practice exam for exam 3
practice exam for exam 3 ECON 2001.01
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Pre-Test Chapter 22 ed17 Multiple Choice Questions 1. Refer to the above diagram. At the profit-maximizing level of output, total revenue will be: A. NM times 0M. B. 0AJE. C. 0EGC. D. 0EHB. 2. For a pure monopolist marginal revenue is less than price because: A. the monopolist's demand curve is perfectly elastic. B. the monopolist's demand curve is perfectly inelastic. C. when a monopolist lowers price to sell more output, the lower price applies to all units sold. D. the monopolist's total revenue curve is linear and slopes upward to the right. 3. Suppose for a regulated monopoly that price equals minimum ATC but price exceeds MC. This means that: A. both productive and allocativeefficiency are being achieved. B. productive efficiency is being achieved, but not allocative efficiency. C. allocative efficiency is being achieved, but not productive efficiency. D. neither productive nor allocative efficiency is being achieved. Prof Keep Econ Pre-Test Chap 22 ed 17 Page 1 of 9 4. Refer to the figure above. Suppose the graphs represent the demand for use of a local golf course for which there is no significant competition (it has a local monopoly); P denotes the price of a round of golf; Q is the quantity of rounds "sold" each day. If the left graph represents the demand during weekdays, and the right graph the weekend demand, this profit-maximizing golf course will earn how much economic profit over the course of a full seven-day week? A. $4200. B. $3700. C. $3400. D. $2700. Prof Keep Econ Pre-Test Chap 22 ed 17 Page 2 of 9 5. Refer to the above two diagrams for individual firms. In Figure 1 line B represents the firm's: A. demand and marginal revenue curves. B. marginal revenue curve only. C. demand curve only. D. average revenue curve only. 6. Which of the above diagrams correctly portray the demand (D) and marginal revenue (MR) curves of a pure monopolist that is able to price discriminate by charging each customer their maximum willingness to pay? A. A B. B C. C D. D 7. A nondiscriminating pure monopolist finds that it can sell itsfiftieth unit of output for $50. We can surmise that the marginal: A. cost of the fiftieth unit is also $50. B. revenue of the fiftieth unit is also $50. C. revenue of the fiftieth unit is less than $50. D. revenue of the fiftieth unit is greater than $50. 8. In the short run a pure monopolist: A. always earns an economic profit. B. always earns a normal profit. C. always realizes a loss. D. may realize an economic profit, a normal profit, or a loss. Prof Keep Econ Pre-Test Chap 22 ed 17 Page 3 of 9 9. Refer to the above diagrams. In diagram (B) the profit-maximizing quantity is: A. g and the profit-maximizing price is e. B. h and the profit-maximizing price is e. C. g and the profit-maximizing price is f. D. g and the profit-maximizing price is d. 10. Refer to the above diagrams. The price will be _______ and the quantity will be _______ with the industry structure represented by diagram (B) compared to the one represented in (A). A. higher; higher. B. higher, lower. C. lower, lower. D. lower, higher. 11. If a monopolist were to produce in the inelastic segment of its demand curve: A. total revenue would be at a maximum. B. marginal revenue would be negative. C. the firm would be maximizing profits. D. it would necessarily incur a loss. Prof Keep Econ Pre-Test Chap 22 ed 17 Page 4 of 9 12. Refer to the above data for a nondiscriminating monopolist. At its profit-maximizing output, this firm's price will exceed its marginal cost by ____ and its average total cost by ____. A. $20; $27.33. B. $10; $10.40. C. $24; $27.33. D. $30; $20.50. 13. Which of the following approximates a pure monopoly? A. the foreign exchange market B. the Kansas City wheat market C. the diamond market D. the soft drink market 14. Which of the following is characteristicof a pure monopolist's demand curve? A. Average revenue is less than price. B. Its elasticity coefficient is 1 at all levels of output. C. Price and marginal revenue are equal at all levels of output. D. It is the same as the market demand curve. 15. In the long run a pure monopolist will maximize profits by producing that output at which marginal cost is equal to: A. average total cost. B. marginal revenue. C. average variable cost. D. average cost. 16. Economic profit in the long run is: A. possible for both a pure monopoly and a pure competitor. B. possible for a pure monopoly, but not for a pure competitor. C. impossible for both a pure monopolist and a pure competitor. D. only possible when barriers to entry are nonexistent. Prof Keep Econ Pre-Test Chap 22 ed 17 Page 5 of 9 17. Other things equal, a price discriminating monopolist will: A. realize a smaller economic profit than a nondiscriminating monopolist. B. produce a larger output than a nondiscriminating monopolist. C. produce the same output as a nondiscriminating monopolist. D. produce a smaller output than a nondiscriminating monopolist. Answer the next question(s) on the basis of the following information for a pure monopolist: 18. How many units would the above profit-maximizing monopolist produce? A. 1 B. 2 C. 3 D. 4 19. The MR = MC rule: A. applies only to pure competition. B. applies only to pure monopoly. C. does not apply to pure monopoly because price exceeds marginal revenue. D. applies both to pure monopoly and pure competition. 20. Refer to the above two diagrams for individual firms. Figure 2 pertains to: A. a market characterized by government regulation of price and output. B. either an imperfectly competitive or a purely competitive seller. C. a purely competitive seller. D. an imperfectly competitive seller. 