Sample Final Exam 2

1) The table below shows the number of units of labour and capital used in 4 alternative production techniques for producing 1000 widgets per month. Technique A B C D Labour 25 35 50 30 Capital 50 35 25 60 TABLE 8-1 Refer to Table 8-1. If the price of labour is $5 and the price of capital is $10, which production technique minimizes the costs of producing 1000 units of output? A) A B) B C) C D) D E) Any of the techniques have the same cost. 2) When there is no other way of producing a given level of output with a smaller total value of inputs, the firm is operating at A) minimum cost. B) maximum output. C) maximum profit. D) optimal output. E) maximum cost. 3) Which of the following conditions indicate cost minimization, assuming two inputs, labour ( L ) and capital ( K )? A) P K ∙ MP K = P L ∙ MP L B) MP L = MP K C) MPK /P K = MP L /P L D) MPK /P L = MP L /P K E) P K = P L 4) Suppose a firm is using 100 units of labour and 50 units of capital to produce 200 completed client tax returns per day. The price of labour is $10 per unit and the price of capital is $5 per unit. The MP L equals 2 and the MP K equals 5. In this situation, A) the firm is minimizing its costs. B) the firm should increase the use of both inputs. C) the firm could lower its production costs by decreasing labour input and increasing capital input. D) the firm could lower its production costs by increasing labour input and decreasing capital input. E) the firm should decrease the use of both inputs.

5) Suppose capital costs $280 per unit and labour costs $16 per unit. For a profit- maximizing firm operating at its optimal factor mix, if the marginal product of capital is 70, the marginal product of labour must be A) 4. B) 6. C) 8. D) 12. E) 16. 6) The long-run average cost (LRAC) curve for a firm shows A) the lowest unit cost at which the firm can produce a given output. B) the highest unit costs of producing a given output. C) the operation of the law of diminishing returns. D) what happens to the fixed costs in the long run. E) the same cost and output levels as the short-run average cost curve. 7) In the long run, the law of diminishing marginal returns A) is not relevant because there are no fixed factors of production. B) sometimes holds, depending on the production process. C) does hold, regardless of production process. D) is exactly the same as in the short run. E) does not hold because technology is a variable. 8) For many firms, the LRAC curve is U-shaped. The downward-sloping portion of the LRAC curve can be explained by A) economies of scale. B) diminishing returns to the variable factor. C) diminishing returns to the fixed factor. D) rising prices of the fixed factor. E) decreasing short-run marginal cost. 9) A change in the technique for producing an existing product is known as A) product innovation. B) investment. C) invention. D) an increase in productivity. E) process innovation. 10) Consider the short-run and long-run cost curves for a firm. If there is an improvement in the firm's technology, A) the firm will move to a lower point on both its long-run and short-run average cost curves. B) the firm will move to a lower point on its long-run average cost curve only. C) both the long-run and short-run average cost curves will shift downward. D) there will be a downward shift in the long-run average cost curve but not in the short-run average cost curve. E) there will be no change in the cost curves in the long run.

C) 3 only D) 1 and 2 only E) 1 and 3 only 14) For any firm operating in any market structure, marginal revenue is defined as A) total revenue divided by the number of units sold. B) the change in total revenue resulting from the sale of an additional unit of the product. C) the total amount received by the seller from the sale of a product. D) the change in price resulting from the sale of an additional unit of the product. E) price times quantity of the product sold. 15) In the short run, the profit-maximizing behaviour for a price-taking firm requires it to operate where A) P = MC , given that P is greater than or equal to ATC . B) P = TR = TC . C) P > MR > MC . D) AVC = AR . E) P = MC , given that P is greater than or equal to AVC . 16) Suppose XYZ Corp. is producing and selling disposable wooden chopsticks in a perfectly competitive market. The market price is $0.05 per unit and the firm is currently producing 600 000 units per month. The firm's total revenue is ________ per month. The firm's marginal revenue is ________. A) $30 000; $0.05 B) $12 million; $0.05 C) $1.2 million; $0.01 D) $3000; $0.50 E) $3000; $0.05 17) Assume the following total cost schedule for a perfectly competitive firm. Output TVC ($) TFC ($) 0 0 100 1 40 100 2 70 100 3 120 100 4 180 100 5 250 100 6 330 100 TABLE 9-1 Refer to Table 9-1. If the market price were $75, this perfectly competitive firm wishing to maximize its profits would A) produce 2 units of output. B) produce 6 units of output. C) produce 5 units of output.

