Choose the single best answer for each question. Do all of your scratch work in the margins or in the blank space at the bottom of the last page.

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1 Econ 0, Section 2, S0, Schroeter Exam #4, Special code = 2 Choose the single best answer for each question. Do all of your scratch work in the margins or in the blank space at the bottom of the last page.. In 2009, Bill's Bike Shop had revenue of $450,000, explicit costs of $300,000, and implicit costs of $200,000. For 2009, Bill's Bike Shop had accounting profit and economic profit. a. positive; positive. *. positive; negative. c. negative; positive. d. negative; negative. 2. Economists normally assume that the goal of a firm is to a. maximize its total revenue. *. maximize its profit. c. minimize its explicit costs. d. minimize its total cost. 3. Jan runs a chain of lemonade stands and is trying to get a better understanding of her costs by categorizing them as fixed or variable. Which of the following costs is most likely to be a fixed cost? The cost of a. lemons and sugar. b. paper cups. c. the wages paid to her hourly workers. *. hiring an artist to design a logo for her sign. 4.. When the Wondrous Widget company produces 800 widgets/day, its average variable cost is $2.50/widget. The company's fixed cost is $,200/day. At an output level of 800 widgets/day, average total cost is *. $4.00/widget. b. $3.50/widget. c. $3.00/widget. d. $.00/widget. 5. A firm uses labor (a variable input) in combination with fixed inputs to produce output. When 6 workers are employed, output is 20 units/day. When 7 workers are employed, output is 34 units/day. If this firm's marginal product of labor is diminishing, we can conclude that output with 5 workers would have to be *. less than 06 units/day. b. between 06 and 20 units/day. c. between 20 and 34 units/day. d. Any one of the above could be consistent with diminishing marginal product of labor.

2 2 6. A firm's marginal cost is steadily increasing over the output range of 200 to 250 units/day. At an output level of 200 units per day, the firm's marginal cost and its average total cost are both equal to $4.00/unit. At an output level of 250 units per day, the firm's average total cost *. must be greater than $4.00/unit. b. must be equal to $4.00/unit. c. must be less than $4.00/unit. d. could be either less than, equal to, or greater than $4.00/unit. 7. Suppose that a firm's total cost is $3000/day when it employs 4 workers. If the wage paid to workers is $00/day and the marginal product of the fifth worker is 500 units of output per day, what is the firm's average total cost when it employs 5 workers? a. $6.20/unit. b. $620/unit. c. $700/unit. *. Impossible to determine without more information. 8. A competitive firm is producing,500 units of output per day and selling each unit at a price of $5/unit. At that output rate, the firm's average total cost of production is $4.25/unit. The firm's profit is a. $7500/day. b. $6375/day. *. $25/day. d. $375/day. 9. Which of the following is not a characteristic of a perfectly competitive market? *. A barrier to entry limits the number of firms. b. Buyers and sellers are price takers. c. Firms sell identical products. d. Each firm chooses an output level that maximizes profit. 0. A competitive firm faces a price of $3.00/unit for its output. At an output level of 00 units/day, the firm's marginal cost is $3.00/unit and its average variable cost is $2.50/unit. To maximize profit (or minimize loss) in the short-run, the firm should *. produce 00 units of output per day. b. produce more than 00 units of output per day. c. produce fewer than 00 but more than zero units of output per day. d. shut down (produce zero units of output per day).. A competitive firm faces a price of $.40 /unit. It is currently operating where average variable cost is $.20/unit, average total cost is $.60/unit, and marginal cost is $.80/unit. To maximize profit (or minimize loss) in the short-run, the firm should a. increase output. *. decrease output, but not shut down. c. shut down. d. not enough information given for an answer.

3 3 2. Which of the following statements describes the reaction of a profit-maximizing firm in a competitive market when price falls below the minimum of average variable cost? The firm will *. immediately stop production to minimize its losses. b. continue to produce in the short-run, but only until it has paid off its fixed costs. c. continue to produce in the short-run but, if market conditions don't improve, will exit in the long-run. d. increase its rate of output in order to make up for the lower price. 3. A firm in a competitive industry faces the following total costs of production in the short-run: Output (units/day) Total cost ($/day) If the market price of output is $0/unit, this firm will produce *. 4 units/day in the short-run and face competition from new entrants in the long-run. b. 5 units/day in the short-run and exit in the long-run. c. 2 units/day in the short-run and face competition from new entrants in the long-run. d. 3 units/day in the short-run and exit in the long-run. 4. The entry of new firms into a competitive industry will a. increase market supply and increase market price. b. decrease market supply and decrease market price. *. increase market supply and decrease market price. d. decrease market supply and increase market price. 5. When firms have an incentive to exit a competitive market, their exit will a. decrease the market price. *. increase the profits (or decrease the losses) of the firms that remain in the industry. c. shift the market demand curve to the right. d. all of the above. 6. A benefit to society of the patent and copyright laws is that those laws *. encourage creative activity. b. help to keep prices down. c. help to prevent a single firm from acquiring monopoly status. d. discourage excessive amounts of output of certain products.

