ECON 260 (2,3) Practice Exam #4 Spring 2007 Dan Mallela

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1 ECON 260 (2,3) Practice Exam #4 Spring 2007 Dan Mallela Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. Profit is defined as a. net revenue minus depreciation. b. total revenue minus total cost. c. average revenue minus average total cost. d. marginal revenue minus marginal cost. 2. Which of the following would be categorized as an implicit cost? (i) forgone investment opportunities (ii) wages of workers (iii) raw materials costs a. (i) b. (ii) c. (ii) and (iii) d. (i) and (iii). Scenario 13-1 Joe wants to start his own business. The business he wants to start will require that he purchase a factory that costs $400,000. Joe currently has $500,000 in the bank earning 3 percent interest per year. 3. Refer to Scenario Suppose Joe purchases the factory using $200,000 of his own money and $200,000 borrowed from a bank at an interest rate of 6 percent. What is Joe s annual opportunity cost of purchasing the factory? a. $3,000 b. $6,000 c. $15,000 d. $18, A firm's opportunity costs of production amount to its a. explicit costs only. b. implicit costs only. c. explicit costs + implicit costs. d. explicit costs + implicit costs + total revenue. 5. John has decided to start his own lawn-mowing business. To purchase the mowers and the trailer to transport the mowers, John withdrew $1,000 from his savings account, which was earning 3% interest, and borrowed an additional $2,000 from the bank at an interest rate of 7%. What is John's annual opportunity cost of the financial capital that has been invested in the business? a. $30.00 b. $ c. $ d. $3, The marginal product of labor is equal to the a. incremental cost associated with a one unit increase in labor. b. incremental profit associated with a one unit increase in labor. c. increase in labor necessary to generate a one unit increase in output.

2 d. increase in output obtained from a one unit increase in labor. 7. When adding another unit of labor leads to an increase in output that is smaller than the increases in output that resulted from adding previous units of labor, we have the property of a. diminishing labor. b. diminishing output. c. diminishing marginal product. d. negative marginal product. Figure 13-1 The figure below depicts a production function for a firm that produces cookies. 8. Refer to Figure As the number of workers increases, a. total output increases, but at a decreasing rate. b. marginal product increases, but at a decreasing rate. c. marginal product increases at an increasing rate. d. total output decreases. Figure 13-2 The figure below depicts a total cost function for a firm that produces cookies.

3 9. Refer to Figure Which of the following is true of the production function (not pictured) that underlies this total cost function? (i) Total output increases as the quantity of inputs increases, but at a decreasing rate. (ii) Marginal product is diminishing for all levels of input usage. (iii) The slope of the production function decreases as the quantity of inputs increases. a. (i) only b. (ii) and (iii) c. (i) and (iii) d. All of the above are correct. 10. Let L represent the number of workers hired by a firm and let Q represent that firm's quantity of output. Assume two points on the firm's production function are (L = 12, Q = 122) and (L = 13, Q = 132). Then the marginal product of the 13th worker is a. 8 units of output. b. 10 units of output. c. 122 units of output. d. 132 units of output. 11. If a firm produces nothing, which of the following costs will be zero? a. total cost b. fixed cost c. opportunity cost d. variable cost 12. Marginal cost equals (i) change in total cost divided by change in quantity produced. (ii) change in variable cost divided by change in quantity produced. (iii) the average fixed cost of the current unit. a. (i) and (ii) b. (ii) and (iii) c. (i) only

