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Test #3

Multiple Choice
Please write your name in the upper right-hand corner of this page. Identify the letter of the choice that best completes the statement or answers the question and write the letter in the space provided.
 

 1. 
The shape of the long-run average cost curve reflects
a.
economies and diseconomies of scale
b.
productivity of fixed inputs
c.
increasing and diminishing marginal returns
d.
market demand
e.
all of the above
 

 2. 
If variable cost at each output level doubles,
a.
MC remains unchanged
b.
MC doubles
c.
MC less than doubles
d.
AFC doubles
e.
ATC doubles
 
 
Exhibit 8-2

Total cost and total revenue for a firm in a
perfectly competitive wool blanket market
  
Cost
Demand
Q
TC
Q
TR
0
$30  
0
$0
1
33
1
10
2
37
2
20
3
42
3
30
4
51
4
40
5
60
5
50
6
90
6
60
 

 3. 
How much profit is the firm in Exhibit 8-2 earning (or how much of a loss is it suffering) at the profit maximizing level of output?
a.
$30
b.
zero profit or loss
c.
$10
d.
-$17
e.
-$10
 

 4. 
If a monopolist must lower the price on all units in order to sell an additional unit,
a.
the monopolist will always lose profit when it increases quantity
b.
the monopolist will always lose revenue when it increases quantity
c.
it is impossible for the monopolist to maximize profit
d.
price will always be less than marginal revenue
e.
price will always be greater than marginal revenue
 

 5. 
If a monopolistically competitive firm can earn a profit, it will adjust production until
a.
MC > MR
b.
MC = P
c.
MR = MC
d.
MR = AR
e.
MR > AVC
 

 6. 
Which of the following is true of marginal revenue for a monopolist that charges a single price?
a.
P < MR because the monopolist must decrease price on all units sold in order to sell an additional unit.
b.
AR = MR because there are no close substitutes for the monopolist's product.
c.
P = MR only at the profit-maximizing quantity.
d.
P > MR because the monopolist must decrease price on all units sold in order to sell an additional unit.
e.
P = MR because there are no close substitutes for the monopolist's product.
 
 
Exhibit 7-4

Units of
labor
Total
product
Marginal
product
0
  0
  -
1
  6
  6
2
14
  8
3
24
10
4
36
12
5
42
  6
6
46
  4
 

 7. 
In Exhibit 7-4, marginal returns begin to diminish with the hiring of the _________ worker.
a.
fourth
b.
third
c.
fifth
d.
sixth
e.
second
 

 8. 
Suppose Ernie gives up his job as financial advisor for P.E.T.S., at which he earned $30,000 per year, to open up a store selling spot remover to Dalmatians. He invested $10,000 in the store, which had been in savings earning 5 percent interest. This year's revenues in the new business were $50,000, and explicit costs were $10,000. Calculate Ernie's economic profit.
a.
$9,500
b.
$20,000
c.
$40,000
d.
$10,000
e.
$50,000
 
 
Exhibit 8-6

molly_files/i0120000.jpg
 

 9. 
Consider Exhibit 8-6. At which quantity will this firm maximize profit?
a.
point e
b.
point c
c.
point b
d.
point d
e.
point a
 

 10. 
Diseconomies of scale are pictured on a graph by the upward-sloping portion of the
a.
long-run average cost curve
b.
long-run marginal cost curve
c.
marginal product curve
d.
short-run marginal cost curve
e.
short-run average cost curve
 

 11. 
There are five firms in the cresset industry. The market shares of the five firms are 60 percent, 15 percent, 15 percent, 6 percent, and 4 percent. The Herfindahl index is
a.
4,100
b.
10,000
c.
4,086
d.
96
e.
4,102
 

 12. 
If the demand curve facing the Acme Awl Company is tangent to its average total cost curve, all of the following statements are true except one. Which is the exception?
a.
A normal profit exists.
b.
Acme has excess capacity.
c.
Economic profit is zero.
d.
Marginal cost must exceed marginal revenue.
e.
Firms have no incentive to enter or leave this industry.
 
