ECO 2023 Principles of Microeconomics Fall 2013 Practice Test #2. 1. Which of the following are factors of production?

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1 ECO 2023 Principles of Microeconomics Fall 2013 Practice Test #2 1. Which of the following are factors of production? A. Output in a production function. B. Productivity. C. Land, labor, capital, and entrepreneurship. D. Implicit and explicit costs. 2. Labor productivity will increase in response to A. Lower wages. B. An increase in the amount of physical capital per worker. C. Higher resource costs. D. An increase in diminishing returns. 3. When a firm produces at a technically efficient output level, it is A. Producing the output at the minimum MC curve. B. Using the fewest resources to produce a good or service. C. Producing the output where the AVC curve is at a minimum. D. Producing the best combination of goods and services. 1

2 4. The marginal physical product of the third unit of labor in Figure 21.1 is A units per day. B units per day. C units per day. D. 4.0 units per day. 5. The marginal physical product is the A. Change in total input required to produce one additional unit of output. B. Change in total output associated with one additional unit of the variable input. C. Number of units of output obtained from all units of input employed. D. Additional cost of an additional unit of output. 6. In the short run, the law of diminishing returns A. Occurs for only a few economies. B. Can be observed in every production process. C. Does not occur in command economies. D. Can be overcome by using more variable inputs. 2

3 7. Marginal cost A. Is the change in total output from hiring one more factor of production. B. Is the change in total cost from producing one additional unit of output. C. Falls when there are diminishing returns. D. Is the change in the total cost when hiring one more factor of production. 8. At any given rate of output, the difference between total cost and fixed cost is A. Marginal cost. B. Average variable cost. C. Zero in the short run. D. Variable cost. 9. In the short run, which of the following is most likely a variable cost? A. Contractual lease payments. B. Labor and raw materials costs. C. Property taxes. D. Interest payments on borrowed funds. 10. When the average total cost curve is rising, the marginal cost curve will be A. Below the average fixed cost curve. B. Falling with greater output. C. Above the average total cost curve. D. Below the average total cost curve. 11. Economists assume the principal motivation of producers is A. Psychological gratification. B. Social status. C. Profit. D. Their preference for being "their own person." 12. The best measure of the economic cost of doing your homework is A. The most valuable opportunity you give up when you do your homework. B. The amount you would have to pay to get someone else to do it. C. The economic cost plus the accounting cost of doing the homework. 3

4 D. The tuition paid for your education plus the cost of any required textbooks. 13. In defining economic costs, economists emphasize A. Explicit and implicit costs while accountants recognize only implicit costs. B. Explicit and implicit costs while accountants recognize only explicit costs. C. Only explicit costs while accountants recognize only implicit costs. D. Only explicit costs while accountants recognize explicit and implicit costs. 14. Economic profit is A. Greater than accounting profit by the amount of implicit cost. B. Greater than accounting profit by the amount of explicit cost. C. Less than accounting profit by the amount of implicit cost. D. Less than accounting profit by the amount of explicit cost. 15. The accounting profit is equal to A. $925. B. $1,525. C. $2,125. D. $4,000. 4

5 16. Suppose the entrepreneur could earn $1,000 as an employee elsewhere. This means the economic profit is A. -$925. B. -$75. C. -$1,000. D. $ Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What is the accounting profit for the firm described above? A. -$90,000. B. $0. C. $90,000. D. $200, A monopoly occurs when A. There is only one producer of a good or service. B. There is only one buyer of a good or service. C. Owners take on additional risk and earn huge profits. D. Companies become greedy and raise the price of a good or service. 5

6 19. Market structure is determined by the A. Annual revenue, costs, and profits for an industry. B. Number and relative size of the firms in an industry. C. Amount of compensation given to the CEOs. D. Price charged for the good or service produced. 20. Perfect competition is a situation in which A. Every year, owners are likely to earn economic profits. B. Every year, owners are likely to earn economic losses. C. There are many firms and several buyers or sellers have market power. D. There are many firms and no buyer or seller has market power. 21. Which of the following is a determinant of market supply but not the supply curve of an individual firm? A. The price of factor inputs. B. Expectations. C. The number of firms in the market. D. Technology. 22. If a new sushi restaurant opens, then A. The market supply curve for sushi will shift to the right. B. The market supply curve for sushi will shift to the left. C. There will be a movement up along the market supply curve for sushi. D. There will be a movement down along the market supply curve for sushi. 23. Marginal cost is the increase in total cost associated with a one-unit A. Increase in production. B. Decrease in production. C. Increase in input usage. D. Decrease in input usage. 24. In making an investment decision, an entrepreneur A. Makes a decision to exit if price is above marginal cost. B. Makes a short-run decision. 6

