#1 - Introduction to Firms

#1 - Introduction to Firms F-1) Which of the following is not an advantage of a corporation? a. Limit liability b. Unlimited life c. Double taxation d. Professional management e. Greater ability to raise funds F-8) Bonds are a. A loan b. Ownership c. A coupon d. Interest e. Indirect financing F-2) In terms of the number of firms, 71% of firms are a. Sole Proprietorships b. Partnerships c. Limited liability partnerships d. Corporations e. None of the above F-3) In terms of the number of sales or revenue, 84% of revenue is generated by a. Sole Proprietorships b. Partnerships c. Limited liability partnerships d. Corporations e. None of the above F-4) Which of the following is a not a reason firms exist (particularly large firms with employees) a. Specialization of employees b. Risk sharing c. Principle-Agent problem d. Reduction of transaction costs F-5) A corporation s top management has what role in comparison to shareholders? a. The shareholder s principal b. The shareholder s agent c. Limited Liability d. Officer privilege e. non-voting rights F-6) The principal-agent problem is that a. Agents must be paid a salary b. Agents may not do what they re hired to do c. Agents are not as skilled as the principal d. Agents may not understand communication from the principal e. All of the above F-7) What pays a dividend? a. Indirect financing b. Retained earnings c. Bonds d. Stocks e. Capital

#2 Production and Costs Short Run C-1) In the short run a. Firms can enter the industry, but not exit b. Firms can exit the industry, but not enter c. Firms cannot enter or exit the industry, but they can shut down d. Firms can enter the industry only if there are profits e. Firms can enter or exit the industry C-2) The short run is defined as a time period so short that a. Firms cannot change the price of their product b. Firms cannot change the quantity of goods produced c. Consumers cannot change their demand d. For a firm, some resources are fixed e. For a firm, all resources are fixed C-3) Which of the follow is not associated with diminishing returns: a. Happens in the short run b. Is when production declines as more labor is used. c. Occurs because there is at least one fixed resource d. Can be seen as declining marginal product e. Leads to increasing marginal cost C-4) A firm which experiences diminishing returns will a. shut down b. suffer economic losses c. experience increasing marginal costs d. exit the industry in the short run e. exit the industry in the long run Production Function in Short Run C-5) The relationship between quantity of inputs and the number of goods produced, output, is called a. Marginal product b. Total cost curve c. Explicit profit d. Implicit production equation e. Production function Table 1 Number of Workers Production (Q) 1 12 2 28 3 42 4 55 5 65 6 73 7 79 C-6) Using Table 1, marginal product of worker 3 is a. 16 b. 14 c. 4 2/3 d. 42 e. 28 C-7) Using Table 1, diminishing returns begins with which worker? a. 1 b. 2 c. 3 d. 4 e. 5 C-8) If the firm in Table 1 hires 5 workers, how many goods will be produced? a. 10 b. 13 c. 55 d. 65 e. 0 C-9) The assumed typical shape of the Marginal Product curve in the short run is: a. Always falling b. Always rising c. Falling briefly, then rising after that d. Rising briefly, the falling after that e. Horizontal C-10) When the Marginal Product curve is rising, that means a. Products are getting more expensive b. Workers are getting more expensive c. Workers are getting more productive d. There s an increase in technology e. The firm invested in more capital

C-11) Why does the Marginal Product curve rise? a. Workers are specializing in their work b. Workers are getting in each other s way c. Workers are getting more skills d. More productive workers are being hired e. Less productive workers are being hired C-12) Why does the Marginal Product curve fall? a. Too many workers sharing a fixed resource b. New workers have less skills c. Increasing marginal product d. Decreasing marginal costs e. Specialization of workers 40 30 20 10 Figure 1 2 4 6 MP C-13) Using Figure 1, this firm has a fixed amount of capital and technology, so we know a. The firm is inefficient b. This is the short run c. Demand is falling d. There s no investment in the industry e. All of the above C-14) Using Figure 1, the marginal product of the 5 th worker is a. -5 b. 5 c. 15 d. 30 e. 120 C-15) Using Figure 1, if the firm employs 4 workers, total production, Q, will be a. 5 b. 35 c. 60 d. 90 e. 120 L C-16) Using Figure 1, diminishing returns begins with this many workers a. 3rd b. 4th c. 5th d. 6th e. 7th C-17) Using Figure 1, increasing marginal costs begins with this many workers a. 3rd b. 4th c. 5th d. 6th e. 7th C-18) When the Marginal Product curve drops, it is called a. Economies of Scale b. Diseconomies of Scale c. Diminishing Returns d. Productivity loss e. Productivity gain Cost Calculations Q TC 0 100 1 120 2 128 3 135 4 144 5 155 6 169 Table 2 C-19) Given the firm costs in Table 2, at a quantity of 3, Fixed Cost is a. $0 b. $20 c. $50 d. $100 e. $135 C-20) Given the firm costs in Table 2, at a quantity of 3, Variable Cost is a. $7 b. $35 c. $100 d. $128 e. $135

