TEST 3 J. Spraggon Student Number: November 21, 2003

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1 Econ 1100 Name: TEST 3 J. Spraggon Student Number: November 21, 2003 This test consists of 9 pages, containing 42 multiple-choice questions. There will be 1 mark for each of the multiple choice questions. Please answer all questions, you have 50 minutes. Please enter your answer (a, b, c, d, e) from the MULTIPLE CHOICE QUESTIONS in the appropriate box below This is Page 1 of 9

2 1. There are 100 dog kennels in Sydney, N.S. An economist studying the pricing behaviour of dog kennels tells you that she is limiting her analysis to a time period that does not allow for any new dog kennels to enter the industry or for any established dog kennels to leave the industry. The time period this economist is referring to is a. the market period. b. the industry run. c. the long run. d. the short run. 2. The formula for marginal product of labour is a. L/q. b. ( L)( q). c. q/l. d. q/ L. 3. Marginal product a. is always decreasing. b. is the change in production that results if we double the amount of all inputs. c. is the part of total product created by a specific input (i.e., "labour's share" of production). d. is the additional output created by the hiring of one more unit of a specific input, holding all other inputs constant. e. More than one of the above. 4. When Burger Barn hires one worker, 20 customers can be served in an hour. When Burger Barn hires two workers, 50 customers can be served in an hour. The marginal product of the second worker is customers served per hour. a. 15 b. 30 c. 40 d The formula for average product of labour is a. q/ L. b. L/ q. c. q/l. d. L/q. 6. If the marginal product of labour is less than the average product of labour, then the a. marginal product must be increasing. b. average product must be decreasing. c. marginal product must be decreasing. d. both b and c. This is Page 2 of 9

3 7. Suppose output varies, ceteris paribus, with labour input in the following manner: L Q After how many units of labour do diminishing returns set in? a. 3 b. 4 c. 5 d. They do not set in. 8. The formula for total fixed cost is: a. TFC = TC + TVC. b. TFC = TVC - TC. c. TFC = TC/TVC. d. TFC = TC - TVC. 9. The formula for average fixed costs is a. TFC - q. b. TFC/q. c. q/tfc. d. q/ TFC. 10. As output increases, average fixed costs a. fall. b. initially fall and then increase. c. remain constant. d. increase. 11. Marginal cost a. is the increase in total cost resulting from producing one more unit. b. is the average cost of production divided by output. c. equals the increase in AVC resulting from producing one more unit. d. always equals average cost. 12. The formula for MC is a. TVC/q. b. q/tvc. c. TVC/q. d. TVC/ q. 13. The formula for AVC is a. q/tvc. b. TVC/q. c. TVC/ q. d. q/ TVC. This is Page 3 of 9

4 14. In the short run the marginal cost of the first unit of output is $20, the marginal cost of the second unit of output is $16, and the marginal cost of the third unit of output is $14. The firm's total cost of producing three units of output is a. $ b. $42. c. $50. d. indeterminate from this information. 15. If the marginal cost curve is below the average variable cost curve, then a. average variable costs are increasing. b. average variable costs are decreasing. c. marginal cost must be decreasing. d. average variable costs could either be increasing or decreasing. 16. If you know that average variable cost is at a minimum, then you can deduce that a. marginal cost is below average variable cost. b. marginal cost equals average variable cost. c. marginal cost is at a minimum. d. marginal cost is falling. 17. If the average variable cost curve is above the marginal cost curve, then a. marginal costs must be decreasing. b. average variable costs must be increasing. c. marginal costs must be increasing. d. marginal costs can be either increasing or decreasing. 18. Which of the following is an INCORRECT statement about average total cost (ATC)? a. ATC = (TVC + TFC)/q. b. ATC = TC/q. c. ATC = MC if MC is at minimum. d. ATC = AVC + AFC. 19. The law of diminishing marginal returns a. results in both the average total cost (ATC) and marginal cost (MC) curves being U-shaped. b. results in the MC but not the ATC being U-shaped. c. causes average fixed costs to decline continuously as output increases. d. causes the difference between average total cost and average variable cost to get smaller as output increases. This is Page 4 of 9