4 d. All of the above are correct. 13. The marginal cost curve crosses the average total cost curve at a. the efficient scale. b. the minimum point on the average total cost curve. c. a point where the marginal cost curve is rising. d. All of the above are correct. 14. For a construction company that builds houses, which of the following costs would be a fixed cost? a. The $50,000 per year salary paid to a construction foreman b. The $30,000 per year salary paid to the company's bookkeeper c. The $10,000 per year premium paid to an insurance company d. All of the above are correct. Table 13-5 Measures of Cost for ABC Inc. Widget Factory Quantity of Widgets Variable Costs Total Costs Fixed Costs 0 $10 1 $ 1 2 $ 3 $13 3 $ 6 $16 4 $10 5 $25 6 $21 $ Refer to Table What is the variable cost of producing five widgets? a. $13.00 b. $14.00 c. $15.00 d. It can't be determined from the information given. Table 13-8 Quantity of gigaplots Fixed Cost Variable Cost Total Cost 1 $13 $38 2 $28 3 $70 4 $64 5 $110 6 $108 7 $133 8 $185 Average Fixed Cost Average Variable Cost Average Total Cost Marginal Cost 16. Refer to Table What is the fixed cost of production at Jimmy's Gigaplot factory? a. $12 b. $20 c. $25

5 d. More information is needed. 17. Refer to Table What is the variable cost of producing 8 gigaplots at Jimmy's Gigaplot factory? a. $120 b. $140 c. $155 d. $ Refer to Table What is the average fixed cost of producing 3 gigaplots at Jimmy's Gigaplot factory? a. $1.67 b. $2.67 c. $5.33 d. $ Refer to Table What is the marginal cost of the 8th gigaplot at Jimmy's Gigaplot factory? a. $20 b. $27 c. $160 d. $ If marginal cost is greater than average total cost then a. profits are increasing. b. economies of scale are becoming greater. c. average total cost remains constant. d. average total cost is increasing. 21. A market is competitive if (i) firms have the flexibility to price their own product. (ii) each buyer is small compared to the market. (iii) each seller is small compared to the market. a. (i) and (ii) only b. (i) and (iii) only c. (ii) and (iii) only d. All of the above are correct. Table 14-1 Quantity Price Refer to Table The price and quantity relationship in the table is most likely that faced by a firm in a a. monopoly. b. concentrated market. c. competitive market. d. strategic market.

6 23. For a firm in a perfectly competitive market, the price of the good is always a. equal to marginal revenue. b. equal to total revenue. c. greater than average revenue. d. equal to the firm s efficient scale of output. 24. Suppose a firm in a competitive market received $1,000 in total revenue and had a marginal revenue of $10 for the last unit produced and sold. What is the average revenue per unit, and how many units were sold? a. $5 and 50 b. $5 and 100 c. $10 and 50 d. $10 and As a general rule, when accountants calculate profit they account for explicit costs but usually ignore a. certain outlays of money by the firm. b. implicit costs. c. operating costs. d. fixed costs. Table 14-2 The following table presents cost and revenue information for Soper s Port Vineyard. COSTS REVENUES Total Marginal Quantity Total Cost Cost Demanded Price Revenue Quantity Produced Marginal Revenue 26. Refer to Table Consumers are willing to pay $120 per unit of port wine. What is the marginal cost of the 8th unit? a. $0 b. $100 c. $120 d. $ Refer to Table Consumers are willing to pay $120 per unit of port wine. What is Soper's Port Vineyard's economic profit at their profit maximizing point? a. $78 b. $243 c. $278 d. $ A profit-maximizing firm in a competitive market will always make marginal adjustments to production as long as a. average revenue is greater than average total cost.

