Perfect Competition

1. At present output levels, a firm in a perfectly competitive industry is in the

following position: output = 1000 units, market price = $3, total cost = $6000, fixed
cost = $2000, marginal cost = $3. To achieve optimum output, the firm should:
A. reduce output but keep producing.
B. increase its selling price.
C. leave output unchanged.
D. reduce output to zero.
E. increase output but keep its price constant.

2. Which of the following is not usually a characteristic of a perfectly competitive

industry?
A. no individual firm has any significant amount of market power.
B. the market demand curve is perfectly elastic.
C. any individual firm can increase its production and sales without affecting
the price of the good.
D. existing firms cannot bar the entry of new firms.
E. all of the above are characteristics of perfectly competitive industries.

3. A competitive firm's demand curve is determined by:

A. firm demand and firm supply.
B. the price set by the individual firm.
C. market demand and market supply.
D. the level of the firm's short-run average total cost.
E. the MC curve above average variable cost.

4. At present output levels, a perfectly competitive firm is in the following position:

output = 4000 units, market price = $1, fixed costs = $2000, total variable costs =
$1000, marginal cost = $1.10. This firm is:
A. making a positive economic profit.
B. making a zero economic profit.
C. losing money, although it could make a profit by decreasing its output.
D. producing the output where AVC = MC.
E. not maximizing its profit but could do so by increasing its output.

5. In the long-run for a competitive industry:

A. all factors of production are variable so that firms are free to enter or leave
the market.
B. technology may change in response to profit opportunities.
 C. all inputs are fixed for the industry as a whole.
D. firms can earn more than normal accounting profits if demand is high.
E. profits serve as a signal for entry which does not happen for other market
structures (such as monopolies, oligopolies, or monopolistically competitive
firms).

6. When typical firms in a perfectly competitive industry are making economic

profits, then all of the following will take place except:
A. new firms will enter the industry.
B. the industry supply curve will shift to the right.
C. the firm demand curves will shift down.
D. the typical firm in the industry will begin to experience a reduction in
profits.
E. all of the above will occur.

7. If an industry is characterized by perfect competition as well as increasing costs

then:
A. the long-run industry supply curve is perfectly elastic.
B. each firm must experience decreasing returns to scale at low levels of
production.
C. some of the resources used in production have supply curves that are upward
sloping.
D. some firms are likely to become natural monopolies.
E. economies of scale are significant for all firms.

8. In the long-run, competition in competitive markets:

A. yields economic inefficiency with the absence of government intervention.
B. results in output being produced at maximum opportunity cost.
C. forces all surviving firms to adopt the most efficient technology.
D. guarantees each firm economic profits.
E. may result in economic losses.

9. As a budding young economist you are called in to consult with a friend of yours
who has just started his own business producing and selling pie cherries in Utah
Valley. He tells you that in the past year, he has attempted to maximize his profits by
decreasing his price below the market price. He currently sells his pie cherries for $1 a
pound which is just equal to his ATC and his MC (the market price is $1.50 a pound).
You do a study of the cherry industry and find that there are a very large number of
pie cherry producers who are all quite small relative to the market. Further, you find
that the cost of starting a cherry orchard is relatively small. What would you suggest
that your friend do to maximize profits?
 A. increase price to the market price but decrease his output.
B. increase price to the market price and increase his output.
C. increase price to the market price but leave his output unchanged.
D. decrease price further in an attempt to gain more market share.
E. shut down since he is just barely covering his cost at the present output
level.

10. Consider the market for hard red winter wheat. You know that there are numerous
firms in the market, all of which are relatively small. Assume further that there are no
entry costs that cannot be recovered on exiting the industry. Suppose that a health fad
emerges in the U.S. that encourages the consumption of natural grains and cereals.
What will be the effect on profits of wheat farmers, the price of wheat and output in
both the short-run and the long-run? (Assume that input prices are constant over the
relevant range.)
A. price, quantity and profits will rise in the short-run but remain constant in
the long-run.
B. price, quantity and profits will rise in both the short-run and the long-run.
C. quantity will rise in both the short and the long-run, price will rise in the
short-run but remain constant in the long-run, profits will rise in the short-run
but fall to zero in the long-run.
D. price and quantity will increase in both the short and the long-run while
profits, although initially rising, will fall to zero in the long-run.
E. while price, quantity, and profits will rise in the short-run it is impossible to
predict what will happen in the long-run.

