Eco 202 Exam 2 Spring 2014

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1 Eco 202 Exam 2 Spring 2014 PLEASE ANSWER 50 OF THE FOLLOWING QUESTIONS. 1. Jon Brooks quit his job in a bicycle shop, where he earned $15,000 per year, to become a graduate student in economics. At the university he attended, he spent $2,000 on books, $1,000 on cough medicine, and earned $12,000 as an economics instructor. What were Jon's economic costs while attending college? A. $18,000 B. $15,000 C. $6,000 D. $3, Suppose that you could prepare your own tax return in 15 hours, or you could hire a tax specialist to prepare it for you in 2 hours. You value your time at $11.00 an hour. The tax specialist will charge you $55 an hour. The opportunity cost of preparing your own tax return is: A. $40 B. $55 C. $110 D. $ Implicit costs are: A. Equal to total fixed costs B. Comprised entirely of variable costs C. "payments" for self-employed resources D. Always greater in the short run than in the long run 4. When economic profits in an industry are zero and implicit costs are greater than zero: A. Resources will move out of the industry B. There will be no production in the short run C. Accounting profits will be greater than zero D. Resources may remain in the industry, but they will be unproductive 5. Suppose a firm sells its product at a price lower than the opportunity cost of the inputs used to produce it. Which is true? A. The firm will earn accounting and economic profits B. The firm will face accounting and economic losses C. The firm will face an accounting loss, but earn economic profits D. The firm may earn accounting profits, but will face economic losses

2 6. The sole proprietor of the Milwaukee Machine Company receives all accounting profits earned by her firm and a $28,000-a-year salary. She has a standing salary offer of $35,000 a year working for a large corporation. If she had invested her capital outside her own company, she estimates that would have returned $22,000 this year. If accounting profits for the year were $50,000, economic profits were: A. $0 B. -$7,000 C. $21,000 D. $50, Which is most likely to be a long-run adjustment for a firm that manufactures cars on an assembly line basis? A. An increase in the amount of aluminum the firm buys B. A change in the production managers of the assembly line C. A change in the production to a redesigned, new model car D. An increase in the number of shifts of workers from two to three 8. Which relationship does not result from diminishing marginal returns? A. Diseconomies of scale B. Upward-sloping short-run supply curves C. Marginal product is the slope of the total product curve D. When marginal product becomes negative, total product is necessarily declining 9. Over the range of positive, but diminishing, marginal returns for an input, the total product curve: A. Falls B. Rises at a constant rate C. Rises at a decreasing rate D. Rises at an increasing rate The next question(s) are based on the following table that provides information on the production of a product that requires one variable input.

3 10. Refer to the above table. Diminishing returns set in with the addition of the: A. First unit of input B. Second unit of input C. Third unit of input D. Fourth unit of input 11. Refer to the above table. There are negative marginal returns when the: A. Fifth unit of input is added B. Sixth unit of input is added C. Seventh unit of input is added D. Ninth unit of input is added 12. Which is not a fixed cost? A. Monthly rent of $1,000 contractually specified in a one-year lease B. An insurance premium of $50 per year, paid last month C. An attorney's retainer of $50,000 per year D. A worker's wage of $15 per hour 13. If you know that total fixed cost is $200, total variable cost is $600, and total product is 4 units, then: A. Marginal cost is $50 B. Average fixed cost is $100 C. Average total cost is $100 D. Average variable cost is $ If you know that when a firm produces 10 units of output, total costs are $1,030 and average fixed costs are $10, then total fixed costs are: A. $5 B. $100 C. $1,020 D. $1, At an output level of 50 units per day a firm has average total costs of $60 and average variable costs of $35. Its total fixed costs are: A. $925 B. $1,250 C. $1,750 D. $3,000

4 16. When marginal cost is increasing: A. Total cost must be increasing B. Average total cost must be increasing C. Average total cost must be decreasing D. Average fixed costs might be increasing or decreasing 17. The following cost data are for a firm operating in the short run. Other things equal, diminishing returns begin to set in with the production of which unit of output? A. 2 B. 3 C. 4 D Assume a firm is operating at minimum average total cost in the short run. If there is a decrease in output it follows that: A. Marginal cost increases B. Average fixed cost increases C. Average total costs decrease D. Average variable cost increases

