1. The amount of money that a firm receives from the sale of its output is called a. total cost. b. profit. *. total revenue. d. depreciation.

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1 Econ 101, section 4, S07 Schroeter Exam #4, Red Choose the single best answer for each question. 1. The amount of money that a firm receives from the sale of its output is called a. total cost. b. profit. *. total revenue. d. depreciation. 2. Which of the following equations is correct? *. accounting profit = economic profit + implicit costs b. accounting profit = total revenue - implicit costs c. economic profit = accounting profit + explicit costs d. economic profit = total revenue - implicit costs. 3. A firm is able to produce 3,000 units of output per day when it employs 2 workers. When it increases employment to 3 workers, holding other inputs fixed, output increases to 4,400 units per day. Which of the following possibilities is consistent with a marginal product of labor that is positive but diminishing? If employment were further increased to 4 workers, again holding other inputs fixed, output would be a. 4,200 units per day. *. 5,400 units per day. c. 5,800 units per day. d. 6,200 units per day. 4. Smith Tire Company has total fixed costs of $300,000 per month. The firm's average variable cost is $40/tire when it produces 10,000 tires per month. At that level of output, the firm's average total cost is a. $50/tire. b. $60/tire. *. $70/tire. d. impossible to determine without more information. 5. For a particular firm, labor is the only variable input. Fixed cost is $500/week and variable cost per unit of labor is $400/worker/week. When the firm employs 4 workers, output is 200 widgets/week and the marginal product of the 5th worker is 20 widgets/week. What is the average total cost of production when the firm employs 5 workers? a. $4.09/widget. *. $11.36/widget. c. $45.00/widget. d. $125.00/widget.

2 2 The following table reports a firm's variable cost for three different output levels. Fixed cost is $400/day. Use this information to answer questions 6 and 7. Output (widgets/day) Variable cost ($/day) Average total cost at an output of 100 widgets/day is a. $4/widget. b. $6/widget. c. $8/widget. *. none of the above. 7. Over the output range from 120 to 140 widgets/day, the firm's marginal cost is approximately a. $4/widget. *. $6/widget. c. $8/widget. d. $10/widget. 8. Which of the following statements is true? At an output level at which marginal cost is increasing a. average total cost must be increasing. b. average total cost must be above marginal cost. c. average total cost must be below marginal cost. *. none of the above. 9. The Wheeler Wheat Farm sells wheat to a grain exporter based in Kansas City. Since the market for wheat is competitive, the Wheeler Farm does not a. choose the quantity of wheat to produce. *. choose the price at which it sells the wheat. c. set marginal revenue equal to marginal cost in order to maximize profit. d. have any fixed costs of production. 10. A competitive firm faces a price of $4.00/unit for its product. It is currently operating where average total cost is $3.50/unit and marginal cost is $3.00/unit. To maximize profit (or minimize loss) in the short-run, the firm should a. maintain its current output. *. increase output. c. decrease output, but not shut down. d. shut down.

3 3 11. With a $20 price in the competitive market for gizmos, the firm Gary's Gizmos produces the profit-maximizing output and earns positive profit as a result. Then the price increases to $25. After Gary's Gizmos makes whatever adjustments are necessary to maximize its profit, a. its output will be higher than before. b. its marginal cost will be higher than before. c. its average total cost will be higher than before. *. all of the above. 12. Cy-Hawk Transit provides passenger bus service on only one route: Ames to Iowa City. The company's buses are leased, at a cost of $750 per week, on a contract that extends until the end of Other costs (fuel, drivers' wages, etc.) amount to $800 per week. Currently, Cy-Hawk Transit's revenues are $750 per week. All prices and costs are expected to continue at their present levels. If Cy-Hawk Transit wants to maximize profit, it should *. discontinue the service immediately. b. continue the service for one week and then drop the route. c. continue the service until the lease expires and then drop the route. d. continue the service indefinitely, renewing the lease when it expires. 13. A competitive industry is in long-run (zero-profit) equilibrium to begin. Then demand increases and stays at the new higher level. After firms make the appropriate short-run adjustment to the demand shift, the typical firm will *. produce more output than before. b. still earn zero economic profit. c. sell its output at the same price that prevailed before the demand shift. 14. A competitive industry is in long-run (zero-profit) equilibrium to begin. Then demand increases and stays at the new higher level. After the industry has made its longrun adjustment to the demand shift, there will be *. more firms than before. b. the same industry output as before. c. both a and b. 15. When technology is such that one firm supplying the entire market is more efficient than two or more firms sharing the market, we say that the industry is a. a resource monopoly. b. an exclusive dealership. *. a natural monopoly. d. a technology anomaly.