C-21) Given the firm costs in Table 2, at Q = 4, ATC is a. $9 b. $11 c. $36 d. $44 e. $144 C-22) Given the firm costs in Table 2, at Q = 4, MC is a. $9 b. $11 c. $36 d. $44 e. $144 C-23) Given the firm costs in Table 2, at a quantity of 2, Marginal Cost is a. $100 b. $120 c. $20 d. $8 e. $4 C-24) Given the firm costs in Table 2, at a quantity of 4, AVC is a. $9 b. $11 c. $36 d. $44 e. $144 Reading the Cost Curves 1 8 14.50 14 9 7 Figure 2 7 0 80 90 1 0 0 C-25) Using Figure 2, the marginal cost of producing 80 goods is a. $7 b. $9 c. $14 d. $1120 e. $1160 C-26) Using Figure 2, the average total cost of producing 100 goods is a. $9 b. $14 c. $14.50 d. $100 e. $1400 C-27) Using Figure 2, the variable cost of producing 70 goods is a. $7 b. $9 c. $490 d. $630 e. $1015 C-28) Using Figure 2, the total cost of producing 100 goods is a. $14.50 b. $18 c. $100 d. $1450 e. $1800 C-29) Using Figure 2, the total cost of producing 80 goods is a. $9 b. $14 c. $14.50 d. $720 e. $1160 C-30) The firm represented in Figure 2 is a. In the short run b. In the long run c. In the immediate run d. In the very long run e. All the above C-31) When marginal cost is very low and below average cost a. Marginal product is falling b. Average cost is falling c. It must be the long run d. It is the short run e. Costs are efficient C-32) When an average is rising a. The margin must be rising b. The margin must be falling c. The margin must be above the average d. The margin must be below the average e. The margin must be constant and greater than the average

C-33) When the marginal rate is rising, we know a. The average rate is rising b. The average rate is falling c. The average must be above the margin d. The average must be below the margin e. None of the above C-34) This curve is always above AVC a. MC b. LRAC c. ATC d. AFC e. MR C-35) The AFC curve is a. Always downward sloping b. Constant because costs are fixed c. Rising as quantity increases d. U-shaped e. Like a checkmark C-36) The gap between the AVC curve and the ATC curve is a. FC b. AFC c. MC d. VC e. MP C-37) Where MC = ATC a. ATC = AVC b. ATC = AFC c. ATC = VC d. ATC is at a minimum e. MC is at a maximum C-38) ATC * Q is a. Total Cost b. Average Total Cost c. Variable Cost d. Fixed Cost e. Marginal Cost C-39) The area of a rectangle formed off of the cost curve AVC represents a. marginal cost b. total cost c. average total cost d. variable cost e. average variable cost C-40) In the short run, at quantity zero, the firm has a. variable costs b. revenue c. marginal costs d. fixed costs e. price Long Run Average Cost C-41) A firm who experiences economies of scale a. can produce larger quantities at a lower cost b. has a perfectly elastic supply curve c. will make an economic profit d. has a good management system e. has an upward sloping LRAC C-42) Diseconomies of scale occur because of a. fixed resources b. diminishing returns c. the problems of managing a large firm d. the depreciation of capital e. limitations of technology C-43) Diseconomies of scale are represented graphically as a. ATC is above AVC b. MP upward sloping c. MC downward sloping d. MC upward sloping e. LRAC upward sloping C-44) Which of the following is not a reason for economies of scale? a. High creation cost but a low duplication cost b. The benefits of management c. The ability to negotiate discounts on large contracts d. The advantages of using lots of capital in production e. All of the above are reasons for economies of scale C-45) If a firm experiences economies of scale (increasing returns to scale), its long run average cost curve will be a. horizontal b. U-shaped c. Upward sloping d. Downward sloping e. Inverted C-46) The LRAC curve is formed by a. Averaging all the short run ATC curves b. Taking an envelope of all the MC curves c. Taking an envelope of all the ATC curves d. Taking the lowest point of all the ATC curves e. Taking the lowest point of all the AVC curves C-47) A firm that has significant economies of scale will probably want to a. Produce large quantities b. Reduce the amount of management c. Use more capital than labor d. Move to the short run e. Change technology