 
Exhibit 10-13

molly_files/i0170000.jpg
 

 13. 
Consider Exhibit 10-13. If two firms each produced 500 units, the total cost of supplying 1,000 units would be
a.
$6
b.
$4,000
c.
$6,000
d.
$4
e.
$3,000
 
 
molly_files/i0190000.jpg
 

 14. 
If regulators set price equal to marginal cost for the natural monopoly in Exhibit 0204, then from the usual profit-maximizing position, price moves from
a.
$14 to $20, and quantity increases from 5 to 8
b.
$24 to $18, and quantity remains unchanged
c.
$24 to $22, and quantity increases from 5 to 10
d.
$24 to $20, and quantity increases from 5 to 8
e.
$24 to $18, and quantity increases from 5 to 8
 

 15. 
In game theory, if two rivals in an oligopoly can avoid a large loss by cutting price from $40 to $35,
a.
they will collude to do what's best for both of them
b.
each will cut price but not all the way to $35
c.
their actions will depend on their respective strategies
d.
neither will cut its price
e.
one will charge $40 and the other will charge $35
 

 16. 
If the Econ Store earns a normal profit this year, its
a.
accounting profit is less than its economic profit
b.
economic profit is equal to the average accounting profit in other industries
c.
economic profit is equal to its accounting profit
d.
accounting profit is zero
e.
economic profit is zero
 
 
Exhibit 9-17

molly_files/i0230000.jpg
 

 17. 
Which area in Exhibit 9-17 represents deadweight loss under monopoly without price discrimination?
a.
area a
b.
area f
c.
area e
d.
area c
e.
area b
 

 18. 
Technological efficiency means that
a.
the same output could not be produced with fewer resources
b.
there are economies of scale in this industry
c.
the same output could not be produced at a lower cost
d.
the same inputs could not be purchased at a lower cost
e.
technology is constantly improving in this industry
 
 
Exhibit 9-3

molly_files/i0260000.jpg
 

 19. 
At the profit-maximizing quantity, the demand curve facing the firm in Exhibit 9-3 is
a.
perfectly inelastic
b.
price inelastic
c.
price elastic
d.
unit elastic
e.
perfectly elastic
 

 20. 
The rail system in Metropolis is a natural monopoly. If the government regulates the system by setting the fare equal to marginal cost, which of the following will be true?
a.
Profit will be higher than if the monopoly were unregulated.
b.
Only normal profit will be earned under regulation.
c.
Economic loss will occur under regulation.
d.
Accounting profit will be zero under regulation.
e.
Profit will be zero under regulation.
 

 21. 
Which of the following correctly describes the relationship between the marginal cost and average variable cost curves?
a.
MC is everywhere above AVC
b.
both AVC and MC first rise and then fall
c.
MC crosses AVC at AVC's minimum point
d.
AVC is everywhere above MC
e.
MC crosses AVC at MC's minimum point
 
 
Exhibit 9-13

molly_files/i0300000.jpg
 

 22. 
In the short run, the monopolist depicted in Exhibit 9-13 should
a.
continue producing because P > ATC at all output levels
b.
shut down because P < AVC at some output levels
c.
continue producing because monopolists never shut down
d.
shut down because P < ATC at all output levels
e.
continue producing because P > AVC at some output levels
 

Short Answer
 

 23. 
(2 points) Explain the difference between diseconomies of scale and diminishing returns. You must use graphs to explain your answer.
 

Problem
 

 24. 
(2 points) Jack and Jill both run gasoline stations.  They have two choices in terms of the number of gallons each might sell on any give day – 40 gallons or 30 gallons. If they both sell 40 gallons, they split the profits, earning $1,600 each.  If they both sell 30 gallons, they both earn $1,800.  If one of the two sells 40 gallons, s/he will earn $2,000 and the other will earn $1,500.  Create a payoff matrix that depicts the potential outcomes for this game.  What would be the Nash equilibrium in this case?
 

 25. 
(2 points) The marginal revenue curve of a natural monopoly crosses its marginal cost curve at $50 per unit, indicating an output of 500,000 units. The price that consumers are willing to pay for this output is $65 per unit. marginal cost and demand cross at $55 and 750,000 units. The firm’s average total costs per unit are $95 at the point at which marginal cost and marginal revenue are equal. Average fixed cost is $20 per unit at the same point. (a) Graph this information. (b) What is the firm’s profit position at profit-maximizing output? (c) What is average variable cost at the profit-maximizing level of output? (d) Now, assume that the natural monopoly is faced with a marginal cost pricing regulation. What is the natural monopolies profit position under this regulation?
 



 
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