4 4 16. David Nicholas, a former Iowa State doctoral student, invented a a. drought-resistant soybean variety. b. method for producing high-strength steel alloys. c. livestock feed additive that promotes animal growth. *. process for converting text into digital code. 17. A monopolist can sell 30 widgets/day when it charges a price of $10.00/widget. In order to sell 31 widgets/day, the monopolist would have to reduce its price to $9.85/widget. The monopolist's marginal revenue of the 31st widget is a. $9.70/widget. *. $5.35/widget. c. -$0.15/widget. d. -$4.50/widget. 18. At its current output level, a monopolist finds that its price and marginal cost are both $4/unit, and its average total cost is $3/unit. To maximize profit (or minimize loss) in the short-run, the monopolist should a. increase its output level. b. maintain its current output level. *. decrease its output level, but not shut down. d. not enough information given for an answer. 19. What is the monopolist's profit under the following conditions? The profitmaximizing price charged for goods produced is $12/unit. At an output of 10 units/day, marginal revenue and marginal cost are both $6/unit, and average total cost is $5/unit. a. $60/day. *. $70/day. c. $100/day. d. $120/day. 20. Suppose that an increase in the price of a factor of production causes a monopolist's marginal cost to shift up. The profit-maximizing response to this event will be a. an increase in the price and an increase in the quantity of output. *. an increase in the price and a decrease in the quantity of output. c. a decrease in the price and an increase in the quantity of output. d. a decrease in the price and a decrease in the quantity of output. 21. Assuming no change in demand or cost conditions, monopolization of a competitive industry leads to *. a decrease in consumer surplus and a decrease in total surplus. b. a decrease in consumer surplus and an increase in total surplus. c. an increase in consumer surplus and a decrease in total surplus. d. an increase in consumer surplus and an increase in total surplus.

5 5 22. Which of the following is not a characteristic of oligopoly markets? a. Firms have some degree of market power. b. The profit of any one firm depends on actions taken by other firms. c. There are relatively few firms in the market. *. Goods typically sell at prices equal to marginal cost. Questions 23 and 24 refer to the following information. A monopolist faces two groups of potential customers. There are 600 potential customers with a willingness-to-pay (WTP) of $10 for the first unit of the monopolist product, and $0 for additional units. Also, there are 400 potential customers with a WTP of $8 for the first unit and $0 for additional units. The monopolist produces the product at zero fixed cost and a constant marginal cost of $6/unit. 23. If the monopolist is required to charge a uniform price, the price it would change and the maximum profit it would earn are a. $10; $4000. *. $10; $2400. c. $8; $2800. d. $8; $ If the monopolist is allowed to price discriminate, the maximum profit it could earn is a. $4000. b. $3600. *. $3200. d. $ There are only two firms producing widgets, a homogeneous product. Market demand is given by the formula: P = Q, where Q is market quantity in widgets/day and P is the price in $/widget. Each firm has zero fixed cost and marginal cost that is constant at $2/widget. If firm 1 produces 70 widgets/day and firm 2 produces 50 widgets/day, firm 1's profit will be a. $100/day. b. $120/day. *. $140/day. 26. Recall the widget duopoly example we discussed in lecture. We identified three possible outcomes for this industry: competitive equilibrium, monopoly (or cartel) equilibrium, and Nash equilibrium. The ordering of these three equilibria in terms of market output (from greatest to least) is: a. Nash equilibrium, monopoly equilibrium, competitive equilibrium. b. monopoly equilibrium, competitive equilibrium, Nash equilibrium. *. competitive equilibrium, Nash equilibrium, monopoly equilibrium.

6 6 Questions 27 and 28 refer to the following information. In the Chicken Game, two drivers start off driving their cars straight at one another at high speed. Neither wants to crash into the other, because of the risk of death or injury. But neither wants to be the first to turn away, because it would be seen as a sign of cowardice by those observing the contest. Because of the high speeds involved, for all practical purposes, the drivers' decisions to "turn away" or "drive straight" are made simultaneously. The payoff matrix below shows the payoffs (measured in "happiness units") to each player for each combination of strategies. (Needless to say, more happiness units are better than fewer.) In each cell of the table, Driver 1's happiness payoff is listed first and Driver 2's happiness payoff is listed second. Driver 1's strategies Driver 2's strategies Turn away Drive straight Turn away (5, 5) (0, 50) Drive straight (50, 0) (-100, -100) 27. Which of the following is true? a. "Turn away" is a dominant strategy for Driver 1. b. "Turn away" is a dominant strategy for Driver 2. c. Both a and b are true. *. None of the above is true. 28. Which of the following strategy pairs (Driver 1's strategy listed first; Driver 2's strategy listed second) is a Nash equilibrium? *. ("Drive straight," "Turn away") is a Nash equilibrium. b. ("Turn away," "Turn away") is a Nash equilibrium. c. ("Drive straight," "Drive straight") is a Nash equilibrium. d. None of the above is a Nash equilibrium. 29. The Prisoners' Dilemma game provides insights into the *. difficulty of maintaining cooperation in an oligopoly. b. benefits of government ownership of oligopolies. c. tendency for cartels to form and remain stable in oligopolies. d. ease with which oligopoly firms maintain high prices. 30. The famous mathematician John Nash a. was the main character in the movie, "A Beautiful Mind." b. was a co-winner of the Nobel prize in Economics in c. suffered from serious mental illness. *. all of the above.