7 b. average revenue is equal to marginal cost. c. marginal cost is greater than average total cost. d. price is above or below marginal cost. 29. When price is below average variable cost, a firm in a competitive market will a. shut down and incur fixed costs. b. shut down and incur both variable and fixed costs. c. continue to operate as long as average revenue exceeds marginal cost. d. continue to operate as long as average revenue exceeds average fixed cost. 30. When economists refer to a production cost that has already been committed and cannot be recovered, they use the term a. implicit cost. b. explicit cost. c. variable cost. d. sunk cost. 31. When profit-maximizing firms in competitive markets are earning profits, a. market demand must exceed market supply at the market equilibrium price. b. market supply must exceed market demand at the market equilibrium price. c. new firms will enter the market. d. the most inefficient firms will be encouraged to leave the market. 32. Profit-maximizing firms enter a competitive market when, for existing firms in that market, a. total revenue exceeds fixed costs. b. total revenue exceeds total variable costs. c. average total cost exceeds average revenue. d. price exceeds average total cost. 33. When a profit-maximizing firm is earning profits, those profits can be identified by a. P Q. b. (MC - AVC) Q. c. (P - ATC) Q. d. (P - AVC) Q. 34. In the long run, a profit-maximizing firm will choose to exit a market when a. average fixed cost is falling. b. variable costs exceed sunk costs. c. marginal cost exceeds marginal revenue at the current level of production. d. total revenue is less than total cost. 35. The intersection of a firm's marginal revenue and marginal cost curves determines the level of output at which a. total revenue is equal to variable cost. b. total revenue is equal to fixed cost. c. total revenue is equal to total cost. d. profit is maximized. 36. A firm in a competitive market has the following cost structure: Output Total Cost 0 $5 1 $10 2 $12 3 $15 4 $24 5 $40

8 If the market price is $4, this firm will a. produce two units in the short run and exit in the long run. b. produce three units in the short run and exit in the long run. c. produce four units in the short run and exit in the long run. d. shut down in the short run and exit in the long run. 37. Which of the following represents the firm's long-run condition for exiting a market? a. Exit if P < MC b. Exit if P < FC c. Exit if P < ATC d. Exit if MR < MC 38. Suppose a firm operates in the short run at a price above its average total cost of production. In the long run the firm should expect a. new firms to enter the market. b. the market price to fall. c. its profits to fall. d. All of the above Figure Refer to Figure When the market is in long-run equilibrium at point A in panel (b), the firm represented in panel (a) will a. have a zero economic profit. b. have a negative accounting profit. c. exit the market. d. choose to increase production to increase profit. 40. Refer to Figure Assume that the market starts in equilibrium at point A in panel (b). An increase in demand from Demand 0 to Demand 1 will result in a. a new market equilibrium at point D. b. an eventual increase in the number of firms in the market and a new long-run equilibrium at point C. c. rising prices and falling profits for existing firms in the market. d. falling prices and falling profits for existing firms in the market. 41. Which of the following statements is correct? a. A competitive firm is a price maker and a monopoly is a price taker.

9 b. A competitive firm is a price taker and a monopoly is a price maker. c. Both competitive firms and monopolies are price takers. d. Both competitive firms and monopolies are price makers. 42. Angelo is a wholesale meatball distributor. He sells his meatballs to all the finest Italian restaurants in town. Nobody can make meatballs like Angelo. As a result, his is the only business in town that sells meatballs to restaurants. Assuming that Angelo is maximizing his profit, which of the following statements is true? a. Meatball prices will be less than marginal cost. b. Meatball prices will equal marginal cost. c. Meatball prices will exceed marginal cost. d. Meatball prices will be a function of supply and demand and will therefore oscillate around marginal costs. 43. Which of the following is an example of a barrier to entry? (i) A key resource is owned by a single firm. (ii) The costs of production make a single producer more efficient than a large number of producers. (iii) The government has given the existing monopoly the exclusive right to produce the good. a. (i) and (ii) b. (ii) and (iii) c. (i) only d. All of the above are examples of barriers to entry. 44. A natural monopoly occurs when a. the product is sold in its natural state (such as water or diamonds). b. there are economies of scale over the relevant range of output. c. the firm is characterized by a rising marginal cost curve. d. production requires the use of free natural resources, such as water or air. 45. Patent and copyright laws are major sources of a. natural monopolies. b. government-created monopolies. c. resource monopolies. d. antitrust regulation. 46. Drug companies are allowed to be monopolists in the drugs they discover in order to a. allow drug companies to charge a price that is equal to their marginal cost. b. discourage new firms from entering the drug market. c. encourage research. d. allow the government to earn patent revenue. 47. Additional firms often do not try to compete with a natural monopoly because a. they fear retaliation in the form of pricing wars from the natural monopolist. b. they are unsure of the size of the market in general. c. they know they cannot achieve the same low costs that the monopolist enjoys. d. the natural monopoly doesn't make a huge profit. 48. Most markets are not monopolies in the real world because a. firms usually face downward-sloping demand curves. b. supply curves slope upward. c. price is usually set equal to marginal cost by firms. d. there are reasonable substitutes for most goods. 49. The market demand curve for a monopolist is typically a. unitary elastic at the point of profit maximization.