5 19. The following table shows the relationship between output and costs for two firms in the short run. Which of the following is correct? A. A has greater fixed costs than B B. A has higher unit costs than B at low levels of output C. A has greater marginal costs than B at each level of output D. A experiences diminishing returns throughout the range of production 20. If marginal cost is below average variable cost: A. Average total cost is increasing but average variable cost is decreasing B. Both average total cost and average variable cost are decreasing C. Both average total cost and average variable cost are increasing D. Average variable cost is less than average fixed cost 21. Suppose that when 100 units of output are produced, the MC of the 101st unit is $2. This is equal to the minimum average total cost, and MC is rising. If the optimal output level is 150 units (in the short run), at that level: A. MC > $2 and MC < ATC B. MC > $2 and MC > ATC C. MC = $2 and MC = ATC D. MC = $2 and MC > ATC 22. If the price of a fixed factor of production increases by 50 percent, what effect would this have on the marginal-cost schedule facing a firm? A. None B. Marginal cost would increase by 50 percent C. Marginal cost would increase by less than 50 percent D. Marginal cost would increase by more than 50 percent

6 23. Round Things, Inc.'s production process exhibits economies of scale. Currently their long-run average cost = $1/unit. If Round Things doubles its use of all inputs, its new long-run average total cost will be: A. $1/unit B. Less than $1/unit C. Greater than $2/unit D. Greater than $1/unit but less than $2/unit 24. The larger the diameter of a natural gas pipeline, the lower is the average total cost of transmitting 1,000 cubic feet of gas 1,000 miles. This is an example of: A. Economies of scale B. Normative economies C. Diminishing marginal returns D. An increasing marginal product of labor 25. In the long run a firm will choose a plant size that has the: A. Minimum of average fixed costs B. Capacity to produce the largest quantity of the product C. Minimum average total cost of producing the target level of output D. Maximum level of resource use per unit of the total product of output 26. Popquick Popcorn of upper north-central Indiana experiences a long-run ATC = $1,500 per 1,000 pounds after doubling its plant size. The original long-run ATC was $500 per 1,000 pounds. Popquick Popcorn is now operating: A. Where AFC > MC B. At the minimum of its long-run ATC curve C. On the upward-sloping portion of its long-run ATC curve D. On the downward-sloping portion of its long-run ATC curve

7 27. Refer to the above graphs. They show the long-run average total cost (LRATC) for cars. Just after World War II the Ford Motor Company opened a large automobile manufacturing facility near Detroit with capacity Q 0 autos per year. Shortly thereafter, the plant was closed and two smaller ones were opened in the same vicinity, each more profitably producing about one-half as many cars as the old facility. Which graph best shows the situation described above, when only one plant was operating? A. Graph A B. Graph B C. Graph C D. Graph D 28. Which is true under conditions of pure competition? A. There are differentiated products B. The market demand curve is perfectly elastic C. No single firm can influence the market price by changing its output D. Firms that cannot make pure or economic profits go bankrupt 29. Which is a reason why there is no advertising by individual firms under pure competition? A. Firms produce a homogeneous product B. The quantity of the product demanded is very large C. The market demand curve cannot be increased D. Firms do not make long-run profits

8 30. Farmer Jones is producing wheat, and must accept the market price of $6.00 per bushel. At this time, her average total costs and her marginal costs both equal $8.00 per bushel. Her average variable costs are $5 per bushel. In choosing her optimal output, farmer Jones should: A. Increase output B. Increase selling price C. Produce zero output and close down D. Reduce output but continue production 31. Which is necessarily true for a purely competitive firm in short-run equilibrium? A. Marginal revenue less marginal cost equals zero B. Price less average total cost equals zero C. Total revenue less total cost equals zero D. Marginal revenue is zero 32. The wage rate increases in a purely competitive industry. This change will result in a(n): A. Decrease in average total cost for a firm in the industry B. Decrease in average variable cost for a firm in the industry C. Increase in the marginal cost curve for a firm in the industry D. Increase in short-run supply curve for a firm in the industry 33. Refer to the above graphs. What will happen in the long run to industry supply and the equilibrium price of the product? A. S will decrease, P will decrease B. S will increase, P will decrease C. S will decrease, P will increase D. S will increase, P will increase

9 34. Assume a purely competitive increasing-cost industry is initially in long-run equilibrium and that an increase in consumer demand occurs. After all economic adjustments have been completed, product price will be: A. Higher, and total output will be larger than originally B. Lower, and total output will be smaller than originally C. Lower, but total output will be larger than originally D. Higher, but total output will be smaller than originally 35. The long-run supply curve in a constant-cost industry will be: A. Income-elastic B. Income-inelastic C. Perfectly price-elastic D. Perfectly price-inelastic 36. The graph above represents a(n): A. Decreasing-cost industry: Firms may be paying lower prices for their inputs when the industry expands B. Increasing-cost industry: Firms may be paying higher prices for their inputs when the industry expands C. Competitive, break-even industry: The long-run supply curve is upward sloping as it must be according to the law of supply D. Constant-cost industry: Prices of the inputs stay the same, and other production costs are constant as the industry expands

