Econ 101 Kong CMP final review session - solution 2014 fall. Benji Huang

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1 Econ 101 Kong CMP final review session - solution 2014 fall Benji Huang

2 practice monopoly 1 A monopoly make positive economic profit in the long run because. A) can; barriers to entry prevent other firms from entering the market and sharing the profit B) cannot; eventually demand will decrease and prices will fall C) cannot; other firms will enter the market until all firms are making zero economic profit D) can; new technology constantly lowers costs for the monopoly firm and for its competitors E) can; demand constantly increases and price constantly rises

3 practice monopoly 2 When perfect price discrimination occurs, which one of the following statements is false? A) Buyers cannot resell the product. B) The firm can distinguish between buyers. C) The firm sets prices. D) The firm captures consumer surplus. E) The outcome is less efficient than with single-price monopoly.

4 practice monopoly 3 Which area in figure indicates the deadweight loss from a perfect price-discriminating monopoly? A) EACF B) ACD C) ABD D) BCD E) None of the above.

5 practice monopoly 4 Refer to table. If a perfect price-discriminating monopoly faces the demand schedule shown in Table and if marginal cost is constant at $3, output is A) 2 units. B) 3 units. C) 4 units. D) 5 units. E) 6 units.

6 practice monopoly 5 Table shows the demand schedule faced by a monopoly. If the monopoly is a perfect price-discriminating monopoly the marginal revenue from the sale of the 3rd unit of output is A) $2. B) $6. C) $4. D) $3. E) $5.

7 practice monopoly 6 Table shows the demand schedule faced by a monopoly. If the monopoly is a perfect price-discriminating monopoly the marginal revenue from the sale of the 3rd unit of output is A) $2. B) $6. C) $4. D) $3. E) $5.

8 practice monopoly 7 What quantity will TransCanada produce and what is the price of natural gas if TransCanada is a. Regulated to make zero economic profit? (2 points) If TransCanada is regulated to make zero economic profit, it produces the output at which price equals average total cost at the intersection of the demand curve and the LRAC curve. TransCanada will produce 3 million cubic metres a day and charge 4 cents a cubic metre.

9 practice monopoly 7 What quantity will TransCanada produce and what is the price of natural gas if TransCanada is b. Regulated to be efficient? (2 points) If the firm is regulated to be efficient, it will produce the quantity at which price (marginal social benefit) equals marginal social cost at the intersection of the demand curve and the marginal cost curve. TransCanada will produce 4 cubic metres a day and charge 2 cents a cubic metre.

10 practice monopoly 8 Briefly explain whether the following statements are true or false. a. Because they can control product price, monopolists are always assured of profitable production by simply charging the highest price consumers will pay. (1 point) The statement is false. If the monopolist charged the highest price consumers would pay, it would sell precisely one unit! (Conceivably, it might sell a little more than one if more than one consumer made matching bids for the first unit offered.) It is highly unlikely that the sale of one unit (or a very few) would cover the very high AFC of one or a very few units. And even a monopolist that does produce sensibly where MR = MC may still suffer a loss: P can be below ATC at all levels.

11 practice monopoly 8 Briefly explain whether the following statements are true or false. b. The monopolist seeks the output that will yield the greatest per-unit profit. (1 point) The statement is false. The monopolist seeks the output that will yield the greatest profit. The profit equation is Q(P - ATC). It is not (P - ATC). If the monopolist sells one unit for $100 when ATC is $60, then its profit per unit and total profit is $40 (= $100 - $60). Nice, but if the same monopolist can sell 1,000 units for $40 when ATC is $39, then, though its per unit profit is a mere $1 (= $40 - $39), its total profit is $1,000 [= 1,000($40 - $39)]. And this is much better than $40.

12 practice monopoly 8 Briefly explain whether the following statements are true or false. c. An excess of price over marginal cost is the market s way of signalling the need for more production of a good. (1 point) The statement is true. Price is the value society sets on the last item produced. Marginal cost is the value to society of the alternative production forgone when the last item is produced. When P>MC, society is willing to pay more than the opportunity cost of the last item s production.

13 practice past material 1 A firm will want to increase its scale of plant if A) it is persistently producing on the upward-sloping part of its short-run average total cost curve. B) it is persistently producing on the downward-sloping part of its short-run average total cost curve. C) it is producing below minimum efficient scale. D) marginal cost is below average total cost. E) marginal cost is below average variable cost.

