Unit 3 Practice Exam Answer the questions on a separate sheet of paperplease do not write on this practice test.

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1 Unit 3 Practice Exam Answer the questions on a separate sheet of paperplease do not write on this practice test. 1. Which of the following items is most likely to be an implicit cost of production? a. property taxes on a building owned by the firm b. transportation costs paid to a trucking supplier c. rental payments for a building utilized by the company and rented from another party d. interest income foregone on funds invested in the firm by the owners 2. The law of diminishing returns a. is reflected in the eventually rising marginal cost curve for the firm in the short run. b. implies that average fixed costs will remain unchanged as output expands. c. is true for physical production activities but not for activities such as studying. d. applies to a capitalist economy but would be irrelevant if the means of production were owned by the state. 3. In the short run, the marginal cost curve crosses the average total cost curve at a. a point just below the average fixed cost curve. b. the minimum point on the average total cost curve. c. the maximum point of the average variable cost curve. d. All of the above are correct. 4. When costs that do not change with the level of output are divided by the output level, you have calculated a. total cost. b. average total cost. c. average fixed cost. d. marginal cost. 5. Which of the following would shift a firm's short-run cost curves upward? a. an advance in technology b. an increase in employees' wages c. a decrease in the demand for the firm's product d. a reduction in excise taxes levied on the firm's product 6. The most important implicit cost generally omitted from the accounting statement of a large corporation is the a. rental cost of machinery. b. cost of compliance with government regulations. c. opportunity cost of the equity capital invested by the owners. d. accounting cost incurred as the result of tax compliance. 7. When an economist says a firm is earning zero economic profit, this implies that the firm a. will be forced out of business in the near future unless market conditions change. b. is earning a zero rate of return on its assets. c. is earning as high a rate of return now as could be earned in other industries. d. has an accounting profit of zero. 8. During the short-run period of the production process, a firm will be a. unable to vary any of its factors of production. b. able to vary some of its factors of production. c. able to vary all of its factors of production. d. able to vary the size of its plant. 9. The long run is a period of a. at least one year. b. sufficient length to allow a firm to expand output by hiring additional workers. c. sufficient length to allow a firm to alter its plant size and capacity and all other factors of production. d. sufficient length to allow a firm to transform economic losses into economic profits. 10. Which of the following is always true? a. When marginal costs are less than average total costs, average total costs will be increasing. b. When average fixed costs are falling, marginal costs must be less than average fixed c. When average fixed costs are rising, marginal costs must be greater than average total d. When marginal costs are greater than average total costs, average total costs will be increasing. 11. The marginal cost of a good is a. lower for competitive firms than for monopolists. b. the cost of an additional unit. c. equal to fixed cost at high output levels. d. equal to variable cost when the firm is maximizing profit. 12. If a firm's per-unit costs fall as it produces a larger output, then a. average variable cost must also decline as output expands. b. marginal cost must also decline as output expands. c. average fixed cost must be less than average variable d. marginal cost must be less than average total cost. 13. Use the table below to answer the following question. Units of Output Total Fixed Cost Total Variable Cost 1 1,000 1, ,000 2, ,000 3, ,000 4, ,000 5,600 What is the average total cost at an output level of four units? a. $1,200 b. $1,400 c. $1,500 d. $2,000

