ECON 2100 (Summer 2010 Sections 05 and 06) Exam #3 (Version C)

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1 ECON 21 (Summer 21 Sections 5 and 6) Exam #3 (Version C) Multiple Choice Questions: (3 points each) 1. Average Fixed costs of Production A. are defined as Fixed Costs of Production divided by quantity of output produced. B. are equal to Average Total Costs of Production us Average Revenue, multiplied by quantity of output. C. measure the increase in total costs of production associated with producing a greater amount of total output. 2. is a market structure in which there is one single seller of a unique good (with no close substitutes ) and in which there are barriers to entry which prevent rival firms from entering the market A. Monopoly B. Monopolistic Competition C. Oligopoly D. Perfect Competition 3. William works as a self employed dog walker. In a typical day he is able to walk 2 dogs. He is considering hiring his brother Henry to work for him. If he did hire Henry, then together they could walk a total of 36 dogs in a typical day. It follows that Henry s marginal product is units. A. 16 B. 28 C. 56 D In Industry Y : the largest firm produces 4% of total industry output, the second largest firm produces 3% of total industry output, the third largest firm produces 1% of total industry output, and the fourth largest firm produces 5% of total industry output. From this information alone we know that A. this market is a Pure Monopoly. B. the value of the Four Firm Concentration Ratio is greater than 85. C. the value of the Herfindahl-Hirschman Index is greater than 2, Disneyland Resort in Anaheim, CA offers a season pass to residents of Southern California and Northern Baja California for $184. The regular price for this annual pass is $289. To receive the lower price, a consumer must present a valid I.D. at the time of purchase, showing that they reside in a Southern California town with a ZIP Code in the range of 9 to or a Northern Baja California town with a Postal Code in the range of 21 to This pricing behavior is an example of A. First Degree Price Discriation (or Perfect Price Discriation ). B. Second Degree Price Discriation (or Menu Pricing ). C. Third Degree Price Discriation (or Segmented Pricing ). D. Sixth Degree Price Discriation (or Kevin Bacon Pricing )

2 6. The refers to a period of time sufficiently far enough into the future so that the amount hired/used of every factor of production can be varied. A. Efficient Scale B. Short Run C. Long Run D. Variable Cost Avoidance Stage 7. What do economists call the business practice of selling different units of the same good to different consumers at different prices? A. Natural Monopoly. B. Patent protection. C. The Inverse Elasticity Pricing Rule. D. Price Discriation. For questions 8 through 1, consider a firm with costs of production as illustrated below: $ ATC(q) ATC =15.6 AVC(q) AVC =7.95 quantity 1,725 2,5 8. The Marginal Cost of producing the 2, th unit of output must be A. exactly equal to $7.95. B. greater than $7.95, but less than $15.6. C. exactly equal to $15.6. D. greater than $ ,29 9. If this firm were to produce 6,5 units of output, Fixed Costs of Production would be equal to A. exactly equal to $2. B. exactly equal to $4.56. C. exactly equal to $13,. D. greater than $39,. 1. The Efficient Scale of production is equal to units of output. A. B. 1,725 C. 2,5 D. 3,29

3 11. Charles sells cotton candy in a perfectly competitive market. He hires a business consultant to analyze his company s financial records. The consultant recommends that he increases his production. The consultant must have concluded that at his current level of output Charles A. Total Revenues are greater than his Accounting Costs. B. Total Revenues are less than his Fixed Costs. C. Marginal Revenue is greater than his Marginal Cost. D. Marginal Revenue is less than price. 12. refers to differences between the products sold by different firms, which lead to consumers basing their purchasing decisions on more than just price. A. Excess Capacity B. Perfect Competition C. Product Differentiation D. Natural Monopoly 13. In a perfectly competitive market, the market supply curve is A. the portion of the Marginal Cost curve which lies above the Average Total Cost curve. B. the horizontal summation of all the individual firms supply curves. C. a horizontal line at the prevailing market price. D. the lower envelope of the different possible short run Average Total Cost curves. 14. Consider the Breakfast Cereals industry. Suppose that between 23 and 29 the value of the Herfindahl-Hirschman Index for this industry increased from (2,138.8) to (2,445.9). This change would directly suggest that in recent years A. the Breakfast Cereal industry has become somewhat more competitive. B. the Breakfast Cereal industry has become somewhat less competitive. C. production costs of each individual breakfast cereal producer have increased. D. total collective profits of all breakfast cereal producers have increased. 15. If a firm made an Accounting Profit of $48, last year, then the Economic Profit of the firm A. must have been greater than $48,. B. must have also been equal to exactly $48,. C. must have been less than $48, (but had to have been positive). D. must have been less than $48, (and could have been either positive or negative). 16. Which of the following best describes the outcome of excess capacity which results in a monopolistically competitive market? A. When maximizing profit, firms produce more output than is socially desirable. B. The amount of output which is produced by a typical firm is less than the output level which would imize Average Total Costs of production. C. In order to maximize joint profits, monopolistically competitive firms will attempt to coordinate their actions and collectively produce the same quantity of output which a monopolist would choose to produce. D. Long Run profits in such an industry can remain positive, since the firm is easily able to prevent new entrants from entering the market. 17. refer(s) to input costs that do not require an outlay of money by the firm. A. Fixed Costs B. Variable Costs C. Implicit Costs D. Explicit Costs

