ECON 2100 (Summer 2014 Sections 08 & 09) Exam #3D

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1 ECON 21 (Summer 214 Sections 8 & 9) Exam #3D Multiple Choice Questions: (3 points each) 1. I am taking of the exam. D. Version D 2. If a firm is currently operating at a point where costs of production exhibit Diseconomies of Scale, then as the firm increases its level of output A. Average Total Costs of Production must decrease. B. Average Total Costs of Production must increase. C. Average Fixed Costs of production must remain constant. D. Total Costs of Production must remain constant. 3. In general, a monopolist will A. produce/sell every unit of output for which buyer s reservation price is positive. B. produce/sell the level of output at which Marginal Revenue is equal to Marginal Costs. C. produce/sell the level of output at which Marginal Costs are equal to Average Fixed Costs. D. set the price of their product equal to the value of the highest reservation price that any buyer has for their product. 4. In the Short Run, the only variable input which Company X hires is labor. Suppose that the Marginal Product of Labor is always positive. When increasing the amount of labor hired from 29 units to 3, output increases from 8 units to 82 units. If the production process of this firm is such that the Marginal Product of Labor is diminishing, then units of output would be produced if 31 units of labor were hired. A. exactly 84 B. more than 82 but fewer than 84 C. exactly 82 D. fewer than Ted produces shoes in a perfectly competitive market. During the month of April he: produced 9 shoes, sold each pair of shoes at a price of $3 per pair, had fixed costs of $2,5, and earned a total profit of $( 1,5). In the long run, we should expect that Ted would A. choose to produce more than 9 units per month, so that he could completely avoid his Fixed Costs of production. B. exit this market. C. charge less than $3 per pair of shoes, so that he could increase his revenues by increasing the quantity of output which he sells. D. charge more than $3 per pair of shoes, so that he could increase his revenues by getting more money for each pair of shoes sold. 6. At the most basic level, profit is defined as A. Average Total Costs minus Average Fixed Costs. B. Total Revenues multiplied by Total Costs. C. Total Revenues minus Total Costs. D. Total Costs minus Total Revenues.

2 7. refers to a practice of presenting each consumer with multiple pricing schedules and allowing each consumer to buy the item according to the schedule which he prefers. A. 1 st Degree Price Discrimination (or Perfect Price Discrimination ). B. 2 nd Degree Price Discrimination (or Menu Pricing ). C. 3 rd Degree Price Discrimination (or Segmented Pricing ). D. Inverse Elasticity Pricing 8. Average Fixed Costs of Production A. measure the increase in total costs of production associated with producing a greater amount of total output. B. are defined as Fixed Costs of Production multiplied by quantity of output produced. C. are equal to Average Total Costs of Production minus Average Variable Costs of Production. D. More than one (perhaps all) of the above answers is correct. 9. Consider a monopolist who is charging a price of $2 for each unit of output sold in order to sell 2,5 units of output. At this point along the demand curve, price elasticity of demand is equal to This monopolist has constant Marginal Costs of Production of $8 for each unit (so that Variable Costs are simply VC( q) 8q ). Finally, Fixed Costs are equal to $2,. This monopolist A. is not maximizing profit. B. is maximizing profit, but is not able to earn a positive profit. C. is maximizing profit, and is able to earn a positive profit. D. is maximizing profit, but may or may not be earning a positive profit. For questions 1 and 11, consider a perfectly competitive market in which there are four different types of firms in the short Run (Type A, Type B, Type C, and Type D). The table below provides a summary of the collective profit maximizing output of each type of firm at various output prices in the short run. For example, at a price of $2.5 the Type A firms will collectively supply 2, units of output, while all other firms will supply zero units. price Collective Output of Type A Firms Collective Output of Type B Firms Collective Output of Type C Firms Collective Output of Type D Firms , , 8, 2, 5. 45, 2, 1, , 35, 2, 3, 1. Considering Market Supply, the total quantity supplied at a price of $5. would be. A. 135, B. 75, C. 45, D. 25, 11. It appears as if the Minimum Value of Average Variable Costs of Production (i.e., AVC min ) for a Type C firm is A. less than $1.25. B. between $1.25 and $2.5. C. between $2.5 and $3.75. D. above $3.75.