11. At present output levels, a perfectly competitive firm is in the following position:
output = 4000 units, market price = $1.10, fixed costs = $2000, total variable costs =
$1000, marginal cost = $1.00. This firm is:
A. not maximizing its profit but could do so by decreasing its output.
B. making a zero economic profit.
C. losing money, although it could make a profit by increasing its output.
D. Producing the output where ATC = MC.
E. not maximizing its profit but could do so by increasing its output.

12. In the long-run, competition in competitive markets:

A. yields economic inefficiency in the absence of external costs.
B. results in output being produced at maximum opportunity cost.
C. forces all surviving firms to adopt the most efficient technology.
D. guarantees each firm long-run economic profits.
E. may result in economic losses.
13. That portion of a perfectly competitive firm's marginal cost curve lying above its
AVC curve has all of the following characteristics except:
A. it is upward sloping.
B. it intersects the firm's ATC curve at minimum ATC.
C. its intersection with the firm's MR curve determines the firm's profit
maximizing output level.
D. it is the firm's supply curve.
E. all of the above are true.

14. When in long-run equilibrium, perfectly competitive firms:

A. must employ the most efficient (least costly) production technology or be
driven out of the business by competition.
B. are paid a price that equals the maximum value of the long-run average cost
curve.
C. collectively produce more output than society desires.
D. reap economic profits if the firm is exceptionally efficient.
E. cover all variable costs and make a profit just sufficient to cover previous
losses.

15. The short-run shutdown point for the perfectly competitive firm occurs:
A. where total revenue is just sufficient to cover total cost.
B. when the demand curve facing the firm is tangent to its average variable cost
curve.
C. where total revenue is just sufficient to cover all explicit cost but not any
implicit or imputed costs.
D. when the firm is able to cover all of its fixed costs and part of its variable
costs.
E. at the same quantity level as the long-run shutdown point.

Monopoly

1. If the monopolist operated in the inelastic range of its demand curve:

A. it could raise total revenue by lowering price.
B. the firm would be acting to maximize total revenue rather than profit.
C. marginal revenue would be negative.
D. it could increase its profit by lowering its price and increasing output.
E. it could increase its profit by increasing both price and output.

2. At the profit-maximizing output for a monopolist, price:

 A. always exceeds average total cost.
B. is less than marginal cost.
C. exceeds marginal cost.
D. equals marginal cost.
E. may be greater than or equal to average total cost but will never be less than
average total cost.

3. A monopoly firm will produce at minimum ATC:

A. when in long-run equilibrium.
B. if MR happens to equal MC where ATC is at a minimum.
C. if price happens to equal ATC at the output where ATC is at its minimum.
D. under no circumstances.
E. whenever price is everywhere below the monopolist's ATC.

4. That portion of a monopolist's marginal cost curve lying above its AVC curve has
all of the following characteristics except:
A. it is upward sloping.
B. it intersects the monopolist's ATC at its minimum.
C. its intersection with the firm's MR curve determines the firm's profit
maximizing output level.
D. it is the firm's supply curve.
E. all of the above are true.

5. As compared to other firms that may have monopoly power, a natural monopoly:
A. faces a demand curve that is inelastic throughout its entire output range.
B. has marginal and average costs that decline continuously over the entire
range of industry or market demand.
C. is often the result of mergers.
D. is likely to have a stranglehold on raw material sources.
E. faces a demand curve that is elastic throughout its entire output range.

6. When a monopoly firm is operating in a range of output where total revenue is

rising as output rises, then marginal revenue:
A. is also rising.
B. is constant.
C. is falling but is greater than zero.
D. is falling but is less than zero.

7. A natural monopolist will shut down in the long-run when forced by regulation to
set price at the socially optimum price (where P = MC) because at the output level
where P = MC:
 A. the firm's average fixed costs are high.
B. the firm may have substantial excess productive capacity.
C. marginal revenue may be greater than marginal cost.
D. average total cost will be greater than price.

8. Assuming constant total costs of production (i.e. marginal cost is equal to zero),
economic profits:
A. are exactly proportional to the price a monopolist charges.
B. rise if price is cut in the inelastic range of a demand curve.
C. fall if price is cut in the elastic range of a demand curve.
D. rise when price is changed if demand is unitarily elastic.
E. none of the above.