5 20. Refer to Figure 8.6. The curve labeled 1 is Outdoor Equipment's a. marginal cost curve. b. average variable cost curve. c. average total cost curve. d. average fixed cost curve. 21. Refer to Figure 8.6. The curve labeled 2 is Outdoor Equipment's a. marginal cost curve. b. average variable cost curve. c. average total cost curve. d. average fixed cost curve. 22. Refer to Figure 8.6. The curve labeled 3 is Outdoor Equipment's a. marginal cost curve. b. average variable cost curve. c. average total cost curve. d. average fixed cost curve. 23. Refer to Figure 8.6. The vertical distance labeled AB is Outdoor Equipment's a. marginal cost. b. average fixed cost. c. total fixed cost. d. total cost. 24. Refer to Figure 8.6. At the point indicated by p and q a. Outdoor Equipment should shutdown. b. MR=MC. c. Outdoor Equipment should reduce quantity (layoff workers) to increase profit. d. Outdoor Equipment should increase quantity (hire more workers) to increase profit. e. More than one of the above. 25. Refer to Figure This farmer's profit-maximizing level of output is tonnes of output. This is Page 5 of 9

6 a. 200 b. 700 c d Refer to Figure If this farmer is producing the profit maximizing level of output her profit is a. $0. b. $ c. $ d. $ Refer to Figure If the market price of soybeans falls to $8, then to maximize profits this farmer should produce a. 200 tonnes of soybeans. b. 700 tonnes of soybeans. c tonnes of soybeans. d. a level of output that is indeterminate from this information. 28. Refer to Figure At the market price of $8 per tonne, if this farmer produces 700 tonnes of soybeans its total revenue would be a. $ b. $ c. $ d. $ Number of Sweaters TVC MC AVC TFC TC AFC ATC This is Page 6 of 9

7 Figure 8.4: Cost Schedule for Sheila's Sweaters 29. Refer to Figure 8.4. If Sheila produces zero sweaters, her total fixed costs are a. $0. b. $50. c. $100. d. indeterminate from this information. 30. Refer to Figure 8.4. If Sheila produces one sweater, her total variable costs are a. $50. b. $100. c. $150. d. indeterminate from this information. 31. Refer to Figure 8.4. If Sheila produces two sweaters, her marginal cost is a. $40. b. $45. c. $ d. $ Refer to Figure 8.4. If Sheila produces five sweaters, her total costs are a. $320. b. $360. c. $370. d. $ Refer to Figure 8.4. For Sheila's Sweaters the relevant time period is the a. short run. b. long run. c. market period. d. very long run. 34. Refer to Figure 8.4. Assume that Sheila's Sweaters is producing in a perfectly competitive output market and the price of the output is $60. To maximize profits Sheila's Sweaters should produce sweaters. a. 2 b. 3 c. 4 d. 5 This is Page 7 of 9

8 35. The shut-down point for a perfectly competitive firm is a. the lowest point on the ATC curve. b. the point at which a firm's long-run supply curve ends. c. the lowest point on the AVC curve. d. the lowest point on the marginal cost curve. 36. The owner of Tie-Dyed T-shirts, a perfectly competitive firm, has hired you to give him some economic advice. He has told you that the market price for his shirts is $20 and that he is currently producing 200 shirts at an AVC of $15 and an ATC of $25. What would you recommend to him? a. To continue producing in the short run, since his loss from production is less than his fixed costs, but to exit the industry in the long run, if there are no changes in economic conditions. b. To shut down in the short run since he is incurring a loss and to leave the industry in the long run, if there are no changes in economic conditions. c. To continue to produce in the short run even though he is earning a loss and to expand in the future with the hope of increasing market share and total revenue. d. You tell him you cannot make any recommendations until you know what his fixed costs are. 37. Refer to Figure 9.3. This firm's shut-down point corresponds to point a. A. b. B. c. C. d. D. This is Page 8 of 9

9 38. Refer to Figure 9.7. For this firm, diseconomies of scale set in after units of output. a. q1 b. q2 c. q3 d. q4 SITUATION 1: Amy borrows $ from her parents to open a donut shop. She agrees to pay her parents a 5% yearly return on the money they lent her. Her other yearly fixed costs equal $ Her variable costs equal $ She sold dozen donuts during the year at a price of $1.50 per dozen. 39. Refer to Situation 1. Amy's total fixed costs equal a. $ b. $ c. $ d. $ Refer to Situation 1. Amy's total costs equal a. $ b. $ c. $ d. $ Refer to Situation 1. Amy's total revenue was a. $ b. $ c. $ d. $ Refer to Situation 1. Amy's profit is a. $0. b. $ c. $ d. $ This is Page 9 of 9

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