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ECON 101
2nd Sample Midterm
Name:..........................
PART 1
1) Pınar runs a restaurant at Alsancak. Her total revenue last year was 110,000 TL . The rent
on her restaurant was 48,000 TL, her labor costs were 42,000 TL, and her materials, food and
other variable costs were 20,000 TL. Pınar could have worked as a biologist and earned
50,000 TL per year. An economist calculates her economic profit/loss as
a) 110,000 TL profit.
b) 50,000 TL profit.
c) 50,000 TL losses.
d) 0 TL .
2) Which of the following is correct about marginal and average products?
a) When the marginal product is increasing, the average product must be increasing.
b) When the marginal product exceeds the average product, the average product
must be increasing.
c) When the average product is increasing, the marginal product must be decreasing.
d) When the marginal product is decreasing, the average product must be decreasing.
3) The vertical distance between total cost curve and total variable cost curve is equal to
a) average fixed cost.
b) total fixed cost.
c) average variable cost.
d) average total cost
4) Refer to the graph below. Which of the following statements is correct?
a) Points D, C, and B show different combinations of inputs that yield the same cost of
production.
b) At points D, C, and B, the amount of output produced is the same
c) At points D, C, and B, the total cost of production is minimized
d) At points B and D, the total cost of production is lower than that at point C.
5) Which of the following is a characteristic of perfect competition?
a) Each firm produces different products.
b) There are many firms.
c) Each firm is large relative to the industry
d) Each firm controls its own price.
6) Movement from one point to another along an isoquant implies a change in
a) production methods
b) the scale of production
c) the rate of productivity growth
d) the level of output
7) Which of the following statements concerning short-run and long-run decisions is
FALSE?
a) In short-run quantity of some inputs, called fixed factors, cannot be altered.
b) Long-run is the period of time which there are no fixed factors of production.
c) Short-run may extend over different time periods for different industries.
d) In short-run new firms can enter and existing firms can exit the industry.
8) Which of the following statements concerning indifference curves is FALSE?
a) An indifference curve shows all combinations of goods that give the same amount of
satisfaction.
b) The further away from the origin an indifference curve is, the greater the amount of
satisfaction it represents
c) An indifference curve’s diminishing slope shows that the more of a good a consumer
has the greater amount of it she is willing to exchange for another good
d) An increase in real income will cause an indifference curve to shift outward.
9) The law of diminishing marginal returns states that:
a) When additional units of a variable input are added to fixed inputs, the total product
declines.
b) When additional units of a variable input are added to fixed inputs, the marginal
product of the variable input declines.
c) When variable and fixed inputs are combined, the total product eventually declines.
d) When additional units of a fixed input are added to variable inputs, the total product of
the fixed input declines.
10) Which of the following statements is entirely correct?
a) Economies of scale is a short run concept, while diminishing returns is a long run
concept.
b) Both economies of scale and diminishing returns are short run concepts
c) Both economies of scale and diminishing returns are long run concepts.
d) Economies of scale is a long run concept, while diminishing returns is a short run
concept
PART 2
1) Assume that a given firm combines capital and labor in various ways to minimize costs.
The price of a unit of capital is 2 TL and the price of a unit of labor is 3 TL. The following
data represents the total productivities.
Capital
# of
units
1
2
3
4
5
6
7
TP
MP
MP/TL
Labor
# of units
5
12
22
30
36
40
42
5
7
10
8
6
4
2
2,5
3,5
5
4
3
2
1
1
2
3
4
5
6
7
TP
MP
MP/TL
8
20
30
36
40
41
41
8
12
10
6
4
1
0
8/3
4
3,33
2
4/3
0,33
0
a)
Fill in the figures for the marginal product and marginal product per TL for both
capital and labor.
b)
Does the information regarding labor indicate a situation of diminishing marginal
returns? Explain.
Yes, the information regarding labor indicates diminishing marginal returns. Because
marginal product of labor starts to diminish after the second unit of labor.
c)
Given a total cost of 14 TL available for this firm to employ capital and labor, what
quantity of capital and labor will minimize this firm’s costs? Explain briefly.
According cost minimization rule the following condition must hold:
MPK /PK = MPL /PL
This condition holds when the firm employs 4 units of capital and 2 units of labor. And the
total cost becomes:
TC= PK * K + PL *L
=2*4 +3*2
=14 TL
2) Cost figures for a hypothetical firm are given in the following table. Use them for them
exercises below. The firm is selling in a perfectly competitive market.
Output
1
2
3
4
5
a)
b)
c)
d)
TFC
$50
50
50
50
50
AFC
50
25
16,7
12,5
10
TVC
$30
$50
$80
$120
$170
AVC
30
25
26,6
30
34
TC
80
100
130
170
220
ATC
80
50
43,3
42,5
44
MC
30
20
30
40
50
Fill in the blank columns.
What is the minimum price needed by the firm to break even? $42,5
What is the shutdown price? $25
At a price of $40, what output level would the firm produce? 4 units What would its
profit be? $10 losses
e) Suppose that the market price falls to $20. What would its loss be? (TR – TC = 2 x $20
– $80 = $60.) Would the firm still operate at this price in the short-run? NO. Why or
why not? Operating profit is negative. ( TR- TVC = 2x 20- 50 < 0) At this price will
the firm still operate in the long-run? NO. The firm will shut down in the short-run
and exit from the market in the long-run.
3) The figure below shows three curves, MC, ATC and AVC, for the firm in a perfectly
competitive market. Presently, in this market, the price of the good is $3. Use this graph to
answer the following questions.
Note: At Point A, the price is $4.7 and the quantity is 11.
Price or Cost
per unit ($)
Marginal Cost
Average Total Cost
B
$5
Price=$3
$1
A
C
D
Average Variable
Cost
5
10
Q=Output
a) What is the optimal quantity of goods for this firm to sell if the price is $3? 10
b) Is there any economic profit or economic loss? If so, calculate this value? Economic
loss. ( TR- TC = $3 x 10 - $5 x 10= $20 losses)
c) What is the point (A, B, C or D) at which the situation is break-even for this firm?
Point A: The minimum of ATC curve.
d) What is the shut-down price for this firm? $1: The minimum of AVC curve.
e) At which point is the firm making a loss? D and C. Because ATC is above the price
at these points.
PART 3
Indicate whether you agree or disagree with each of the following statements. Briefly explain
your answers.
a) A firm suffering losses in the short-run will continue to operate as long as total revenue will
at least cover fixed cost.
Disagree! A firm suffering losses in the short-run will continue to operate as long as total
revenue will at least cover total variable cost, not fixed cost. Total revenue less total
variable cost is called as operating profit. If operating profit is positive, the firm should
continue operating. If operating profit is negative, the firm should shut down.
b) Fixed cost is constant at every level of output except zero. When a firm produces no output,
fixed costs are zero in the short run.
Disagree! Fixed cost is constant at every level of output including zero. When a firm
produces no output, it still has to incur total fixed costs like rent in the short-run.