Oligopoly and Monopolistic Competition

. Although a monopolistically competitive firm in long-run equilibrium is producing

output at an average total cost higher than the minimum, economists are not greatly
concerned about this inefficiency because:
A. additional firms may enter the industry and force price down.
B. consumers gain satisfaction from having a wide variety of products
available.
C. consumers would unquestionably benefit from having fewer products
produced more cheaply.
D. advertising may allow a firm to expand output.
E. firms are making zero economic profit.

2. In the long run, the profit-maximizing, monopolistically competitive firm fails to

produce a level of output where:
A. MR = MC.
B. P = ATC.
C. P > MC.
D. MSB > MSC.
E. economic profits are realized.

3. Suppose your father, who is a potato farmer in Idaho, has decided that he grows the
"best, damn potatoes in the world." In other words, he is claiming that his potatoes are
different than potatoes grown by other farmers. If his claim is true (and he can
convince consumers of this), then:
A. he can make profits in the long-run.
B. he can make profits in the short-run by increasing price and quantity.
C. he faces a downward sloping demand curve and his quantity decisions will
have an effect on market price for his potatoes.
D. while he may make a profit in the short-run, in the long-run competition will
still force his profits to zero.
E. c and d.

4. The demand curve that confronts a monopolistically competitive firms is:

A. less elastic than the demand curve that confronts the industry.
B. perfectly inelastic because of numerous substitutes for the firm's product.
C. less elastic than the demand curve facing a perfectly competitive firm.
D. horizontal, showing that MR = P.
E. perfectly elastic in the long-run, driving economic profits to zero.

5. In a monopolistically competitive industry, a firm in long-run equilibrium will be

operating where price is:
A. greater than average total cost (ATC) but equal to marginal cost (MC).
B. greater than ATC and greater than MC.
C. equal to both ATC and MC.
D. equal to both marginal revenue and MC.
E. greater than MC but equal to ATC.

6. The important difference between the characteristics of perfectly competitive and

monopolistically competitive markets is that firms in monopolistically competitive
industries:
A. have a downward sloping and relatively inelastic demand (as compared to
market demand.)
B. do not try to maximize profits by producing where MR = MC.
C. sell similar but not identical products.
D. have substantial barriers to deter the entry of competing firms while
perfectly competitive firms do not.
E. are relatively few in number.

7. All of the following are methods that firms in an oligopolistic industry may use to
create entry barriers except:
A. the proliferation of brands.
B. investing in advertising so that entering firms face a high cost of entering the
market.
 C. limit pricing.
D. substantial "natural" economies of scale in production.
E. all of the above are methods firms may use to deter entry.

8. A member of a cartel would be most likely to increase its profits by:

A. cheating on cartel output restrictions by under cutting the prices of other
cartel members (assuming that it did not get caught cheating).
B. setting its price above that of other cartel members.
C. pursuing an aggressive non-price promotions policy.
D. restricting its output below the cartel-set production quota in order to drive
price up.
E. insisting that the cartel continually raise the price it charges.

9. One of the identifying characteristics of oligopoly is sticky prices. When

economists state that prices are sticky with respect to oligopolistic industries, they
mean that:
A. prices are set by the market rather than the firm or, in other words, the firm
is a price-taker rather than a price-setter.
B. the oligopolist sets product prices so that profits are maximized at all times.
C. prices are less responsive to changes in demand in oligopolies than in
perfectly competitive markets.
D. oligopolies practice predatory pricing, so competition in the market is
reduced.
E. prices are less responsive to changes in costs, either input prices or
technology, than in perfectly competitive markets.

10. Which of the following is not a characteristic of an oligopolistic market structure?

A. zero economic profits in the long-run.
B. substantial barriers to entry.
C. domination of the industry by a relatively small number of firms.
D. awareness by individual firms that other firms will react to changes in their
price.

11. According to limit pricing models of oligopolist pricing behavior, existing firms in
an oligopolistic industry can deter the entry of new firms by:
A. setting lower prices and producing more than that which maximizes short-
run profits, if economies of scale and capital costs are significant.
B. setting lower prices and producing more than competitive firms if economies
of scale are insignificant and capital costs are small.
C. setting higher prices and producing less than a pure monopoly.
D. encouraging government regulation and licensing.
 E. only by resorting to such illegal practices as price discrimination or setting
price below marginal cost.