21. If a regulatory commission imposes upon a nondiscriminating natural monopoly a price that is equal to marginal cost and below average total cost at the resulting output, then: A. the firm will realize an economic profit. B. the firm will earn only a normal profit. C. allocative efficiency will be worsened. D. the firm must be subsidized or it will go bankrupt. Prof Keep Econ Pre-Test Chap 22 ed 17 Page 6 of 9 22. Refer to the above diagram for a pure monopolist. Monopoly price will be: A. e. B. c. C. b. D. a. 23. Refer to the above diagram. Demand is relatively inelastic: A. at price P 3 B. at any price below P . 2 C. in the P 2 4rice range. D. in the P 2 3rice range. Prof Keep Econ Pre-Test Chap 22 ed 17 Page 7 of 9 24. (Last Word) Over a recently ended 66-year period, DeBeers: A. earned only a normal profit because of its high mining and marketing costs. B. operated substantially in accord with thepredictions of the unregulated monopoly model. C. was subject to U.S. antimonopoly laws and therefore could not control diamond prices. D. was regulated by the South African government and thus had to limit prices to average total cost. 25. Patents: A. give firms the exclusive right to produce or control a product for 100 years. B. discourage research and innovation. C. are a source of monopoly. D. are also called trademarks. 26. For a nondiscriminating imperfectly competitive firm: A. the marginal revenue curve lies above the demand curve. B. the demand and marginal revenue curves coincide. C. the demand curve intersects the horizontal axis where total revenue is at a maximum. D. marginal revenue will become zero at thatoutput where total revenue is at a maximum. 27. Assume the above figure applies to a pure monopolist. If this firm is able to price discriminate between children and adults, its economic profit will be: A. (P 2MC) x (Q +Q1C 2 B. (P1-MC) x (Q +Q1C 2 C. (P2-P 1 x (Q 1C ) 2 D. [(P 1MC) x Q ] 1C[(P -MC2 x Q ] 2 Prof Keep Econ Pre-Test Chap 22 ed 17 Page 8 of 9 28. In the short run, a monopolist's economic profits: A. are always positive because the monopolist is a price-maker. B. are usually negative because of government price regulation. C. are always zero because consumers prefer to buy from competitive sellers. D. may be positive or negative depending on market demand and cost. 29. A single-price monopoly is economically undesirable because, at the profit maximizing output: A. marginal revenue exceeds product price at all profitable levels of production. B. monopolists always price their products on the basis of theability of consumers to pay rather than on costs of production. C. MC > P. D. society values additional units of the monopolized product more highly than it does the alternative products those resourcescould otherwise produce. 30. Refer to the above diagrams. The demand for Firm A's product is: A. perfectly elastic over all ranges of output. B. perfectly inelastic over all ranges of output. C. elastic for prices above $1 and inelastic for prices below $1. D. inelastic for prices above $1 and inelastic for prices below $1. Pre-Test Chapter 22 ed17 Key 1. B 11. B 21. D 2. C 12. D 22. B 3. D 13. C 23. B 4. A 14. D 24. B 5. A 15. B 25. D 6. A 16. B 26. D 7. C 17. B 27. D 8. D 18. C 28. D 9. D 19. D 29. D 10. B 20. D 30. A Prof Keep Econ Pre-Test Chap 22 ed 17 Page 9 of 9 ECO 110 Principles of Microeconomics review Exam 3 Dr. Anwar Alshriaan Use the table below to answer the following TWO questions. Units of Total labor product 1 10 2 20 3 27 4 25 1. According to the table above, the average product (AP) of 2 units of labor is a) 7 b) 9 c) 10 d) 27 Answer : c 2. According to the table above, the marginal product (MP) of 2 unit of labor is a) 7 b) 9 c) 10 d) 27 Answer: c price, cost S = MC $3 $2 $1 D MR Q 20 30 3. Consider the graph above. The profitmaximizing price and output for a firm under monopolistic competition is a) a price of $2 and a quantity of 30. b) a price of $1 and a quantity of 20. c) a price of $3 and a quantity of 30. d) a price of $3 and a quantity of 20. Answer is d 4. I pay only $5 for a large cheese pizza at Little Caesar’s even though I am willing to pay $20. My consumer surplus is a) $50 b) $15 c) $7.50 d) $5 Answer b 14.Complete the following shortrun cost table using the information provided. Q TC TFC TVC AVC ATC MC 1 ECO 110 Principles of Microeconomics review Exam 3 Dr. Anwar Alshriaan 0 $ 4 $_____ $_____ $_____ $_____ $_____ 1 7 _____ _____ _____ _____ _____ 2 9 _____ _____ _____ _____ _____ 3 10 _____ _____ _____ _____ _____ 4 11 _____ _____ _____ _____ _____ 5 13 _____ _____ _____ _____ _____ 6 17 _____ _____ _____ _____ _____ 7 22 _____ _____ _____ _____ _____ 15.Consider the two diagrams below. Diagram A represents a typical firm in a purely competitive industry. Diagram B represents the supply and demand conditions in that industry. (a) Describe the price, output, and profit situation for the individual firm in the short run. (b)Describe what will happen to the individual firm and the industry in the long run. Show the changes on diagrams A and B. Use the following to answer questions 1618: Answer the next question(s) on the basis of the following demand and cost data for a pure monopolist: 16. Refer to the above data. The profitmaximizing price for the monopolist will be: A) $5.00. 