Test 3: April 5, 2002

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1 Test 3: April 5, 2002 Multiple Choice 50 points (1 each) Answer the questions on the Scantron sheet. Select the best answer for each question. (See answers on the last page) 1. If the supply curve shifts to the left, there will be a. an increase in consumer surplus. b. an increase in consumers valuation of the good. c. a decrease in consumer surplus. d. no change in consumer surplus. 2. Suppose that the cost of producing automobiles increases. As a result, the equilibrium market price of automobiles, the equilibrium quantity of automobiles bought, and consumer surplus. a. increases, increases, increases b. increases, increases, decreases c. increases, decreases, decreases d. decreases, decreases, decreases e. decreases, increases, decreases 3. Refer to the graph shown. When the price is P 1, consumer surplus is a. A b. A + B c. A + B + C d. A + B + D e. A + B + C + D + E 1

2 4. Refer to the graph shown. When the price rises from P 1 to P 2, consumer surplus a. increases by an amount equal to A. b. decreases by an amount equal to B + C. c. increases by an amount equal to B + C. d. decreases by an amount equal to C. 5. Refer to the graph shown. When the price rises from P 1 to P 2, a. the buyers who still buy the good are worse off because they now pay more. b. some buyers leave the market because they are not willing to buy the good at the higher price. c. the total value of what is now purchased to buyers is actually higher. d. all of the above are correct e. both a and b are correct 6. A seller would be willing to sell a product only if a. the price received is less than the cost of production. b. the price received is at least as great as the cost of production. c. the price received is equal to the cost of production. d. The price received is at least double the cost of production. 7. Suppose that the demand for French bread increases. What will happen to producer surplus in the market for French bread? a. It increases. b. It decreases. c. It is unaffected by this change in market forces. d. It decreases briefly, then increases. 8. Total surplus in a market is a. the total costs to sellers of providing the goods less the total value to buyers of the goods, as measured by their willingness to pay. b. always less than consumer surplus plus producer surplus. c. the total value to buyers of the goods, as measured by their willingness to pay, less the costs to sellers of providing those goods. d. always greater than consumer surplus plus producer surplus. e. none of the above is correct 2

3 9. I n t h e f i gu r e s h own, a t t h e ma r k e t - c l ea r i ng e qu i l i b r i u m, t o t a l c o n s u me r wi l l i ng n e s s t o p ay i s r ep r e s e n t e d by t h e ar e a a. A. b. A + B + C. c. A + B + C + D + E + F + G + H. d. A + B + D + F + G. e. D + E + F + G + H. 10. I n t h e f i gu r e s h own, a t t h e ma r k e t - c l ea r i ng e qu i l i b r i u m, t o t a l pr o du c e r wi l l i ng n e s s t o s el l i s r e p r es e nt e d b y t h e a r e a a. D + F + G. b. D + E + F. c. A + B + C + D + E + F + G + H. d. D + E + F + G + H. e. G + H. 11. Accountants use in determining profits because their goal is to. a. sunk costs, measure changes in the wealth of company owners b. sunk costs, explain the behaviour of the firm c. opportunity costs, measure changes in the wealth of company owners d. opportunity costs, explain the behaviour of the firm 12. Economists emphasize because their goal is to. a. opportunity costs, explain the behaviour of the firm b. sunk costs, measure changes in the wealth of company owners c. sunk costs, explain the behaviour of the firm d. opportunity costs, measure changes in the wealth of company owners 3

4 13. While apartment hunting you find an apartment and give the landlord a $100 nonrefundable deposit to hold it for you and agree to return the next day to sign a contract. Before signing the contract, you run across a much nicer apartment with the same rent payment as the first. Furthermore this landlord will not require a deposit if you sign a lease now. As a starving student, you place a high value on $100. What should you do? a. Lease the first apartment because you can not afford to lose $100. b. Lease the first apartment because the opportunity cost of leasing the second apartment is too high. c. Lease the second apartment only if the landlord agrees to deduct $100 from the first month's rent. d. Lease the second apartment even though you would lose the $100 deposit. 14. Categorizing a factor of production, such as a large piece of machinery, as a fixed cost or a variable cost often depends on a. if it is being categorized for accounting or for economic decision making purposes. b. the time horizon being considered. c. the cost of the factor of production. d. all of the above 15. All sunk costs are a. opportunity costs. b. applicable to the decision making process. c. fixed costs. d. all of the above 16. If XYZ company chooses not to produce anything this month, its will be zero for the month. a. marginal cost b. total cost c. average cost d. opportunity cost 17. When a producer is operating at the bottom of a U-shaped average total cost curve, she is said to be operating at a. decreasing returns to scale. b. a point where there is excess capacity in her fixed capital. c. efficient scale. d. increasing returns to scale. 4

