost
e. total revenue exceeds total cost
24.
If Carol's Crayon Factory's price exceeds its average total cost in the short run, then
a. it should shut down
*. it is earning a profit
c. profits are being maximized
d. it should increase output
e. it should decrease output
25. Jim's Shoe Shine Shop operates in a perfectly competitive market. If its marginal revenue is $5 per
shine, then
a. the next shine will bring in less than $5 in additional revenue
b. the next shine will bring in more than $5 in additional revenue
*. the market price per shine is $5
d. price is less than $5
e. price is equal to total revenue at all output levels
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26.
In short-run equilibrium, the perfectly competitive firm of Figure 8-8 will earn a total economic
profit of
a. zero
*. $950
c. $825
d. $1,425
e. $575
27.
The All-the-Rage microbrewery is represented in Figure 8-9. If the market price is $4.50 per pint,
then in the short run, the microbrewery will
*. produce in the short-run and earn an economic profit
b. produce in the short-run and suffer an economic loss
c. be indifferent between shutting down and producing in the short-run
d. shut-down in the short-run and earn an economic profit
e. shut-down in the short-run and suffer an economic loss
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28.
In perfect competition, as the long run approaches, economic losses will cause
*. the exit of existing firms, shifting the market supply curve to the left
b. government regulation
c. technological innovation
d. inflation
e. a favorable shift in tastes and preferences
29.
Which of the following statements about perfectly competitive markets is not correct?
a. In the short run, firms can earn economic profits or suffer economic losses.
b. The market demand curve is downward sloping.
c. The demand curve facing an individual firm is perfectly elastic.
*. In the long run, firms can earn economic profits or suffer economic losses.
e. In the long run, firms can enter or exit the market.
30.
In long-run equilibrium, every perfectly competitive firm
a. maximizes its output
b. chooses its plant size and output level to operate at minimum long-run marginal cost
*. chooses its plant size and output level to operate at minimum long-run average total cost
d. earns an economic profit
e. suffers an economic loss
ANS: C
DIF: 2
TOP: Perfect Competition and Plant Size
Questions 31-32 refer to the following statement.
Julie, who has been working for an advertising firm, is thinking of starting her own advertising
company. She has determined that, based on how much business she would likely be doing, her
yearly costs would be $60,000 for rent on the office building, $200,000 for wages and salaries of
employees, and $7,000 for materials and utilities. In addition, in order to start the business, she
would have to invest $80,000 of her own funds. She plans to manage the business herself, which
would require her to quit her job at the advertising firm, where she currently earns $50,000 per year.
Finally, the interest rate (or rate of return) on investments in the economy is 5%.
31. If Julie starts her business, what would be her total implicit cost per year?
*. $54,000
b. $60,000
c. $267,000
d. $80,000
32. If Julie starts her business, what would be her total cost (TC) per year?
*. $321,000
b. $267,000
c. $54,000
d. $401,000
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33.
Which of the following statements best describes the behavior of average variable cost (AVC)
and average fixed cost (AFC) as output rises?
a. At low levels of output, a firm's average fixed cost increases steadily, while its average
variable cost decreases steadily. Eventually, the opposite occurs.
b. Across all levels of output, a firm's average fixed cost and its average variable cost increase
steadily.
c. At low levels of output, both the average fixed and average variable cost increase steadily.
Eventually, the opposite occurs.
*. At low levels of output, both the average fixed and average variable cost decrease.
Eventually, the average fixed cost continues to decrease but the average variable cost increases.
Questions 34-35 refer to the following statement.
When Better Beds produces 40 beds per day, its average variable cost is $600 and its average total
cost is $800. The marginal cost of producing the 40th bed is $700.
34. Based on this information, what is the Better Beds' average fixed cost (AFC) for quantities of 20
and 40 beds per day?
*. (20, 400) and (40, 200)
b. (400, 20) and (200, 40)
c. (20, 200) and (40, 400)
d. (200, 20) and (400, 40)
35. Now consider the average total cost. When Better Beds increased production from 39 to 40 beds
per day:
a. The average total cost remained at $800 per day.
b. The average total cost rose.
c. There is no way to know how the average total cost changed.
*. The average total cost fell.
36. A firm has accounting profit of $5,000 per year, but in terms of economic profit, it is breaking even
(earning economic profit of zero). Which of the following is true?
a. Total implicit costs are greater than total explicit costs.
b. Total explicit costs are greater than total implicit costs.
*. Total implicit costs are equal to $5,000 per year.
d. Total explicit costs are equal to $5,000 per year.
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Questions 37-40 refer to the following statement.
Alwite is a perfectly competitive firm that produces white t-shirts. The market for white t-shirts is
perfectly competitive and the market price of a t-shirt is $10.
37. What will be Alwite's total revenue if it sells 20 t-shirts?
a. 150
b. 100
*. 200
d. 30
38. What will be Alwite's total revenue if it sells 21 t-shirts?
a. 160
b. 90
*. 210
d. 290
39.
What is Alwite's marginal revenue when it increases production from 20 to 21 white t-shirts?
*. 10
b. 20
c. 16
d. 8
40.
True or False: Alwite's marginal revenue is the same for all levels of production.
*. True
b. False
BONUS QUESTIONS
41. What is the effect of a decrease in the price of a normal good?
a. The consumer will buy more of the good, but reach a lower indifference curve.
b. The consumer will buy less of the good, but reach a higher indifference curve.
*. The consumer will buy more of the good and reach a higher indifference curve.
d. The consumer will buy the same quantity of the good and remain on the same indifference
curve.
e. The consumer will buy more of the good and remain on the same indifference curve.
42. Suppose that Carla's Candy Shop finds that at the current level of output, marginal revenue is below
marginal cost and average variable cost is below price. If the market price is held constant,
Carla's Candy Shop should ____________ in order to maximize profits.
a. raise output
b. reduce its price
*. reduce output
d. close down
e. maintain its current output level
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