Practice Exam 3: S201 Walker Fall 2004

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1 Practice Exam 3: S201 Walker Fall 2004 I. Multiple Choice (3 points each) 1. Which of the following statements about the short-run is false? A. The marginal product of labor may increase or decrease. B. Average fixed costs decrease as output increases. C. Total fixed cost is the same regardless of output. D. Marginal cost is constant due to the existence of fixed inputs. 2. MC is at its minimum when A. AVC is at its minimum. B. O.C. are zero. C. MP is at its maximum. D. All of the above are true when MC is at its minimum. Use the table below to answer the next two questions. Q $MC $FC At 3 units of output, ATC is equal to A. $3.00. B. $7.00. C. $ D. $ In this particular problem, we know that A. MP is constant. B. MP increases over the entire range of output shown. C. MP decreases over the entire range of output shown. D. MP decreases at first, but then increases.

2 Use the following information to answer the next two questions. Labor Input (L) Output (Q) The price of a unit of labor = $5 1 5 Total fixed cost = $ When Q=10, average total cost is A. $ B. $ C. $ D. $ The per unit marginal cost of increasing output from Q=5 to Q=10 is A. $ B. $ C. $ D $ Using the information in the figure shown above, at Q=50 A. MC=$20 and TVC=350. B. MC=$1000 and TVC=350. C. MC=$20 and TVC=150. D. MC=$1000 and TVC=150.

3 8. Assume that a firm is producing 50 units of output and finds that the marginal cost of the 50th unit is $10 and increasing. Further, average total cost at 50 units is $5. From this information we can conclude that A. average total cost is increasing. B. input prices are increasing. C. marginal product is increasing. D. All of the above are correct. 9. An IRS loss of $1000 per month implies the firm is making A. above normal profits. B. above economic profits. C. negative economic profits. D. None of the above, there is insufficient information to draw a conclusion. 10. Assume a firm is profit maximizing (or loss minimizing). It currently has TR = $33,000 per week, TFC = $100,000 per week, and TVC = $28,000, which include opportunity costs equal to $3,000 per week. This firm A. should shut down. B. is making a zero economic profit, but accounting profits. C. is making both economic losses and accounting losses, but should operate in the SR. D. is making economic losses, but may be making accounting profits. 11. The table below shows MR and MC for a firm, where TFC = $10. A. $5. B. $10. C. -$5. D. -$15. Q $MR $MC Maximum profits for this firm would be 12. For a profit maximizing firm facing perfect competition, it is always true that A. average revenue per unit equals marginal revenue per unit equals market price. B. average revenue per unit equals marginal revenue per unit equals average total cost. C. at optimal output, marginal costs are at a minimum. D. fixed costs are minimized. E. All of the above would be true for a profit maximizing firm facing perfect competition.

4 13. A perfectly competitive firm is producing 1000 units of output in a market where the price is $50 per unit. At this output, TC = $40,000 and TVC = $30,000. The firm is currently producing a level of output where MC is $20 per unit. This output level maximizes the difference between market price and MC. Assuming this firm wants to maximize total profits, we can conclude that A. this firm should increase output. B. this firm should decrease output. C. this firm is producing the output level that maximizes profits. D. this firm should shut down. 14. The perfectly competitive s firm short run supply curve would be perfectly inelastic if A. the marginal cost curve was vertical. B. the marginal cost curve was horizontal. C. the marginal cost curve was linear and upward sloping. D. the marginal cost curve was linear and downward sloping. 15. The theory of P.C. implies that supply will decrease if A. the MC schedule of firms shifts upward. B. input prices increase. C. opportunity costs increase. D. All of the above would lead to a decrease in supply. 16. Suppose the U.S. government is currently considering a ban on the sell of wheat to a large foreign country. Proponents of the deal claim that price of wheat may fall initially, but will rebound somewhat in the future. Can this prediction be supported with sound economic analysis? A. Yes. Price may fall initially, but the exit of firms from wheat farming in the long run will force the price back upward, towards the original price level. B. No. The policy will shift the demand curve for wheat to the left. This will lead to further price decreases in the long run as consumers look for alternatives to wheat. C. Yes. Wheat prices will fall initially, but some wheat farmers will maintain the higher prices in order to maintain profits. In the long run, other wheat farmers will respond in a similar manner. D. No. Price will fall initially, and then fall further in the long run, as firms exit the industry. 17. A single price monopoly is producing an output level of 100 units where MC = $5 and MR = $5. At this output, ATC = $16, AVC = $8, and consumers' limit price is $15. What is the firm's economic profit? A. $0 B. $100 C. -$100 D. $ 700

5 18. A single price monopoly is producing an output level of 100 units where MC = $5 and MR = $3. At this output, ATC = $8, AVC = $6, and consumers' limit price is $10. The firm should A. increase output and lower price. B. decrease output and lower price. C. increase output and increase price. D. decrease output and increase price. 19. A perfect price discriminating monopolist would A. earn greater profits than a single price monopolist. B. produce greater output than a single price monopolist. C. produce the socially optimum level of output. D. None of the above are true. E. All of the above are true. 20. In the long run, A. all monopolists make economic profits. B. only perfect price discriminating monopolists earn economic profits. C. single price monopolists would produce the socially optimal level of output. D. all monopolists will eventually face the conditions of a perfectly competitive market.

6 II. Short Essay - Be precise, complete, and neat in your answers. Use only the space allowed 1) (10 points total) Complete the following table. Assume the price of labor is $20.00 per unit. FC=$60. Units Labor MP Total Units Output MC per unit TVC TC ATC ) (10 points total) Evaluate the following statements. Precisely state what is incorrect about each statement. A. The short run supply curve of a perfectly competitive firm is the firm s short run marginal cost curve. B. In long run equilibrium of a perfectly competitive industry all firms make the same IRS profits.

7 3) (10 points total) Using precisely drawn and labeled graphs - illustrate each of the following situations in the space allotted. Only a brief summary explanation of your graph is necessary. A. A perfectly competitive firm in the short run, facing a market price of $20, producing the loss minimizing output of 50 units, and earning losses of $500 per time month. B. A single price monopolist in the long run, producing the profit maximizing output of 50 units, and earning an economic profit of $2000 per month.

8 4. Fill in the blank (10 points total) A. In the short run, the marginal product of variables inputs is assumed to decrease because of. B. Long run average costs are assumed to eventually increase due to an assumption of. C. Perfect price discrimination by a monopolist implies the monopolist s MR curve is the same as its. D. As a firm s output increases, its ATC exceeds its AVC by smaller and smaller amounts, this is due to. E. According to economic theory, a) and b) markets will yield the socially optimal output level, whereas markets will under produce relative to the socially optimal level of output. Answers to MC: 1) D, 2) C, 3) A, 4) A, 5) C, 6) B, 7) A, 8) A, 9) C, 10) C, 11) C 12) A, 13) A, 14) A, 15) D, 16) A, 17) C, 18) D, 19) E, 20) A

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