10 b. downward sloping. c. horizontal. d. vertical. 50. For a monopolist, marginal revenue is a. positive when the demand effect is greater than the supply effect. b. positive when the monopoly effect is greater than the competitive effect. c. negative when the price effect is greater than the output effect. d. negative when the output effect is greater than the price effect. 51. When a monopolist decreases the price of its good, consumers a. continue to buy the same amount. b. buy more. c. buy less. d. may buy more or less, depending on the price elasticity of demand. Table 15-1 Quantity Price Total Revenue Average Revenue Marginal Revenue Refer to Table When 4 units of output are produced and sold, what is average revenue? a. 17 b. 21 c. 23 d Refer to Table What is the marginal revenue for the monopolist for the sixth unit sold? a. 3 b. 5 c. 11 d For a monopoly firm, which of the following equalities is always true? a. price = marginal revenue b. price = average revenue c. price = total revenue d. marginal revenue = marginal cost 55. Which of the following statements is true of a monopoly firm? a. A monopoly firm is a price taker and has no supply curve. b. A monopoly firm is a price maker and has no supply curve c. A monopoly firm is a price maker and has a downward-sloping supply curve. d. A monopoly firm is a price maker and has an upward-sloping supply curve.

11 56. Generic drugs enter the pharmaceutical drug market once a. the ingredients to the name brand drug have been discovered. b. 10 years have passed. c. they are patented. d. the patent on the name brand drug expires. 57. The monopolist's profit-maximizing quantity of output is determined by the intersection of which of the following two curves? a. Marginal cost and demand b. Marginal cost and marginal revenue c. Average total cost and marginal revenue d. Average variable cost and average revenue Table 15-2 Dreher's Designer Shirt Company, a monopolist, has the following cost and revenue information. COSTS REVENUES Total Cost Marginal Quantity Price Total ($) Cost Demanded ($/unit) Revenue Quantit Produced Marginal Revenue 58. Refer to Table Which of the following quantities will achieve the maximum profit? a. 3 b. 4 c. 6 d Monopolies use their market power to a. charge prices that equal minimum average total cost. b. attain normal profits in the long run. c. charge a price that is higher than marginal cost. d. dump excess supplies of their product on the market. 60. Suppose a monopolist chooses the price and production level which maximizes its profit. From that point, to increase society s economic welfare, output would need to be increased as long as a. average revenue exceeds marginal cost. b. average revenue exceeds average total cost. c. marginal revenue exceeds marginal cost. d. marginal revenue exceeds average total cost.

12 ECON 260 (2,3) Practice Exam #4 Spring 2007 Dan Mallela Answer Section MULTIPLE CHOICE 1. ANS: B DIF: 1 REF: 13-1 TOP: Profit 2. ANS: A DIF: 2 REF: 13-1 TOP: Implicit costs 3. ANS: D DIF: 2 REF: 13-1 TOP: Opportunity cost 4. ANS: C DIF: 1 REF: 13-1 TOP: Opportunity cost 5. ANS: C DIF: 3 REF: 13-1 TOP: Opportunity cost 6. ANS: D DIF: 1 REF: 13-2 TOP: Marginal product of labor 7. ANS: C DIF: 1 REF: 13-2 TOP: Diminishing marginal product 8. ANS: A DIF: 2 REF: 13-2 TOP: Production function 9. ANS: D DIF: 3 REF: 13-2 TOP: Production function 10. ANS: B DIF: 2 REF: 13-2 TOP: Marginal product of labor 11. ANS: D DIF: 1 REF: 13-3 TOP: Variable costs 12. ANS: A DIF: 2 REF: 13-3 TOP: Marginal cost 13. ANS: D DIF: 2 REF: 13-3 TOP: Average total cost 14. ANS: D DIF: 1 REF: 13-3 TOP: Fixed costs 15. ANS: C DIF: 2 REF: 13-3 TOP: Variable costs 16. ANS: C DIF: 2 REF: 13-3 TOP: Fixed costs 17. ANS: D DIF: 2 REF: 13-3 TOP: Variable costs 18. ANS: D DIF: 2 REF: 13-3 TOP: Average fixed cost 19. ANS: B DIF: 2 REF: 13-3 TOP: Marginal cost 20. ANS: D DIF: 1 REF: 13-3 TOP: Average total cost 21. ANS: C DIF: 1 REF: 14-1 TOP: Competitive markets 22. ANS: C DIF: 1 REF: 14-1 TOP: Competitive markets