2 ECO 110 Principles of Microeconomics review Exam 3 Dr. Anwar Alshriaan B) $2.90. C) $3.35. D) $4.50. Answer: D 17. Refer to the above data. The profitmaximizing level of output will be: A) 4 units. B) 7 units. C) 6 units. D) 5 units. Answer: D 18. Refer to the above data. The monopolist will realize a: A) profit of $8.50. B) profit of $7.50. C) profit of $16. D) loss of $14. Answer: C Use the following to answer questions 1922: 19. Refer to the above diagram. To maximize profits or minimize losses this firm should produce: A) E units and charge price C. B) E units and charge price A. C) M units and charge price N. D) L units and charge price LK. Answer: B 20. Refer to the above diagram. At the profitmaximizing level of output, total revenue will be: A) NM times 0M. B) 0AJE. C) 0EGC. D) 0EHB. 3 ECO 110 Principles of Microeconomics review Exam 3 Dr. Anwar Alshriaan Answer: B 21. Refer to the above diagram. At the profitmaximizing level of output, total cost will be: A) NM times 0M. B) 0AJE. C) 0CGC. D) 0BHE. Answer: D 22. Refer to the above diagram. At the profitmaximizing level of output, the firm will realize: A) an economic profit of ABHJ. B) an economic profit of ACGJ. C) a loss of GH per unit. D) a loss of JH per unit. Answer: A Use the following to answer questions 2326: 23. Refer to the above diagram for a monopolistically competitive firm in shortrun equilibrium. This firm's profitmaximizing price will be: A) $10. B) $13. C) $16. D) $19. Answer: C 24. Refer to the above diagram for a monopolistically competitive firm in shortrun equilibrium. The profitmaximizing output for this firm will be: A) 210. B) 180. C) 160. D) 100. Answer: C 25. Refer to the above diagram for a monopolistically competitive firm in shortrun equilibrium. This firm will realize an economic: A) loss of $320. B) loss of $480. C) profit of $280. 4 ECO 110 Principles of Microeconomics review Exam 3 Dr. Anwar Alshriaan D) profit of $600. Answer: B 26. Refer to the above diagram for a monopolistically competitive firm in shortrun equilibrium. Assume the firm is part of an increasingcost industry. In the long run firms will: A) leave this industry, causing both demand and the ATC curve to shift upward. B) enter this industry, causing demand to rise and the ATC curve to shift downward. C) enter this industry, causing demand to fall and the ATC curve to shift upward. D) enter this industry, causing both demand and the ATC curve to shift upward. Answer: C Use the following to answer questions 2729: 27. In shortrun equilibrium, the monopolistically competitive firm shown above will set its price: A) below ATC. B) above ATC. C) below MC. D) below MR. Answer: A 28. The monopolistically competitive firm shown in the above figure: A) is in longrun equilibrium. B) might realize an economic profit or a loss, depending on its choice of output level. C) cannot operate profitably, at least in the short run. D) can realize an economic profit. Answer: C 29. If all monopolistically competitive firms in the industry have profit circumstances similar to the firm shown above: A) new firms will enter the industry. B) some firms will exit the industry. C) all firms will exit the industry. D) no firms will exit the industry. Answer: B Use the following to answer questions 3034: 5 ECO 110 Principles of Microeconomics review Exam 3 Dr. Anwar Alshriaan F i r mM a r k e t s h a r e ( % ) A 2 0 B 2 0 C 2 0 D 2 0 E 1 0 F 1 0 30. Refer to the above data. The industry characterized by the above information is: A) an oligopoly. B) a monopolistically competitive industry. C) a purely competitive industry. D) a pure monopoly. Answer: A 31. Refer to the above data. The fourfirm concentration ratio for the above industry is: A) 100 percent. B) indeterminate, since we don't know which four firms are included. C) 80 percent. D) 20 percent. Answer: C 35. The study of how people (or firms) behave in strategic situations is called: A) costbenefit analysis. B) recursive analysis. C) normative economics. D) game theory. Answer: D 36. The terms strategic behavior and payoff matrix both relate directly to: A) the perfect competition model. B) the monopolistic competition model. C) game theory. D) the price leadership model. Answer: C 37. Game theory is best suited to analyze the pricing behavior of: A) pure monopolists. B) pure competitors. C) monopolistic competitors. D) oligopolists. Answer: D 38. Game theory can be used to demonstrate that oligopolists: A) rarely consider the potential reactions of rivals. B) experience economies of scale. C) can increase their profits through collusion. D) may be either homogeneous or differentiated. Answer: C 6 ECO 110 Principles of Microeconomics review Exam 3 Dr. Anwar Alshriaan The price of a resource with a perfectly inelastic supply, A .41 .a. is pure economic rent 0 .b. consists of only opportunity cost and has no economic rent 1 .c. cannot change 2 .d. is determined by the supply 3 What does monopolistic competition have in common with perfect competition? A .51 a. a large number of firms and freedom of entry and exit 0 b. a standardized product 1 c. product differentiation 0 d. the ability to earn an economic profit in the long run 1 In the long run, existing firms exit a perfectly competitive market when D .61 .a. economic profits are zero1 .b. economic profits are greater than zero2 .c. normal profits are greater than zero3 .d. they incur an economic loss4 1 If a firm does not produce any output, its C .82 .a. total fixed cost must be zero1 .b. economic profit must be positive2 .c. total variable cost must be zero3 .d. total costs must be zero4 Economies of scale occurs when the average total cost of production ____ as .91 output ____. C a. increases, increases1 b. decreases, decreases2 c. decreases, increases3 d. remains constant, increases4 5 1. Which of the following is an explicit cost? a. The wages a firm pays to its workers. b. The opportunity cost of an owner/entrepreneur's time invested in the firm. c. The opportunity cost of the money the business owner/entrepreneur has invested in the firm. d. None of the above. Answer A 2. For a perfectly competitive firm, marginal revenue (MR) a. is constant, given that the firm is a price taker. b. is less than price, given that selling additional units pulls down the price of all units. c. is greater than price since the firms demand is perfectly elastic. d. is ushaped due to the law of diminishing marginal returns. Answer A Use the table below to answer the following TWO questions. 