D) not produce because P < minimum of ATC . E) not produce because P < TFC . 18) Assume the following total cost schedule for a perfectly competitive firm. Output TVC ($) TFC ($) 0 0 100 1 40 100 2 70 100 3 120 100 4 180 100 5 250 100 6 330 100 TABLE 9-1 Refer to Table 9-1. What is the marginal cost of producing the 2nd unit of output? A) $10 B) $15 C) $5 D) $30 E) $35 19) Suppose ABC Corp. is a firm producing newsprint in a perfectly competitive industry. We have the following information about the firm's production: - output (Q) = 1500 tonnes per month - average total cost (ATC) = $627 per tonne - average variable cost (AVC) = $614 per tonne - marginal revenue (MR) = $620 per tonne - marginal cost (MC) = $620 per tonne In the short run, this firm should A) reduce output because the price per tonne is less than ATC. B) shut down because the firm is incurring economic losses. C) maintain production at the current level. D) increase output because MR is greater than AVC. E) Not possible to determine because the price of the product is not known. 20) Consider a perfectly competitive firm that is producing a level of output such that price equals average total cost and average total cost is less than marginal cost. In order to maximize its profits, the firm should A) reduce output. B) expand output. C) shut down. D) increase the market price. E) not change output.

D) earning profits of $1250. E) suffering losses of $1250. 24) The short-run supply curve for a perfectly competitive firm is A) its entire marginal-cost curve. B) its rising portion of the average-variable-cost curve. C) its average-revenue curve. D) its marginal-cost curve above the average-variable-cost curve. E) the industry supply curve. 25) If firms in a competitive industry are earning positive economic profits, in the long run we expect A) the demand curve for the product will shift to the left, so that the price of the product will fall. B) the supply curve for the product will shift to the right as new firms enter the industry, causing industry output to increase and price to fall. C) there would be no change in the industry as long as P = MC for the individual firms. D) the individual firms will lower their price to discourage new firms from entering the industry. E) the government would intervene and force the firms to lower prices. 26) Which of the following statements about a perfectly competitive industry in long-run equilibrium is correct? A) In order to stay in the industry, each firm is making an economic profit. B) Losses are tolerable because of high fixed costs. C) Individual firms will have no incentive for technological improvement. D) Firms must exhibit economies of scale. E) Each firm is producing at the minimum point on its LRAC curve. 27) The marginal revenue curve facing a single-price monopolist A) is the same as the average revenue curve facing the monopolist. B) is the same as the demand curve facing the monopolist. C) shows the change in the profit for the firm. D) lies below the average revenue curve. E) at first falls to a minimum and then rises as output is increased. 28) A monopoly is distinguished from a firm operating under any other market structure in the following way: The monopoly A) charges a price higher than its average revenue. B) can choose its output level. C) can choose its level of cost. D) does not produce at a profit-maximizing level of output. E) faces a demand curve which is identical to the market demand curve. 29) Marginal revenue is less than price for a single-price monopolist because the A) firm's output decisions do not affect the selling price.

B) firm must lower its price for all units if it wants to sell more of the product. C) monopolist charges a price higher than the unit production cost. D) monopolist must worry about how its price setting will lead to entry by other firms. E) monopolist has achieved economies of scale. 30) The table below shows the demand schedule for a product produced by a single-price monopolist. Price Quantity Demanded $8 5 $7 6 $6 7 $5 8 $4 9 $3 10 $2 11 TABLE 10-1 Refer to Table 10-1. For a single-price monopolist producing and selling 9 units, the marginal revenue earned by selling the 9th unit is A) -4. B) -2. C) 0. D) 2. E) 4. 31) The figure shows demand and marginal revenue for a single price monopoly.