4 4 7. At its current output level, a monopolist's marginal cost and marginal revenue are both $0.80/unit. Its average variable cost is $.00/unit and its price is $.50/unit. To maximize profit (or minimize loss) in the short-run, the monopolist should *. maintain its current output. b. decrease output, but not shut down. c. shut down. d. not enough information given for an answer. 8. A monopolist can sell 40 widgets/day when it charges a price of $6.00/widget. When the monopolist reduces its price sufficiently to increase demand to 4 widgets/day, its revenue is $647.80/day. The monopolist's marginal revenue of the 4st widget/day is a. -$0.20/widget. *. $7.80/widget. c. $5.80/widget. d. none of the above. 9. The defining characteristic of natural monopoly is a. continually increasing average total cost. b. continually increasing marginal cost. *. continually decreasing average total cost. d. continually decreasing marginal cost. 20. A monopoly firm maximizes its profit by producing 500 units of output per month. At that level of output, its marginal revenue is $30/unit, it's average revenue is $60/unit, and its average total cost is $34/unit. The monopoly's profit is a. $30,000/month. b. $7,000/month. c. $5,000/month. *. $3,000/month. 2. If a monopoly faces a downward-sloping demand for its product, its a. average revenue is less than its price. b. average revenue is less than its marginal revenue. c. average revenue is greater than its price. *. average revenue is greater than its marginal revenue. 22. Arbitrage is a. the practice of selling the same good at different prices to different customers when those price differences are not cost-justified. *. the practice of buying a good at one price in one market and reselling it at a higher price in another market. c. the monopolist's balancing of marginal revenue and marginal cost in the determination of the profit-maximizing output level. d. one firm's acquisition of competing firms in an effort to monopolize the market.

5 5 Questions 23 and 24 refer to the following information. A monopolist faces two groups of potential customers. There are 250 potential customers with a willingness-to-pay (WTP) of $4 for the first unit and $0 for additional units. Also, there are 00 potential customers with a WTP of $2 for the first unit and $0 for additional units. The monopolist produces the product at zero fixed cost and a constant marginal cost of $/unit. 23. If the monopolist is required to charge a uniform price, it would charge a. $2 and make a profit of $700. b. $2 and make a profit of $350. c. $4 and make a profit of $300. *. $4 and make a profit of $ If the monopolist is allowed to price discriminate, the maximum profit it could earn is a. $050. b. $900. *. $850. d. $ In general, game theory is the study of how people behave *. in strategic situations. b. in an environment of mutual trust. c. when their welfare is independent of the actions of others. d. when they are members of a large group sharing a common interest. Questions 26 and 27 refer to the following information. There are two firms, labeled "" and "2", producing widgets, a homogeneous product. Market demand is given by the formula: P = Q, where Q is market quantity in widgets/day and P is the price in $/widget. Each firm has zero fixed cost and marginal cost that is constant at $0/widget. 26. If each firm produces 250 widgets/day, the combined profit of both firms will be a. $0,000/day. b. $7,500/day. *. $5,000/day. d. $2,500/day. 27. If firm produces 250 widgets/day and firm 2 produces 300 widgets/day, the profits of firm ( π ) and firm 2 ( π 2 ) will be: *. π = $2250/day and π 2 = $2700/day. b. π = $2750/day and π 2 = $2200/day. c. π = $3750/day and π 2 = $4200/day. d. π = $2500/day and = $2400/day. π 2

6 6 28. Identical-product oligopolies can end up performing more-or-less like competitive markets if the number of firms is a. small and they all cooperate. b. small and they do not cooperate. c. large and they all cooperate. *. large and they do not cooperate. Questions 29 and 30 refer to the following payoff matrix describing a game between two players, A and B. Player A chooses among strategies "Up," "Middle," and "Down." Player B chooses between strategies "Left" and "Right." The entries in the cells of the table give the payoffs, in dollars, to each player for each combination of strategies. (More dollars are better than fewer. In each cell, Player A's payoff is listed first and Player B's payoff is listed second.) Player A's strategies Player B's strategies Left Right Up (4, 2) (-3, 7) Middle (3, -2) (6, 0) Down (-, 4) (5, 5) 29. Which of the following strategy pairs is a Nash equilibrium? a. Up-Left. *. Middle-Right. c. Down-Right. d. None of the above is a Nash equilibrium. 30. Which of the following is true? a. Only Player A has a dominant strategy. *. Only Player B has a dominant strategy. c. Both players have dominant strategies. d. Neither player has a dominant strategy.