3 12. Counterintuitive Technologies is the sole producer of Good X. They were able to become the only producer of this good, primarily because total production costs of Good X are lowest when only one single firm produces all units of output. Thus, Counterintuitive Technologies can be described as a. A. Discriminating Monopoly B. Competitive Monopoly C. Variable Cost Monopoly D. Natural Monopoly 13. Bobby used to work as a car salesman, earning $45, per year. He gave up that job to pursue his passion of becoming a full time puppeteer. In calculating his economic profit from being a puppeteer, the $45, income that he gave up is A. included as an implicit cost. B. included as an explicit cost. C. included as part of total revenue. D. not included in the calculation of economic profit, since he voluntarily chose to give up the income. For Questions 14 through 16, consider the following scenario. A firm operating in a perfectly competitive market, with all inputs other than labor fixed. Each unit of Labor costs $4. 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. Suppose that each unit of output can be sold for $3. Number of Workers Quantity of Output Marginal Product of Labor Marginal Costs of Production Average Variable Costs of Production Average Fixed Costs of Production , If this firm were to hire 2 workers, then A. they would produce 4 units of output. B. their variable costs of production would be ($4)(2) = $8. C. their Fixed Costs of Production would be $2. D. None of the above answers is correct. 15. If this firm produced 1,5 units of output, their Total Costs of Production would be equal to. A. $1,6 B. $1,62 C. $2,4 D. $4, 16. Given that each unit of output can be sold for $3, when maximizing profit this firm A. should hire 3 workers. B. should shutdown and produce zero units of output. C. cannot earn a positive profit (i.e., the maximum profit of the firm is negative). D. More than one (perhaps all) of the above answers is correct.

4 17. 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. Monopoly C. Monopolistic Competition D. Perfect Competition 18. The short run supply curve of a firm in a perfectly competitive market is A. the Average Fixed Cost Curve. B. the portion of the Average Variable Cost Curve which lies above the Average Total Cost curve. C. the portion of the Marginal Cost curve which lies above the Average Variable Cost Curve. D. a horizontal line at the prevailing market price. For Questions 19 and 2, consider a firm facing demand and with marginal costs as illustrated below. Marginal Costs of production are minimized if the firm produces 1, units of output. Suppose throughout that this firm is able to engage in First Degree (i.e., Perfect) Price Discrimination. $ 29.5 MC(q) (i) 17. (ii) (v) 11.5 (iii) (vi) 6.5 Demand (vii) (iv) quantity 1, 24, This firm has Fixed Costs of production equal to $9,. Finally, the seven regions identified above have areas equal to: Area (i) Area (ii) Area (iii) Area (iv) Area (v) Area (vi) Area (vii) $6, $55, $7, $45, $63, $64, $97, 19. When this firm maximizes profit (by way of engaging in Perfect Price Discrimination), it will sell units of output. A. exactly 1, B. some amount more than 1, but less than 24, C. exactly 24, D. some amount more than 24, 2. When this firm maximizes profit (by way of engaging in Perfect Price Discrimination), it is able to earn a profit of. A. $364, B. $312, C. $222, D. $6,