7 ECO 110 Principles of Microeconomics review Exam 3 Dr. Anwar Alshriaan Units of Total labor product 1 10 2 20 3 27 4 25 3. According to the table above, the average product (AP) of 3 units of labor is a. 7 b. 9 c. 10 d. 27 Answer B 4. According to the table above, the marginal product (MP) of 3 unit of labor is a. 7 b. 9 c. 10 d. 27 Answer A 5. In the short run, a perfectly competitive firm will produce even with an economic loss, as long as a. marginal revenue equals marginal cost. (MR=MC) b. price is less than average total cost. (P < ATC) c. price is greater than average variable cost. (P > AVC) d. price is greater than marginal revenue. (P > MR) Answer C 6. Which of the following correctly explains why sellers in a perfectly competitive market are pricetakers? a. There are few sellers, and so they have the power to take whatever price they want. b. Sellers in a competitive market have the power to influence price by colluding with one another and using quotas to limit overall market output and thus raise price. c. Individual buyers in a competitive market have the power to influence price, and thus can impose prices and other conditions on powerless sellers. d. There are many small sellers, and so the market process generates an equilibrium price that cannot be influenced by any one seller. Thus they have no choice but to take the price generated by the market process. Answer D 7. Which of the following represents the key difference between the short run and the long run? a. In the short run at least one of a firm's resources is fixed, while in the long run all resources under the firm's control are variable. b. The short run corresponds to the anticipated remaining life span of the owner/entrepreneur. c. In the long run at least one of a firm's resources is fixed, while in the short run all resources under the firm's control are variable. d. None of the above. Answer A 8. When a firm is experiencing economies of scale a. the longrun average cost curve is declining. 8 ECO 110 Principles of Microeconomics review Exam 3 Dr. Anwar Alshriaan b. the longrun average cost curve is constant. c. the longrun average cost curve is rising. Answer A 9. The profitmaximizing rate of output for a firm in a perfectly competitive market is found when which of the following occurs? a. Total revenue equals total cost. (TR =TC) b. Price equals average total cost. (P=TC) c. Marginal revenue equals marginal cost. (MR=MC) d. Price equals average variable cost. (P=AVC) Answer C 10. The firm’s demand curve for a product sold in a perfectly competitive market is a. inelastic, but not perfectly inelastic. b. perfectly inelastic. c. elastic, but not perfectly elastic. d. perfectly elastic. Answer D 11. Monopolistic competition differs from perfect competition in that a. monopolistic competition has barriers to entry. b. monopolistic competition allows for economic profits in the long run. c. monopolistic competitive firms sell a product differentiated through marketing and advertising. d. all of the above. Answer C 12. A firm will hire a resource a. until the extra revenue from employing that resource is equal to the extra cost of hiring that resource. b. as long as the resource brings in a positive amount of revenue. c. as long as its marginal product is positive. d. both b and c. Answer A 13. The demand for automobile workers will rise if a. the wage of automobile workers rises. b. the wage of automobile workers falls. c. the demand for automobiles rises. d. both b and c. Answer C 14. Oligopoly is a market structure characterized by a. a horizontal demand curve. b. a large number of small firms. c. one single firm and many buyers d. interdependence among firms in decision makin Answer D 15. If UPS hires another worker, UPS will be able to deliver an additional 20 packages an hour. The price of each package is $5. The marginal revenue product (MRP) of this additional worker is equal to a. $5. b. $100. c. $4. 9 ECO 110 Principles of Microeconomics review Exam 3 Dr. Anwar Alshriaan d. 20 packages. B 16. A permanent price differential for a resources across two alternative uses suggests that a. there are nonmonetary differences between the two uses. b. there is a market failure. c. the resource demand curve has shifted. d. the resource supply curve has shifted Answer B price, cost S = MC $3 $2 $1 D MR Q 20 30 17. Consider the graph above. The profitmaximizing price and output for a firm under monopolistic competition is a. a price of $2 and a quantity of 30. b. a price of $1 and a quantity of 20. c. a price of $3 and a quantity of 30. d. a price of $3 and a quantity of 20. Answer D 18. When the wage increases, a consumer will work more because the opportunity cost of leisure and nonmarket work have risen. This is known as the a. substitution effect. b. income effect. c. leisure effect. d. backwardbending effect. Answer A 19. For a monopoly, the deadweight loss represents a. the diversion of consumer surplus to producer profits. b. the loss of consumer surplus due to the lower output of a monopoly relative to perfect competition. c. the loss of consumer surplus due to price discrimination. d. the costs of antitrust regulation. Answer