ECON 102 Kagundu Final Exam (New Material) Practice Exam Solutions

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1 ECON 102 Kagundu Final Exam (New Material) Practice Exam Solutions 1. A A large number of firms will be able to operate in the industry because you only need to produce a small amount to be able to produce at the lowest cost per unit. 2. B It is important to understand perfect competition in theory, but there are few real life examples of perfect competition 3. C Cucumbers 4. C All products are identical (homogenous) in perfect competition so there is no such thing as brand preference. 5. C Breakeven is another way of saying they will earn zero profit. 6. A MR = MC. This will hold true for all market structures. 7. C Since price is constant in perfect competition, marginal revenue and price are the same thing. 8. B In perfect competition MR = P. The firm will produce where MR = MC. A firm will be earing zero profit when the ATC is tangent to the demand curve at the point where the demand curve intersects MC because this is the point where P = ATC. 9. C Since we found the price of $7 is the point where profit is $0, that means any price below $7 will have a negative profit. 10. D When this is true we should shut down operations. 11. B If the farmer shuts down the only costs he will have will be his fixed costs. 12. D AVC > P 13. C They are zero because there are no barriers to entry in perfect competition. 14. A More firms will enter the market. 15. C This is another way of saying that firms will earn a profit of zero. 16. A When a firm produces at the minimum point of the average total cost curve. 17. C Firms in perfect competition are considered to be price takers. In the long run in perfect competition, firms will earn zero economic profit. 18. A Price 19. D The monopolist should reduce output and raise price until MR = MC. 20. B ATC is greater than price at the point where MR = MC. 21. D Price must be greater than ATC for a firm to be able to earn a profit.

2 22. C Remember that maximizing revenue is different than maximizing profit. Firms maximize profit at the point where MR = MC. However, maximizing revenue means that you are just trying to earn as much revenue as possible and you aren t concerned about the level of your costs. You maximize revenue by producing at the point where MR = 0 because that means you have gotten all of the revenue you can and if you sell any more units you will have negative MR. 23. C This problem has to do with the social costs of monopolies covered in the review. The perfect competition graph doesn t look like this, but if it did we would produce where MC intersects the demand curve. Don t over think why the graph changed, just know if you have a question on perfect competition and see a graph like this perfect competition will produce where MC = D. 24. A A monopoly will produce where MR = MC. 25. D The monopoly would reduce quantity from Q2 to Q1 and raise price from P2 to P A Ownership of resources that do not have close substitutes 27. B Price discrimination will give the monopolist higher profits than a single price for all customers. 28. A Price is greater than ATC at the point where MR = MC. 29. B Monopolies can lose money. Monopolies will only earn a profit if price is greater than average total cost. 30. C The firm identifies 2 or more groups and charges them different prices. 31. A This is the quantity where MR = MC. 32. A To find price we find where MR = MC and then WE GO UP TO THE DEMAND CURVE and then over to find price. 33. A At the quantity Q1 price is greater than ATC. 34. C Economies of scale 35. D Positive, P1,P2,b,a 36. A Price is greater than ATC at the point where MR = MC. 37. D The market price for their goods is affected by the amount they sell. 38. D Cereal 39. D They must determine the share of output each firm will produce. 40. C It can be an effective entry barrier. 41. D Only monopolies can earn a positive profit in the long run. 42. C Monopolistic competition is more competitive than oligopoly 43. D Firms are mutually interdependent 44. B - Note that answer choice D is not correct, or at least not the best answer, because firms in monopolistic competition do not generally strategically interact. We did say that monopolistically competitive firms might strategically interact with the competitors that produce products most similar to their own a little, but this is more of a side note than an absolute rule. All firms in monopolistically competitive markets have downward sloping demand curves so B is the best answer. Make sure to keep this question in mind on your exam. You always want to pick the best answer. 45. B Setting MR = MC 46. C There are high barriers to entry and firms interact strategically with each other.