10 37. Which would indicate that a firm is operating under conditions of pure competition and is being productively efficient? A. It is making economic profits in the long run B. Marginal cost equals average variable cost C. It produces at the minimum average total cost D. Its marginal revenue is less than average revenue 38. A barrier to entry that significantly contributes to the establishment of a monopoly would be: A. Patents B. X-inefficiency C. Price-taking behavior D. Diseconomies of scale 39. At which combination of price and marginal revenue (P, MR) is the price elasticity of demand greater than 1? A. P = 15, MR = 8 B. P = 12, MR = 0 C. P = 8, MR = -2 D. P = 4, MR = Suppose a monopolist produces output where total revenue is maximized. At that output, the price elasticity of demand for the monopolist's output is: A. Greater or equal to one B. Less than one C. Equal to one D. Impossible to determine 41. A pure monopoly firm will never charge a price in the inelastic range of its demand curve because lowering price to get into this region will: A. Increase total revenue, increase total cost, and decrease profit B. Decrease total revenue, increase total cost, and decrease profit C. Increase total revenue, decrease total cost, and decrease profit D. Decrease total revenue, total cost, and profit

11 42. A monopolist can sell 20 toys per day for $8.00 each. To sell 21 toys per day, the price must be cut to $7.00. The marginal revenue of the 21st toy is: A. -$10 B. -$13 C. -$18 D. -$ At the profit-maximizing level of output, a monopolist will always operate where: A. Price is greater than marginal cost B. Price is greater than average revenue C. Average total cost equals marginal cost D. Total revenue is greater than total cost 44. Monopolists are said to be allocatively inefficient because: A. They produce where MR > MC B. At the profit-maximizing output price is greater than AVC C. They produce only the type of product they desire and do not consider the consumer D. At the profit-maximizing output the marginal benefit to society of additional output is greater than the marginal cost to society 45. To practice long-run price discrimination, a monopolist must: A. Be a natural monopoly B. Charge one price to all buyers C. Permit the resale of the product by the original buyers D. Be able to separate buyers into different markets with different price elasticities 46. Which would definitely not be an example of price discrimination? A. A theater charges children less than adults for a movie B. Universities charge higher tuition for out-of-state residents C. A doctor charges for services according to the income of patients D. An electric power company charges less for electricity used during off-peak hours when production costs are lower

12 47. Refer to the above graph. A profit-maximizing monopolist would set what price and quantity levels in the short run? A. P 1 and Q 1 B. P 2 and Q 3 C. P 3 and Q 2 D. P 4 and Q Refer to the above graph. If the government regulated the monopoly shown and forced it to produce the level of output where there is fair-return price, what price and quantity levels would we observe in the short run? A. P 1 and Q 1 B. P 2 and Q 3 C. P 3 and Q 2 D. P 4 and Q Refer to the above graph. If the government regulated the monopoly shown and forced it to produce the level of output where there is an optimal allocation of scarce resources, what price and quantity levels would we observe in the short run? A. P 1 and Q 1 B. P 2 and Q 3 C. P 3 and Q 2 D. P 4 and Q 1

13 50. The stronger the product differentiation in monopolistic competition, the: A. Less elastic the demand curve, and production will take place further to the left of minimum average costs B. Less elastic the demand curve, and production will take place further to the right of minimum average costs C. More elastic the demand curve, and production will take place further to the left of minimum average costs D. More elastic the demand curve, and production will take place further to the right of minimum average costs 51. Monopolistic competition is characterized by excess capacity because: A. Firms are always profitable in the long run B. Firms charge a price that is less than marginal cost C. Firms produce at an output level less than the least-cost output D. The demand for a product is perfectly elastic in this type of industry 52. Under oligopoly, a kinked demand curve would explain why firms: A. Avoid price wars B. Undertake new investment C. Have different levels of efficiency D. Are approximately the same size 53. On the above graph, if the oligopolist's MC curve shifts from MC 1 to MC 2, the firm will charge: A. A higher price and total revenue will increase B. The same price and sell more output; total revenue will increase C. The same price and sell the same amount of output; total revenue will remain the same D. A higher price and sell less output; it can't be determined whether total revenue will increase

14 54. If a firm is somehow able to enter an industry previously monopolized by one firm, the demand curve for the firm already in the industry will: A. Become steeper B. Shift to the left C. Shift to the right D. Remain the same, in spite of the entry of the other firm 55. An oligopolistic firm finds that marginal revenue can range from $10 to $25 at an output level of 2,500 units. This information would suggest that the oligopolistic model for this industry is most likely one of: A. Collusive pricing B. Price leadership C. Cost-plus pricing D. Kinked demand

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