2 14. If a firm is continually applying additional units of a variable resource to a fixed amount of other resources, and its output is increasing at a decreasing rate, this indicates that a. the firm is experiencing diminishing marginal returns. b. the firm is producing under conditions of increasing returns to scale. c. average fixed costs must be rising. d. the firm should expand its plant capacity. 15. What is the shape of the average total cost curve for a normal firm in the short run? a. U-shaped b. a horizontal line c. a vertical line d. a curve that slopes upward to the right 16. Use the table below to answer the following question. Units of Output Total Fixed Cost Total Variable Cost What is the marginal cost of producing the fourth unit of output? a. $25 b. $30 c. $62.50 d. This cannot be determined from the data. 17. In the short run, if average variable costs equal $20, average total costs equal $70, and output equals 100, then the total fixed cost equals a. $50. b. $1,000. c. $5,000. d. $9, If fixed costs are $200,000 and variable costs are $50 per unit over the relevant range of output, when 10,000 units are produced the average total cost will be a. $20. b. $30. c. $50. d. $ Bill lives in Montana and likes to grow zucchini. He applies fertilizer to his crop twice during the growing season and notices that the second layer of fertilizer increases his crop, but not as much as the first layer. What economic concept best explains this observation? a. the law of diminishing marginal utility b. the law of diminishing returns c. return equalization principle d. the principal-agent problem 20. Use the table below to answer the following question. Units of Output Total Fixed Cost Total Variable Cost 1 1,000 1, ,000 2, ,000 3, ,000 4, ,000 5,600 Given the total fixed cost and total variable cost schedules presented here, what is the average total cost of an output level of five units? a. $1,000 b. $1,120 c. $1,320 d. $6, In price-taker markets, individual firms have no control over price. Therefore, the firm's marginal revenue curve is a. indeterminate. b. a downward-sloping curve. c. constant at the market price of the product. d. precisely the same as the firm's total revenue curve. 22. When market conditions in a price-taker market are such that firms cannot cover their production costs, then a. the firms will suffer long-run economic losses. b. the firms will suffer short-run economic losses that will be exactly offset by long-run economic profits. c. some firms will go out of business, causing prices to rise until the remaining firms can cover their production d. all firms will go out of business, since consumers will not pay prices that enable firms to cover their production 23. "Our marginal revenue exceeds our marginal costs at current factor prices." This statement indicates that a. an expansion in output will increase revenues more than b. the firm is maximizing its profit. c. a larger output will reduce the firm's profit. d. the firm is better at marketing its goods than it is at producing efficiently. 24. If a single firm in a price-taker market lowers its price below the market equilibrium price, then a. it will get a larger share of the market. b. it will lose revenue without increasing the quantity sold. c. other firms will lower their prices. d. other firms will be driven out of the industry.

3 25. In a price taker's market, how does the elasticity of the market demand curve compare with the elasticity of demand of a firm in the market? a. Both demand curves have the same elasticity. b. Both demand curves are perfectly elastic. c. The firm's demand curve is downward sloping, while the industry demand curve is flat. d. The firm's demand curve is perfectly elastic, while the industry demand curve is downward sloping. 26. A price taker firm will tend to expand its output so long as a. its marginal revenue is positive. b. its marginal revenue is greater than the market price. c. its marginal revenue is less than the market price. d. its marginal cost is less than the market price. 27. When the marginal cost of a price-taker firm is less than the market price of its product, the firm should a. expand output. b. reduce output. c. maintain output. d. charge more than the market price. 28. Within the framework of the price-taker model, a price taker will always produce a quantity of output that a. minimizes the per-unit cost of production. b. she expects to provide the largest possible total revenue. c. maximizes the difference between total revenue and total cost. d. brings average total cost and price into equality. 29. Which of the following conditions will necessarily be true in short-run equilibrium for a profit-maximizing firm in a price-taker market? a. The firm will earn economic profit. b. The firm's average total cost will be at a minimum. c. The firm will produce at an output where marginal revenue just equals marginal cost. d. All of the above are true. 30. The short-run market supply curve in a price-taker industry equals the horizontal sum of the individual firm's a. MC curves above AVC. b. AVC curves above marginal revenue. c. MC curves above ATC. d. MC curves between AVC and ATC. 31. The price-taker firm should discontinue production immediately if a. the market price exceeds the firm's average total b. the market price is less than the firm's average variable c. the market price is less than the firm's average total costs, but greater than its average variable cost. d. its accounting statement indicates that it is suffering losses. a. bring total revenue into equality with total cost. b. maximize the difference between the revenue received from the last unit and the cost incurred in producing the last unit. c. result in the lowest possible average total costs of production. d. maximize the firm's profit. 33. If a firm is making zero economic profit, a. it will be forced to shutdown and leave the market. b. it will also generally be making zero accounting profit. c. it is doing as well as typical firms in other markets. d. it will not survive in the long run. 34. Which of the following will be true for a competitive firm in long-run equilibrium? a. P = MC b. P = ATC c. ATC = MC d. All of the above are correct. 35. The textile industry is composed of a large number of small firms. In recent years, these firms have suffered economic losses, and many sellers have left the industry. Economic theory suggests that these conditions will a. shift the market demand curve outward so that price will rise to the level of production cost. b. cause the remaining firms to collude so they can produce more efficiently. c. cause the market supply to decline and the price of textiles to rise. d. cause firms in the textile industry to suffer long-run economic losses. 36. If an increase in demand for beef leads to economic profits for beef producers, then a. new firms will be drawn into beef production. b. existing beef producers will exit the industry because of increased competition. c. the suppliers of beef will earn long-run economic profit. d. All of the above are correct. 37. When a competitive price taker market is in long-run equilibrium a. the firms in the market will earn zero economic profit. b. the average total cost of the firms in the market will be minimized. c. every unit of the relevant good that is valued more than its opportunity costs will be produced and sold. d. All of the above are true. 32. In general, firms will produce at a rate of output such that marginal revenue equals marginal cost because this output rate will