14 practice past material 2 The long-run average cost curve is the relationship between the lowest attainable average total cost and output, when plant size is and labour is. The long-run average cost curve is made up of the segments of individual average cost curves with the lowest average cost for a given output. A) varied; varied; variable; variable B) varied; varied; total; total C) varied; held constant; variable; variable D) held constant; varied; total; total E) held constant; varied; variable; variable

15 practice past material 3 Refer to Figure which shows the total product curves for four different plant sizes as Tania varies the quantity of capital and workers. The curve that represents the plant using the largest amount of capital is A) plant A. B) plant B. C) plant C. D) plant D. E) all curves because each plant uses the same number of machines, just different amounts of labour.

16 practice past material 4 Refer to Figure which illustrates the total product curves for four different plant sizes. One of the fundamental technological facts reflected in the shape of each of the total product curves is the A) price of the inputs. B) price of the output. C) law of diminishing marginal returns. D) law of economies of scale. E) fact that capital and labour cannot be substituted for each other.

17 practice past material 5 For perfect competition to arise, it is necessary that market demand be A) inelastic. B) elastic. C) perfectly elastic. D) large relative to the minimum efficient scale of a single firm. E) small relative to the minimum efficient scale of a single firm.

18 practice past material 6 Suppose a firm is trying to decide whether or not to temporarily shut down to minimize total loss. If price equals average variable cost, then A) total revenue equals total fixed cost, and the loss equals total variable cost. B) total revenue equals total variable cost, and the loss equals total fixed cost. C) total fixed cost is zero. D) total variable cost equals total fixed cost. E) total cost equals total variable cost.

19 practice past material 7 Refer to Table, which represents Swanky's production possibilities as the firm varies the quantities of knitting machines and workers per day. If Swanky increases the number of knitting machines from 2 to 3 and increases the number of workers employed from 2 to 3, the factory experiences A) economies of scale. B) constant returns to scale. C) diseconomies of scale. D) constant marginal product. E) minimum efficient scale.

20 practice past material 8 Refer to Table, which represents Swanky's production possibilities as the firm varies the quantities of knitting machines and workers per day. If Swanky increases the number of knitting machines from 1 to 2 and increases the number of workers employed from 1 to 2, the factory experiences A) economies of scale. B) constant returns to scale. C) diseconomies of scale. D) constant marginal product. E) minimum efficient scale.

21 practice past material 9 If price falls below minimum average variable cost, the best a firm can do is A) increase production and incur a loss equal to total variable cost. B) increase production and incur a loss equal to total fixed cost. C) stop production and incur a loss equal to total fixed cost. D) stop production and incur a loss equal to total variable cost. E) stay at the same production level and incur a loss equal to the difference between total cost

22 practice past material 10 Refer to Figure, which shows a perfectly competitive firm's total revenue and total cost curves. answer question on next slide

23 practice past material 10 Refer to Figure in previous slide, which shows a perfectly competitive firm's total revenue and total cost curves. Which one of the following statements is false? A) Economic profit is the vertical distance between the total revenue curve and the total cost curve. B) At an output of Q1 units a day, the firm makes zero economic profit. C) At an output greater than Q3 units a day, the firm incurs an economic loss. D) At an output of Q2 units a day, the firm incurs an economic loss. E) At an output less than Q1 units a day, the firm incurs an economic loss.

24 practice past material 11 If a profit-maximizing firm in a perfectly competitive market is incurring an economic loss, then it must be producing a level of output where A) price is greater than marginal cost. B) price is greater than marginal revenue. C) marginal cost is greater than marginal revenue. D) average total cost is greater than marginal cost. E) average total cost is less than marginal cost.

25 practice past material 12 Technological change spreads through a perfectly competitive industry. Choose the statement that is incorrect. A) The market price falls and the equilibrium quantity increases. B) The technological change brings permanent gains for consumers and producers. C) Firms that do not change to the new technology will incur an economic loss and eventually go out of business. D) Firms that are quick to adopt to the new technology will make economic profits initially, but in the long run they will make zero economic profit. E) Average cost will fall for firms who adopt the new technology.

26 practice past material 13 Average variable cost is at a minimum at the same output at which A) average product is at a maximum. B) average product is at a minimum. C) marginal product is at a maximum. D) marginal product is at a minimum. E) marginal cost is at a minimum.

27 practice past material 14 Refer to Figure, which illustrates short-run average and marginal cost curves. Which one of the following statements is false? A) Average fixed cost decreases with output. B) The vertical gap between curves B and C is equal to average variable cost. C) Line B comes closer to line C as output increases because of a decrease in average fixed cost. D) Curve D is the marginal cost curve. E) The vertical gap between curves B and C is equal to average fixed cost.

