Econ 101 Sample Question

Chapter 10

1) What is a firm’s fundamental goal and what happens if the firm that doesn’t pursue this goal?

2) Why do accountants and economists calculate a firm’s cost and profit in different ways?3) Why is normal profit an opportunity cost?4) What are the constraints that a firm faces? How does each constraint limit the firm’s

profit?5) Is a firm technologically efficient if it uses the latest technology? Why or why not?6) Is a firm economically inefficient if it can cut its costs by producing less? Why or why

not?7) Explain the key distinction between technological efficiency and economic efficiency.8) Explain the distinction between a command system and an incentive system.9) What is the principal-agent problem? What are three ways in which firms try to cope with

it?10) What are the three types of firms? Explain the major advantages and disadvantages of

each.11) What are the four market types? Explain the distinguishing characteristics of each.12) What are the two measures of concentration? Explain how each measure is calculated.13) Market shares of chocolate makers are in the table below.

a. Calculate the four- firm Concentration ratiob. What is the structure of the chocolate industry?

14) Kuku runs a kebab restaurant in Belik. With no skills and no job experience, Kuku has no alternative employment. Other Kebab restaurant owners that Kuku knows earn $20,000 a year. Kuku pays the airport $3,000 a year for the space he uses, and his total revenue from selling Kebab is $40,000 a year. He spent $2,000 on Oven, Knives, and pots and paid for these items using his credit card. The interest on his credit card balance is 10 percent a year. At the end of the year, Kuku was offered $1000 for his business and all its equipment. Calculate Kuku’s opportunity cost of production and his economic profit.

FirmMarket share

(percent)Mayfair, Inc 15Bond, Inc 25Magic, Inc 20All Natural, Inc

15

others 25

15) Alternative ways of Printing 100 textbooks are:

a) Which methods are technologically efficient?b) Which method is economically efficient if the

hourly wage rate and implicit rental rate of capital are

(i) Wage rate $1, rental rate $100?(ii) Wage rate $5, rental rate $50?(iii) Wage rate $50, rental rate $5?

Chapter 11

1) Define the following concept:i) Total Costii) Average costiii) Marginal costiv) Variable costv) Average variable costvi) Fixed costvii) Average fixed cost

2) What is the law of diminishing returns? Why does marginal product eventually diminish?

3) Explain the relationship between marginal product and average product.4) How does marginal cost change as output increases (a) initially and (b) eventually?5) What does the law of diminishing returns imply for the shape of the marginal cost

curve?6) What does a firm’s production function show and how is it related to a total product

curve?7) What does a firm’s long-run average cost curve show? How is it related to the firm’s

short-run average cost curves?8) What are economies of scale and diseconomies of scale? How do they arise? What do

they imply for the shape of the long-run average cost curve?9) What is a firm’s minimum efficient scale?

Method

Labor(hours

)

Capital(machine

s)A 1 10B 5 8C 20 4D 50 1

10) Bill’s Bakery has a fire and Bill loses some of his cost data. The bits of paper that he recovers after the fire provide the information in the table (all the cost numbers are dollars). Bill asks you to come to his rescue and provide the missing data in the five spaces identified as A, B, C, D, and E.

11) Pro Painters hires students at $250 a week to paint houses. It leases equipment at $500 a week. The table sets out its total product schedule.

a. What is total cost, average total cost, and marginal cost if Pro Painters paints 12 houses a week?

b. At what output is average total cost a minimum?

c. Explain why the gap between total cost and total variable cost is the same at all outputs.

12) ProPainters hire students at $250 a week to paint houses. It leases equipment at $500 a week. Suppose that ProPainters doubles the number of students it hires and doubles the amount of equipment that it leases. ProPainters experiences diseconomies of scale.a. Explain how the ATC curve with one unit of equipment differs from that when ProPainters uses double the amount of equipment.b. Explain what might be the source of the diseconomies of scale that ProPainters experience.

13) The table shows the production function of Bonnie’s Balloon Rides. Bonnie’s pays $500 a day for each balloon it rents and $25 a day for each balloon operator it hires

a. Graph the ATC curve for Plant 1, Plant 2, Plant 3 and Plant 4b. On Bonnie’s LRAC curve, what is the average cost of producing 18 rides and 15

rides a day?

TP AFC AVC ATC MC10 120 100 220

8020 A B 150

9030 40 90 130

13040 30 C D

E50 24 108 132

Labor(students

)

Output(houses

painted per week)

1 22 53 94 125 146 15

c. Explain how Bonnie’s uses its long-run average cost curve to decide how many balloons to rent.

Chapter 121) Why is a firm in perfect competition a price taker?2) In perfect competition, what is the relationship between the demand for the firm’s output

and the market demand?3) In perfect competition, why is a firm’s marginal revenue curve also the demand curve for

the firm’s output?4) What decisions must a firm make to maximize profit?5) Why does a firm in perfect competition produce the quantity at which marginal cost

equals price?6) What is the lowest price at which a firm produces an output? Explain why.7) What is the relationship between a firm’s supply curve, its marginal cost curve, and its

average variable cost curve?8) How do we derive the short-run market supply curve in perfect competition?9) In perfect competition, when market demand increases, explain how the price of the good

and the output and profit of each firm changes in the short run.10) In perfect competition, when market demand decreases, explain how the price of the

good and the output and profit of each firm changes in the short run.11) Pat’s Pizza Kitchen is a price taker. Its costs are in the table.

a. Calculate Pat’s profit-maximizing output and economic profit if the market price is(i) $14 a pizza.(ii) $12 a pizza. (iii) $10 a pizza.

Labor(workersper day)

Output(rides per day)

Plant 1 Plant 2 Plant 3 Plant 410 4 10 13 1520 10 15 18 2030 13 18 22 2440 15 20 24 2650 16 21 25 27

Balloons 1 2 3 4

b. What is Pat’s shutdown point and what is Pat’s economic profit if it shuts down temporarily?

c. Derive Pat’s supply curve.d. At what price will firms with costs identical to Pat’s exit the pizza market in the long

run?e. At what price will firms with costs identical to Pat’s enter the pizza market in the long run?

12) The market is perfectly competitive and there are 1,000 firms that produce paper. The first table sets out the market demand schedule for paper. Each producer of paper has the costs in the second table when it uses its least-cost plant.

a. What is the market price of paper?b. What is the market’s output?c. What is the output produced by each

firm?d. What is the economic profit made or

economic loss incurred by each firm?e. What is the breakeven Point?f. What is the shut down point?g. Do firms have an incentive to enter or exit the market in the long run?h. What is the number of firms in the long run?i. What is the market price in the long run?j. What is the equilibrium quantity of paper produced in the long run?

13) Quick Copy is one of the many copy shops near the campus. Figure 12.5 shows Quick Copy’s cost curves. If the market price of copying a page is 10 cents, calculate Quick Copy’s

a. Marginal revenue.b. Profit-maximizing output.c. Economic profit.

Price(dollars per

box)

Quantity demanded(thousands of boxes

per week) 3.65 500 5.20 450 6.80 400 8.40 35010.00 30011.60 25013.20 200