2) All combinations of capital and labor along a given isoquant cost the same amount.

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1 Micro Problem Set III WCC Fall 2014 A=True / B=False 15 Points 1) If MC is greater than AVC, AVC must be rising. 2) All combinations of capital and labor along a given isoquant cost the same amount. 3) An increasing MPP leads to decreasing MC. 4) If the MPP L /P L > MPP K /P K, a cost minimizing firm should reduce its use of capital and increase its use of labor. 5) If price is less than ATC a perfectly competitive firm should immediately shut down. 6) Under both monopoly and perfect competition, there can be no exit or entry in the short-run. 7) Compared to a perfectly competitive industry, a monopolist who charges a single price produces a smaller output and charges a higher price. 8) The demand curve for a perfectly competitive industry is horizontal. 9) When regulatory agencies set price equal to average total cost, a subsidy is necessary to keep the regulated firm in business. 10) Often public utilities are permitted to operate as monopolies because they enjoy economies of scale. 11) A monopoly firm's market power enables it to shift the full cost of a tax on to consumers. 12) Under both perfect competition and monopoly, a firm s demand curve can also be described as its average revenue curve. 13) Monopolistically competitive firms typically produce an output at the least cost position on their average total cost curve. 14) If entry by new first lowers the cost of production, the long-run industry supply curve will have a negative slope under perfect competition. 15) Interlocking directorates were prohibited by the Sherman Antitrust Act.

2 Multiple Choice Pick the single best answer. 30 Points 16) Allie's Donuts produces about 600 dozen donuts per day. Due to bad weather, there is a shortage of wheat and the price of flour has risen 20 percent. Which of the cost curves for Allie's will shift up? a. marginal cost only b. marginal cost and average total cost only c. marginal cost, average variable cost, and average total cost only d. marginal cost, average variable cost, average total cost, and average fixed cost 17) If MC > MR a. output should be reduced. b. marginal profit is positive. c. there are losses. d. the total profit curve has yet to peak. e. none of the above. 18) The federal government imposes a 50 percent tax on the economic profit of all companies. We can expect that firms will a. raise prices. b. reduce output. c. raise prices and reduce output. d. do nothing. 19) In 1975, there was a great surplus of tankers on the world's oceans. As a result, Exxon was able to rent a tanker and the services of its crew from a Japanese ship owner for one year at a cost of $900,000. Salaries of the sailors are the responsibility of the ship owner, and wages for the crew of this tanker were $2 million per year. Japanese unions require crews be paid even if the ship does not sail. For the Japanese, this deal obviously a. was irrational. b. maximized profits. c. increased losses. d. was a mistake. 20) The ATC and AVC curves get closer to each other as output increase because a. AFC approaches zero as output increases. b. fixed costs are being spread over a larger and larger output. c. some costs do not change as output increases. d. all of the above are true.

3 21) Which of the following will shift the AC curve (everything else equal)? a. the price of the product rises b. technical change raises MPP of one input c. output is increased d. increasing returns to scale 22) A cost curve drawn with years on the horizontal axis and costs per unit on the vertical axis would be a(n) a. analytical cost curve. b. long run cost curve. c. historical cost curve. d. theoretical cost curve. 23) Which of the following is not a characteristic of long-run equilibrium? a. Total revenue equals total costs. b. Marginal costs are rising as output increases. c. Excess profits are zero. d. Firms are entering the industry. 24) Richard owns Gas Monkey Garage. He buys old cars and fixes them up for sale. Recently Richard bought a cheap 57 Chevy at auction for $14,000. While he could have simply relisted the car on his website and sold it for $20,000, he chose to lower the suspension at a cost of $2,000, give it a wicked cool paint job for $3,000, and have Sue install a two-tone leather interior for $4,000. He then sold this car for $38,000. What is Richard s economic profit on this restoration job? a. $38,000 b. $9,000 c. $15,000 d. -$5,000 25) Given the information in the table to the right, where does diminishing MPP set in? a. before the first unit of labor b. between the first and second units of labor c. between the third and fourth units of labor d. between the fourth and fifth units of labor e. between the fifth and sixth units of labor Labor TPP

4 26) Successful advertising by a monopolist may a. reduce the gap between the monopoly and competitive industry output. b. increase the gap between the monopoly and competitive industry output. c. cause the monopolist to overproduce. d. cause the monopolist to decrease output. 27) Entry of new firms into a perfectly competitive industry causes the short-run industry supply curve to a. shift out. b. shift back. c. shift up. d. shift down. 28) A perfectly competitive industry in long-run equilibrium is described as being allocatively efficient because a. firms produce a level of output such that marginal utility equals marginal cost for the last unit produced. b. firms produce where marginal revenue equals marginal cost. c. entry and exit are possible in the long-run. d. firms are not profitable. 29) Which of the following is not characteristic of perfect competition? a. Many buyers and sellers b. Brand name advertising by individual firms c. Homogeneous products d. Perfect information e. Freedom of entry and exit in the long-run 30) Suppose Thelma and Louise both sell fried green tomatoes in a perfectly competitive market. If Louise increases her output, a. Thelma must reduce output b. The price Thelma can charge falls c. The price Thelma can charge rises d. The price Thelma can charge is unaffected 31) The demand curve for an individual perfectly competitive firm is a. Perfectly inelastic b. Perfectly elastic c. Unit elastic d. Downward sloping e. Nonlinear

