Week 6 Practice 101

8/9/2019 Week 6 Practice 101

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Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) If a firm shuts down in the short run, 1)

A) is makes zero economic profit.

B) its total revenue is not large enough to cover its fixed cost.C) its loss equals zero.

D) its loss equals its fixed cost.

2) A firm's total profit can be calculated as all of the following except 2)

A) marginal profit times quantity sold.

B) total revenue minus total cost.

C) (price minus average total cost) times quantity sold.

D) average profit per unit times quantity sold.

3) If a perfectly competitive firm's price is above its average total cost, the firm 3)

A) is earning a profit. B) is incurring a loss.

C) should shut down. D) is breaking even.

4) If total revenue exceeds fixed cost, a firm 4)

A) should produce in the short run.

B) is making short- run profits.

C) has covered its variable cost.

D) may or may not produce in the short run, depending on whether total revenue covers

variable cost.

5) An increase in demand for U.S. farm exports will ________ the market prices for these exports and

________ economic profit in these markets.

5)

A) decrease; decrease B) increase; increaseC) increase; decrease D) decrease; increase

6) Apple introduced its iPhone 3G in July 2008 and within a month sales had topped 3 million units.

By April 2009, more than 25,000 apps for the iPhone 3G were available in the iTunes store, an

indication that in a competitive market

6)

A) the ease at which a new firm can enter a competitive market is low.

B) entry into the market is restricted in the short run, but becomes easier in the long run.

C) the ease at which a new firm can enter a competitive market is high.

D) entry into the market is blocked.

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Tabl e 9 - 1

QuantityTotal Cost

(dollars)

Variable Cost

(dollars)

0 $1,000 $0

100 1,360 360

200 1,560 560

300 1,960 960

400 2,760 1,760

500 4,000 3,000

600 5,800 4,800

Table 9- 1 shows the short- run cost data of a perfectly competitive firm that produces plastic camera cases. Assume that

output can only be increased in batches of 100 units.

7) Refer t o Tabl e 9 - 1. If the market price of each camera case is $8, what is the profit- maximizing

quantity?

7)

A) 300 units B) 400 units C) 500 units D) 600 units

Figure 9 - 7

8) Refer t o Figure 9 - 7. Suppose the prevailing price is $20 and the firm is currently producing 1,350

units. In the long- run equilibrium,

8)

A) there will be fewer firms in the industry but total industry output increases.

B) there will be more firms in the industry and total industry output increases.C) there will be fewer firms in the industry and total industry output decreases.

D) there will be more firms in the industry and total industry output remains constant.

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Tabl e 9 - 1

QuantityTotal Cost

(dollars)

Variable Cost

(dollars)

0 $1,000 $0

100 1,360 360

200 1,560 560

300 1,960 960

400 2,760 1,760

500 4,000 3,000

600 5,800 4,800



14) Refer t o Tabl e 9 - 1. What is the fixed cost of production? 14)

A) $0 B) $500C) $1,000 D) It cannot be determined.

15) Which of the following describes a situation in which every good or service is produced up to the

point where the last unit provides a marginal benefit to consumers equal to the marginal cost of

producing it?

15)

A) allocative efficiency B) profit maximization

C) marginal efficiency D) productive efficiency

16) Writing in the New York Times on the technology boom of the late 1990s, Michael Lewis argues,

"The sad truth, for investors, seems to be that most of the benefits of new technologies are passed

right through to consumers free of charge." What does Lewis means by the benefits of new

technology being "passed right through to consumers free of charge"?

16)

A) In the long run, price equals the lowest possible average cost of production. In this sense,

consumers receive the new technology "free of charge."

B) In perfect competition, consumers place a value on the good equal to its marginal cost of

production and since they are willing to pay the marginal valuation of the good, they are

essentially receiving the new technology "free of charge."

C) In perfect competition, price equals marginal cost of production. In this sense, consumers

receive the new technology "free of charge."

D) Firms in perfect competition are price takers. Since they cannot influence price, they cannot

dictate who benefits from new technologies, even if the benefits of new technology are being

"passed right through to consumers free of charge."

17) In the long run, a perfectly competitive market will 17)

A) supply whatever amount consumers will buy at a price which earns the market an economic

profit.

B) produce only the quantity of output that yields a long- run profit for the typical firm.

C) supply whatever amount consumers demand at a price determined by the minimum point on

the typical firm's average total cost curve.

D) generate a long- run equilibrium where the typical firm operates at a loss.

