MIDTERM II. GROUP A Instructions: December 18, 2013

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2 1. Suppose Joe starts his own business. In the first year of business, he earns \$100,000 in total revenue and incurs \$75,000 in explicit costs. If Joe has a standing offer to work for his brother at a salary of \$50,000, then the economic profit of Joes business is a. \$25,000 b. \$75,000 c. -\$25,000 d. \$100, How long does it take a firm to go from the short run to the long run? a. six months b. one year c. two years d. It depends on the nature of the firm Mt. Dew B A Popcorn 3. Suppose a consumer has \$100 in income, the price of popcorn is \$2, and the value of B is 100. What is the price of Mt. Dew? a. \$1 b. \$2 c. \$5 d. \$100 Version A, Page 2

3 4. The market for novels is a. perfectly competitive b. a monopoly c. monopolistically competitive d. an oligopoly P S \$10 \$10 \$8 \$6 \$5 D \$2 \$ MC ATC AVC D f = MR = AR Q Q Use the diagram above to answer question In order to maximize profits, the firm will produce a. 100 units b. 175 units c. 250 units d. 300 units Version A, Page 3

4 Output Total cost 0 \$40 10 \$60 20 \$90 30 \$ \$ \$ Refer to the table above. What is the average variable cost when output is 50? a. \$3.60 b. \$4.00 c. \$4.40 d. \$ Sam sells soybeans to a broker in Chicago, Illinois. Because the market for soybeans is generally considered to be competitive, Sam maximizes his profit by choosing a. to produce the quantity at which average variable cost is minimized. b. the quantity at which market price is equal to Sam's marginal cost of production. c. to sell at a price where marginal cost is equal to average total cost. d. to produce the quantity at which average fixed cost is minimized. 8. If a competitive firm is selling 1,000 units of its product at a price of \$9 per unit and earning a positive profit, then a. its total cost is less than \$9,000. b. its marginal revenue is less than \$9. c. its average revenue is greater than \$9. d. the firm cannot be a competitive firm because competitive firms cannot earn positive profits. Version A, Page 4

5 P S MC ATC = AVC e p e p = D f = MR = AR D Q Q 9. Assume the typical firm has long run cost structure as illustrated in the right most graph in the diagram above; what can we expect to happen in the long run? a. new firms would be likely to enter the industry. b. firms will use the opportunity to reduce production to align with the minimum point on the marginal cost curve. c. economic profits are likely to increase significantly. d. most firms will do nothing and enjoy significant economic profit throughout the long run 10. Suppose that the marginal utility you derive from the last slice of cheese pizza purchased is 50 utils and its price is \$1.00. Also, the marginal utility you derive from the last bottle of soda purchased is 300 utils and its price is \$3.00. a. Your are presently maximizing your total utility from consuming pizza and soda b. You can increase your total utility by purchasing more pizza and less soda c. You can increase your total utility by purchasing more soda and less pizza d. You can increase your total utility by purchasing zero units of both goods 11. When the law of diminishing returns sets in: a. total variable cost of producing output begins to rise b. average total cost of producing output begins to rise c. average variable cost of producing output begins to rise d. marginal cost of producing output begins to rise Version A, Page 5

6 12. If I conclude that I should see fewer movies and go to more football games, the marginal utility of the last dollar spent on movies is the marginal utility of the last dollar spent on football games. a. less than b. more than c. increasing more rapidly than d. diminishing more rapidly than 13. A car-wash company found that when it employed 30 workers the average product of labor was 30 cars per hour and the marginal product of labor was also 30 cars per hour. If the company were to hire an additional worker, then: a. the average product of workers would become greater than 30 b. the marginal product of workers would become greater than 30 c. the average product and marginal product of workers would both remain at 30 d. the average product and marginal product of workers would both become less than Suppose that a firm has only one variable input, labor, and firm output is zero when labor is zero. When the firm hires 6 workers the firm produces 90 units of output. Fixed costs of production are \$6 and the variable cost per unit of labor is \$10. The marginal product of the seventh unit of labor is 4. Given this information, what is the average total cost of production when the firm hires 7 workers?, a. \$0.81 b. \$9.64 c. \$10.06 d. Cannot be calculated with provided information Version A, Page 6

7 15. Which of the following occurs when a firm experiences increasing returns to scale? a. The productivity of the firm decreases as the firm gets bigger b. The long-run average total cost of producing output increases as the firm gets bigger c. The long-run average total cost of producing output decreases as the firm gets bigger d. Both a and b 16. Suppose there are 100 firms in an industry and these firms produce differentiated products. Which of the following is true? a. Competition will force each firm to charge the same price for its good. b. Consumers perceive these products to be imperfect substitutes, and therefore are willing to pay different prices for the products sold by different firms. c. Firms will exit the industry in the long-run d. A firms will not attempt to minimize the cost of producing its product 17. If the price that a firm receives for its product is equal to the average revenue it earns from selling its product, then we can conclude that it sells its product in which of the following types of markets? a. Perfect competition b. Monopoly c. Oligopoly d. It could be selling its product in any of the above markets 18. The demand curve of a monopolist: a. is the same as the marginal revenue curve b. is the same as the average revenue curve c. is the industry demand curve d. Both b and c Version A, Page 7