3 47. D Minimum efficient scale 48. B A small number of firms in the market. 49. D AVC > P 50. C A monopolist will charge a higher price than a perfect competitor 51. B A perfectly competitive firm s supply curve is the firm s marginal cost curve above the marginal cost curves intersect with average variable cost. 52. A The firm will produce where MR = MC. 53. C $40 Profit = (P ATC)(Q) Profit = ($30 $28)(20) Profit = $ D Either A or B. We will need to compare the price to AVC to know for sure. If price is greater than AVC, the firm will continue to operate in the short run even though price is less than ATC. If price is less than AVC, the firm will shut down. 55. C The economies of scale are large relative to the industry demand. 56. C Only large-scale production can lower the average cost of production. This means you have to produce large volumes of output to be able to get to the lowest cost per unit. 57. E P1, Q1 because this is the point where MR = MC. Make sure to remember you up to the demand curve and then over to find price. 58. Correct answer not listed P1, A, B, P4 because profit is the difference between price and average total cost multiplied by quantity. 59. B Q3, P3 because if a firm is able to use perfect price discrimination it will produce all the way to the point where P = MC. This is the point where the MC curve and demand curve intersect. 60. C A monopoly will only produce expensive products. 61. D All firms produce where MR = MC no matter what kind of market they are in. 62. C Lower price because the monopolist faces a downward sloping demand curve. 63. A Only 1 because the other two are requirements to be able to price discriminate using market segmentation.

4 64. A More elastic because there is more competition so consumers are more sensitive to changes in price. 65. D It is downward sloping because if a monopolistically competitive firm wants to sell additional units, it will have to lower price. 66. C The monopolistically competitive firm will charge a higher price and produce less output. 67. D It is possible for both perfectly competitive and monopolistically competitive firms to earn positive or negative profit in the short run. However, since there are no barriers to entry and exit in either market, both firms will earn zero economic profit in the long run. 68. D Fast food 69. B Decrease the number of firms in an industry. 70. B Vertical merger 71. B There are a few large firms in the industry. 72. D There is strong interdependence among competing firms. This means that one firm s actions directly impact the other firms in the industry.

5 73. Q TC TVC TFC ATC AVC AFC MC When Q=2 TVC = TC TFC = = 30 TFC = 100 *TFC will be 100 in all rows because fixed costs stay constant by definition ATC = TC / Q = 130 / 2 = 65 AVC = TVC / Q = 30 / 2 = 15 AFC = TFC / Q = 100 / 2 = 50 MC = Change in TC = = 20 When Q=3 TC = TVC + TFC = = 160 TFC = 100 ATC = TC / Q = 160 / 3 = 53.3 AVC = TVC / Q = 60 / 3 = 20 AFC = TFC / Q = 100 / 3 = 33.3 MC = Change in TC = = 30

6 When Q=4 TVC = MC when Q=4 + TVC when Q=3 = = 120 TC = TVC + TFC = = 220 TFC = 100 ATC = TC / Q = 220 / 4 = 55 AVC = TVC / Q = 120 / 4 = 30 AFC = TFC / Q = 100 / 4 = 25 When Q=5 TVC = AVC x Q = 40 x 5 = 200 TC = TVC + TFC = = 300 TFC = 100 ATC = TC / Q = 300 / 5 = 60 AFC = TFC / Q = 100 / 5 = 20 MC = Change in TC = = 80

7 74. C For this problem you need to compare the marginal revenue of this transaction to the marginal cost of the transaction. The marginal revenue will be $30 because we will get $30 if we sell the additional unit. We need to add a total cost column to the table we were given in the problem so we can determine the marginal cost of making the 21 st unit. Units Average Cost Total Cost 20 $20 $ $22 $462 You can find the total cost by simply multiplying the average cost by the number of units produced. We can see that our total costs go from $400 for producing 20 units to $462 for producing 21 units. That means the marginal cost of producing the 21 st unit is $62 (remember that MC is the change in TC). Since the marginal revenue from selling the 21 st unit is $30 and the marginal cost is $62 we should not take the order because we will be losing money. 75. C - This is the section of the long run average total cost curve that increases as more output is produced. 76. B Economic profits will always be less than or equal to accounting profits. 77. C Total product increases because we get 10 additional units from one more unit of labor. APL decreases because 10 is less than 12 so it will bring the average down. 78. D Total product increases because we get 14 additional units from one more unit of labor. APL increases because 14 is greater than 8 so it will bring the average up. 79. C In this class we assume that each unit of labor will cost the same, but each unit of labor does not produce the same number of units of output. 80. B Average fixed cost 81. A Law of diminishing returns 82. D Minimum efficient scale 83. A TC = TFC + TVC 84. B Total variable cost divided by output 85. A $300 Average variable costs = $1,200 / 4 = $ D The period of time in which the firm cannot change its use of at least one input.

8 87. E Both C and D. When output is zero total cost and total fixed cost will always be equal because there will be no variable cost when output is zero.

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