13 23. ANS: A DIF: 1 REF: 14-1 TOP: Marginal revenue 24. ANS: D DIF: 2 REF: 14-1 TOP: Average revenue 25. ANS: B DIF: 1 REF: 14-1 TOP: Implicit costs 26. ANS: C DIF: 2 REF: 14-2 TOP: Marginal cost 27. ANS: C DIF: 2 REF: 14-2 TOP: Economic profit 28. ANS: D DIF: 2 REF: 14-2 TOP: Profit maximization 29. ANS: A DIF: 2 REF: 14-2 TOP: Profit maximization 30. ANS: D DIF: 1 REF: 14-2 TOP: Sunk costss 31. ANS: C DIF: 2 REF: 14-2 TOP: Competitive markets 32. ANS: D DIF: 2 REF: 14-2 TOP: Profit maximization 33. ANS: C DIF: 2 REF: 14-2 TOP: Profit 34. ANS: D DIF: 2 REF: 14-2 TOP: Profit maximization 35. ANS: D DIF: 2 REF: 14-2 TOP: Profit maximization 36. ANS: B DIF: 3 REF: 14-2 TOP: Profit maximization 37. ANS: C DIF: 2 REF: 14-2 TOP: Profit maximization 38. ANS: D DIF: 1 REF: 14-2 TOP: Profit maximization 39. ANS: A DIF: 2 REF: 14-3 TOP: Profit maximization 40. ANS: B DIF: 2 REF: 14-3 TOP: Competitive markets 41. ANS: B DIF: 1 REF: 15-1 TOP: Monopoly 42. ANS: C DIF: 2 REF: 15-1 TOP: Pricing 43. ANS: D DIF: 1 REF: 15-1 TOP: Barriers to entry 44. ANS: B DIF: 2 REF: 15-1 TOP: Natural monopoly 45. ANS: B DIF: 1 REF: 15-1 TOP: Patents 46. ANS: C DIF: 2 REF: 15-1 TOP: Patents

14 47. ANS: C DIF: 2 REF: 15-1 TOP: Natural monopoly 48. ANS: D DIF: 1 REF: 15-1 TOP: Monopoly 49. ANS: B DIF: 2 REF: 15-2 TOP: Demand curve 50. ANS: C DIF: 3 REF: 15-2 TOP: Marginal revenue 51. ANS: B DIF: 1 REF: 15-2 TOP: Demand curve 52. ANS: D DIF: 2 REF: 15-2 TOP: Average revenue 53. ANS: B DIF: 2 REF: 15-2 TOP: Marginal revenue 54. ANS: B DIF: 2 REF: 15-2 TOP: Average revenue 55. ANS: B DIF: 2 REF: 15-2 TOP: Monopoly 56. ANS: D DIF: 2 REF: 15-2 TOP: Patents 57. ANS: B DIF: 2 REF: 15-2 TOP: Profit maximization 58. ANS: C DIF: 2 REF: 15-2 TOP: Profit maximization 59. ANS: C DIF: 2 REF: 15-2 TOP: Pricing 60. ANS: A DIF: 2 REF: 15-3 TOP: Welfare

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