12. Legal barriers to entry do not include:

A. outright government prohibition of entry.
B. protection of inventions or creative works by patent and copyright law.
C. licensing and bonding restrictions.
D. substantial economies of scale in production.
E. all of the above are legal barriers to entry.

13. The doctrine of "conscious parallelism":

A. was developed to deal with the socially undesirable economic effects caused
by oligopolies making similar pricing decisions.
B. was developed by the FTC to deal with collusive oligopoly behavior.
C. is used to deal with cartels in the U.S.
D. is based on written documents passed between oligopoly firms.
E. has its roots in existentialist philosophy.

14. The public-interest theory of regulation suggests that:

A. consumers and workers need protection from such things as monopoly
power, externalities, business misrepresentations, and other abuses as well as
protection from their own ignorance.
B. nearly all business activities need to be closely regulated due to monopoly
power.
C. business firms may manipulate government regulation for their own ends.
D. only the federal government should correct failures of the market system.

15. "Good" monopolies or trusts were exempt from antitrust action under the:
A. "per se" approach to antitrust enforcement.
B. Webb-Pomerene doctrine.
C. Sherman Antitrust Act as amended by the Clayton Act.
D. acceptable behavior guideline developed in the Robinson-Patman Act.
E. "rule of reason" approach to antitrust enforcement.

16. If all monopolies and large firms were broken up into a larger number of small
competing firms, the most likely result would be:
A. decreases in prices in these industries because large firms are invariably less
efficient than small firms.
B. increases in prices in these industries because large firms are invariably
more efficient than small firms.
C. lower prices because competition eliminates economic profit.
 D. higher prices in industries which have large economies of scale.

17. The economic rationale for antitrust laws is that monopoly markets are inefficient
and must be made to:
A. set output so that marginal social benefit exceeds marginal social cost.
B. set price and output as if the market were competitive.
C. reinvest profits into research and development of new technologies.
D. pay taxes that shrink concentrated wealth and power.

Monolpoly and Perfect competition compared

. An indication of the technological inefficiency of the monopolist, when compared to

the perfect competitor, is that:
A. the monopolist's price is set above the marginal cost of the good.
B. the demand curve facing the monopolist is downward sloping.
C. in the long-run, a monopolist is not forced to produce at the minimum point
of the average total cost curve.
D. a monopolist earns more economic profit in the long-run than does the
competitive firm.
E. the monopolist has no competition to force him to produce where MC =
MR.

2. The differences between a monopoly firm and a perfectly competitive firm include
all of the following except:
A. the demand curve for the monopoly is downward sloping and for the
perfectly competitive firm is horizontal.
B. marginal revenue is less than price for the monopoly and equal to price for
the perfectly competitive firm.
C. marginal cost is upward sloping for a monopoly firm and horizontal for a
perfectly competitive firm.
D. in the short-run, the monopoly will produce such that P > MC while
perfectly competitive firms will produce such that P = MC.
E. in the long-run monopolies can sustain positive economic profits while
perfectly competitive firms cannot.

3. Unlike a firm in pure competition, a monopoly is able to:

A. reap economic profits in the long-run as long as sufficient barriers to entry
exist, legal or illegal.
B. generate only normal profits in the long-run.
 C. sustain consistent economic losses and still survive in the long-run due to
substantial economies of scale.
D. remain viable only in the short-run if it operates in an economically
inefficient manner.
E. make economic profits even if short-run total costs exceed total revenue.

4. Economists would be willing to say that price discrimination is more efficient than
single-price monopoly pricing if it results in:
A. higher total revenue for the firm.
B. an increase in net benefit for society.
C. the producer capturing some of the consumer's surplus.
D. some consumers paying a lower price than they would under a single-price
monopoly.
E. all of the above.