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18) The perfectly competitive market structure benefits consumers because 18)

A) firms add a much smaller markup over average cost than firms in any other type of market

structure.

B) firms produce high quality goods at low prices.

C) firms do not produce goods at the lowest possible price in the long run.

D) firms are forced by competitive pressure to be as efficient as possible.

19) If a typical firm in a perfectly competitive industry is earning profits, then 19)

A) the number of firms in the industry will remain constant in the long run.

B) new firms will enter in the long run causing market supply to increase, market price to fall

and profits to decrease.

C) all firms will continue to earn profits.

D) new firms will enter in the long run causing market supply to decrease, market price to rise

and profits to increase.

20) All of the following can be used to compute average profit except 20)

A) total profit divided by quantity.

B) marginal profit minus marginal cost.

C) average revenue minus average total cost.

D) price minus average total cost.

21) If total variable cost exceeds total revenue at all output levels, a perfectly competitive firm 21)

A) is making short- run profits. B) should produce in the short run.

C) should shut down in the short run. D) has covered its fixed cost.

22) Which of the following is a characteristic of a monopoly? 22)

A) There is only one seller in the market.

B) It is easy for new firms to enter the market.

C) The product is not unique.

D) The firm has no control over price.

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Figure 9 - 5

Figure 9- 5 shows cost and demand curves facing a typical firm in a constant- cost, perfectly competitive industry.

23) Refer t o Figure 9 -

5. If the firm's fixed cost increases by $1,000 due to a new environmentalregulation, what happens in the diagram above?

23)

A) Only the average variable cost and average total cost curves shift upward; marginal cost is not

affected.

B) Only the average total cost curve shifts upward; the marginal cost and average variable cost

curves are not affected.

C) All the cost curves shift upward.

D) None of the curves shifts; only the fixed cost curve, which is not shown here, is affected.

24) An individual seller in perfect competition will not sell at a price lower than the market price

because

24)

A) demand is perfectly inelastic.

B) demand for the product will exceed supply.C) the seller can sell any quantity she wants at the prevailing market price.

D) the seller would start a price war.

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Figure 9 - 1

25) Refer t o Figure 9 - 1. If the firm is producing 700 units, 25)

A) it is making a loss.

B) it should increase its output to maximize profit.C) it is making a profit.

D) it should cut back its output to maximize profit.

26) Refer t o Figure 9 - 1. If the firm is producing 200 units, 26)

A) it should cut back its output to maximize profit.

B) it breaks even.

C) it is making a loss.

D) it should increase its output to maximize profit.

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Figure 9 - 6

Figure 9- 6 shows cost and demand curves facing a profit- maximizing, perfectly competitive firm.


6. Identify the firm's short- run supply curve. 27)A) the marginal cost curve B) the marginal cost curve from a and above

C) the marginal cost curve from b and above D) the marginal cost curve from d and above

28) Assume the market for organically- grown produce is perfectly competitive. All else equal, as

farmers find it less profitable to produce and sell organic produce in this market,

28)

A) the demand curve will shift to the left and the equilibrium price will decrease.

B) the supply curve will shift to the left and the equilibrium price will increase.

C) the supply curve will shift to the left, the demand curve will shift to the left, and the

equilibrium price will increase.

D) the supply curve will shift to the right, the demand curve will shift to the left, and the

equilibrium price will decrease.

29) Assume that the tuna fishing industry is perfectly competitive. Which of the following best

characterizes the industry if, as demand for tuna increases, fishing boats have to go farther into the

ocean to harvest tuna?

29)

A) an increasing- cost industry B) a fixed- cost industry

C) a decreasing- cost industry D) a constant- cost industry

30) Which of the following is not a characteristic of a monopolistically competitive market structure? 30)

A) All sellers sell products that are differentiated.

B) Each firm must react to actions of other firms.

C) There is a large number of independently acting small sellers.

D) There are low barriers to entry of new firms.

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Figure 9 - 2

33) Refer t o Figure 9 - 2. Suppose the firm is currently producing Q2 units. What happens if it expands

output to Q3 units?

33)

A) It makes less profit.

B) Its profit increases by the size of the vertical distance df .

C) It will be moving toward its profit maximizing output.

D) It incurs a loss.

34) When a perfectly competitive firm finds that its market price is below its minimum average

variable cost, it will sell

34)

A) the output where marginal revenue equals marginal cost.

B) the output where average total cost equals price.

C) nothing at all; the firm shuts down.