B 20. All else being equal, earnings are higher for jobs that a. involve greater risk or injury or layoff. b. require greater training or education. c. are unionized. d. all of the above. Answer D 10 ECO 110 Principles of Microeconomics review Exam 3 Dr. Anwar Alshriaan 21. For a monopoly, a. marginal revenue is less than price (MR <P) due to a downward sloping demand curve. b. marginal revenue equals price (MR=P) due to a perfectly elastic demand curve. c. marginal revenue is greater than price (MR >P) due to price discrimination. d. marginal revenue is less than marginal cost (MR < MC), guaranteeing a profit. Answer A 22. When price discrimination occurs a. the monopolist charges the same profitmaximizing price to all buyers. b. the firm attempts to convert consumer surplus to economic profit. c. the buyers with the most inelastic demand will pay the lowest price. d. both b and c. Answer B 23. When firms collude to act as a single monopolist, this is known as a. price discrimination. b. a cartel. c. monopolistic competition. d. a natural monopoly. Answer B 24. A natural monopoly will result when a. a firm is granted by the government a patent for the exclusive right to make and sell a product. b. a firm owns most or all of the natural resources needed to produce a product. c. there are large fixed costs, so the longrun average cost declines over a wide range of output. d. all of the above. Answer C 25. In order for price discrimination to occur a. a firm must have some pricing power, i.e. not be a price taker. b. a firm must be able to identify and separate buyers according to their willingness to pay. c. a firm must be able to prevent the lowprice buyers from reselling to the highprice buyers. d. all of the above. Answer D 26. A legal monopoly results from a. a patent or copyright. b. large fixed costs. c. a cartel d. price discrimination Answer A 27. A feature of oligopoly that makes it similar to monopoly is a. marginal revenue is equal to price. b. zero economic profit in the long run. c. barriers to entry into the industry. d. all of the above. Answer C 11 ECO 110 Principles of Microeconomics review Exam 3 Dr. Anwar Alshriaan 1 Under the substitution effect of a wage change C .28 a. an increase in the wage leads people to spend more time on leisure and .nonmarket work .b. the labor supply curve has a negative slope .c. an increase in the wage leads to an increase in the quantity of labor supplied .d. all of the above 12 UNIT 4 PRACTICE EXAM 1. The prices paid for resources affect 5. At a wage rate of $30, the firm will choose to A. the money incomes of households in the economy employ B. the allocation of resources among different firms A. 2 workers and industries in the economy B. 3 workers C. the quantities of different resources employed to C. 4 workers produce a particular product D. 5 workers D. all of the above 6. If the product price increases to a constant $8, 2. The demand for a resource is derived from the then at a wage rate of $30 the firm will choose to A. marginal productivity of the resource and price of employ the good or service produced from it A. 2 workers B. marginal productivity of the resource and the B. 3 workers price of the resource C. 4 workers C. price of the resource and the price of the good or D. 5 workers service produced from it D. price of the resource and the quantity of the Use the graph below to answer questions 7-10. resource demanded Assume that the quantities of other resources the firm employs remain constant. 3. The law of diminishing returns explains why A. the MRP of an input in a purely competitive market decreases as a firm increases the quantity of an employed resource B. the MRC of an input in a purely competitive market decreases as a firm increases the quantity of an employed resource C. resource demand is a derived demand 7. If the product the firm produces sells for a D. there are substitution and output effects for resources constant $3 per unit, the marginal revenue product of the 4th unit of the resource is A. $3 Use the following table for a purely competitive B. $6 market to answer questions 4-7. C. $9 D. $12 8. If the firm's product sells for a constant $3 per unit and the price of the resource is a constant $15, the firm will employ how many units of the resource? A. 2 B. 3 C. 4 4. At a wage rate of $15, the firm will choose to D. 5 employ A. 2 workers 9. If the firm can sell 14 units of output at a price of B. 3 workers $1 per unit and 18 units of output at a price of $0.90 C. 4 workers per unit, the marginal revenue product of the 3rd unit D. 5 workers of the resource is A. $4 B. $3.60 C. $2.20 D. $0.40 10. If the firm can sell 8 units at a price of $1.50, 14 16. A firm is allocating its expenditure for resources units at a price of $1.00, 18 units at a price of $0.90, in a way that will result in the least total cost of 21 units at a price of $0.70, and 23 units at a price of producing any given output when the $0.50, then the firm is A. amount the firm spends on each resource is the A. maximizing profits at a product price of $0.50 same B. minimizing its costs at a product price of $1.00 B. marginal revenue product of each resource is the C. selling in an imperfectly competitive market same D. selling in a purely competitive market C. marginal product of each resource is the same D. marginal product per dollar spent on the last unit 11. As a firm that sells its product in an imperfectly of each resource is the same competitive market increases the quantity of a resource it employs, the marginal revenue product of 17. A business is employing inputs such that the that resource falls because marginal product of labor is 20 and the