Name: Student ID: 1. A manufacturing company that benefits from lower costs per unit as it grows is an example of a firm experiencing: A) scale reduction. B) increasing returns to scale. C) increasing opportunity costs. D) decreasing returns to scale. Use the following to answer question 2: Figure: Profit Maximizing 2. (Figure: Profit Maximizing) The figure shows cost curves for a firm operating in a perfectly competitive market, with M denoting the MC curve, N denoting the ATC curve and O denoting the AVC curve. If the market price is P3, the firm will produce quantity and in the short run. A) q2; make a profit B) q4; incur a loss C) q1; break even D) q2; incur a loss Version 5 Page 1
Use the following to answer question 3: Figure: Market for Hamburgers 3. (Figure: Market for Hamburgers) The figure shows the weekly market for hamburgers at the Tasty Burger Palace. If the market is originally in equilibrium and the government then imposes an excise tax of $0.80 per unit of the good sold, the government's revenue from the tax will be: A) $105. B) $240. C) $90. D) $175. 4. Assume that a person is consuming the utility-maximizing quantities of pork and chicken. We can conclude that: A) the person is consuming the same amount of pork and chicken. B) the ratio of the marginal utility to price is the same for pork as it is for chicken. C) the marginal utility of pork equals the marginal utility of chicken. D) the price of pork equals the price of chicken. Use the following to answer question 5: Scenario: Budget Constraint Tom is trying to decide how to allocate his $50 budget for CD purchases and DVD rentals when the price of a CD is $10 and the price of a DVD rental is $5. Version 5 Page 2
5. (Scenario: Budget Constraint) Which of the following combinations of CD purchases and DVD rentals lies on Tom's budget line? A) 0 CDs and 5 DVDs B) 5 CDs and 0 DVDs C) 10 CDs and 5 DVDs D) 5 CDs and 10 DVDs 6. The implicit cost of capital is: A) depreciation. B) the explicit cost of capital that the firm might have used but didn't need to. C) the cost of human capital. D) the opportunity cost of the capital used by a business. Use the following to answer question 7: Figure: Budget Lines for Tea and Scones Version 5 Page 3
7. (Figure: Budget Lines for Tea and Scones) For months now, Agnes has had $20 per month to spend on tea and scones. The price of each cup of tea and each scone has been $1. Which of the charts in the figure shows what will happen to her budget line if the price of a scone rises to $2? A) Chart D B) Chart B C) Chart A D) Chart C 8. An excise tax is a tax charged on: A) the inheritance of assets. B) each unit of a good or service that is sold. C) the ownership of real estate. D) earnings. 9. The relationship between an individual's consumption bundle and his or her utility is called a: A) utility function. B) production function. C) demand function. D) consumption function. Use the following to answer question 10: Version 5 Page 4
10. (Table: Marginal and Total Benefit) Rodger is deciding how many football games he wants to attend this year. The total benefit that Rodger receives from football games is shown in the table. If tickets to each football game cost $10, then he should attend game(s). A) 1 B) 0 C) 5 D) 2 11. Consider a perfectly competitive firm in the short run. Assume that it is sustaining economic losses but continues to produce. At the profit-maximizing (loss-minimizing) output, all of the following statements are correct except: A) marginal cost is equal to marginal revenue. B) price is equal to marginal cost. C) marginal cost is less than average total cost. D) marginal cost is less than average variable cost. 12. If Marie Marionettes is operating under conditions of diminishing marginal product, the marginal costs will be: A) increasing. B) equal to ATC. C) decreasing. D) constant. Use the following to answer question 13: Version 5 Page 5
13. (Table: Utility from Pizza and Beer) At All-Sports Bar, a bottle of beer costs $4; a slice of pizza costs $2. Jimmy has $10 to spend on beer and pizza, and he has the preferences shown in the table. To maximize his utility, Jimmy will consume slice(s) of pizza and bottle(s) of beer. A) 1; 2 B) 3; 1 C) 4; 3 D) 5; 0 Use the following to answer question 14: Figure: Total Product 14. (Figure: Total Product) When hiring units of labor between zero and L1 units of labor, which of the following statements is true? A) The marginal product of labor is increasing. B) Average product is decreasing. C) The marginal product of labor is decreasing. D) Total product is increasing at a diminishing rate. 15. According to the optimal output rule, if marginal benefit: A) exceeds marginal cost, net benefit is maximized. B) exceeds marginal cost, an activity should be reduced. C) is equal to marginal cost, net benefit is maximized. D) is less than marginal cost, an activity should be increased. Version 5 Page 6