4 38. The diagram below illustrates a firm a. in a price-taker market earning economic profit. b. in a price searcher market earning a profit. c. that can break even when it maximizes profit. d. that should shut down immediately. 41. The cost conditions for a profit-maximizing firm operating in a price-taker market are indicated in the graph below. If the market price were $3, what output should the firm produce and what would be the firm's maximum profit? Output Maximum Profit a. 3 $3 loss b. 5 zero c. 5 $5 profit d. 6 $6 profit 39. The diagram below illustrates a firm a. capable of earning economic profit. b. that is only able to break even when it maximizes economic profit. c. making economic losses. d. that should shut down immediately. 40. The graph below indicates the cost conditions for a firm operating in a price-taker market. If the market price of the firm's product is $6, what should the firm do? a. go out of business since it cannot make a profit b. produce an output of 3 million c. produce an output of 5 million d. produce an output of 6 million 42. If the market price increases to $4, what output should the firm produce and what would be the firm's maximum profit? Output Maximum Profit a. 3 $3 loss b. 5 zero c. 5 slightly less than $5 profit d. 6 slightly less than $6 profit 43. If the market price fell to $2.50, what should the firm do? a. raise its price b. shut down and wait for conditions to improve c. continue operating in the short run if it expects conditions to improve d. go out of business immediately Use the graph below to answer the following THREE questions. 44. The average total cost (ATC) and marginal costs (MC) of a firm producing in a price-taker industry are depicted below. If the current market price of the firm's product is $15, what output should this firm produce? a. 10 b. 15 c. 20 d. 25

5 45. If the market price increases to $20, what should the firm do? a. produce an output of 15 b. expand output to 20 c. expand output to 25 d. increase its price to $ When the market price is $20, the firm's maximum profit will be approximately a. zero. b. $3. c. $60. d. $400. Use the graph below to answer the following THREE questions. 47. If the current market price for the firm depicted below is OC, given the firm's cost conditions, which output should it produce? a. OM b. OL c. OK d. OI 48. Which of the following represents the firm's total cost of producing the profit-maximum output? a. OCFK b. OBGK c. OAEL d. OCHI 49. Which of the following indicates the firm's profit (or loss) at the profit maximum output? a. profit BCFG b. profit OCDM c. the firm is making zero economic profit d. loss AEFC

6 1. d. 2. a. 3. b. 4. c. 5. b. 6. c. 7. c. 8. b. 9. c. 10. d. 11. b 12. d 13. b. 14. a. 15. a 16. b. 17. c. 18. d. 19. b. 20. c. 21. c. 22. c 23. a. 24. b 25. d. 26. d. 27. a 28. c 29. c. 30. a. 31. b 32. d. 33.c 34.d 35. c. 36. a 37. d. 38.d 39. a. 40.c 41. b. 42.d 43. c. 44. b. 45. b. 46. c. 47. c. 48. b. 49. a ANSWER KEY FOR TEST

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