5 18. When marginal cost is less than average total cost, a. marginal cost must be falling. b. average total cost is falling. c. average total cost is rising. d. average variable cost must be falling. 19. When marginal cost exceeds average total cost, a. average variable cost must be rising. b. marginal cost must be rising. c. average total cost must be rising. d. average total cost is falling. 20. Assume that Andy borrows $10,000 to invest in a carpet cleaning business, and his brother, Bart takes $10,000 out of his savings account to start a mobile mechanic business. At the end of the year, each earns an accounting profit of $20,000. Assuming that this is Andy and Bart's sole source of income a. Both businesses are equally profitable. b. Bart's business is more profitable than Andy's. c. Andy's business is more profitable than Bart's d. Bart has lower costs of production than Andy. 21. Interest paid on a bank loan is a. an implicit cost. b. always lower than money you borrow from yourself. c. an explicit cost. d. always higher than money you borrow from yourself. 22. If marginal cost exceeds marginal revenue a. the firm must be incurring economic losses. b. the firm may still be generating economic profit. c. the firm may be at the profit-maximizing level of output. d. a profit-maximizing firm should always increase the level of production. 23. A profit-maximizing producer always chooses to produce the level of output where a. average variable cost exceeds marginal cost. b. average revenue is greater than marginal cost. c. marginal revenue equals marginal cost. d. average total cost is less than average revenue. 5

6 24. When price is greater than marginal cost for a perfectly competitive firm a. there are profit opportunities to be exploited by increasing production. b. the firm should decrease output to maximize profit. c. marginal cost must be rising. d. the firm is likely to be minimizing its losses. 25. The supply curve for a firm in a perfectly competitive market a. is determined by forces external to the firm. b. is reflected in its marginal cost curve (above average variable cost). c. will be influenced by the magnitude of fixed costs. d. is likely to slope downward. 26. When price is below average total cost, a firm in a competitive market will a. shut down and incur the loss of both variable and fixed costs. b. continue to operate as long as average revenue exceeds marginal cost. c. continue to operate as long as average revenue exceeds average variable cost. d. always exit the industry. Use the figure below to answer questions 27. 6

7 27. If a profit-maximizing firm is faced with a market price of P, it will choose to produce a. Q 0 units of output. b. Q 1 units of output. c. Q 2 units of output. d. Q 3 units of output. Use the figure below to answer questions Market price is P In the figure shown, total revenue to the profit-maximizing firm is represented by area a. A b. A + B + C c. A + B d. B + C 29. In the figure shown, total cost to the profit-maximizing firm is represented by area a. C b. A + B + C c. B + C d. A + B 7

8 30. In the figure shown, total profit to the profit-maximizing firm is represented by area a. A + B b. A c. B d. we can't tell from the information provided. 31. A competitive firm will choose to increase production when marginal cost is less than a. average variable cost. b. average total cost. c. marginal revenue. d. all of the above 32. If marginal revenue exceeds average total cost, the perfectly competitive firm will a. reduce output. b. increase output. c. turn a profit. d. none of the above 33. By comparing marginal revenue and marginal cost, the firm adjusts to the level that. a. production, maximizes profit b. production, minimizes average total cost c. prices, maximizes profit d. prices, minimizes average total cost 34. If your local cable TV operates as a monopolist, a doubling of the cable TV subscription price would result in a. an indeterminate change in the profitability of the cable TV company. b. a doubling of the cable TV revenue. c. a doubling of cable TV profits. d. some increase in the profit of the cable TV company. 8

