Exam #4, Red
Choose the single best answer for each question. 1. Profit is defined as
a. net revenue minus depreciation. *. total revenue minus total cost.
c. average revenue minus average total cost. d. marginal revenue minus marginal cost.
2. Jessica used to work as a high school teacher for $45,000 per year but quit in order to start her own catering business. To buy the necessary equipment, she withdrew $20,000 from her savings (which paid 3 percent interest). Last year she paid $25,000 for
ingredients and had revenue of $60,000. For the year, her accounting profit was a. $15,000 and her economic profit was $25,000.
b. $14,400 and her economic profit was -$10,000. c. $59,400 and her economic profit was $34,400. *. $35,000 and her economic profit was -$10,600. 3. The marginal product of any input is the
a. increase in expenditure on the input associated with a one-unit increase in production. b. change in total output resulting from a $1.00 increase in expenditure on the input. c. change in total cost that occurs when employment of the input is increased by one unit. *. increase in total output obtained from a one unit increase in the input.
4. Holding fixed the employment levels of other inputs, a certain firm is able to produce 165 units of output per day when 15 workers are employed. When employment is 16 workers, the firm is able to produce 176 units of output per day. If the marginal product of labor is positive but diminishing, output with 14 workers would be
*. fewer than 154 units of output per day.
b. more than 154 but fewer than 165 units of output per day. c. more than 165 but fewer than 176 units of output per day.
d. Any one of the above could be consistent with positive but diminishing marginal product of labor.
5. For a coffee shop owner, the cost of coffee beans is a _______ cost and the cost of the shop's display ad in the Yellow Pages is a _______ cost.
a. fixed; fixed. b. fixed; variable. *. variable; fixed. d. variable; variable.
6. Average total cost is increasing with output whenever a. total cost is increasing with output.
b. marginal cost is increasing with output. c. marginal cost is less than average total cost. *. none of the above.
The following table provides some information on a short-run production function for a firm employing one fixed factor, "factory," and one variable factor, "labor." In particular, the table shows how output increases with labor employment for a given size of the factory. Suppose that the wage paid to workers is $100/day. Use this information to answer questions 7, 8, and 9.
Labor Output (workers/day) (widgets/day) 0 0 1 80 2 140 3 180
7. At output of 140 widgets/day, the firm's average variable cost (to the nearest penny) is a. $0.70/widget.
*. $1.43/widget. c. $3.33/widget.
d. impossible to determine without more information.
8. At output of 180 widgets/day, the firm's average total cost (to the nearest penny) is a. $0.60/widget.
b. $1.67/widget. c. $2.33/widget.
*. impossible to determine without more information.
9. Over the output range from 140 to 180 widgets/day, the firm's marginal cost is approximately
a. $0.90/widget. b. $1.67/widget. *. $2.50/widget. d. $3.60/widget.
10. If a firm in a perfectly competitive market increases the number of units sold by 50%, then its total revenue will
a. increase by more than 50%. *. increase by 50%.
c. increase by less than 50%. d. decrease.
11. A competitive firm faces a price of $10/unit for its product. It is currently operating where marginal cost is $8/unit and average total cost is $6/unit. To maximize profit (or minimize loss) in the short-run, the firm should
*. increase output. b. shut down.
c. decrease output but not shut down.
d. impossible to determine without more information.
12. When price falls below the minimum of average variable cost, a profit-maximizing firm in a competitive market will
a. continue to produce in order to pay off as much of fixed cost as possible. *. immediately stop production to minimize its losses.
c. continue to produce in the short-run but will exit the market in the long run if conditions do not improve.
d. stop production as soon as it is able to pay its sunk costs.
13. A competitive firm faces a price of $2.50/unit and produces 8000 units of output per day. At this output level, the firm's average total cost is $2.15/unit. The firm's profit is *. $2800/day.
b. $3500/day. c. $3750/day.
d. impossible to determine without more information.
14. When price is greater than marginal cost for a firm in a competitive market, a. marginal cost must be decreasing.
b. the firm must be making positive economic profit.
*. there is an opportunity to increase profit (or decrease loss) by increasing output. d. the firm would have to reduce its price in order to sell more output.
15. A competitive industry is in long-run equilibrium. Then demand decreases. Which of the following is the most accurate description of the market's response to the demand shift?
*. Price will fall in the short-run. Price will then rise to its original level in the long-run as some firms exit the industry.
b. Price will fall in the short-run and remain at the new permanently lower level throughout the long-run. Some firms will exit the industry.
c. Price will rise in the short-run. Entry of additional firms in the long-run will cause price to gradually return to its original level.
d. Price will rise in the short-run. The number of firms will remain unchanged in the long-run but profits will increase.
16. When new firms have an incentive to enter a competitive market, their entry will a. drive up the price of the product.
*. drive down profits of firms already in the market. c. shift the market supply curve to the left.
