Test 3—VERSION 2

Principles of Microeconomics

Fall 2002

 

Instructions:  Answer each of the following 40 multiple choice questions in the allotted time.  YOU MUST PUT YOUR VERSION NUMBER ON YOUR ANSWER SHEET!! Failure to do so will result in lost points.  You may write on your test, but you may not tear off any pages.  Failure to so do will result in lost points.  You must write your name on the test.  Failure to do so will result in lost points.  Finally, you must turn in your test.  Failure to do so will result in a zero.  You can not use a graphing calculator or your cell phone as a calculator.

 

The correct answer are in bold.

 

1.  Bill runs a factory that makes lie detectors in Little Rock, Arkansas.  This month, Bill’s 34 workers produced 680 machines.  Bill’s average product of labor is

            a.  20

            b.  34

            c.  680

            d.  23,120

 

2.  Price discrimination is

            a. illegal

            b. not a profit maximizing behavior

            c. selling the same product to different segments of the market at different prices

            d. not possible in the United States due to low barriers to entry

 

3.  A firm in monopolistic competition maximizes its profits by producing where

            a.  MC=ATC

            b.  MC=AR

            c.  MC=MR

            d.  AR=ATC

 

4.  A firm in a perfectly competitive industry should shut down in the short run if the

market price

            a. lies below the average total cost curve, but above the average variable cost curve

            b. lies above the average total cost curve

            c. lies below the average variable cost curve

            d. doesn't cover all costs

 

5.  Happy hour at P.J.’s Bar and Grill is an example of

            a.  price discrimination

            b.  monopoly behavior

            c.  marginal cost pricing

            d.  average cost pricing

 

6.  The monopolistically competitive firm will maximize profits when

            a. marginal revenue equals short run average variable cost

            b. marginal cost equals short run average variable cost

            c. price equals marginal cost

            d. marginal cost equals marginal revenue

 

7.  Which of the following markets most closely resembles a monopolistically competitive market?

            a. the stock market

            b. the market for t-shirts

            c. the market for automobiles

            d. the market for electricity

 

8.  In the long run, firms in monopolistic competition operate on the portion of the LRAC curve where the firm will experience

            a. increasing returns to scale

            b. constant returns to scale

            c. decreasing returns to scale

            d. either increasing returns to scale or constant returns to scale depending upon market conditions.

 

9.  The monopolistically competitive firm faces a(n)

            a.  inelastic demand curve

            b.  elastic demand curve

            c.  perfectly elastic demand curve

            d.  horizontal demand curve

 

10.  In order for price discrimination to be profitable for a firm it must

            a.  separate consumer groups by the elasticities of their demand

            b.  keep consumers from different groups from selling to each other

            c.  charge different prices to different consumers

            d.  all of the above

 

11.  The perfectly competitive firm's supply curve is the

            a. total revenue curve

            b. marginal cost curve above the short run average variable cost curve

            c. marginal cost curve above the short run average total cost curve

            d. the entire marginal cost curve

 

12.  In monopolistic competition, the marginal revenue curve lies

            a. above the demand curve

            b. is equal to the demand curve

            c. below the demand curve

            d. below the demand curve when marginal cost is falling, but above the demand curve when marginal cost is increasing.

 

13.  In monopolistic competition, the demand curve facing a firm will become more elastic

            a. the greater the degree of product differentiation

            b. the greater the obstacles to entry

            c. the greater the number of sellers

            d. the smaller the number of sellers

 

14.  Any firm can increase profits by expanding output

            a.  until revenue is large enough to cover costs

            b.  until costs are reduced by enough to match revenues

            c.  as long as marginal cost is less than marginal revenue

            d.  until marginal revenue is zero

 

15.  If a firm is making zero economic profits, than

            a.  the firm is earning zero accounting profits.

            b.  the firm is earning negative accounting profits

            c.  the firm is earning either positive or negative accounting profits

            d.  the firm is earning positive accounting profits

 

16.  Wooten’s White Lighting Factory produces white lighting (moonshine) in a perfectly competitive market. Suppose that the AVC of producing white lighting is $8 and the ATC is $15. If the price Ms. Wooten receives for her white lighting is $10, then she should

            a. continue to produce white lighting in the short run, even though she is making a loss

            b. continue to produce white lighting in the short run because she is making a profit.

            c. shut down. This will minimize her losses

            d. expand production to the point where AVC is greater than $10.  This will maximize profits.  

 

17.  Suppose that The Lindsey Corporation is faced with the following output and cost information; at an output level of 150, ATC is equal to $300 and at an output level of 151, ATC is equal to $310. What product price would The Lindsey Corporation need in order to induce them to produce the 151st unit of their product?

a. $1,810

b. $310

c. $10

d. The answer can not be determined

 

 

18.  Suppose that Lori has a job paying $32,000 per year which she quits to start her own business.  Lori is going to make small plastic castles, which will be modeled after the castles in Europe, and sell them to consumers at the local mall.  Her total revenue for the year was $75,000.  She has signed a lease for a store at the mall for $24,000 per year and she hires one college student at $6,000 per year.  In addition to this she spends $14,000 per year for supplies.  What is Lori’s profits?

            a.  $75,000

            b.  $56,000

            c.  $31,000

            d.  -$1,000

 

19.   If the MP of labor is increasing than,

            a.  MC is increasing

            b.  MC is decreasing

            c.  MC is constant

            d.  this is a trick question—there is no relationship between the MP of labor and MC.