5. The simple analysis of monopoly that we carried out in class suggested that
monopolists are inefficient from society's viewpoint. However, monopolists may not
always be inefficient. Which of the following is not an argument which could be used
to justify the existence of monopoly power on the basis of economic efficiency?
A. entry and exit are almost always relatively costless so that the mere threat of
competition will force the monopolist's price to the competitive price.
B. when substantial economies of scale exist, the monopolist may be more
efficient than any number of smaller firms.
C. when substantial economies of scope exist, the monopolist may be more
efficient than any number of smaller firms.
D. monopolist firms always have more incentive to innovate than perfectly
competitive firms.

6. Price discrimination:
A. tends to decrease the allocative inefficiency of a monopolist.
B. will provide more total revenue to the firm than the profit-maximizing price
the monopolist would set in the absence of such discrimination.
C. generally results in greater output than under a single price monopoly.
D. when it is perfect, causes the monopolist to produce where marginal social
cost is just equal to marginal social benefit.
E. all of the above.

7. The socially optimal (the allocatively efficient) level of output occurs where:
A. marginal revenue is maximized.
B. economic profits are maximized.
C. price equals marginal cost.
 D. marginal revenue equals marginal cost.
E. total benefit to society is maximized.

Consumer Choice

1. Marginal utility:
A. is the change in total utility caused by the consumption of an addition unit of
a good.
B. is equal to total utility divided by total consumption.
C. always decreases as consumption increases.
D. is never negative.
E. all of the above.

2. In a given market, consumers' surplus would, all else equal, be increased by:
A. leftward shifts of the demand and supply curves that leave price unchanged.
B. a decrease in supply.
C. an increase in price.
D. an increase in supply.

3. In a competitive market, diminishing marginal utility implies that:

A. the first units bought will contribute the most to consumer surplus.
B. the last units bought will contribute the most to consumer surplus.
C. the higher the price, the greater will be the consumer surplus, all else equal.
D. each unit bought will contribute an equal amount to consumer surplus.
E. nothing, since consumer surplus and marginal utility are totally unrelated.

4. Consumer surplus is:

A. the area above the market price but below the demand curve.
B. a measure of the net welfare buying a particular good gives to consumers.
C. the difference between the dollar amounts people would willingly pay for
specific quantities of goods and the amounts they pay at market prices.
D. less for goods that are luxuries than for necessities.
E. all of the above.

5. Marginal utilities:
A. reflect subjective preferences that are not easily measured.
B. are easily compared between individuals if measured by money.
C. are determined by society as a whole.
D. increase as total utility falls.
 E. include electric and gas companies threatened by bankruptcy.

6. Which of the following seems a contradiction to the law of diminishing marginal

utility?
A. Ken enjoys his 30th beer of the evening more than his first.
B. Joan finds that the effort associated with preparing for a date exceeds the
enjoyment gained.
C. Howard has a decreasing desire for more wealth the richer he becomes.
D. Natasha must work increasingly hard to cast extra steel ingots as she
attempts to exceed her production quota.
E. Morris the cat likes catnip more than canned tuna, and canned tuna more
than dry cat food.

7. The consumer maximizes utility whenever spending patterns cause:

A. it to be possible to realize net increases in total utility by buying differently.
B. the marginal utilities of all goods consumed to be equal.
C. conformance with the principle of equal marginal utilities per dollar.
D. total utility to be at its maximum value.
E. marginal utility to be at its maximum value.

8. According to the law of diminishing marginal utility:

A. marginal utility always falls with the extra consumption of a good.
B. a consumer inevitably reaches a point where the additional satisfaction from
consuming each additional unit of a good rises.
C. a consumer inevitably reaches a point where he or she decreasingly values
additional units of a good.
D. utility is easily measured by dollar values.
E. none of the above.

9. When a household is allocating its expenditure among commodity A and all other
commodities so as to maximize total utility, then a decrease in the price of commodity
A will lead the household to buy more of commodity A:
A. so that the marginal utility of a unit of commodity A will increase.
B. because a dollar spent on commodity A will now yield less utility than
before the decrease in price.
C. because a dollar spent on another commodity would now yield more utility
if spent on commodity A.
D. because the marginal utility of a unit of commodity A has increased.

10. If total utility is increasing, marginal utility:

A. must be increasing.
 B. must be decreasing.
C. may either be increasing or decreasing, although it must be greater than zero.
D. must be increasing at an increasing rate.
E. none of the above.

