ECON 2100 (Summer 2015 Sections 07 & 08) Exam #3A

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1 ECON 2100 (Summer 2015 Sections 07 & 08) Exam #3A Multiple Choice Questions: (3 points each) 1. I am taking of the exam. A. Version A 2. For a firm with market power Marginal Revenue, while for a firm in a perfectly competitive market Marginal Revenue. A. is less than Price; is greater than Price. B. is less than Price; is equal to Price. C. is equal to Price; is less than Price. D. is equal to Price; is greater than Price. 3. A perfectly competitive firm maximizes profit by choosing to produce and sell A. the quantity which maximizes Deadweight Loss. B. the quantity which maximize revenue. C. the quantity at which Average Variable Costs are minimized. D. a quantity at which Marginal Costs are equal to price. 4. The short run supply curve of a firm in a perfectly competitive market is A. the portion of the Marginal Cost curve which lies above the Average Variable Cost Curve. B. the portion of the Marginal Cost curve which lies above the Average Total Cost Curve. C. a horizontal line at the prevailing market price. D. a vertical line at the efficient scale of production. 5. Olivier sells ice cream in a perfectly competitive market. He hires a business consultant to analyze his company s financial records. The consultant recommends that he slightly decrease his quantity sold. The consultant must have concluded that at his current level of output his A. Marginal Revenue is less than price. B. Marginal Revenue is greater than price. C. Marginal Cost is less than price. D. Marginal Cost is greater than price. 6. Which of the following does NOT describe a firm in a monopolistically competitive market? A. It provides a product that is at least somewhat different than its competitors. B. It has some market power (i.e., control over the price of ) its product. C. It can easily erect significant barriers to entry. D. It maximizes profit in the short run. 7. refers to a practice whereby a seller of a good separates consumers into different groups and then charges each different group of consumers a different constant per unit price for each unit of the good purchased. A. 4 th Degree Price Discrimination (or Patriotic Pricing ). B. 3 rd Degree Price Discrimination (or Segmented Pricing ). C. 2 nd Degree Price Discrimination (or Menu Pricing ). D. 1 st Degree Price Discrimination (or Perfect Price Discrimination ).

2 8. A firm is producing 200 units of output and currently has Average Total Costs of $18 and Marginal Costs of $22. If it were to increase production to 201 units A. Average Total Costs would increase. B. Average Total Costs would decrease. C. Average Fixed Costs would increase. D. Profit would increase. 9. At the most basic level, profit is defined as A. Total Costs minus Total Revenues. B. Total Revenues plus Total Costs. C. Total Revenues minus Total Costs. D. None of the above answers are correct. 10. For a profit-maximizing monopoly that charges the same price to all consumers: (i) price is marginal revenue and (ii) marginal revenue is marginal cost. A. equal to; equal to. B. equal to; greater than. C. greater than; equal to. D. greater than; greater than. For questions 11 and 12, consider the graph below which illustrates the maximum profit which can be earned by a firm in a perfectly competitive market as a function of the price of its output. Observe that maximum profit is equal to $8,000 if and only if price is less than or equal to $20. Profit of Firm Profit 2, Price of Output 2, , For this firm, Fixed Costs of production are: A. $352,000. B. $8,000. C. $2, D. $ For this firm, the Minimum Value of Average Total Costs of Production is: A. $20. B. $40. C. $44. D. $48.

3 13. Producer s Surplus can be expressed as A. Profit plus Fixed Costs of Production. B. Revenue minus Variable Costs of Production. C. Neither (A) nor (B) is correct. D. Both (A) and (B) are correct. For Questions 14 through 17, consider a monopolist facing demand and with marginal costs of production as illustrated below. The Marginal Revenue curve which is illustrated below was drawn under the assumption that the firm charges a common price for every unit of output sold. $ a b MC(q) 9.40 c d e g f h 6.20 i Demand 3.00 j 0 quantity 31, ,000 8,825 MR(q) 10, Assuming the firm charges a common price for every unit of output sold, increasing quantity from 4,500 to 5,000 would Total Revenue, Total Cost, and Profit. A. decrease; increase; decrease. B. increase; decrease; increase. C. increase; increase; decrease. D. increase; increase; increase. 15. If this firm charges the same price for every unit of output sold, in order to maximize profit it should charge per unit. A. $ B. $ C. $9.40. D. $ Assuming the firm charges a common price for every unit of output sold, when this firm maximizes profit it is able to realize a Producer s Surplus of A. areas a+b+c+d+e+f+g+h+i. B. areas a+b+c+d+f+g+i+j. C. areas a+b+c+d+f+g+i. D. areas c+d+f+g+i. 17. If this monopolist could engage in First Degree (i.e., Perfect ) Price Discrimination, it would sell A. 6,000 units of output. B. 8,825 units of output. C. 10,950 units of output. D. 31,430 units of output.