#3: Cost Curves and Calculations Using the graph: At a Quantity of 60, what is: AVC ATC MC AFC VC FC TC At a Quantity of 90, what is: 15 11 7 5 AVC ATC MC AFC VC FC TC 60 90 --------------------------------------------------------------------------------------------------------- Q TC 0 100 1 140 2 170 3 205 4 245 5 290 At what quantity do increasing marginal costs begin? Using the cost schedule to the left, at a quantity of 3, what is: AVC ATC MC AFC VC FC TC Using the cost schedule to the left, at a quantity of 5, what is: AVC ATC MC AFC VC FC TC

#4 Marginal Revenue, Profit Maximization and Monopoly Marginal Revenue Q P 1 $50 2 $44 3 $38 4 $33 5 $28 6 $24 Table 1 M-1) Given the Demand Schedule in Table 4, this firm a. Is perfectly competitive b. Faces a perfectly elastic demand curve c. Faces a perfectly inelastic demand curve d. Has monopoly (market) power e. Is a price taker M-2) Given the Demand Schedule in Table 4, what is the Total Revenue if the firm prices its good at $44? a. $0 b. $22 c. $44 d. $66 e. $88 M-3) Given the Demand Schedule in Table 4, the Marginal Revenue of the 5 th good is a. $28 b. $5 c. $140 d. $8 e. $5.6 M-4) Given the Demand Schedule in Table 4, if a firm wants to sell 6, it charges a price a. $44 b. $38 c. $33 d. $28 e. $24 M-5) MR is defined as a. Total revenue divided by quantity b. Total revenue divided by price c. Change in total revenue divided by quantity d. Change in total revenue divided by change in quantity e. Change in total revenue divided by change in total cost M-6) For a monopoly, the MR curve is a. Upward sloping b. Downward sloping and below the demand curve c. Downward sloping and above the demand curve d. The same as the demand curve e. Perfectly elastic M-7) For a monopoly, MR is a. equal to price b. greater than price because they can raise price by producing more c. greater than price because they can raise price by producing less d. less than price because in order to increase quantity, they have to reduce price on all goods e. less than price because it costs money to increase production M-8) When MR > 0 we know a. price is > 0 b. demand is downward sloping c. demand is perfectly elastic d. demand is elastic e. demand is inelastic The Monopoly M-9) A monopolistic industry is one in which there are a. a few firms with barriers to entry b. a few firms with no barriers to entry c. a single firm with barriers to entry d. a single firm with no barriers to entry e. many firms with barriers to entry M-10) A Pure Monopoly produces a good for which a. there is no close substitute b. there is no increasing marginal cost c. there is no technological change d. there is brand name recognition e. all of the above M-11) Which of the following is not an example of a barrier to entry a. Economies of scale b. Patents c. Government licensing d. Diminishing returns e. Sole ownership of a critical resource

M-12) A firm that can produce all the market quantity at the lowest cost because of economies of scale is called a. A market monopoly b. A network monopoly c. A non-competitive firm d. A natural monopoly e. Imperfect competition M-13) The condition that a particular good becomes more valuable as more people own and use one is called a. Network externality b. Common good c. Public good d. Economies of scale e. A market monopoly Profit Maximization M-14) The profit maximizing rule is a. Produce at the price where MR=MC b. Produce anywhere TR>TC c. Produce at the quantity where MC=ATC d. Produce at the quantity where MR=ATC e. Produce at the quantity where MC=MR M-18) The assumed goal of a firm is to a. Make profit b. Maximize total revenue c. Maximize the difference between revenues and costs d. Be efficient e. Produce at the lowest average cost M-19) At the quantity the firm is producing, if P > ATC, we know a. the firm is maximizing profit b. the firm should produce more goods c. the firm is making a profit d. the firm is making a loss e. demand is elastic M-20) At the quantity the firm is producing, if P < ATC, we know a. the firm is maximizing profit b. the firm should produce more goods c. the firm is making a profit d. the firm is making a loss e. demand is elastic Figure 1 M-15) If a firm is producing where MR > MC it should a. Produce fewer goods b. Raise its price c. Reduce the elasticity of demand d. Increase production e. Produce the same quantity but increase total cost P0 P1 P2 P3 M-16) If a monopoly is producing where MR > MC it should a. Produce fewer goods and charge a higher price b. Produce fewer goods and charge a lower price c. Produce more goods and charge a higher price d. Produce more goods and charge a lower price e. Do nothing different P4 P5 A B C D E M-17) If P > MC, the monopolist should a. Produce more b. Raise price c. Lower price d. Increase cost e. Not enough information to say M-21) In figure 1 to maximize profit, this firm would produce how many goods? a. A b. B c. C d. D e. E

