Practice Exam 3: S201 Walker Fall 2007 - with answers to MC Print Your Name: I. Multiple Choice (3 points each) 1. If marginal utility is falling then A. total utility must be falling. B. marginal utility per dollar spent must be increasing. C. the consumer cannot be maximizing satisfaction. D.* None of the above are true. 2. If total utility increases by smaller and smaller amounts as more units of a product are consumed, then marginal utility is A. decreasing and is a negative amount. B.* decreasing and is a positive amount. C. zero. D. increasing and is a negative amount. E. increasing and is a positive amount. 3. In buying goods and services with equal prices, a utility maximizing consumer should A. spend the same amount on each good or service. B. purchase equal units of each good or service. C.* buy enough of these goods or services so (at the margin) the marginal utilities are the same. D. buy enough of these goods or services so (at the margin) the total utilities are the same. 4. 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 diseconomies of scale. D. the law of diminishing marginal utility. 5. Which of the following statements about the short-run is true? A. The marginal product of labor will decrease if wages increase. B. Average fixed costs increase as marginal product decreases. C. Total fixed costs decrease if MC decrease. D. Marginal costs decrease if AVC decrease. E. * None of the above are true statements. 1
Use the table below to answer the next question. Q $MC $FC 1 1 9 2 10 9 3 10 9 6. At 3 units of output, ATC is equal to A. $3.00. B. $6.67. C.* $10.00. D. $16.00. 7. If MP of the first worker is 100 and the wage for that worker is $10, the MC of units 1 through 100 is equal to A. $.01. B.* $.10. C. $1.00 D. Cannot be computed with the information given. 8. Assume at Q = 100, the MC of the 100 th unit is $200, ATC = $10, and AVC = $7. Using this information, at Q = 99 A. total costs equal $20,000, of which fixed costs equal $1,000. B. total costs equal $9,900, of which fixed costs equal $3,000. C.* total costs equal $800, of which fixed costs equal $300. D. total costs equal $1,700, of which fixed costs equal $100. 9. An IRS loss of $1,000 per month implies the firm is making A. above normal profits. B. positive economic profits. C.* negative economic profits. D. None of the above, there is insufficient information to draw a conclusion. 10. Assume a firm is profit maximizing (or loss minimizing). It currently has TR = $33,000 per week, TFC = $10,000 per week, and TVC = $38,000 per week. Included in TVC are opportunity costs equal to $13,000 per week. This firm A.* should shut down. B. is making zero economic profits, but accounting profits. C. is making both economic losses and accounting losses, but should operate in the SR. D. is making economic losses, but may be making accounting profits. 2
11. The table below shows MR and MC for a firm, where TFC = $5. A. $0. B. $2. C.* -$3. D. -$5. Q $MR $MC 1 10 15 2 8 3 3 4 2 4 0 7 Maximum profits for this firm would be 12. A perfectly competitive firm is producing 1,000 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 $50 per unit. 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 profits. D. this firm should shut down. 13. Suppose firms in a perfectly competitive industry are earning accounting profits, but economic losses. In the long run, A. Firms exit, supply increases, demand increases and losses disappear. B.* Firms exit, supply decreases, price increases, and losses disappear. C. Firms enter, economic losses disappear, and accounting profits are driven to zero. D. Firms enter, economic losses and accounting profits are equalized, and supply increases. 14. In LR equilibrium in a perfectly competitive industry, all firms make A. zero IRS profits. B.* zero economic profits and positive accounting profits. C. positive economic profits equal to the firm s owners opportunity costs. D. normal profits equal to their accounting profits plus their opportunity costs. 15. A single price monopoly is producing an output level of 100 units where MC = $5 and MR = $5. At this output, ATC = $15, AVC = $8, and consumers' limit price is $15. What is the firm's economic profit? A.* $0 B. $200 C. -$500 D. -$1,000, and the firm should shut down. 3
16. A single price monopoly is producing an output level of 100 units where MC = $5 and MR = $2. At this output, ATC = $8, AVC = $6, and consumers' limit price is $10. This firm should A. increase output and lower price. B. decrease output and lower price. C. increase output and increase price. D.* decrease output and increase price. 17. Assume a single price monopolist faces a downward-sloping demand curve. This firm can sell 1 unit at a price of $10 and 2 units at a price of $8. The marginal revenue of the 2nd unit is A.* $6. B. $8. C. $16. D. $18. 18. All else equal, a firm s monopoly power is greater A. the higher the elasticity of demand for its product. B.* the lower the elasticity of demand for its product. C. the higher the marginal cost of producing its product. D. the lower the marginal cost of producing its product. 19. A perfect price discriminating monopolist would A. earn greater profits than a single price monopolist. B. produce greater output than a single price monopolist. C. produce where MR=MC. D. None of the above are true. E. * All of the above are true. 20. In the short run, A.* single price monopolists produce where demand is elastic. B. all monopolists make economic profits. C. single price monopolists would produce the socially optimal level of output. D. None of the above are true. 4
II. Short Answer 1. (5 Points) Assuming the price of labor is $10 per unit, complete the following table. Q L MP L Total Output MC output TVC output AVC output 1 5 2 5 2. (5 Points) Assume a firm faces increasing MP at output levels below 50 and decreasing MP at output levels above 50. Show graphically a set of cost curves (as shown in class) that would characterize the AVC and MC of this firm. Make this graph very neat and legible. No discussion necessary. 3. (5 Points) True/False (explain) -- Profits will decline if the MR of extra units of output is falling. 5
4. (5 Points) Complete the following table for a firm in a Perfectly Competitive Industry: Q MC FC TVC TC MR TR Total Profit 0 $50 1 $5 $5 2 $1 $5 3 $5 5. (5) points. Assume a profit maximizing perfectly competitive industry with an equilibrium price of $10. Show graphically (fully label your graph), the case of a firm in this industry in the SR producing 50 units of output and making an economic profit of $0. No discussion necessary. 6. (5 points) Monopoly Output - Complete the table. The information given below represents the demand and cost conditions faced by a monopolist in the LR. Q $P $MR for a SINGLE $MR for a PERFECT PRICE PRICE MONOPOLIST DISCRIMINATING MONOPOLIST 1 20 2 15 3 10 6
7. (5) points. Assume a profit maximizing single price monopoly firm. Show graphically (fully label your graph) the case of this firm producing 50 units of output, charging $20 per unit, and making an economic profit of $0. No discussion necessary. 8. (5) points. Assume the firm in question 7 could perfectly price discriminate. Show graphically (fully label your graph), the case of this firm. Briefly and precisely state what we know about its output, the lowest price it will charge, and profits? 7