5 32) Which of the following is NOT true with regard to economic profit? a. Economic profit equals total revenue minus total cost b. A firm earning an economic profit must be earning an accounting profit c. Firms attempt to maximize economic profit d. Economic profit attracts new firms to industries without barriers to entry 33) If a firm in perfect competition charges the market price of $14 per unit, a. Its marginal revenue will be $14, and its average revenue will be less than $14 b. It will sell no output c. Its average recenue will by $14, and its marginal revenue will be less than $14 per unit d. Its average revenue and its marginal revenue will both be $14 e. Its average revenue and marginal revenue will be $14 only for the first unit sold 34) The golden rule of profit maximization states that any firm maximizes profit by producing where a. Demand is unit elastic and total revenue is maximized b. Price equals average revenue c. Price equals marginal revenue d. Price equals marginal cost e. Marginal revenue equals marginal cost 35) Consider a perfectly competitive firm in the short-run. The firm is maximizing profit at Q = 3,000. Then its fixed costs increase. Assuming it still produces, the profitmaximizing output is now a. Greater than 3,000 and its profits decrease b. Less than 3,000 units and its profits decrease c. Equal to 3,000 and its profits decrease d. Equal to 3,000 and its profits remain the same 36) In the short run, if a firm shuts down, its loss will be a. Zero b. Equal to its variable costs c. Equal to its fixed costs d. Equal to its fixed costs minus its variable costs

6 37) When we say that perfectly competitive firms achieve allocative efficiency in the long-run, we mean that a. entry and exit occur until all firms earn an normal profit b. they produce at the low point on their ATC curve c. they charge a price equal to the lowest point on their ATC d. they produce a level of output at which the MC of producing the last unit is just equal to the MU gained from consuming the last unit e. there are no fixed costs under perfect competition in the long-run 38) Which of the following statements is true of a monopolist? a. The firm charges the highest possible price. b. The firm will always earn an economic profit. c. The firm might earn an economic profit in the long-run. d. The firm generates a larger consumer surplus than a perfectly competitive industry. e. The firm is more productively efficient than a perfectly competitive firm. 39) The fact that an individual competitive firm's demand curve is horizontal means a. consumers will pay any price for the output. b. an increase in industry output will not alter price. c. each firm has no control over output. d. none on the above. 40) In the figure below, which is the total revenue curve of the perfect competitor? a. A b. B c. C d. None of the above

7 41) A monopolist has power that a competitor does not. The monopoly may a. select any combination of price and quantity they desire for the product. b. select any price-quantity combination along the demand curve for the product. c. maximize profit by setting price equal to long run cost. d. all of the above. 42) In which of the following ways is a monopolist different from a perfect competitor? a. Average cost will continually drop as output expands. b. Price is above marginal revenue. c. Average total cost equals average fixed costs plus average variable costs. d. The demand curve for the industry has a negative slope. 43) The figure below shows a perfectly competitive industry's supply and demand curves in panel (1) and the cost curves of a firm in the industry in panel (2). In the case of S 2, the firm a. should shut down. b. is incurring losses. c. is earning zero economic profits. d. is earning economic profit greater than zero. 44) In economics, products are considered "heterogeneous" only if a. they are physically or chemically different b. sellers decide that they are different c. buyers perceive them as being different d. they are produced by different firms

8 45) Consider Figure 22.1 above. If the monopolist charges the same price to all of her customers, which of the following will not be true? a. The monopolist will select output level G. b. The monopolist will charge a price equal to B. c. The consumer surplus will be equal to area ACH. d. There will be a deadweight loss equal to area EFH.

9 Short Answer Directions: Please answer the following question on a single, separate, 8.5x11 sheet of paper with no fringes. Your work must meet my standards for neatness (not yours) or it will not be graded. Do not simply write down the first thing that comes to mind. Think carefully, organize your thoughts, and use your own words. While a one sentence answer won t suffice, you should be able to answer the following question in no more than a single, wellcrafted paragraph. (And I am not interested in reading more than that.) 1) A pure monopoly guarantees economic profits." Discuss the extent to which this is a valid statement.

Directions: This problem set is graded. Feel free to ask me questions. Turn your answers in on the provided scantron form.

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