Practice EXAM 3 Spring Professor Walker - E201

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1 Practice EXAM 3 Spring Professor Walker - E The theory behind short run production costs can be narrowed to an assumption that MC is expected to initially fall, but rise at larger levels of output. This assumption follows from A. the laws of supply and demand. B. the law of diminishing returns. C. the concept of comparative opportunity costs. D. the law of increasing MP. 2. Accounting, or IRS costs, are less than economic costs because economic costs include and IRS costs do not. A. fixed costs B. variable costs C. explicit costs D. opportunity costs 3. 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 costs are the same regardless of output. D. Marginal costs are constant due to the existence of fixed inputs. Use the table below to answer the next two questions. Q $MC $FC At 3 units of output, ATC is equal to A. $0.00. B. $3.00. C. $5.00. D. $ In this particular problem, we know that A. MP is constant over the entire range of output shown. 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 6. Assume that a firm is producing 10 units of output and finds that the marginal cost of the 10th unit is $100 and AFC is $20. From this information we can conclude A. average total cost is decreasing. B. input prices are increasing. C. marginal product is decreasing. D. We cannot conclude A, B, or C. 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 variable costs equal A. $ B. $ C. $ D. $ The per unit marginal cost of increasing output from Q=5 to Q=10 is A. $ B. $ C. $ D $ Assume at Q=10, a firm faces a MC=20, an ATC=100, and an AVC=70. Using this information, at Q = 9 A. total costs equal $1,000 and fixed costs equal $270. B. total costs equal $880 and fixed costs equal $270. C. total costs equal $720 and fixed costs equal $270. D. total costs equal $980 and fixed costs equal $ Accounting profits of $1000 per month implies the firm is making A. normal or zero economic profits. B. above zero economic profits. C. below zero economic profits. D. None of the above can be inferred with this information. 11. If firms make zero economic profits then A. TR=TC. B. accounting profits are zero. C. fixed costs are covered, but TVC may not be. D. All of the above could be true if a firm is making zero economic profits. 2

3 12. Assume a firm is profit maximizing (or loss minimizing). It currently has TR=$105,000 per week, TFC=$100,000 per week, and TVC=$28,000. The firm s TVC include $25,000 in opportunity costs. 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 accounting profits. 13. The table below shows MR and MC for a firm and FC=0. Q $MR $MC Maximum profits for this firm would be A. $5 B. $16 C. $18 D. None of the above are correct. 14. Each firm in a perfectly competitive industry faces a demand curve for the product it produces that is A. perfectly inelastic, because competing firms produce perfect substitutes. B. perfectly elastic, because competing firms produce perfect substitutes. C. unitary elastic, because competing firms produce where demand equals MR. D. unitary elastic, because competing firms produce where demand equals MC. 15. For individual firms in a perfectly competitive industry A. Pe = MR = AR at all output levels. B. Pe = MR = MC at all output levels. C. Pe = MR = minimum MC at the profit maximizing output level. D. Pe = MR = minimum AVC when the firm is making zero economic profits. 16. In the short run, the individual firm's supply curve, in a perfectly competitive industry is A. that portion of the marginal cost curve above minimum marginal cost. B. that portion of the average total cost curve above minimum marginal cost. C. that portion of the marginal cost curve above minimum average total cost. D. that portion of the marginal cost curve above minimum average variable cost. 3

4 17. The theory of perfect competition implies that supply will increase if A. the MR schedule of firms shifts upward. B. input prices decrease. C. opportunity costs increase. D. All of the above are correct. Use the information in the table below to answer the next question. This is cost data for a firm in a perfectly competitive industry, facing a market equilibrium price of $10. Q MC If FC=$8, the firm s profits would be A. $-4. B. $0. C. $1. D. $ A perfectly competitive firm is producing 700 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 at a minimum and equal to $20 per unit. Using only this information, and 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 output. D. this firm should shut down. 20. A perfectly competitive firm is producing 500 units of output in a market where the price is $50 per unit. At this output, TC=$10,000 and TVC=$1,000. The firm is currently producing a level of output where MC is $70 per unit. Using only this information, and 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 output. D. this firm should shut down. 4

5 21. As a result of a decrease in the price of foreign vegetables, decreased demand for vegetables produced in the U.S. has left U.S. producers with economic losses. If the U.S. vegetable industry is a perfectly competitive industry, and imported vegetable prices stay at their current levels, how will the LONG RUN equilibrium for the U.S. vegetable industry differ from the current SHORT RUN equilibrium? In the LONG RUN, OUTPUT PRICE LOSSES A. decreases rises disappear B. decreases rises increase C. increases falls increase D. increases falls disappear 22. The figure shown above represents the cost and market conditions for a firm in a perfectly competitive industry, with a market price of $10. If this firm is maximizing profits (or minimizing losses), we know that the firm is making A. above normal profits (positive economic profits). B. below normal profits (negative economic profits). C. positive accounting profits, but economic losses. D. positive economic profits, but accounting losses. 23. Assume a new, cost saving, technology is introduced into a perfectly competitive industry that is in LR equilibrium. Which of the following would NOT be expected to characterize the new LR equilibrium for this competitive industry? A. Price will be lower. B. Industry output will be greater. C. There will be a larger number of firms. D. Firms' economic profits will be greater. 5

6 Use the figure below to answer the next question. 24. If market price were $40, this firm in a perfectly competitive industry A. could be making economic profits of $20. B. should reduce output below 10. C. should increase output above 10. D. could be making economic profits of $200. Use the following table to answer the next question. Q MC FC TVC TC MR TR Total Profits 0 $50 1 $7 $5 2 $3 3 $1 25. At 3 units of output, this firm from a perfectly competitive industry would have A. TC=$161, TR=$5, and Total Profits=minus $156. B. TC=$61, TR=$15, and Total Profits=minus $46. C. TC=$161, TR=$15, and Total Profits=minus $146. D. TC=$61, TR=$5, and Total Profits=minus $56. Assume a single price monopolist faces the following demand conditions. $P Q For this monopolist, the MR of the 4th unit of output is A. 12. B. 4. C. 3. D

7 27. A single price monopoly is producing an output level of 100 units where MC=$5 and MR=$5. At this output, ATC=$13, AVC=$6, and consumers' reservation price is $8. What is the firm's economic profit? A. $0 B. $200 C. -$500 D. -$800, the firm should shut down Assume a monopolist who can perfectly price discriminate faces the following demand conditions: $P Q For this monopolist, the MR of the 4th unit of output is A. 12. B. 8. C. 4. D. -4. $ MC ATC AVC D Q/t MR The figure above is used in the next two questions. 29. The figure above shows the demand and cost conditions for a single price monopolist. This monopolist would make maximum profits (minimum losses) of. A. $150 B. -$150 C. $100 D. -$ If this monopolist could perfectly price discriminate it would produce A. 80 units of output. B. 70 units of output. C. 50 units of output. D. 30 units of output. 7

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