E) There is insufficient information to make a recommendation. 34) The two characteristic problems for cartels are A) agreeing on the price to be set and preventing new entrants. B) policing members' output restrictions and preventing new entrants. C) coordinating marketing policies and policing members' quotas. D) agreeing on the price to be set and coordinating marketing policies. E) policing members' prices and restricting output. 35) A number of firms agreeing together to restrict output and thereby raise prices is known as A) a monopoly. B) a natural monopoly. C) a cartel. D) a barrier to entry. E) an oligopoly. 36) Suppose all of the firms in a perfectly competitive industry form a cartel and agree to restrict output, thereby raising the price of the product. Individual Firm A will gain the most from the existence of the cartel if A) all firms, including A, cooperate and restrict output. B) Firm A restricts output, while the other firms do not. C) all firms, except Firm A, cooperate and restrict output. D) no firms restrict output. E) all firms revert back to their competitive outputs. 37) Which of the following statements about a monopoly practicing perfect price discrimination is correct? A) The profit-maximizing criterion is MR = P , the same as for perfect competition. B) The demand curve is also the marginal-revenue curve. C) It will charge higher prices in those market segments with more elastic demand. D) The output will always be less than that produced by a single-price monopolist. E) Total costs will be lower than that of a single-price monopolist. 38) Consider a price-setting firm that is able to practice price discrimination. By doing so the firm is able to increase its profits. How? A) by shifting its cost curves downward B) by raising the price above the competitive price C) by charging different prices according to the willingness to pay of each consumer D) by reducing costs through a reduction in output E) by charging different prices according to the different marginal cost on each unit 39) One reason movie theatres charge a lower admission price to senior citizens is that A) movie-theatre owners are able to practice perfect price discrimination. B) government sets the price policies. C) senior citizens have a more elastic demand than other movie-goers. D) senior citizens have a less elastic demand than other movie-goers.

E) senior citizens have a higher willingness-to-pay than other people. 40) Suppose you go to a retailer's website and print a coupon that gives you a discount on your next purchase at their store. But your friend, who also plans to purchase there, can't be bothered. You are revealing to the store that A) you have a lower income than your friend. B) you understand price discrimination and your friend does not. C) you have a lower elasticity of demand than your friend. D) you have a higher elasticity of demand than your friend. E) elasticity of demand changes according to the size of the discount offered. 41) Suppose the market for gasoline retailing (gas stations) in an island economy has 12 firms. The two largest firms each account for 30% of sales, the third accounts for 15%, the fourth for 7%, the fifth for 4% and the remaining firms for 2% each. What is the four-firm concentration ratio? A) 8% B) 60% C) 75% D) 82% E) 100% 42) A monopolistically competitive firm and a monopoly are similar because A) both firms will earn zero profits in the long run. B) both firms always operate at their point of minimum average cost. C) each firm can raise its price without losing all of its sales. D) both firms must behave strategically toward other firms in the industry. E) each firm has a large number of competitors. 43) One difference between a perfectly competitive market and a monopolistically competitive market is that A) there are no barriers to entry in monopolistic competition. B) there are no barriers to exit in monopolistic competition. C) there is no product differentiation in perfect competition D) there is no product differentiation in monopolistic competition E) there is strategic interaction among firms in monopolistic competition. 44) If entry into a monopolistically competitive industry occurs because of positive profits earned by the existing firms, the A) industry demand curve will shift to the left. B) industry demand curve will shift to the right. C) demand curve for each existing firm will shift to the left. D) demand curve for each existing firm will shift to the right. E) demand curves for the existing firms will remain unchanged. 45) Compared with perfect competition, monopolistic competition results in

E) earn zero profits in the long run. 49) "Brand proliferation" in an oligopolistic industry A) allows easier entry to a new entrant with small sales. B) can shift the average total cost curve down and raise the overall minimum scale of operation. C) allows new entrants to the industry to gain significant market share. D) will generally reduce the expected market share of new entrants to the industry. E) allows firms to cooperate to maximize their joint profits. 50) What is a Nash equilibrium? A) an example of a cooperative equilibrium B) a situation where all players are maximizing their payoffs given the current behaviour of the other players C) a situation where all players are better off than they would be with any other combination of strategies D) an unstable equilibrium E) will in general produce the greatest payoff for the players