marginal A. the price paid by the firm for the resource falls product of capital is 45. The price of labor is $10 and B. the marginal product of the resource falls the price of capital is $15. If the business wants to C. the price at which the firm sells its product falls minimize costs, then it should D. both the marginal product and the price at which A. use more labor and less capital the firm sells its product fall B. use less labor and less capital C. use less labor and more capital 12. Which of the following would increase a firm's D. make no change in resource use demand for a particular resource? A. an increase in the prices of complementary 18. Assume that a profit-maximizing computer disk resources used by the firm manufacturer is employing resources so that the B. a decrease in the demand for the firm's product MRP of the last unit hired for resource X is $240 C. an increase in the productivity of the resource and the MRP of the last unit hired for resource Y is D. an increase in the price of the particular resource $150. The price of resource X is $80 and the price of resource Y is $50. The firm should 13. The substitution effect indicates that a firm will A. hire more of resource X and less of resource Y use B. hire less of resource X and more of resource Y A. more of an input whose relative price has C. hire less of both resource X and resource Y decreased D. hire more of both resource X and resource Y B. more of an input whose relative price has increased 19. A firm that hires resources in a purely C. less of an input whose relative price has competitive market is not maximizing its profits decreased when D. less of an input whose relative price has remained A. the marginal revenue product of every resource is constant equal to 1 B. the marginal revenue product of every resource is 14. Two resource inputs, capital and labor, are equal to its price complementary and used in fixed proportions. A C. the ratio of the marginal revenue product of every decrease in the price of capital will resource to its price is equal to 1 A. increase the demand for labor D. the ratio of the price of every resource to its B. decrease the demand for labor marginal revenue product is equal to 1 C. decrease the quantity demanded for labor D. have no effect because the relationship is fixed Use the table below to answer the following 25. A monopsonist pays a wage rate which is question. A. greater than the marginal revenue product of labor B. equal to the marginal revenue product of labor C. equal to the firm's marginal labor cost D. less than the marginal revenue product of labor 26. If a firm employs resources in imperfectly 20. Assume that a purely competitive firm uses two competitive markets, to maximize its profits the resources -- labor (L) and capital (C) -- to produce a marginal revenue product of each resource must product. In which situation would the firm be equal maximizing profit? A. its marginal product A. A B. its marginal resource cost B. B C. its price C. C D. 1 D. D 27. Compared with a purely competitive labor 21. A characteristic of a purely competitive labor market, a monopsonistic market will result in market would be A. higher wage rates and a higher level of A. firms hiring different types of labor employment B. workers supplying labor under a union contract B. higher wage rates and a lower level of C. wage taker behavior by the firms employment D. price maker behavior by the firms C. lower wage rates and a higher level of employment 22. The supply curve for labor in a purely D. lower wage rates and a lower level of competitive market is upward sloping because employment A. opportunity costs are rising B. the marginal resource cost is constant 28. Which would increase the demand for a C. the wage rate paid to workers falls particular type of labor? D. the marginal revenue product rises A. a decrease in the wages of that type of labor B. an increase in the prices of those resources which 23. The individual firm which hires labor under are substitutes for that type of labor purely competitive conditions faces a supply curve C. an increase in the prices of the resources which for labor which are complements to that type of labor A. is perfectly inelastic D. a decrease in the demand for the products B. is of unitary elasticity produced by that type of labor C. is perfectly elastic D. slopes upward from left to right 29. Industrial unions typically attempt to increase wage rates by 24. All of the following are characteristics of a A. imposing an above-equilibrium wage rate on monopsonist except: employers A. there is only a single buyer of a particular kind of B. increasing the demand for labor labor C. decreasing the supply of labor B. the type of labor is relatively immobile D. forming a bilateral monopoly C. the wage rate it must pay workers varies directly with the number of workers it employs D. the supply curve is the marginal resource cost curve Use the graph below to answer questions 30-32. 