11. Marginal utility is a measure:

A. of the total utility derived from consuming marginally beneficial goods.
B. of the additional utility derived through the consumption of an additional
unit of a good.
C. computed by dividing total utility by the number of units of a good
consumed.
D. determined strictly by interactions of supply and demand.
E. none of the above.

Firms Production

1. A corporation differs from a proprietorship in all of the following ways except:

A. having limited liability for its owners.
B. its income is subject to double taxation.
C. it is assumed to be seeking to maximize profits.
D. it is a legal entity separate from its owners.
E. all of the above are ways in which corporations differ from proprietorships.

2. Implicit costs:
A. are the opportunity costs of the productive resources that the firm's owner
makes available without direct outlays of cash.
B. refer to inputs wrongly included in costs, from the economists's view point.
C. plus all fixed and variable costs equal total costs.
D. include interest payments made when a firm finances its operations with
bank loans.
E. from an economist's view point, should be included in total cost because
they represent direct payments for production.

3. A firm's "normal" profit is:

A. equal to a firms total revenues minus its total costs.
B. the imputed returns to capital and risk taking (as well as any other implicit
costs) just necessary to prevent firms from withdrawing from the industry.
C. the same as accounting profits.
D. the excess of revenue over full economic costs including imputed returns to
capital and risk taking.
 E. a way of adjusting economic profit to consider both explicit and implicit
costs.

4. Which of the following would most likely represent an imputed or implicit cost for
a firm?
A. wages for current employees.
B. interest paid on borrowed funds.
C. dividends paid to shareholders of the firm's stock.
D. taxes paid to the local government.
E. interest that could have been received on money currently invested in
inventory.

5. Normal profits refers to:

A. what all firms, on average, obtain as a return on investment.
B. the excess of revenue over full economic costs including imputed returns to
capital and risk-taking.
C. the base used by the government to levy business taxes.
D. the imputed returns to capital and risk taking (as well as any other implicit
costs) just necessary to prevent firms from withdrawing from the industry.
E. the level of profits necessary to ensure that the firm covers its day-to-day
operating costs.

6. Which of the following is not a characteristic of a corporation?

A. it can legally enter into contracts.
B. it is a legal entity separate from its owners and, as such, confers limited
liability upon its owners.
C. it is legally obligated to distribute all profits.
D. owners of a corporation may not be able to easily control management of the
corporation.
E. its income is subject to double taxation.

Short run production costs

. In the short run, the firm's production curves exhibit all of the following
relationships except:
A. Average product of labor (APL) is at its maximum when marginal product of
labor (MPL) is equal to APL.
B. Total Product of Labor (TPL) is at its maximum when MPL=0.
C. TPL begins to decrease when APL begins to decrease.
 D. when MPL < APL, APL is decreasing.
E. MPL reaches a maximum sooner than does either APL or TPL.

2. If we know that capital is fixed and a business firm can produce 36 units of output
per day with 3 workers and 44 units of output per day with 4 workers, then we know
all of the following except:
A. the marginal product is below the average product.
B. the firm has passed the point of diminishing marginal productivity.
C. the average product of three workers is 12.
D. the marginal product of the third worker must be greater than 8.
E. we know all of the above.

3. All of the following describe marginal cost except marginal cost is (does) not:
A. the change in total cost associated with producing an additional unit of
output.
B. given by: (change in TC) / (change in Q).
C. given by: (change in TVC) / (change in Q).
D. positively related to the short-run marginal product of labor (MPL).
E. reach a minimum at the same time that the MPL reaches a maximum.

4. If average fixed cost is declining, then:

A. marginal cost (MC) must be declining.
B. average variable cost (AVC) must be declining.
C. average total cost (ATC) is declining.
D. AVC must be increasing.
E. it is impossible to determine what is happening to MC, AVC, or ATC
without more information.

5. Short run cost curves are U-shaped due to:

A. increasing input prices.
B. increasing marginal product.
C. decreasing marginal product.
D. the returns to specialization of labor that occurs at low production levels and
the congestion that occurs at high production levels.
E. the returns to specialization of labor that occurs at high production levels and
the congestion that occurs at low production levels.