8 19. Many sea-side hotels shut-down in the off-season (winter months) because: a. hotel owner can t maximize revenue b. the off-season market price is below the hotel s average fixed cost c. off-season revenue is not high enough to cover the hotel s variable cost d. hotel owners like to spend the off-season in Ankara 20. If firms in a competitive industry are earning zero economic profits in the short-run, then one would expect that in the long-run: a. new firms will enter the industry b. existing firms will leave the industry c. firms will neither enter nor leave the industry d. all firms will shut-down their operations so that total industry output will be zero 21. What is the shape of the monopolist s marginal revenue curve? a. a downward-sloping line that is identical to the demand curve b. a downward-sloping line that lies below the demand curve c. a horizontal line that is identical to the demand curve d. a horizontal line that lies below the demand curve 22. Which of the following statements about oligopolies is not correct? a. Oligopolistic firms are always large. b. Each firm possesses some market power. c. There are only a few firms in the industry. d. An important reason for the existence of oligopolies is the presence of economies of scale. Version A, Page 8

9 23. The differences between a monopolistic firm and a perfectly competitive firm include all of the following except: a. the demand curve for the monopolist is downward sloping and the demand curve for the competitive firm is horizontal. b. marginal revenue is less than price for the monopolist and equal to price for the perfectly competitive firm c. marginal cost is upward sloping for the monopolist and horizontal for the perfectly competitive firm d. in short-run equilibrium the monopolist will produce the level of output for which price is greater than marginal cost and the perfectly competitive firm will produce the level of output where price is equal to marginal cost 24. Which of the following would not be considered price discrimination? a. Airline fares are lower if you purchase your ticket several weeks in advance b. A drug company charges a higher price of a cholesterol-lowering drug than for aspirin. c. Doctors charge high-income patients a higher price for a physical examination than low-income patients. d. Senior citizens pay a lower price for restaurant meals 25. If zinc suppliers are successful in forming an international cartel, then they will experience: a. higher zinc prices, higher zinc output, and greater profits b. lower zinc prices, higher zinc output, and greater profits c. lower zinc prices, lower zinc output, and greater profits d. higher zinc prices, lower zinc output, and greater profits Version A, Page 9

10 26. Each member of a cartel has an economic incentive to cheat on its agreed output quota because: a. producing more output than its quota will increase the cheating firm s sales and profits b. producing more output than its quota forces other members of the cartel to decrease their cost, which increases the cheating firm s profits c. producing less output than its quota will increase the cheating firm s sales and profits d. Both a and b 27. Which of the following statements comparing monopoly with competition is correct? a. A monopolist produces a higher level of output and charges a lower price than a competitive firm would. b. With perfect price discrimination, the total surplus under monopoly can be the same as under competition. c. With or without price discrimination, the consumer surplus under monopoly is at least as large as it would be under competition. d. The deadweight loss associated with monopoly is caused by the positive economic profits of the monopolist; competitive firms do not earn a positive economic profit so there is no deadweight loss under competition. 28. Because a monopolistically competitive firm has some market power, in the long-run the price of its product exceeds its a. average revenue b. average total cost c. marginal cost d. None of the above is correct. Version A, Page 10

11 29. Consider two countries, US and Russia, that are engaged in an arms race. Each country must decide whether to build new weapons or to disarm existing weapons. Each country prefers to have more arms than the other because a large arsenal gives it more influence in world affairs. But each country also prefers to live in a world safe from the other country's weapons. The following table shows the possible outcomes for each decision combination. The numbers in each cell represent the country s ranking of the outcome (4 = best outcome, 1 = worst outcome). Russia Build new Disarm existing weapons weapons Build new US: 2 US: 4 US weapons Disarm existing weapons Russia: 2 US: 1 Russia: 4 Russia: 1 US: 3 Russia: 3 a. Both US and Russia build new weapons b. Both US and Russia disarm existing weapons c. US disarms existing weapons and Russia builds new weapons d. US builds new weapons and Russia disarms existing weapons 30. The outcome in a Nash equilibrium: a. maximizes total well-being of all players. b. means that each player is happy with his decision, given the decisions of the other players. c. occurs when players collude to produce the best possible outcome. d. occurs when one player convinces the others to follow a course of action that will be in everyone's best interest. Version A, Page 11