1 ECON111 Sample Questions 1.) Please fill in the table below for a perfect competetive firm. Q P TC MC FC VC AFC AVC ATC TR MR a) Calculate profit at each quantity level. b) What is the profit maximizing level of quantity (best approximation)? c) What should this firm do in the short-run? d) What should this firm do in the long run? 2.) Suppose Firm A and Firm B are the only firms in Bosnia and Herzegovina serving in domestic air service. They need to decide to choose a city as their center. According to market research by a consultant, their respective profit estimations (in million KM) are found as presented in the payoff matrix below. Based on this, please answer the following questions: Firm A Firm B Sarajevo Tuzla Mostar Bihac Sarajevo 20,16 24,15 21,14 25,12 Tuzla 17,22 12,10 15,20 15,18 Mostar 15,20 10,12 8,7 12,20 Bihac 18,25 18,14 18,22 14,12 a) What is the cooperative equilibrium in this game? b) What is the dominant strategy for firm A, if there is any? c) What is the dominant strategy for firm B,if there is any? d) What would be the result, if both firms follow Maxi-Min strategy? e) What is/are the Nash Equilibrium strategy (ies)?
2 Please answer questions from 1 to 12, using the table below for monopolistically competitive firm: Q P TC MC FC VC AFC AVC ATC TR MR What is the FC for this firm? 2. What is the AFC at Q =10? 3. What is the AVC at Q = 30? 4. What is the VC at Q = 30? 5. What is the TC at Q = 100? 6. What is the price at Q = 50? 7. What is the MR between Q=30 and Q=50? 8. What is the TR at P = 20? 9. What is MC between Q=50 and Q=100? 10. What is the profit maximizing level of quantity for this firm (approximately, best answer possible from the table)? 11. How much profit does this firm earns at Q = 50? 12. What should this firm do in the short-run? a) Should produce with profit b) Should produce with zero economic profit c) Should produce with loss d) Should shut down immediately e) Should exit the industry
3 Please answer the following questions, using the table and information below for a duopoly: Firm A and Firm B are the only firms in supermarket industry in a middle size town. According to market research, the town can only accommodate two supermarkets. However, the location of the supermarket may significantly impact the profits earned. Firm A Firm B North South East West North 11,12 24,22 15,18 13,16 South 23,25 12,14 13,16 18,20 East 16, 18 14,15 13,15 24,25 West 15,17 15,16 20,21 14, What is the dominant strategy for firm A? 14. What is the dominant strategy for firm B? 15. What is the cooperative equilibrium in this game? a) North for Firm A and South for Firm B b) East for Firm A and West for Firm B c) West for Firm A and East for Firm B d) South for Firm A and West for Firm B e) None 16. What would be the result, if both firms follow Maxi-Min strategy? a) North for Firm A and West for Firm B b) South for Firm A and South for Firm B c) West for Firm A and West for Firm B d) East for Firm A and North for Firm B e) None
4 17. What is the best response of Firm A given that Firm B choses the South? 18. What is the best response of Firm B given that Firm A choses the West? 19. How many Nash equilibrium strategies exist in this game? a) 0 b) 1 c) 2 d) 3 e) Which one of the following strategy combinations constitutes a Nash equilibrium? a) West for Firm A and South for Firm B b) East for Firm A and North for Firm B c) West for Firm A and North for Firm B d) East for Firm A and South for Firm B e) None 21. Napoli Pizza s average variable cost consists of $3.60 of labor, $1.80 of materials, and $0.60 of other variable inputs. If it has fixed costs of $3000, what level of output is required at a price of $8 for a pizza to generate $5000 in profits? a) 2000 b) 2500 c) 3000 d) 3500 e) Suppose you give up your job and use some savings to buy a small truck which you drive on a remote rural route to transport commercial products. Which of the following costs of your firm is not an explicit (accounting) cost? a) Gasoline expense b) Wages you pay to your workers c) Interest forgone due to the purchase of the truck d) Rent expense for the office of the company e) Expenses for utilities such as electricity and telephone
5 23. If a firm s marginal revenue is below its marginal cost, an increase in production will a) Lead to a loss of some profit b) Increase the firm s profit c) Make the firm more efficient d) Attract new firms to enter this industry e) Result in existing firms to exit 24. If a firm is a price taker, its marginal revenue is a) Equal to its MC b) Equal to the price of the product c) Equal to the ATC d) Less than the price e) Less than the MC 25. A profit-maximizing monopolist finds that if it remains open, the best output is 50 units a week, but at this output it would make a loss. Under what circumstances should it shut down? a) If the price equal to its ATC b) If the price is greater than its ATC c) If the price is greater than its AVC d) If the price is below its AVC e) If the price is equal to its MC 26. Under perfect competition, if an industry is characterized by positive economic profits in the short run, firms will a) Shut down b) Exit the industry c) Decrease their production
6 d) Increase their production e) Enter this industry 27. A natural monopoly occurs when a) Government only allows one firm to serve in the market b) There are patents which do not allow other firms to enter c) Only one company has the technical knowledge to produce the product d) The market size is not large enough to accommodate two or more firms e) Monopolist uses predatory pricing and punish other entrants 28. Which of the following statements about industries that are oligopolies is true? a) Firms are price takers b) There is interdependence among the firms c) Firms operate like a monopoly d) Firms produce identical product e) Entry is free and easy in the short run 29. Which of the following creates a negative production externality? a) Smoking b) Using deodorants c) Education d) Chemical products e) Driving automobiles 30. In the case of a negative externality, the social marginal cost will a) Be larger than the marginal private cost b) Be equal to the marginal private cost c) Be less than the marginal private cost d) Have nothing to do with the marginal private cost
7 e) None of the above 31. Which one of the following is a common feature of public goods? a) Homogeneity b) Non-excludable c) Substitution d) Inferiority e) Divisibility 32. Which one of the following is the result of non-rivalry feature of public good? a) It is not possible to avoid people using it even if they do not pay for it b) Provision of public good by private sector is inefficient c) Utility from using the public good does not decrease as more people use it d) Public goods are provided by the government e) Public good result in free rider problem