33. If this were a purely competitive labor market, the number of workers hired and the wage rate in equilibrium would be A. 4,000 and $14 B. 4,000 and $8 C. 6,000 and $10 D. 8,000 and $12 34. If this were a monopsonistic labor market, the number of workers hired and the wage rate in 30. If the firm employing labor were a monopsonist, equilibrium would be the wage rate and the quantity of labor employed A. 4,000 and $14 would be, respectively, B. 4,000 and $8 A. $14 and 300 C. 6,000 and $10 B. $13 and 400 D. 8,000 and $12 C. $14 and 400 D. $13 and 300 35. Suppose an inclusive union seeks to maximize the employment of workers with the monopsonist. If 31. But if the market for this labor were purely successful, the number of workers employed and the wage rate would be competitive, the wage rate and the quantity of labor employed would be, respectively, A. 4,000 and $14 A. $14 and 300 B. 6,000 and $12 B. $13 and 400 C. 6,000 and $10 D. 8,000 and $12 C. $14 and 400 D. $13 and 300 36. If the market were characterized as a bilateral 32. If the firm employing labor were a monopsonist monopoly, the number of workers hired and the wage rate in equilibrium would be and the workers were represented by an industrial union, the wage rate would be A. 6,000 and $10 A. between $13 and $14 B. 4,000 and $14 B. between $13 and $15 C. 4,000 and $8 C. between $14 and $15 D. indeterminate D. below $13 or above $15 37. A firm pays an equilibrium wage of $10 an hour Answer questions 33-36 on the basis of the and the workers produce 10 units of output an hour. following labor market diagram, where D is the If the firm adopts an efficiency wage and it is demand curve for labor, S is the supply curve for successful, then the wage rate for these workers will labor, and MRC is the marginal resource (labor) A. rise and output will fall cost. B. fall and output will rise C. rise and output will rise D. fall and output will fall 38. The price paid for a natural resource that is completely fixed in supply is A. profit B. interest C. rent D. a risk payment 39. In total, the supply of land is A. perfectly inelastic B. of unitary elasticity C. perfectly elastic D. elastic but not perfectly elastic 40. The economic rent from land will increase, ceteris paribus, whenever the A. price of land decreases B. demand for land increases C. demand for land decreases D. supply curve for land increases 41. Which of the following is most likely to shift the demand for aircraft mechanics to the right? (A) An increase in the demand for air travel (B) An increase in the price of a license necessary for aircraft mechanics (C) A decrease in the price of a license necessary for aircraft mechanics (D) A decrease in the demand for air travel (E) A decrease in the marginal productivity of aircraft mechanics 42. A firm is producing a given quantity of output by using labor, L, and capital, K. The marginal physical product of labor equals 5 bushels, while that of capital equals 10 bushels. In order to maximize its profit, (A) this firm should use less labor and more capital, provided the price of labor was $20, while the price of capital was $40. (B) this firm should use more labor and less capital, provided the price of labor was $20, while the price of capital was $40. (C) this firm should use less labor and more capital, provided the price of labor was $40, while the price of capital was $20. (D) this firm should use more labor and less capital, provided the price of labor was $40, while the price of capital was $20. (E) this firm should use less labor (raising MPP ) L and more capital (lowering MPP ) uKtil the two MPPs are equalized. ANSWERS: 1. D 15. OOPS 29. A 2. A 16. D 30. D 3. A 17. C 31. C 4. D 18. D 32. B 5. B 19. A 33. C 6. D 20. B 34. B 7. C 21. C 35. C 8. A 22. A 36. D 9. C 23. C 37. C 10. C 24. D 38. C 11. D 25. D 39. A 12. C 26. B 40. B 13. A 27. D 41. A 14. A 28. B 42. C Review Questions 1. You stop by a crafts fair and you notice consumers haggling with vendors over prices. What does this tell you about the competitiveness of this market? Suppose you plan to go to a farmers’ market next. Do you expect to find more or less haggling at this market than you did at the crafts fair? Why? [LO 13.1] Answer: Consumers and sellers haggling over prices is a sign that the market is not perfectly competitive. If the market were perfectly competitive, consumers and sellers would be price takers, and both would accept a given market price. One reason a crafts fair is not perfectly competitive is that vendors are not selling standardized goods. The farmers’ market is likely to be more competitive because the goods will be more standardized; consumers will be fairly indifferent between tomatoes from one farmer versus another. Prices are likely to be more stable, and you would expect to see less haggling at the farmers’ market. 2. In the market for gold jewelry (unlike the market for gold ore), products come in a range of designs, styles, and levels of quality. Which of the characteristics of a competitive market is violated in the jewelry market? What does this imply for consumers’ willingness to buy from different producers? [LO 13.1] Answer: The characteristic of competitive markets that is violated in the jewelry industry is that the goods are not standardized. This will mean that consumers are not indifferent between producers and will have preferences based on style and quality. Consumers do not perceive sellers as all being the same and will be willing to shop around. 3. Suppose that the manager of a donut shop tells you that he sold 220 donuts today, for a total revenue of $220 and average revenue of $0.90. What’s wrong with this story? [LO 13.2] Answer: Average revenue is total revenue divided by quantity. If the manager sold 220 donuts and received total revenue of $220, then the average revenue would be $1, not $0.90. 4. Suppose a firm’s output is small relative to the size of its market. Explain why this means the firm’s marginal revenue will be equal to the market price. [LO 13.2] Answer: If a firm’s output is small relative to the size of the market, the firm’s output decision does not affect the market price. The firm will be a price taker, which means that its revenue on each unit (marginal revenue) will be equal to the market price. 