Test 3 Economics 224 Chappell October 27, 2010
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1 Test 3 Economics 224 Chappell October 27, 2010 First Name Last Name Last 5 Digits of Student Number (Social Security Number): Instructions: Read These! _ You have 50 minutes to complete this test. Please enter your answers on the Scantron sheet provided, using a number 2 lead pencil. On that answer sheet fill in your name and the last 5 digits (only 5 digits please) of your student number (Social Security Number). You must also fill in the grids under your name and your last 5 digits. Use the last 5 columns of the form when you fill in your student number. You must return both this test and the Scantron answer form, and both must have your name and student number. You may write on this test sheet, but your grade will be determined by the Scantron form. Note that the Scantron form may have answers indicated by the numbers 1, 2, 3, 4. On the test, answers are indicated by the letters a, b, c, d. You should match these up in the logical way: 1 a 2 b 3 c 4 d As noted in the syllabus, calculators with the ability to store notes, store formulas, or communicate with others are prohibited. Use of a mobile phone as a calculator is also prohibited.
2 Test 1 Economics 224 Chappell September 15, 2010 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Which of the following statements is correct? a. Assuming that explicit costs are positive, economic profit is greater than accounting profit. b. Assuming that implicit costs are positive, accounting profit is greater than economic profit. c. Assuming that explicit costs are positive, accounting profit is equal to economic profit. d. Assuming that implicit costs are positive, economic profit is positive. Table 13-1 Alyson s Pet Sitting Service Number of Output (number Workers of pet visits) Refer to Table Alyson s pet sitting service experiences diminishing marginal productivity with the addition of the a. first worker. b. second worker. c. third worker. d. fourth worker.
3 Figure Output W orkers 3. Refer to Figure The graph illustrates a typical a. total-cost curve. b. production function. c. production possibilities frontier. d. marginal product of labor curve. 4. Which of the following expressions is correct? a. marginal cost = (change in quantity of output)/(change in total cost) b. average total cost = (total cost)/(quantity of output) c. total cost = variable cost + marginal cost d. average variable cost = (quantity of output)/(total variable cost) 5. Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that the average total cost when 5 units of output are produced is $30, and the marginal cost of the sixth unit of output is $60. What is the average total cost when six units are produced? a. $10 b. $25 c. $30 d. $35
4 Table 13-7 Measures of Cost for ABC Inc. Widget Factory Quantity of Widgets Variable Costs Total Costs Fixed Costs 0 $10 1 $ 1 2 $ 3 $13 3 $ 6 $16 4 $10 5 $25 6 $21 $10 6. Refer to Table The marginal cost of producing the sixth widget is a. $1.00. b. $3.50. c. $5.00. d. $ In the long run, a. inputs that were fixed in the short run remain fixed. b. inputs that were fixed in the short run become variable. c. inputs that were variable in the short run become fixed. d. variable inputs are rarely used.
5 Figure 13-9 The figure below depicts average total cost functions for a firm that produces automobiles. 8. Refer to Figure Which curve represents the long-run average total cost? a. ATC A b. ATC B c. ATC C d. ATC D 9. Suppose a firm in a competitive market reduces its output by 20 percent. As a result, the price of its output is likely to a. increase. b. remain unchanged. c. decrease by less than 20 percent. d. decrease by more than 20 percent. 10. If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then a. average revenue exceeds marginal cost. b. the firm is earning a positive profit. c. decreasing output would increase the firm's profit. d. All of the above are correct. 11. A competitive firm has been selling its output for $20 per unit and has been maximizing its profit, which is positive. Then, the price rises to $25, and the firm makes whatever adjustments are necessary to maximize its profit at the now-higher price. Once the firm has adjusted, which of the following statements is correct? a. The firm's quantity of output is higher than it was previously. b. The firm's average total cost is higher than it was previously. c. The firm's marginal revenue is higher than it was previously. d. All of the above are correct.
6 12. A firm in a competitive market has the following cost structure: Output Total Costs 0 $10 1 $12 2 $15 3 $19 4 $24 5 $30 6 $37 7 $46 8 $55 9 $65 If the market price is $8, how many units should the firm produce to maximize profit? a. 5 units b. 6 units c. 7 units d. 8 units Figure Price MC ATC AVC 7 6 P P2 P3 2 P Quantity 13. Refer to Figure Which of the four prices will cause a perfectly competitive firm to earn negative economic profits in the short run, but remain open? a. P1 b. P2 c. P3 d. P4
7 Figure 14-4 Price M C ATC P7 AVC P6 P5 P4 P3 P2 P1 Q1 Q2 Q3 Q4 Q5 Quantity 14. Refer to Figure When market price is P7, a profit-maximizing firm's short-run profits can be represented by the area a. P7 Q5. b. P7 Q3. c. (P7 - P5) Q3. d. We are unable to determine the firm s profits because the quantity that the firm would produce is not labeled on the graph.
8 Figure 14-6 Price F M C ATC D B C A Quantity 15. Refer to Figure Which line segment best reflects the short-run supply curve for this firm? a. ABCF b. CD c. DF d. BCD 16. In the long run, each firm in a competitive industry earns a. zero accounting profits. b. zero economic profits. c. positive economic profits. d. positive, negative, or zero economic profits.