6. Economists (and Econ 165 students) are primarily interested in the relationship
between production and costs because:
A. it is an interesting and stimulating mathematical exercise.
 B. all of the assumptions used to derive short-run cost curves (as we did in
class) are realistic and economists are interested in realism.
C. along with an assumption of profit maximization, this relationship allows us
to predict how firms will act under different circumstances.
D. U-shaped marginal and average cost curves are observed in the real world
and economists explore production functions to show how these cost curves
arise.

7. In the short-run, a profit-maximizing firm will produce additional units of a product

as long as:
A. price at least covers average fixed cost.
C. total revenue is increasing.
D. elasticity of demand is infinite.
E. price at least covers average variable cost.

8. Assuming that labor is the only short-run variable input in the production process,
AVC (average variable cost):
A. equals the wage rate (w) times labor (L) divided by output (Q) [(wL)/Q.]
B. equals the average product of labor divided by the wage rate [APL/w.]
C. varies directly with APL.
D. varies inversely with the wage rate.

9. When the short-run total product curve (the production function) for a firm:
A. attains a maximum value, the average product of labor (APL) is zero.
B. increases but at a diminishing rate, the APL is below the marginal product of
labor (MPL).
C. is neither rising nor falling, then MPL = APL.
D. increases but at an increasing rate, the MPL is above (greater than) the APL.
E. decreases, APL must be negative.

10. Short-run average variable costs:

A. are incurred even when production ceases.
B. have no bearing whatsoever on rational decision making.
C. are incurred only in the long-run.
D. are only at a minimum when the MPL is at a maximum.
E. are only at a minimum when labor is, on average, most productive.

11. Which of the following does not reflect a short-run decision?

A. Should production be reduced when sales fall off?
B. Should a plant be closed down when sales decrease?
C. Should overtime be expanded when sales increase?
 D. Should a new plant be built if sales increase?
E. all of the above reflect short-run decisions.

12. Short-run average total costs eventually rise because of:

A. rising overhead costs.
B. reduced incentives to work in larger plants.
C. rising factor or input prices.
D. diminishing marginal and average productivity of the variable input(s).
E. technological inefficiency.

13. If the difference between average total cost (ATC) and average variable cost
(AVC) at 100 units of output is $1.00, then at 300 units of output the difference
between ATC and AVC must be:
A. $2.00
B. $.50
C. $.33
D. $1.00
E. there is not enough information given to be able to tell.

Long run and production cost

1. We learned in class that firms minimize costs whenever they use capital and labor
such that, given the output they are producing (and assuming only capital and labor
are used in the production process), the ratio of the marginal product of labor (MPL) to
its price is equal to the ratio of the marginal product of capital (MPk) to its price
(MPL/w = MPk/i). This relationship can also be expressed as:
A. MPL = MPk.
B. MPL/MPk = i/w.
C. MPL/MPk = w/i.
D. MPL/i = MPk/w.
E. none of the above.

2. Each of the following would, all else equal, cause a firm to use more labor except:
A. a decrease in the price of capital.
B. a decrease in the price of labor.
C. an increase in the productivity of labor due to increases in the average
education of the labor force.
D. a decrease in the productivity of capital.
3. Firms advertising their product often claim that they can offer you substantial
savings because "the bigger the volume, the lower the cost, and we pass these savings
on to you". This claim essentially implies that:
A. total cost of the firm remains constant as output expands.
B. the firm expects to experience decreasing returns to scale over the
foreseeable level of output.
C. the firm expects to experience increasing returns to scale over the
foreseeable level of output.
D. the firm expects a decrease in factor prices as it expands output and it will
pass these lower costs on to you in the form of a lower price.
E. the larger firm, whether it intends to fulfill the bargain or not, will never be
able to offer you a lower price than smaller firms in the long-run without
incurring a loss since total cost always rises.

4. If the marginal product of capital is six times as large as the marginal product of
labor and the price of capital is three times as large as the price of labor, for costs to
be minimized:
A. the price of capital must fall.
B. more labor should be used and less capital.
C. more capital should be used and less labor.
D. more labor should be used but the use of capital should remain constant.
E. the firm must increase production to reach the minimum point of the short-
run average cost curve.

5. Diseconomies of scale:
A. occur when long-run average costs decrease as the rate of output increases.
B. emerge because marginal returns do not decline in the long-run.
C. emerge if all advantages of specialization are realized at low levels of
operation.
D. when present, may create natural monopolies. E. require extremely
sophisticated technology.