1 ECON 21 (Summer 216 Sections 1 & 11) Exam #3D Multiple Choice Questions: (3 points each) 1. I am taking of the exam. D. Version D 2. 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. Duopoly B. Monopoly C. Monopolistic Competition D. Perfect Competition 3. According to the FTC classification of market concentration, a market is not concentrated if HHI is and is highly concentrated if. A. positive; negative. B. below 5; above 8. C. below 1,; above 1,8. D. above 7,5; below 1, If a firm made an Economic Profit of $25, last year, then the Accounting Profit of the firm A. must have been greater than $25,. B. must have also been equal to $25,. C. must have been less than $25, (but had to have been positive). D. must have been less than $25, (and could have been either positive or negative). 5. 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. the portion of the Average Fixed Cost curve that lies below the Marginal Cost curve. 6. A firm is producing 25 units of output and currently has Average Total Costs of $18 and Marginal Costs of $16. If it were to increase production to 251 units A. Average Total Costs would increase. B. Average Total Costs would decrease. C. Marginal Costs would increase. D. Marginal Costs would decrease. 7. For a profit-maximizing monopolist that charges the same price to all consumers: (i) marginal revenue is marginal cost and (ii) price is marginal revenue. A. greater than; equal to. B. greater than; greater than. C. equal to; equal to. D. equal to; greater than.
2 8. The is defined as a period of time sufficiently far enough into the future so that the amount hired/used of every factor of production can be varied. A. Marginal Run B. Efficient Scale C. Long Run D. Short Run 9. The U.S. Federal Government Agency that enforces anti-trust laws and regulations is the A. Federal Trade Commission B. Federal Financial Institutions Examination Council C. Department of Commerce D. Internal Revenue Service 1. A firm is producing 3,5 units of output. Its Average Total Costs of Production are minimized by producing 5,1 units of output. It follows that its Excess Capacity is units. A. 8,6. B. 4,3. C. 1,6. D. 8. For questions 11 through 13, consider a market for which in 28, 212, and 216 market shares and squared values of market shares were as reported in the two tables below. Year Share of Share of 2 nd Share of 3 rd Share of 4 th Share of 5 th Share of 6 th Year Share of Share of 2 nd Share of 3 rd Share of 4 th Share of 5 th Share of 6 th 28 1, , The value of the Herfindahl-Hirschman Index (HHI) in this market in 28 was A. 1,24. B. 2,352. C. 2,386. D. 3, The value of the Four Firm Concentration Ratio (C4) A. decreased between 28 and 212, but then increased between 212 and 216. B. decreased between 28 and 212, and then decreased further between 212 and 216. C. increased between 28 and 212, and then increased further between 212 and 216. D. increased between 28 and 212, but then decreased between 212 and This industry was least competitive (i.e., closest to monopoly) A. in 216 according to C4 and in 212 according to HHI. B. in 28 according to C4 and in 216 according to HHI. C. in 28 according to both C4 and HHI. D. in 212 according to both C4 and HHI.
3 14. It is assumed that a perfectly competitive market is characterized by Free Entry/Exit, 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. in the Marginal Run firms can always freely decrease their fixed costs by choosing to increase marginal costs. For Questions 15 through 17, consider a monopolist facing demand and with costs of production as illustrated below. Further, if this monopolist were restricted to charging a common price for every unit of output sold, Marginal Revenue would be as illustrated below by the curve labeled MR(q). $ a b MC(q) i c f d g h e j Demand quantity 1,5 4,125 2,25 MR(q) 2,9 15. If this monopolist must charge a common price for every unit of output sold, then they will maximize profit by charging a price of for each unit sold. A. $1.6 B. $2.5 C. $3.6 D. $ Again suppose that this monopolist must charge a common price for every unit of output sold. When the monopolist charges the price and sells the quantity of output which maximize profit, A. Consumers Surplus will be equal to areas (a)+(b). B. Deadweight-Loss will be equal to area (e)+(h), due to the monopolist selling less than the efficient quantity of the good. C. the monopolist realizes a Producer s Surplus equal to areas (f)+(g)+(h)+(i). D. More than one (perhaps all) of the above answers is correct. 17. If this monopolist is able to engage in First Degree Price Discrimination (or Perfect Price Discrimination ), then A. she would choose to sell 2,9 units of output. B. Deadweight-Loss would be equal to area (j). C. Producers Surplus would be equal to zero. D. More than one (perhaps all) of the above answers is correct.