D) any positive output the entrepreneur decides upon because all of it can be sold.

35) Which of the following is a characteristic of an oligopolistic market structure? 35)

A) There are few dominant sellers.

B) It is easy for new firms to enter the industry.

C) Each firm need not react to the actions of rivals.

D) Each firm sells a unique product.

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Figure 9 - 5

Figure 9- 5 shows cost and demand curves facing a typical firm in a constant- cost, perfectly competitive industry.


5. The firm's manager suggests that the firm's goal should be to maximize averageprofit. If the firm does this, what is the amount of profit that it will earn?

36)

A) $6,600 B) $6,750 C) $12,150 D) $36,000

37) If a perfectly competitive firm's price is less than its average total cost but greater than its average

variable cost, the firm

37)

A) is incurring a loss. B) is earning a profit.

C) is breaking even. D) should shut down.

38) For a perfectly competitive firm, which of the following is not true at profit maximization? 38)

A) Market price is greater than marginal cost.

B) Price equals marginal cost.

C) Marginal revenue equals marginal cost.

D) Total revenue minus total cost is maximized.

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Figure 9 - 2

39) Refer t o Figure 9 - 2. The firm breaks even at an output level of 39)

A) Q1 units. B) Q2 units. C) Q3 units. D) Q4 units.

40) Market supply is found by 40)

A) horizontally summing each individual producer's average total cost curve.

B) vertically summing each individual producer's average total cost curve.

C) horizontally summing the relevant part of each individual producer's marginal cost curve.

D) vertically summing the relevant part of each individual producer's marginal cost curve.

41) The price of a seller's product in perfect competition is determined by 41)

A) market demand and market supply. B) the individual demander.

C) the individual seller. D) a few of the sellers.

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Figure 9 - 6

Figure 9- 6 shows cost and demand curves facing a profit- maximizing, perfectly competitive firm.


6. At price P4 , the firm would 42)

A) lose an amount equal to its fixed cost. B) lose an amount less than fixed cost.

C) make a profit. D) make a normal profit.

43) Refer t o Figure 9 - 6. At price P1 , the firm would 43)

A) lose an amount more than fixed cost. B) break even.

C) lose an amount equal to its fixed cost. D) lose an amount less than fixed cost.

Figure 9 - 4

Figure 9- 4 shows the cost and demand curves for a profit- maximizing firm in a perfectly competitive market.

44) Refer t o Figure 9 - 4. What is the amount of its total fixed cost? 44)

A) $1,080 B) $1,440

C) $2,520 D) It cannot be determined.

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Tabl e 9 - 1

QuantityTotal Cost

(dollars)

Variable Cost

(dollars)

0 $1,000 $0

100 1,360 360

200 1,560 560

300 1,960 960

400 2,760 1,760

500 4,000 3,000

600 5,800 4,800



45) Refer t o Tabl e 9 - 1. Suppose the fixed cost of production rises by $500 and the price per unit is still

$8. What happens to the firm's profit-

maximizing output level?

45)

A) It will remain the same. B) The firm will shut down.

C) It must rise to offset the increased cost. D) It must fall.

46) If, in a perfectly competitive industry, the market price facing a firm is above its average total cost

at the output where marginal revenue equals marginal cost, then

46)

A) firms are breaking even. B) existing firms will exit the industry.

C) market supply will remain constant. D) new firms are attracted to the industry.

47) Assume that price is greater than average variable cost. If a perfectly competitive seller is

producing at an output where price is $11 and the marginal cost is $14.54, then to maximize profits

the firm should

47)

A) produce a larger level of output.B) There is not enough information given to answer the question.

C) produce a smaller level of output.

D) continue producing at the current output.

48) What is allocative efficiency? 48)

A) It refers to a situation in which resources are allocated to their highest profit use.

B) It refers to a situation in which resources are allocated fairly to all consumers in a society.

C) It refers to a situation in which resources are allocated such that the last unit of output

produced provides a marginal benefit to consumers equal to the marginal cost of producing

it.

D) It refers to a situation in which resources are allocated such that goods can be produced at

their lowest possible average cost.

49) Both buyers and sellers are price takers in a perfectly competitive market because 49)

A) each buyer and seller is too small relative to others to independently affect the market price.

B) each buyer and seller knows it is illegal to conspire to affect price.

C) both buyers and sellers in a perfectly competitive market are concerned for the welfare of

others.

D) the price is determined by government intervention and dictated to buyers and sellers.