17. The benefit to society of patent and copyright laws is that they
a. keep down the prices that can be charged for new products and copyrighted works. b. prevent a single firm or individual from acquiring ownership of a key resource. *. encourage creative activity.
d. encourage the production of cheaper "generic" alternatives to brand-name products. 18. A monopolist can sell 30 widgets/day when it charges a price of $4.50/widget. In order to sell 31 widgets/day, the monopolist would have to reduce its price to
$4.45/widget. For this monopolist, the marginal revenue of the 31st widget is a. -$2.95/widget.
b. -$0.05/widget. *. $2.95/widget. d. $4.45/widget.
19. At its current output level, a monopolist's price is $4/unit, average total cost and marginal cost are both $3/unit, and marginal revenue is $2/unit. To maximize profit (or minimize loss) in the short-run, the monopolist should
a. increase its output level.
b. maintain its current output level.
*. decrease its output level, but not shut down.
d. not enough information given to determine the answer.
20. A monopoly faces a downward-sloping demand for its product and an upward sloping marginal cost curve. If it were to produce and sell 100 units/day, its price and marginal cost would both equal $2/unit and its average total cost would equal $1/unit. Which of the following is true?
a. 100 units per day is the profit-maximizing output level for this monopoly. b. To maximize profit, this monopoly should produce more than 100 units/day. *. This monopoly's maximum profit is greater than $100/day.
d. This monopoly could make more profit by charging a lower price.
21. A profit maximizing monopoly charges a price of $10/unit and sells 80 units/day with marginal cost equal to $6/unit. The socially efficient output level would be 100
units/day. Assuming that the demand and marginal cost curves are straight lines, the deadweight loss associated with this monopoly is
*. $40/day. b. $80/day. c. $120/day. d. $200/day.
22. Gigantis Inc., a large manufacturing company, proposes to buy one of its competitors, Humongo Inc. The Antitrust Division of the Department of Justice (DOJ) challenges the merger. You are hired by Gigantis as an economic consultant to try to convince the DOJ that the merger should be allowed to go through. Which of the following arguments would help your case?
a. The Gigantis-Humongo merger would achieve synergies through more efficient joint production.
b. The market power of the merged firm would be limited by the countervailing market power of the large retail chains to which it would sell.
c. The large domestic market shares of Gigantis and Humongo are misleading indicators of their market power because the firms face substantial import competition.
*. All of the above would help your case.
23. In the majority of cases of natural monopoly, the government usually deals with the problem
a. by splitting the natural monopoly into smaller companies.
*. through regulation of the prices charged by the natural monopoly. c. by turning the natural monopoly into a government-owned enterprise.
d. by leaving it to bargaining among private parties to correct the market failure.
Questions 24 and 25 refer to the following information. A monopolist faces two groups of potential customers. There are 300 potential customers with a willingness-to-pay (WTP) of $6 for the first unit of the monopolist's product, and $0 for additional units. There are also 200 potential customers with a WTP of $4 for the first unit and $0 for additional units. The monopolist produces the product at zero fixed cost and a constant marginal cost of $2/unit.
24. If the monopolist were required to charge a uniform price, the price it would charge and the maximum profit it would earn are
*. $6; $1200. b. $6; $2000. c. $4; $1000. d. $4; $800.
25. If the monopolist were allowed to price discriminate, the maximum profit it could earn would be
a. $2000. *. $1600. c. $1200.
d. none of the above.
26. An oligopoly is a market in which *. there are few sellers.
b. each firm's profit is unaffected by decisions made by rival firms. c. firms have no market power.
27. There are only two firms, firm "A" and firm "B," producing widgets, a homogeneous product. Market demand is given by the formula: P = 50 - 0.2Q, where Q is total market quantity in widgets/day and P is price in $/widget. Each firm has zero fixed cost and marginal cost that is constant at $10/widget. If firm A produces 60 widgets/day and firm B produces 50 widgets/day, profit for firm A (πA) and profit for firm B (πB) will be: a. π = $1680/day; A π = $1500/day. B
b. π = $980/day; A π = $1000/day B *. π = $1080/day; A π = $900/day. B d. π = $1200/day; A π = $800/day. B
28. In a homogeneous product oligopoly, two of the possible market outcomes are Nash equilibrium and the joint-profit-maximizing cartel outcome. The price in the Nash equilibrium will be ______ than the cartel price and the quantity in the Nash equilibrium will be ______ than the cartel quantity.
a. higher; higher. b. higher; lower. *. lower; higher. d. lower; lower.
29. An agreement among firms regarding price and/or production levels is called a. an antitrust contract.
b. a free-trade arrangement. *. collusion.
d. a Nash bargaining solution.
30. In markets characterized by oligopoly,
a. pursuit of self-interest by individual firms maximizes collective profits.
*. collective profits are highest when the firms cooperate and behave like a monopoly. *. competition drives each firm's profit to zero.
d. cartel arrangements, once in place, have a tendency to remain stable. (Credit given for either b or c.)