 

20.  In economics, the short run is a period

            a.  of less than a week

            b.  of less than a year

            c.  when at least one of the firm’s inputs is fixed

            d.  when all of the firm’s inputs are variable, but in a time frame of less than a year.

 

21.  The AVC curve in the short run is “U” shaped because of

            a.  economies of scale

            b.  diminishing returns

            c.  diseconomies of scale

            d.  increasing returns

 

22.  In the short run, TFC is

            a.  declining as output expands

            b.  “U” shaped

            c.  increasing as output expands

            d.  constant

 

23.  Suppose that Dawn’s Costume Shop produces the following number of Halloween costumes with the following number of employees:  

 

                           Number of employees                  Number of Costumes

1

8

2

17

3

25

4

30

5

28

 What is the marginal product of the 4th  employee?

            a.  5 costumes

            b.  6.25 costumes

            c.  7.5 costumes

            d.  30 costumes

 

24.  What is the average product of the 4th employee?

            a.  5 costumes

            b.  6.25 costumes

            c.  7.5 costumes

            d.  30 costumes

 

25.  If there is an increase in the cost of denim used to produce jeans then

            a.  the AFC and ATC curves will shift up

            b.  the AFC and AVC curves will shift up

            c.  the AVC and ATC curves will shift up

            d.  just the AVC curve will shirt up

 

26.  The MC curve intersect the ATC curve at

            a.  its minimum point

            b.  on the declining portion of the ATC curve

            c.  on the increasing portion of the ATC curve

            d.  its maximum point

 

27.  Another name for opportunity costs is

            a.  accounting costs

            b.  implicit costs

            c.  explicit costs

            d.  direct costs

 

28.  Economies of scale and diseconomies of scale account for the shape of the

            a.  long run average cost curve

            b.  short run average cost curve

            c.  long run fixed cost curve

            d.  short run marginal cost curve

 

29.  A perfectly competitive firm will shutdown if price

            a.  falls below AVC

            b.  falls below ATC

            c.  falls below MC

            d.  falls to zero

 

30.  A perfectly competitive firm will begin to make a loss if price      

            a.  falls below AVC

            b.  falls below ATC

            c.  falls below MC

            d.  falls to zero

 

31.  In a long run equilibrium for a perfectly competitive firm, price is equal to

            a.  MC

            b.  average cost

            c.  MR

            d.  all of the above

 

32.  I.  If a profit maximizing firm in perfect competition operating in the long run produces 500 units of output at $10 per unit, its MR is $10.  II.  A perfectly competitive firm that is earning zero profits will eventually go out of business.

            a.  both I and II are true

            b.  I is true.  II is false.

            c.  I is false.  II is true.

            d.  both I and II are false.

 

33.  Which of the following is responsible for increasing returns to scale?

            a.  as firms build larger plant sizes, they are able to take advantage of mass

     production techniques

            b.  the law of diminishing returns

            c.  as firms get larger, they begin to experience bureaucratic inefficiencies

            d.  as firms get larger, employees have more incentive to shirk.  Therefore you

     need to increase the number of employees to produce the same amount of

     product.

 

34.  Marginal cost is

            a.  the change in fixed cost from making one more unit of output

            b.  the change in total cost from making one more unit of output

            c.  the change in average variable cost from making one more unit of output

            d.  the change in average total cost from making one more unit of output.

 

35.  If there is an increase in the costs of labor then

            a.  the average fixed cost curve will shift up

            b.  the average variable cost curve will shift up

            c.  the fixed cost will increase

            d.  the Keynesian cost curve will increase

 

36.  The perfectly competitive firm’s supply curve is the

            a.  ATC curve

            b.  MC curve

            c.  MC curve that lies above AVC

            d.  MC curve that lies between AVC and ATC

           

37.  The MP curve intersects the MC curve at

            a.  the minimum point of the MC curve

            b.  the minimum point of the MP curve

            c.   the maximum point of the MC curve

            d.  this is a trick question—the MP curve does not intersect the MC curve.

 

 

Labor

Total Product

1

40

2

100

3

150

4

190

5

220

6

240

 

Use the above table which shows the number of dogs groomed per week for Crystal’s Dog Grooming in Valdosta, Ga. 

 

38.  Assume that Crystal pays each worker $300 per week and that her rent is $600 per week for her dog grooming salon.  These are her only costs.  What is her AFC when she hires 2 workers?

            a.  $600

            b.  $6.00

            c.  $7.50

            d.  $10.00

 

39.  Assume that Crystal pays each worker $300 per week and that her rent is $600 per week for her dog grooming salon.  These are her only costs.  What is her ATC when she hires 6 workers?

            a.  $2,400

            b.  $300

            c.  $7.50

            d.  $10.00

 

40.  Suppose that there is an decrease in the demand for a product. If the industry is

characterized by constant costs, then the price of the good will _____ in the short run and

_____ in the long run.

            a. fall; remain the same

            b. remain the same: fall

            c. rise; remain the same

            d. fall; fall