28 practice past material 15 Which of the following quotes best illustrates the idea of marginal product? A) "If I have 10 workers on my assembly line, I can produce 13 tables a day." B) "If I add an 11th worker, I can produce 1 extra table a day." C) "Each worker produces 2 tables a day." D) "I find if I add an extra shift at night, table production only rises by 80 percent because I need more maintenance time on the assembly line." E) "If I double workers and double the assembly line, I can make 120 percent more tables."

29 practice past material 16 Which one of the following statements is true? A) All technologically efficient methods are also economically efficient. B) All economically efficient methods are also technologically efficient. C) Technological efficiency changes with changes in relative input prices. D) Technologically efficient firms will be more likely to survive than economically efficient firms. E) none of the above

30 practice past material 17 A firm that uses the latest technology technologically efficient because. A) is not necessarily; the firm might not use the least amount of inputs to produce a given output B) is not necessarily; new technology is more expensive than old technology C) is; efficiency is about costs rather than when the technology was developed D) is; new technology isn't developed unless it is efficient E) is; most consumers want access to the latest technology

31 practice past material 18 A subsidy A) raises marginal social benefit above marginal social cost. B) makes marginal social cost equal marginal social benefit. C) results in efficient production. D) raises marginal social cost above marginal social benefit. E) makes world prices higher than domestic prices.

32 practice past material 19 Choose the correct statement. A) When marginal product of labour is greater than average product of labour and marginal product is either increasing or decreasing average product of labour is increasing. B) When total product is increasing average product of labour and marginal product of labour are both increasing. C) When marginal product of labour is greater than or equal to average product of labour, average product of labour is increasing. D) When marginal product of labour is increasing, average product of labour is greater than marginal product of labour. E) When total product is increasing, average product of labour is decreasing and marginal product of labour is increasing.

33 practice past material 20 The price of gasoline rises by 25 percent and remains fixed at the new higher level. Choose the correct statement. A) The demand for gasoline will increase after consumers adjust their consumption behaviour to the new higher price. B) The demand for gasoline will decrease after consumers adjust their consumption behaviour to the new higher price. C) Initially after the price change, the price elasticity of demand will be less elastic than it will be a few years after the price change. D) The price elasticity of demand for gasoline will decrease in the future. E) Initially after the price change, the price elasticity of demand will be more elastic than it will be a few years after the price change.

34 practice past material 21 If the demand for a good is unit elastic, then a 5 percent increase in price results in A) a 5 percent increase in total revenue. B) a 5 percent decrease in total revenue. C) no change in total revenue. D) an increase in total revenue greater than 5 percent. E) an increase in total revenue less than 5 percent.

35 practice past material 22 A production possibilities table for two products, corn and paper, is found below. Usual assumptions regarding production possibilities are implied. Corn is measured in tons, and paper is measured per unit.

36 practice past material 22 a. What is the opportunity cost of producing the first unit of paper? (1 point) 3 corns b. What is the opportunity cost of producing the fourth unit of paper? (1 point) 12 corns c. Explain how increasing opportunity costs are reflected in the production possibilities curve. (1 point) Producing the 1 st unit of paper requires the sacrifice of 3 units of corns, while producing the 4 th unit of paper requires the sacrifice of 12 units of corns. We are giving up more and more corns to produce a given amount of paper (1 st vs 4 th ) as we produce more and more paper.

37 practice past material 23 Harvey quit his job where he earned $45,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits. His company rented a building for $200,000 per year. Harvey also required a normal profit of $50,000 a year. Explain whether Harvey has made a good decision. (2 points) Total revenue = 11000*75 = Total opportunity cost = Economic profit = Harvey did not make a good decision because he is making less money than working.

38 practice past material 24 Briefly discuss the three factors that influence the elasticity of demand. (3 points) 1) More substitutes, more elastic. 2) The greater the proportion of income consumers spent on a good, the larger is its elasticity of demand. 3) The more time consumers have to adjust to a price change, or the longer that a good can be stored without losing its value, the more elastic is the demand for that good.

39 practice past material 25 Business people speak about price elasticity of demand without using the actual term. Which one of the following statements reflects inelastic demand for a good? A) "A price cut won't help me. It won't increase sales, and I'll just get less money for each unit." B) "I don't think a price cut will make any difference to my bottom line. What I may gain from selling more I would lose on the lower price." C) "My customers are real bargain hunters. Since I set my prices just a few cents below my competitors, customers have flocked to the store, and sales are booming." D) "With the recent economic recovery, people have more income to spend and sales are booming, even at the previous prices." E) both A and B

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