4 18. Consider a perfectly competitive market in the Short Run in which at the prevailing market price of $15.75 per unit of output we observe: 2 firms each producing 1, units of output; 5 firms each producing 2, units of output; 2 firms each producing 5, units of output; and 1 firms each producing 3, units of output. It follows that the Short Run market quantity supplied at a price of $15.75 is units of output. A. 7, B. 38, C. 3, D. 2,5 19. Peter used to work as a music composer, earning $4, 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 $4, income that he gave up should A. be included as an explicit cost. B. be included as an implicit cost. C. be included as part of total revenue. D. not be included in the calculation of economic profit, since he voluntarily chose to give up the income. For questions 2 through 22, consider a firm operating in a perfectly competitive market in the Short Run. Suppose all inputs are fixed other than labor. The table below provides a partial summary of the Short Run Production Function and Costs of this firm. Number of Workers Quantity of Output Marginal Product of Labor Marginal Costs Average Variable Costs , ,4 2. If this firm were to produce 96 units of output, its Average Variable Costs would be A. $24. B. $3. C. $4. D. $ If this firm were to shutdown and produce zero units of output, its profit would be A. $. B. $41 (i.e., minus $41 ) C. $96, (i.e., minus $96, ) D. $492, (i.e., minus $492, ) Average Fixed Costs 22. Suppose that each unit of output can be sold for $1,. When maximizing Short Run profit, this firm would A. hire 5 workers. B. produce 1,24 units of output. C. realize a Producer s Surplus of $736,. D. None of the above answers are correct.
5 23. 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. First Degree Price Discrimination (or Perfect Price Discrimination ). B. Second Degree Price Discrimination (or Menu Pricing ). C. Third Degree Price Discrimination (or Segmented Pricing ). D. Fifth Third Degree Price Discrimination (or Banker Pricing ). 24. Consider a firm in a perfectly competitive market with: output price of $18.25 per unit; AVC min $14.85; and ATC min $17.5. In the short run, this firm should A. produce a positive quantity, since they can earn a positive profit. B. produce a positive quantity, even though their maximum profit is negative. C. shut down, so that it can earn zero profit. D. shut down, since their maximum profit is negative. For Questions 25 and 26, consider a firm facing demand and with marginal costs as illustrated below. Marginal Costs of production are minimized if the firm produces 5, 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 5, 12, This firm has Fixed Costs of production equal to $45,. Finally, the seven regions identified above have areas equal to: Area (i) Area (ii) Area (iii) Area (iv) Area (v) Area (vi) Area (vii) $3, $27,5 $35, $22,5 $31,5 $32, $48,5 25. When this firm maximizes profit (by way of engaging in Perfect Price Discrimination), Deadweight Loss will be. A. $ B. $63,5 C. $71, D. $112, 26. When this firm maximizes profit (by way of engaging in Perfect Price Discrimination), it is able to earn a profit of. A. $227, B. $182, C. $156, D. $111,
6 27. If a monopolist faces demand that can be characterized by the linear inverse demand function 1 P D ( q) 2 2, q, then it follows that Marginal Revenue is given by the function 1 A. MR( q) 1 2, q (i.e., Marginal Revenue is a linear function with the same slope as demand but a vertical intercept that is half as large as the vertical intercept of demand). 1 B. MR( q) 2 1, q (i.e., Marginal Revenue is a linear function with the same vertical intercept as demand but is twice as steep as demand). 1 C. MR( q) 2 4, q (i.e., Marginal Revenue is a linear function with the same vertical intercept as demand but is half as steep as demand). D. MR ( q) 1 (i.e., Marginal Revenue is a constant, equal in value to the one price at which market demand is unit elastic). 28. Producer s Surplus can be expressed as A. Revenue minus Fixed Costs of Production. B. Profit plus Fixed Costs of Production. C. Both (A) and (B) are correct. D. Neither (A) nor (B) is correct. 29. If a firm is currently operating at a point where costs of production exhibit Economies of Scale, then as the firm increases the amount of output produced A. Total Costs of Production must decrease. B. Average Total Costs of Production must decrease. C. Average Total Costs of Production must increase. D. Average Fixed Costs of production must increase. 3. Visually, the demand curve facing a firm operating in a perfectly competitive market is A. positively sloped, since the Law of Demand will be violated in such a market. B. downward sloping, since the only way for such a firm to increase quantity sold is by charging a lower price for their output. C. a horizontal line, since such a firm can sell as much as they want at the prevailing market price but would lose all customers if they tried to charge a higher price. D. a vertical line, since whatever price such a firm chooses, quantity demanded will always be exactly equal to the efficient scale of the firm. 31. Consider a firm facing demand for its output such that price elasticity of demand is equal to p 3 at every point along the demand curve. Further suppose that the Marginal Cost of producing every unit of output is a constant $12 per unit. It follows that in order to maximize profit, this firm must charge a price of per unit. A. $4 B. $15 C. $18 D. $36
7 For questions 32 and 33, 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 its level of output. Profit of Firm 1,925 2,4 4,75 15,86 Quantity of Output 1,22 1,845 5,68 9,91 14, For this firm, Fixed Costs of production are. A. $3,65 B. $1,925 C. $1,845 D. $1, Price (of the output sold by the firm) is greater than Average Total Costs of Production for which of the following ranges of output? A. up to 2,4 and beyond 9,91. B. 4,75 up to 15,86. C. 5,68 up to 14,43. D. 2,4 up to 9,91.
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