9 Figure Price MC ATC AVC 7 6 P P2 P3 2 P Quantity 17. Refer to Figure If the price is P3 in the short run, what will happen in the long run? a. Nothing. The price is consistent with zero economic profits, so there is no incentive for firms to enter or exit the industry. b. Individual firms will earn positive economic profits in the short run, which will entice other firms to enter the industry. c. Individual firms will earn negative economic profits in the short run, which will cause some firms to exit the industry. d. Because the price is below the firm s average variable costs, the firms will shut down. 18. Encouraging firms to invest in research and development and individuals to engage in creative endeavors such as writing novels is one justification for a. resource monopolies. b. natural monopolies. c. government-created monopolies. d. breaking up monopolies into smaller firms. 19. Because a monopolist must lower its price in order to sell another unit of output, a. marginal revenue is less than price. b. long-term economic profits will be zero. c. total revenue increases as price increases. d. average revenue is less than price. 20. A monopolist a. has a supply curve that is upward-sloping, just like a competitive firm. b. does not have a supply curve because the monopolist sets its price at the same time it chooses the quantity to supply. c. has a horizontal supply curve, just like a competitive firm. d. does not have a supply curve because marginal revenue exceeds the price it charges for its products.
10 Figure 15-7 Price MC F G D MR D A B C Quantity 21. Refer to Figure What is the socially efficient price and quantity? a. price = F; quantity = A b. price = G; quantity = B c. price = G; quantity = A d. price = D; quantity = A 22. Refer to Figure What is the monopoly price and quantity? a. price = F; quantity = A b. price = G; quantity = B c. price = G; quantity = A d. price = D; quantity = A 23. Refer to Figure What is the area of deadweight loss? a. the rectangle (F-D)xA b. the triangle 1/2[(F-D)x(B-A)] c. the triangle 1/2[(F-G)x(B-A)] d. the rectangle (F-D)xA plus the triangle 1/2[(F-D)x(B-A)] 24. Perfect price discrimination describes a situation in which the monopolist a. knows the exact willingness to pay of each of its customers. b. charges exactly two different prices to exactly two different groups of customers. c. maximizes consumer surplus. d. experiences a zero economic profit.
11 Scenario 15-6 An airline knows that there are two types of travelers: business travelers and vacationers. For a particular flight, there are 100 business travelers who will pay $600 for a ticket while there are 50 vacationers who will pay $300 for a ticket. There are 150 seats available on the plane. Suppose the cost to the airline of providing the flight is $20,000, which includes the cost of the pilots, flight attendants, fuel, etc. 25. Refer to Scenario How much additional profit can the firm earn by charging each customer their willingness to pay relative to charging a flat price of $600 per ticket? a. $15,000 b. $25,000 c. $40,000 d. $70, Which of the following statements comparing monopoly with competition is correct? a. A monopolist produces a higher level of output and charges a lower price than a competitive firm would. b. With perfect price discrimination, the total surplus under monopoly can be the same as under competition. c. With or without price discrimination, the consumer surplus under monopoly is at least as large as it would be under competition. d. The deadweight loss associated with monopoly is caused by the positive economic profits of the monopolist; competitive firms do not earn a positive economic profit so there is no deadweight loss under competition.
12 Econ224_Test03_Fall_2010 Answer Section MULTIPLE CHOICE 1. ANS: B PTS: 1 DIF: 2 REF: 13-1 NAT: Analytic LOC: Costs of production TOP: Economic profit Accounting profit 2. ANS: C PTS: 1 DIF: 3 REF: 13-2 NAT: Analytic LOC: Costs of production TOP: Diminishing marginal product 3. ANS: B PTS: 1 DIF: 2 REF: 13-2 NAT: Analytic LOC: Costs of production TOP: Production function 4. ANS: B PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Average total cost 5. ANS: D PTS: 1 DIF: 3 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Average total cost 6. ANS: D PTS: 1 DIF: 2 REF: 13-3 NAT: Analytic LOC: Costs of production TOP: Marginal cost MSC: Applicative 7. ANS: B PTS: 1 DIF: 2 REF: 13-4 NAT: Analytic LOC: Costs of production TOP: Long run 8. ANS: D PTS: 1 DIF: 1 REF: 13-4 NAT: Analytic LOC: Costs of production TOP: Average total cost 9. ANS: B PTS: 1 DIF: 2 REF: 14-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets 10. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Competitive firms 11. ANS: D PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Competitive firms 12. ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization 13. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Supply curve 14. ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit 15. ANS: A PTS: 1 DIF: 2 REF: 14-2
13 NAT: Analytic LOC: Perfect competition TOP: Supply curve 16. ANS: B PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Zero-profit condition MSC: Applicative 17. ANS: C PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve 18. ANS: C PTS: 1 DIF: 1 REF: 15-1 NAT: Analytic LOC: Monopoly TOP: Patents Copyrights 19. ANS: A PTS: 1 DIF: 2 REF: 15-2 NAT: Analytic LOC: Monopoly TOP: Marginal revenue 20. ANS: B PTS: 1 DIF: 2 REF: 15-2 NAT: Analytic LOC: Monopoly TOP: Supply curve 21. ANS: B PTS: 1 DIF: 2 REF: 15-3 NAT: Analytic LOC: Monopoly TOP: Monopoly MSC: Applicative 22. ANS: A PTS: 1 DIF: 2 REF: 15-3 NAT: Analytic LOC: Monopoly TOP: Monopoly MSC: Applicative 23. ANS: B PTS: 1 DIF: 3 REF: 15-3 NAT: Analytic LOC: Monopoly TOP: Deadweight loss MSC: Applicative 24. ANS: A PTS: 1 DIF: 2 REF: 15-4 NAT: Analytic LOC: Monopoly TOP: Perfect price discrimination 25. ANS: A PTS: 1 DIF: 3 REF: 15-4 NAT: Analytic LOC: Monopoly TOP: Price discrimination 26. ANS: B PTS: 1 DIF: 1 REF: 15-4 NAT: Analytic LOC: Monopoly TOP: Price discrimination
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