5 21. If a firm in a perfectly competitive market chooses to increase its quantity sold by 2%, then its Total Revenue will A. remain unchanged. B. increase, but by less than 2%. C. increase by exactly 2%. D. increase, but by more than 2%. 22. If a firm made an Economic Profit of $12, last year, then the Accounting Profit of the firm A. must have been less than $12, (and could have been either positive or negative). B. must have been less than $12, (but had to have been positive). C. must have also been equal to exactly $12,. D. must have been greater than $12,. For questions 23 through 25, consider a firm in a perfectly competitive market with Short Run costs of production as illustrated below: MC(q) ATC(q) $ 7.2 AVC(q) 6.2 ATC min AVC min 2.9 MC min 2. quantity 3,4 5,945 8,56 9,45 9, 11, If the per unit price of output in this market were $7.2, then this firm would want to produce A. 3,4 units of output. B. 5,945 units of output. C. 9,45 units of output. D. 11,62 units of output. 24. If the per unit price of output in this market were $6.2, then the maximum profit of the firm would be equal to. A. $55,8 B. $49,5 C. $17,1 D. $5, For which of the following prices would this firm choose to shutdown and produce zero output in the Short Run? A. $4.3. B. $2.75. C. $1.95. D. More than one (perhaps all) of the above answers is correct.

6 26. Bruce sells ice cream. He offers customers a 1% discount if they show him a valid student ID. This behavior by Bruce is an example of A. Inverse Elasticity Pricing. B. 1 st Degree Price Discrimination (or Perfect Price Discrimination). C. 2 nd Degree Price Discrimination (or Menu Pricing). D. 3 rd Degree Price Discrimination (or Segmented Pricing). 27. Producer s Surplus is equal to A. Profit minus Fixed Costs of Production. B. Revenue plus Fixed Costs of Production. C. Profit plus Fixed Costs of Production. D. Revenue minus Total Costs of Production. For questions 28 and 29, consider a monopolist who is restricted to charging all customers the same price, operating in a market with Demand, Marginal Revenue, and Marginal Costs illustrated below $ a c b d e f g MC(q) Demand ,325 quantity 8 MR(q) 28. In order to maximize profit, this monopolist should A. sell 1,325 units of output and charge a price of $13.5 per unit. B. sell 52 units of output and charge a price of $13.5 per unit. C. sell 8 units of output and charge a price of $1 per unit. D. sell 96 units of output and charge a price of $8 per unit. 29. When this monopolist maximize profit, there is a Deadweight Loss equal to A. area (g). B. areas (a)+(b). C. areas (a)+(b)+(c)+(d)+(e). D. areas (e)+(f).

7 3. Allerca Lifestyle Pets (the company which produces the world s first scientifically proven hypoallergenic cats) was discussed in lecture as an example of a firm that A. undertook a deliberate action in order to maintain its market power over time. B. is able to easily engage in First Degree Price Discrimination. C. chooses to remain in an industry in the Long Run, even though profit is negative. D. was able to realize zero Fixed Costs of Production in the Short Run. 31. A summarizes the relationship between quantities of inputs used to make a good and the quantity of output of the good produced. A. distinction between the Short Run and the Long Run B. Production Function C. Marginal Revenue Function D. Marginal Cost Function 32. If a monopolist faces demand that can be characterized by the linear inverse demand function 1 P D ( q) 16 1, q, then it follows that Marginal Revenue is given by the function 1 A. MR( q) 16 5 q (which is a linear function with the same vertical intercept that is twice as steep). 1 B. MR( q) 16 2, q (which is a linear function with the same vertical intercept that is half as steep). C. MR ( q) 16 (i.e., Marginal Revenue is a constant, equal in value to the highest reservation price of any consumer in the market). D. MR ( q) 8 (i.e., Marginal Revenue is a constant, equal in value to the one price at which market demand is unit elastic). For question 33, consider the costs functions illustrated below: $ ATC(q) AVC(q) quantity 33. What appears to be wrong with these cost curves? A. The vertical distance between the Average Total Cost Curve and the Average Variable Cost Curve appears to increase as the quantity of output is increased. B. The Average Total Cost Curve is above the Average Variable Cost Curve. C. The Average Total Cost Curve is U-Shaped (instead of always decreasing). D. None of the above answers are correct (since there is nothing wrong with these curves).

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