7 C. Must consider only variable costs. D. Must take account of diminishing returns. 25. For a competitive market in the long run, A. Economic losses induce firms to shut down. B. Economic profits induce firms to enter until profits are normal. C. Accounting profit is zero. D. Economic profit is positive. 26. In a competitive market where firms are earning economic losses, which of the following should be expected as the industry moves to long-run equilibrium, ceteris paribus? A. A higher price and more firms. B. A higher price and fewer firms. C. A lower price and more firms. D. A lower price and fewer firms. 27. Which of the following is not a barrier to entry? A. Government regulation. B. Control of essential factors of production. C. Economies of scale. D. Perfect information. 28. If two products are homogeneous, then they A. Are identical. B. Differ from each other. C. Must be used together. D. Are similar to each other. 29. The behavior expected in a competitive market includes A. Very little entry and exit. B. Marginal cost pricing. C. Aggressive behavior among competitors to control prices. D. Little technological growth. 7

8 30. In a perfectly competitive industry, economic profit: A. Can persist in the long run because of barriers to entry. B. Can persist in the long run because of homogeneous products. C. Will approach zero in the long run as prices are driven to zero. D. Will approach zero in the long run as prices are driven to the level of average production costs. 31. A monopolist will find that its marginal revenue curve A. Is the same as its demand curve. B. Lies above its demand curve and is flatter than its demand curve. C. Lies below its demand curve and is steeper than its demand curve. D. Lies below its demand curve and has the same slope as its demand curve. 32. Suppose a monopoly firm produces bicycles and can sell 10 bicycles per month at a price of $700 per bicycle. In order to increase sales by one bicycle per month, the monopolist must lower the price of its bicycles by $50 to $650 per bicycle. The marginal revenue of the 11th bicycle is A. $150. B. -$50. C. $50. D. $7, In monopoly and perfect competition, a firm should expand production when A. Marginal revenue is below marginal cost. B. Price is below marginal cost. C. Marginal revenue is above marginal cost. D. Price is above marginal cost. 34. Monopolists set prices A. On the marginal revenue curve. B. Without constraints since there is no competition. C. At the output where marginal revenue equals marginal cost. D. At the minimum of the long-run average total cost curve. 8

9 35. Which of the following is the same for monopoly and competition under the same cost and demand conditions? A. The amount of output that is produced. B. Economic profits. C. The goal of maximizing profits. D. Efficiency of production at the profit-maximizing output. 36. A profit-maximizing monopolist produces the rate of output where A. MR = MC and determines price based on the demand curve. B. Price = MC. C. MR = MC and can set price at any amount it chooses. D. MR = MC and determines price based on ATC. 37. In Table 24.1, using the profit maximization rule, a monopolist will produce A. 1 unit. B. 3 units. C. 4 units. D. 5 units. 38. In Table 24.1, according to the profit maximization rule, at the profit-maximizing level of output marginal, cost is A. $200. B. $250. C. $300. D. $350. 9

10 39. In Figure 24.1, the profit-maximizing monopolist will charge a price of A. J. B. L. C. C. D. A. 40. In Figure 24.1 total cost is represented by the area A. ABFE. B. CDFE. C. ABGHE. D. ABDC. 10

11 41. In Figure 24.2, a profit-maximizing monopolist will charge a price of A. $6.40. B. $4.70. C. $4.00. D. $

12 ANSWER KEY 1. C 2. B 3. B 4. B 5. B 6. B 7. B 8. D 9. B 10. C 11. C 12. A 13. B 14. C 15. A 16. B 17. B 18. A 19. B 20. D 21. C 22. A 23. A 24. C 25. B 26. B 27. D 28. A 29. B 30. D 31. C 32. A 33. C 34. C 35. C 36. A 37. B 38. C 39. D 40. B 41. D 12