16. If it produces, a perfectly competitive firm will maximize profits at which: A) price exceeds marginal cost. B) price equals average total cost. C) marginal revenue equals price. D) marginal revenue equals marginal cost. 17. If a firm produces 10 units of output and incurs $30 in average variable cost and $35 in average total cost, total fixed cost is: A) $50. B) $35. C) $300. D) $3. 18. For the Colorado beef industry to be classified as perfectly competitive, ranchers in Colorado must have on prices and beef is a product. A) no noticeable effect; differentiated B) a huge effect; standardized C) no noticeable effect; standardized D) a huge effect; differentiated Use the following to answer question 19: 19. (Table: Output and Costs) Using the information in the table, when quantity increases from one to two, marginal cost equals: A) 8. B) 17. C) 13. D) 10. Version 5 Page 7
20. Which of the following is true? A) Price and marginal revenue are the same in perfect competition. B) Economic profit is always positive in the short run. C) Economic profit per unit is found by subtracting AVC from price. D) If price falls below average total cost, the firm will shut down in the short run. 21. Recently, the government considered adding an excise tax on CDs that can be used to record music and CD players that can record discs. If this tax was enacted, we would expect: A) there to be an increase in economic activity due to the tax. B) that consumers would pay a higher price and producers would sell fewer of these CDs and CD players than before the tax. C) that consumers would pay a lower price and producers would receive a higher price for these CDs and CD players than before the tax. D) there to be no effect on consumption or the prices paid by consumers of these CDs and CD players. 22. Brianna and Jess live in Taxland, which only has one tax, an income tax. Both Brianna and Jess pay $1,000 in taxes each year but Brianna earns $20,000 and Jess earns $10,000. From this information, you can infer that the tax system is: A) proportional. B) regressive. C) equitable. D) progressive. 23. The present value of a future payment increases if the: A) stock market falls. B) period between the present and the future increases. C) interest rate decreases. D) future payment decreases. 24. Suppose a perfectly competitive firm can increase its profits by increasing its output. Then it must be the case that the firm's: A) marginal revenue exceeds its marginal cost. B) marginal cost exceeds its marginal revenue. C) price exceeds its marginal revenue. D) price exceeds its average variable cost, but is less than average total cost. Version 5 Page 8
25. Suppose the government imposes a $4 excise tax on Good X. If the demand for Good X is perfectly elastic and the supply curve is elastic, then the price of Good X will: A) increase, but by less than $4. B) increase by more than $4. C) increase by exactly $4. D) remain constant. 26. The short run is defined as a: A) time period in which some inputs are fixed, but it cannot exceed 1 year. B) period of time less than 1 year. C) period in which some inputs are considered to be fixed in quantity. D) period of time less than 6 months. Use the following to answer question 27: Figure: Tax Incidence Version 5 Page 9
27. (Figure: Tax Incidence) All other things unchanged, when a good or service is characterized by a relatively elastic supply, as shown in Panel, the greater share of the burden of an excise tax imposed on it is borne by. A) B; buyers B) B; sellers C) A; sellers D) A; buyers 28. Sunk costs: A) help to determine the optimal quantity of an activity. B) are not considered in marginal analysis. C) are the same as variable costs. D) can dramatically increase marginal costs. 29. The principle of diminishing marginal utility: A) indicates that, if a good is inferior, less of it will be purchased when income falls during a period. B) refers to the tendency of total utility to increase until an individual's budget is no longer constrained. C) refers to the tendency of marginal utility to decline as the amount of consumption of a good or service increases. D) assumes all goods are normal. 30. Sarah's accountant tells her that she made a profit of $43,002 running a pottery studio in Orlando. Sarah's husband an economist claims Sarah lost $43,002 running her pottery studio. This means her husband is claiming that she incurred in costs. A) $43,002; explicit B) $86,004; implicit C) $43,002; implicit D) $86,004; explicit Version 5 Page 10
Part II: Problem 31. You are given the following graph concerning a firm in a perfectly competitive market. a. Indicate on the graph (And be sure to label your answers!): i. The optimal output level for the firm in the short run, if it decides to produce. ii. The price the firm will charge. iii. The profit or loss of the firm. iv. The shutdown price. v. The breakeven price. b. Should the firm operate in the short run? c. Describe what will happen in this market in the long run?