4 18. According to the Inverse Elasticity Pricing Rule, when maximizing profit a firm must be operating in a way such that 1 is equal to p A. Q P AVC. B. Q P ATC. C. MC P. MC D. P MC. P 19. is a legal protection which grants the holder the exclusive right to create a particular product or use a particular production technique. A. Marginal Revenue B. A Natural Monopoly C. A Patent D. Price Discrimination For Questions 20 through 22, consider the following scenario. A firm operating in a perfectly competitive market, with all inputs other than labor fixed. Each unit of Labor costs $400. The table below provides a summary of the Short Run Production Function of this firm, as well as a partial summary of Short Run Costs. Number of Workers Quantity of Output Marginal Product of Labor Marginal Costs of Production Average Variable Costs of Production Average Fixed Costs of Production , , ,800 1, Over the first four workers hired, this firm s Marginal Product of Labor is A. constant. B. increasing. C. diminishing (but always positive). D. diminishing (and eventually negative). 21. If this firm were to hire 1 worker, then its Average Fixed Production would be equal to. A. $3.00 B. $2.80 C. $1.00 D. $ Suppose that each unit of output can be sold for $0.35. In order to maximize profit in the Short Run, this firm should A. shutdown and hire 0 workers. B. hire 1 worker. C. hire 2 workers. D. hire 3 workers.

5 23. Consider a firm in a perfectly competitive market with: output price of $39.56 per unit; AVC min $34.79; and ATC min $ In the short run, this firm should A. produce a positive quantity, even though their maximum profit is negative. B. produce a positive quantity, since they can earn a positive profit. C. produce a negative quantity, so that they can avoid their fixed costs. D. shutdown, since revenue is less than variable costs for all positive levels of output. 24. is a market structure in which there is one single seller of a unique good (with no close substitutes ) and in which there are barriers to entry which prevent rival firms from entering the market A. Oligopoly B. Perfect Competition C. Monopoly D. Monopolistic Competition 25. It is typically assumed that a perfectly competitive market is characterized by Free Entry/Exit, an assumption which means that A. in the short run all firms in the industry can easily exit and avoid all of their fixed costs of production. B. in the long run, new firms can enter and existing firms can exit the industry with relative ease and without incurring any substantial costs of doing so. C. since there are many buyers and many sellers in such markets, nobody would notice if one particular seller chose to exit the industry. D. None of the above answers are correct. For questions 26 and 27, consider the following scenario. Singular provides cell phone service to customers according to the following three pricing plans. Each consumer has the option of selfselecting the plan which they individually prefer. Plan Name Fixed Charge Per Minute (for minutes Free Minutes Monthly Fee used beyond Free Minutes ) Plan A $35 Unlimited n.a. Plan B $ Plan C $ Singular is engaging in A. 11 th Degree Price Discrimination (or Tufnel Pricing ). B. 3 rd Degree Price Discrimination (or Segmented Pricing ). C. 2 nd Degree Price Discrimination (or Menu Pricing ). D. 1 st Degree Price Discrimination (or Perfect Price Discrimination ). 27. Suppose that Dave wants to talk on his cellphone exactly 750 minutes per month and Brian wants to talk on his cellphone exactly 1,000 minutes per month. In order to consume these desired levels of service at lowest expenditure, Dave should choose and Brian should choose. A. Plan B; Plan A. B. Plan B; Plan B. C. Plan A; Plan A. D. Plan A; Plan B.

6 28. Westley Industries (an Australian based pharmaceutical company) produces Iocaine Powder using three inputs, Input A, Input B, and Input C. During the next month they are able to hire any amount of Input A that they wish, but are restricted to using exactly 800 units of Input B and 5 units of Input C. It appears as if Westley Industries is operating in the A. Short Run. B. Long Run. C. Diagonal Run. D. Cannonball Run. 29. The Efficient Scale of Production refers to the level of output A. above which Fixed Costs are equal to zero. B. at which Average Variable Costs of production are minimized. C. at which Average Total Costs of Production are minimized. D. at which Profit is maximized. For question 30, consider the costs functions illustrated below: $ MC(q) ATC(q) AVC(q) 0 quantity What appears to be wrong with these cost curves? A. The Average Total Cost Curve is above the Average Variable Cost Curve. B. The Marginal Cost Curve intersects both the Average Variable Cost Curve at its minimum and the Average Total Cost Curve at its minimum. C. The vertical distance between the Average Total Cost Curve and the Average Variable Cost Curve appears to increase at higher levels of output. D. The Marginal Cost Curve is J-shaped (instead of always increasing).

7 31. Consider a perfectly competitive market in the Short Run in which at the prevailing market price of $12.50 per unit of output we observe: 100 firms each producing 2,000 units of output; 30 firms each producing 3,000 units of output; and 50 firms each producing 5,000 units of output. It follows that the Short Run market quantity supplied at a price of $12.50 is units of output. A. 2,000 B. 3,000 C. 10,000 D. 540, Suppose that between 2010 and 2015 the value of the Herfindahl-Hirschman Index for the semiconductor industry increased from to This change would directly suggest that in recent years A. production costs of semiconductor manufacturers have increased. B. demand for semiconductors has increased. C. the semiconductor industry has become somewhat less competitive. D. the semiconductor industry has become somewhat more competitive. 33. Alex sells skateboards. Last month he had: Revenue of $4,500; Explicit Costs of $3,250; and Implicit Costs of $1,500. It follows that his Economic Profit was and his Accounting Profit was. A. Negative; Positive. B. Negative; Negative. C. Positive; Positive. D. Positive; Negative.

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