5. The manager of the donut shop tells you that he sells donuts for $1 each, and that if he were to make additional donuts, based on his current level of output, it would cost him $0.80 per donut. Do you recommend that the manager increase or decrease the number of donuts he makes? [LO 13.3] Answer: The manager should increase his production of donuts as long as the marginal revenue is greater than or equal to the marginal cost. The marginal revenue in a competitive market is the market price. In this case, $1 is greater than the marginal cost of $.0.80, so the manager should increase production. 6. Suppose a firm is operating in a competitive market and is maximizing profit by producing at the point where marginal revenue equals marginal cost. Now suppose that consumer wealth decreases in this market (and the good is a normal good). What might you expect to happen to the profit-maximizing output quantity for the firm? [LO 13.3] Answer: If consumer wealth increases, demand for a normal good increases (shifts right). This will cause the price in the market to increase. Price equals marginal revenue for a firm in a competitive industry. Therefore, if price increases, marginal revenue increases, and the firm will increase its output if the new marginal revenue is greater than the marginal cost of increasing output. 7. A restaurant owner is trying to decide whether to stay open at lunchtime. She has far fewer customers at lunch than at dinner, and the revenue she brings in barely covers her expenses to buy food and pay the staff. What do you recommend that she do? Explain your reasoning to her. [LO 13.4] Answer: As long as the revenue from staying open at lunch does cover the variable costs of doing a lunchtime service, the restaurant owner will maximize profits (or minimize losses) by staying open at lunch. Only if the variable costs involved in the lunch service were greater than the associated revenue should the owner consider closing during lunch. 8. In what ways are profit-maximizing and loss-minimizing the same? In what ways are they different? [LO 13.4] Answer: Profit-maximizing and loss-minimizing are the same in that they both mean increasing production until marginal revenue equals marginal cost. Producing by this decision rule will mean that profits are highest or losses are minimized. The difference between the two is that loss- minimizing involves a caveat to the rule of producing where MR = MC. That is, if price is below AVC, the firm should not produce where MR = MC but should shut down to minimize losses instead. 9. Suppose that the profit-maximizing quantity of output for a firm in the competitive textile industry is 1 million yards of cloth. If this firm is representative of others in the industry, how can you describe total supply in the market, with respect to the number of firms? [LO 13.5] Answer: If the firm is representative, then all firms will maximize profit by producing a quantity of one million yards of cloth. Total supply in the market would simply be one million times the number of firms. 10. What would you expect to happen to market supply if variable costs decreased for individual firms in the market? [LO 13.5] Answer: If variable costs decreased for individual firms, the individual firms would maximize profit by producing more because MR would equal MC at a higher quantity for each firm. Total market supply would increase. 11. Suppose that the airline industry is in long-run equilibrium when the price of gasoline increases, raising the cost of operating airplanes. In the long run, what do you expect to happen to the number of airlines in business? Why? [LO 13.6] Answer: If the airline industry is in long-run equilibrium, economic profit for airlines is zero (at least for the marginal airline). Therefore, if the cost of operating airplanes increases, profits will become negative. Airlines will continue to operate in the short run if the price still covers their AVC. In the long run, assuming the higher costs for gasoline persist, airlines will begin to exit the industry. 12. The firm in Figure 13Q-1 represents the cost structure for all firms in the industry. Describe the steps that will lead to long-run equilibrium in this market. [LO 13.6] Answer: If the firm represented in Figure 13RQ-1 is representative of all firms, firms in this market are making positive economic profit. We can see this because price is above ATC. In the long run, other firms will enter this industry to chase these profits. As other firms enter and the supply curve shifts to the right, the price in the market will fall. This process will continue until price falls to the point where there is no further incentive for firms to enter. This happens when economic profit is zero and price is equal to the minimum of ATC. 13. Corn farmers in Iowa are producers in a highly competitive global market for corn. They also have some of the most fertile, productive land in the entire world. Could Iowa’s farmers be earning a positive economic profit in the long run? Why or why not? [LO 13.7] Answer: Yes. A producer can be earning economic profit in the long run if firms differ in cost structure. Long-run equilibrium means that there is no incentive for entry or exit. As long as the marginal firm earns zero economic profit, the industry is in long-run equilibrium and individual producers who may face lower costs than the marginal firm can be earning positive profits. 14. Suppose that firms in an industry have identical cost structures and the industry is in long-run equilibrium. Explain how the profit motive could lead to lower market prices. [LO 13.7] Answer: If a market is in long-run equilibrium and firms have identical cost structures, firms are making zero economic profi
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