M-22) In figure 1 to maximize profit, this firm would charge which price? a. P1 b. P2 c. P3 d. P4 e. P5 M-23) In figure 1 at a quantity of B, demand is a. perfectly elastic b. elastic c. unitary elastic d. inelastic e. perfectly inelastic M-24) In figure 1 at a quantity of D, demand is a. perfectly elastic b. elastic c. unitary elastic d. inelastic e. perfectly inelastic M-25) If the firm in Figure 1 is producing C number of goods and charging P2, to increase profits, the firm should a. Produce more and charge more b. Produce less and charge less c. Produce the same and charge more d. Produce less and charge more e. Produce more and charge less M-26) If the firm in Figure 1 is producing A number of goods and charging P0, to increase profits, the firm should a. Produce more and charge more b. Produce less and charge less c. Produce the same and charge more d. Produce less and charge more e. Produce more and charge less M-27) The firm in Figure 1 is producing at the quantity that maximizes profits. If the firm were to increase production, average total cost would a. increase b. decrease c. stay the same d. not enough information to say M-29) The oldest anti-trust law is a. Sherman Act b. Clayton Act c. Federal Trade Commission Act d. Robinson-Patman Act e. Cellas-Kefauver Act M-30) The Sherman Act outlawed a. tie-in contracts b. price discrimination c. the sharing of a board of directors d. the acquisition of a competitor e. firms that restrained trade through price fixing or collusion M-31) Which of the following is not a policy used to lessen the inefficiency of monopolies a. anti-trust laws b. introduction of barriers to entry c. direct regulation d. government ownership e. introduction of competition M-32) Government setting prices to prevent the inefficient high-prices set by monopolies is called a. direct regulation b. government ownership c. introduction of competition d. anti-trust e. none of the above M-33) Laws used to break-up monopolies, stop their behavior, or stop their formation are called a. direct regulation b. government ownership c. anti-trust d. public goods e. none of the above M-34) The Sherman Act and Clayton Act are part of this policy of dealing with monopolies a. government ownership b. anti-trust c. deadweight loss d. direct regulation e. none of the above Efficiency M-28) Anti-trust laws are intended to a. Limit competition b. Reduce economic efficiency c. Eliminate monopolies d. Increase producer surplus e. Balance producer and consumer surplus

M-35) Compared to perfect competition, a monopolistic industry will a. Produce more goods at a lower price b. Produce more goods at a higher price c. Produce fewer goods at a lower price d. Produce fewer goods at a higher price e. Produce the same number of goods at a higher price M-36) The idea that monopolies are inefficient because they produce too few of goods is referred to as a. an externality b. societal value loss c. contrived scarcity d. a patent e. producer surplus Figure 2 M-39) Using Figure 2, if the monopoly produces Q 1 instead of the competitive equilibrium, overall society will a. lose D b. lose A+D c. lose A+C d. lose A+C+D e. gain E M-40) Using Figure 2, if the monopoly produces Q 1 instead of the competitive equilibrium, the change in total economic surplus is called a. profit b. inelastic profit gain c. deadweight loss d. price discrimination e. externality P 1 P 2 E B C F D A Q 1 Q 2 M-37) Using Figure 2, if the monopoly produces Q 1 instead of the competitive equilibrium, consumer will lose a. D b. A+D c. B+D d. B+D+E e. A+C M-38) Using Figure 2, if the monopoly produces Q 1 instead of the competitive equilibrium, the firm loses but gains a. A+D; B b. D; A c. A; D d. D; B e. A; B