9 35. Barriers to entry arise when: (i) A key resource is owned by a single firm (ii) The government awards a firm the exclusive right to produce a product (iii) Average total costs are always declining (iv) A firm faces perfectly elastic demand a. (i) or (ii) only b. (i) only c. (i), (ii), or (iii) d. all of the above 36. A monopoly that arises from exclusive ownership of a key resource results in a. too much of the resource being used (resource exploitation). b. a price which exceeds marginal cost of production. c. a price that is unrelated to costs. d. a price which reflects the best interests of society. 37. One characteristic of a typical monopolist is that price for its product is than that for a perfectly competitive firm. One advantage of such a characteristic is that it allows a monopolist to. a. lower, increase its production and generate more profit b. higher, produce more than a competitive firm, and thus generate more profit c. higher, provide subsidies to public service announcements on Television and Radio d. higher, recapture some of the costs of research and development 38. A natural monopoly occurs when a. the monopolist product is sold in its natural state (such as water or diamonds). b. firms are characterized by falling marginal cost curves. c. a monopoly firm requires the use of free natural resources (such as water or air) to produce its product. d. average total cost of production decreases as more output is produced. 9

10 39. When a natural monopoly occurs, it is more cost effective for to produce the product. a. always, many private firms b. never, two or more private firms c. always, government owned firms d. never, one firm 40. For a profit-maximizing monopolist, this is in contrast to a profit-maximizing perfectly competitive firm where. a. P = MR = MC, P < MR = MC b. P > MR > MC, P = MR = MC c. P > MR = MC, P = MR = MC d. P > MR < MC, P = MR > MC Use the Figure below to answer the questions A profit-maximizing monopolist will choose to produce units of output. a. Q 1 b. Q 0 c. Q 2 d. Q 3 10

11 42. A profit-maximizing monopolist will have total revenue equal to a. Q 0 x P 5 b. Q 2 x P 3 c. Q 3 x P 2 d. Q 1 x P A profit-maximizing monopolist will have total cost equal to a. Q 3 x P 1 b. Q 3 x P 2 c. Q 0 x P 2 d. Q 1 x P A profit-maximizing monopolist will have profit equal to a. (P 5 P 2 ) x Q 0 b. (P 5 P 0 ) x Q 0 c. (P 4 P 1 ) x Q 1 d. (P 3 P 1 ) x Q If this monopolist decided to produce (and sell) Q 2 units of output a. it would have losses of indeterminate size. b. it would continue to make a profit, but would not be operating at a level consistent with profit maximization. c. revenue would be less than if it sold Q units of output. d. it could not stay in business in the long run. 46. A monopolist's marginal revenue is the price of its good. a. always greater than b. less than or equal to c. greater than or equal to d. always less than 47. For a monopoly, price marginal revenue and marginal revenue marginal cost. a. equals, equals b. equals, is greater than c. is greater than, equals d. is greater than, is greater than 11

12 48. Governments have typically responded to monopoly inefficiency by (i) regulating the behaviour of monopolies (ii) monitoring concentration in industries (iii) doing nothing at all (iv) forcing monopolists to go out of business a. (i) and (iv) only b. (i), (ii) and (iii) c. (ii) and (iii) only d. all of the above 49. In order to prevent the deadweight loss from market concentration, a. the Canadian government reviews all mergers and acquisitions that may lead to monopoly power in a market. b. the Canadian government disallows all horizontal mergers and acquisitions. c. the Canadian government disallows all vertical mergers and acquisitions. d. the Canadian typically nationalizes all industries that have monopoly power. 50. If government regulators force a monopolist to price its product at a level equal to marginal cost a. the monopolist will still cause a deadweight loss. b. the monopolist will likely increase its profit. c. the monopolist may have economic losses. d. fewer consumers will have an ability to buy the monopoly product. 12

13 Answer keys 1. c 2. c 3. c 4. b 5. e 6. b 7. a 8. c 9. c 10. e 11. a 12. a 13. d 14. b 15. c 16. a 17. c 18. b 19. a or c 20. c 21. c 22. a 23. c 24. a 25. b 26. c 27. c 28. b 29. c 30. b 31. c 32. c 33. a 34. a 35. c 36. b 37. d 38. d 39. b 40. c 41. a 42. d 43. d 44. c 13

14 45. b 46. d 47. c 48. b 49. a 50. c 14

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