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50) Max Shreck, an accountant, quit his $80,000- a- year job and bought an existing tattoo parlor from

its previous owner, Sylvia Sidney. The lease has five years remaining and requires a monthly

payment of $4,000. The lease

50)

A) is part of the marginal cost of operating the tattoo parlor.

B) is a fixed cost of operating the tattoo parlor.

C) is an implicit cost of operating the tattoo parlor.

D) is a variable cost of operating the tattoo parlor.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

51) Assuming a market price of $4, fill in the columns in the following table. What is the

profit- maximizing level of production? What are the two ways to determine the

profit- maximizing level of production?

Quantity

Total

Revenue

(TR )

Total

Cost (TC ) Profit

Marginal

Revenue

(MR )

Marginal

Cost (MC )

0 3

1 5

2 6

3 9

4 14

5 20

6 28

7 40

51)

52) Suppose Veronica sells teapots in the perfectly competitive teapot market. Her output per

day and her costs are as follows:

Output per

Day Total Cost

0 $20

1 32

2 37

3 48

4 61

5 75

6 92

7 113

8 136

Suppose the current equilibrium price in the teapot market is $15. To maximize profit, howmany teapots will Veronica produce, what price will she charge, and how much profit (or

loss) will she make? Draw a graph to illustrate your answer. Your graph should include

Veronica's demand, ATC , AVC , MC , and MR curves, the price she is charging, the quantity

she is producing, and the area representing her profit (or loss).

52)

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53) Consider the market for wheat which is a perfectly competitive market. Is the market

demand curve the same as the demand curve facing an individual producer? If not,

explain how and why they are different? Illustrate your answer graphically.

53)

54) Suppose Veronica sells teapots in the perfectly competitive teapot market. Her output per

day and her costs are as follows:

Output per

Day Total Cost 0 $20

1 32

2 37

3 48

4 61

5 75

6 92

7 113

8 136

Suppose the current equilibrium price in the teapot market is $20. To maximize profit, how

many teapots will Veronica produce, what price will she charge, and how much profit (orloss) will she make? Draw a graph to illustrate your answer. Your graph should include

Veronica's demand, ATC , AVC , MC , and MR curves, the price she is charging, the quantity

she is producing, and the area representing her profit (or loss).

54)

55) How are market price, average revenue, and marginal revenue related for a perfectly

competitive firm and why?

55)

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Answer Key

Testname: WEEK6PRACTICE101

1) D

2) A

3) A

4) D

5) B6) C

7) B

8) B

9) A

10) A

11) C

12) B

13) A

14) C

15) A

16) A

17) C18) D

19) B

20) B

21) C

22) A

23) B

24) C

25) D

26) D

27) C

28) B

29) A30) B

31) C

32) D

33) A

34) C

35) A

36) A

37) A

38) A

39) D

40) C

41) A42) C

43) A

44) C

45) A

46) D

47) C

48) C

49) A

50) B

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Answer Key


51)

Quantity

Total

Revenue

(TR )

Total Cost

(TC ) Profit

Marginal

Revenue (MR )

Marginal

Cost (MC )

0 0 3 - 3 - - - - - -

1 4 5 - 1 4 2

2 8 6 2 4 1

3 12 9 3 4 3

4 16 14 2 4 5

5 20 20 0 4 6

6 24 28 - 4 4 8

7 28 40 - 12 4 12

The profit- maximizing level of production is 3 units, which can be determined by the greatest difference between total

revenue and total cost, which is equal to profit, and can also be determined where marginal revenue is equal tomarginal cost (or marginal revenue is the closest to marginal cost, without being below marginal cost).

52) Veronica will produce 5 teapots per day. She will charge the market price of $15. She will break even and make a profit

of $0.

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Answer Key


53) The market demand is downward sloping while the demand for an individual firm's output is horizontal at the

equilibrium market price. This is because an individual producer is too small to influence the market price and must

take the market price as given. At the market price, the individual seller can sell all the output she desires. The figure

below shows the market demand curve and the demand curve for a single firm.

54) Veronica will produce 6 teapots per day. She will charge the market price of $20. She will make a profit of $28.

55) They are all equal to each other. The market price for any firm equals average revenue. This can be verified by noting

that average revenue = total revenue ÷ quantity = (price × quantity) ÷ quantity. Further, a perfectly competitive firm

faces a horizontal demand curve at the market price which means that it does not need to reduce the price to sell more.

Therefore, its marginal revenue equals price.

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Week 6 Practice 101