#5 Monopoly Review Section 1: For the graph at the right, at a quantity of 40, the demand curve is elastic / inelastic? At a quantity of 120, the demand curve is elastic / inelastic? Figure, for the monopoly: Price: Qty: TC: TR: Profit: $30 $24 $21 $16 $12 $9 $6 What's efficient? Price: Quantity: 40 60 70 90 20 20 110 120 130 Section 2: Table 1 Ticket Price Total Attendance $21 200 $18 300 $15 400 $12 500 $9 600 $6 700 How do we know the firm in Table 1 is a price taker or price maker? At a ticket price of $18, what is the firm total revenue? If the firm lowers the price from $18 to $15, what is the marginal revenue? Between $18 and $15, is the demand curve elastic or inelastic? If the firm lowers the price from $9 to $6, what is the marginal revenue? Between $9 and $6, is the demand curve elastic or inelastic? If the current price is $15 and the firm raises the price of the good, TR will go ( up / down ) and demand is ( elastic / inelastic )

#6 Pricing Strategies PS-1) When a producer sells the same good at different prices to different groups of consumers, this is called a. Profit maximization b. Price discrimination c. Monopolization d. Differentiation e. Dual marginal revenue PS-2) In order to be successful at price discrimination, which of the following conditions do not need to hold a. Marginal revenue must exceed marginal cost b. The firm needs to have monopoly power to set price c. There must be two different groups of consumers d. Resale of a good must be difficult e. There must be a way to tell consumers apart PS-3) Which of the following is probably not an example of price discrimination a. senior citizen discounts b. tourist fares on airlines c. higher priced dry cleaning for women d. houses with views cost more e. student discounts to a museum PS-4) Perfect Price Discrimination is a. Charging two different prices that maximize profit perfectly b. Segmenting the market perfectly so that no high-price consumer is able to buy at the low price c. Charging each consumer the most they are willing to pay d. Charging a single consumer two or more different prices e. Using yield management to minimize excess capacity PS-5) With perfect price discrimination a. Consumer surplus is zero b. Some consumers will arbitrage c. Firms will produce a quantity smaller than a monopoly d. A firm will make the same profit as if they were a pure monopoly e. The market will be inefficient PS-6) Which of the following could be considered a two-part tariff? a. Costco charges a membership fee, then charges for the goods purchased b. Most restaurants charge separately for wine which has a huge mark-up c. Airlines charge business travelers more than tourists d. Many sporting events charge for parking in addition to charging for the ticket e. Stores doing buy one, get one free pricing instead of half-off sales. PS-7) The idea of price discrimination is to a. Reduce quantity even more than a monopoly to drive price even higher b. Charge customers with inelastic demand a higher price c. Charge customers with elastic demand a higher price d. Produce where marginal cost is equal to marginal benefit e. Manage yield PS-8) Which of the following would not be considered an example of price discrimination a. Student versions of popular software that sell at an large discount b. Hotels raise their prices during popular holidays c. Offer preferred customer tickets to a jazz club that sell for twice the regular tickets d. Always reduce the price of video games six months after they re released e. Sony sells their PS3 console for a higher price in the US than in Japan. PS-9) Adjusting prices in reaction to fluctuations in demand is referred to as a. price discrimination b. perfect price discrimination c. two part tariff d. contrived scarcity e. yield management

PS-10) If grocery stores practiced yield management, they might a. charge lower prices for generic or store brand goods b. raise the price of a good when there are only a few left on the shelf to sell c. give more inelastic consumers discount coupons to lower the price to just those consumers d. Give quantity discounts e. Charge people for entering the store (like Costco) PS-11) Which of the following would not be considered an example of yield management a. an airline raises the price of a flight as the plane fills b. a cruise ship company offering special, limited time internet discounts on cruises which have empty cabins c. movie theaters charging less for kids under the age of 12. d. some baseball teams charge more for tickets to weekend games or high-demand rivalries. e. Early bird pricing for early dinners at a restaurant PS-12) Perfect price discrimination a. leaves consumers with no surplus b. allows a firm to extract all economic surplus as firm profit c. would require the firm to know what the most each consumer would pay for a good d. impossible to implement in the real world e. all of the above

#7: Production and Cost Calculations 1) Complete the following table by calculating MP L Q MP 0 0 1 10 2 22 3 35 4 46 5 55 6 62 7 67 Formulae Q MP L VC L * w (Assumes labor only variable cost) TC FC VC VC AVC Q AFC FC Q TC ATC Q 2) Use the above production function and assume wages = $50 and fixed costs are $120. Complete the following table: TC MC Q Q VC FC TC AVC AFC ATC MC