4 18. Visually, the demand curve facing a firm operating in a perfectly competitive market is A. a horizontal line at the prevailing market price, since such a firm has no market power. B. a vertical line, since whatever price such a firm sets, quantity demanded will always be exactly equal to the capacity of the firm. C. downward sloping, since the only way for such a firm to increase quantity sold is by charging a lower price for their output. D. None of the above answers are correct. For Questions 19 through 21, consider a monopolist facing demand and with costs of production as illustrated below. Further, if this monopolist were restricted to charging a common price for every unit of output sold, Marginal Revenue would be as illustrated below by the curve labeled MR(q). $ 9.4 MC(q) AVC(q) 2. Demand quantity 5, 6,8 MR(q) 8,4 9,9 19. If this monopolist must charge a common price for every unit of output sold, then they will maximize profit by charging a price of for each unit sold. A. $2. B. $3.8 C. $5.6 D. $ Again suppose that this monopolist must charge a common price for every unit of output sold. When the monopolist charges the price and sells the quantity of output which maximize profit, A. Consumers Surplus will be equal to zero. B. Deadweight-Loss will be positive, due to the monopolist selling less than the efficient quantity of the good. C. the monopolist is clearly unable to earn a positive profit. 21. If this monopolist is able to engage in First Degree Price Discriation (or Perfect Price Discriation ), then A. they would choose to sell 6,8 units of output (less than the efficient level of output). B. the monopolist s profit would be smaller than it was under No Price Discriation. C. Total Consumers Surplus would be equal to zero.

5 22. 54, IEPR Incorporated is the only seller of widgets. They face demand of D ( p) =, for 3 p which the value of price elasticity of demand is equal to ε = 3 at every point along the demand curve. They have production costs of C ( q) = 2q + 2, 5, from which it follows that marginal costs are equal to 2 for each unit produced. When maximizing profit this firm will A. charge $2 for each unit of output sold. B. choose to sell 2, units of output. C. be able to earn a positive profit of $2,. For questions 23 through 25, consider a firm operating in a monopolistically competitive market with costs of production and facing demand as illustrated below. 1 $ MC(q) 6 ATC(q) 5.1 ATC = Demand quantity 2, 2,5 4,2 3,6 MR(q) 3, In order to maximize profit, this firm should produce/sell units of output. A. 2, B. 2,5 C. 3,325 D. 3,6 24. When choosing the level of output and setting the price which maximize profit, the profit of this firm is A. $( 3,657.5) (i.e., a negative profit or loss of $3,657.5) B. $. C. $1,8. D. $12,. 25. In the Long Run this firm should A. completely exit the industry, since their maximum Short Run profit is negative. B. expect demand for their product to increase. C. expect new firms to enter the market.

6 26. After the first 4 games of the season, Atlanta Hawks guard Joe Johnson had scored an average of 22 points per game. From this information alone, it follows that A. after his 5 th game, his average points per game must be lower than 22 points per game. B. if he scores exactly 22 points in his 5 th game, then his average points per game after 5 games will still be equal to 22 points per game. C. his total number of points scored through 4 games must have been equal to 88 points. 27. Consider a firm in a perfectly competitive market with: output price of $8.25 per unit; AVC = $5.8; and ATC = $9.4. In the short run, this firm should A. produce a positive quantity, even though their maximum profit is negative. B. produce a positive quantity, since they can earn a positive profit from doing so. C. shut down and earn zero profit. D. shut down and earn a profit of ( F). For Questions 28 through 3, consider the following scenario. A firm operating in a perfectly competitive market, with all inputs other than labor fixed. Each unit of Labor costs $3,6. The table below provides a summary of the Short Run Production Function of this firm, as well as a partial summary of Short Run Costs. Suppose that each unit of output can be sold for $15. Number of Workers Quantity of Output Marginal Product of Labor Marginal Costs of Production Average Variable Costs of Production Average Fixed Costs of Production , If this firm were to hire 2 workers, then A. they would produce 1,5 units of output. B. their variable costs of production would be ($3,6)(2) = $7,2 C. their Fixed Costs of Production would be $. 29. If this firm produced 1,8 units of output, their Average Variable Costs of Production would be equal to. A. $6. B. $7.5 C. $13,5 D. $1,8 3. Given that each unit of output can be sold for $15, when maximizing profit this firm A. should hire 4 workers. B. should produce 1,8 units of output. C. cannot earn a positive profit (i.e., the maximum profit of the firm is negative).

7 31. Jason sells flip-flops near the beach. Last month he earned Total Revenues of $8,5. His Total Costs of Production were $9,25, while his Variable Costs of Production were $7,75. From these figures, it follows that A. Jason will want to remain in this industry in the Long Run. B. Jason would have been better off shutting down during the past month. C. Jason realized a Producer s Surplus of $75 last month. 32. If a firm is currently operating at a point where costs of production exhibit Diseconomies of Scale, then as the firm increases its level of output A. Marginal Costs of Production must decrease. B. Fixed Costs of Production must increase. C. Total Costs of Production must decrease. D. Average Total Costs of Production must increase. 33. For a firm with market power Marginal Revenue, while for a firm in a perfectly competitive market Marginal Revenue. A. is less than Price; is equal to Price. B. is less than Price; is greater than Price. C. is greater than Price; is less than Price. D. is equal to Price; is less than Price.

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