Costs of Production and Market Structures Practice Test

Pollution abatement policies will improve efficiency if the (A) marginal benefit of abatement is less than the marginal cost of abatement (B) marginal cost of abatement is less than the marginal benefit of abatement (C) marginal cost of abatement is positive (D) marginal benefit of abatement is positive (E) marginal cost of abatement is zero

(B) marginal cost of abatement is less than the marginal benefit of abatement

Suppose that a firm begins to hire workers for a newly completed plant with a fixed amount of machinery. As the firm hires additional workers, one would expect the marginal product to (A) fall initially, but eventually rise (B) rise initially, but eventually fall (C) rise consistently due to diminishing return (D) rise consistently due to the advantages of specialization (E) rise consistently due to economies of scale

(B) rise initially, but eventually fall

A monopolistically competitive profit-maximizing firm is currently producing and selling 2,000 units of output. At this output level, marginal revenue is $9, average revenue is $10, and the average variable cost is $8. The product price is (A) $8 (B) $9 (C) $10 (D) greater than $10 (E) less than $8

(C) $10

Which of the following best describes an oligopolistic market? (A) Many sellers with identical products and no barriers to entry (B) Many sellers, each with a clearly differentiated product, and no barriers to entry (C) A few competing sellers with similar products and high barriers to entry (D) A few competing sellers of identical products and no barriers to entry (E) No competition among sellers and high barriers to entry

(C) A few competing sellers with similar products and high barriers to entry

In the short run, which of the following costs must continuously decrease as output produced increases? (A) Total variable cost (B) Total fixed cost (C) Average variable cost (D) Average fixed cost (E) Average total cost

(C) Average variable cost

The graph above shows the short-run cost curves of a firm in a perfectly competitive market. Which of the following are true at the firm's profit- maximizing output level? I. Price exceeds average total cost. II. Economic profits are zero. III. Marginal cost equals average total cost. IV. New firms are likely to enter the market in the long run. (A) I and II only (B) I and III only (C) I and IV only (D) II, III, and IV only (E) I,II,III,andIV

(C) I and IV only

Within the range of market demand, which of the following is consistent with the conditions of a natural monopoly? (A) Long-run total cost decreases as output increases. (B) Long-run average total cost remains constant as output increases. (C) Long-run average total cost decreases as output increases. (D) Marginal cost exceeds average cost. (E) Setting price equal to marginal cost will maximize profits.

(C) Long-run average total cost decreases as output increases

Let P = price, MR = marginal revenue, MC = marginal cost, and ATC = average total cost. In monopolistic competition, which of the following most accurately describes the long-run equilibriumconditionsforafirm? (A) P>ATC, MR=MC, and P>MC (B) P>ATC, MR>MC, and P=MC (C) P=ATC, MR=MC, and P>MC (D) P=ATC, MR=MC, and P=MC (E) P=ATC, MR>MC, and P>MC

(C) P=ATC, MR=MC, and P>MC

In a given time period, a person consumes more and more of a good or service and, as a result, enjoys each additional unit less and is willing to pay less for each additional unit. This behaviour is consistent with law of (A) diminishing returns (B) diminishing marginal product (C) diminishing marginal utility (D) increasing cost (E) scarce resources

(C) diminishing marginal utility

If the average variable cost of producing 5 units of a good is $100 and the average variable cost of producing 6 units is $150, then the marginal cost of increasing output from 5 to 6 units is (A) $50 (B) $250 (C) $300 (D) $400 (E) $500

(D) $400

If labor is the only variable input in the production process, the short-run marginal cost curve is upward sloping because which of the following occurs as more and more labor is added? (A) Output decreases, and thus marginal cost increases. (B) Output increases, and thus marginal cost increases. (C) Output increases at an increasing rate, and thus the cost of producing each additional unit of output increases. (D) Output increases at a decreasing rate, and thus the cost of producing each additional unit of output increases. (E) Output increases at a decreasing rate, and thus the cost of producing each additional unit of output decreases.

(D) Output increases at a decreasing rate, and thus the cost of producing each additional unit of output increases

At a firm's current rate of output, the marginal cost is $65, the average variable cost is $35, the average fixed cost is $30, and the product price is $65. Which of the following statements is true for the firm? (A) Economic profits are zero because marginal revenue equals marginal cost. (B) Economic profits are negative because total revenue is less than total cost. (C) Economic profits are positive because total revenue is greater than total cost. (D) Economic profits are negative because price is greater than average variable cost. (E) Economic profits are zero because price equals average total cost.

(E) Economic profits are zero because price equals average total cost

Which of the following is true about a firm's average variable cost? (A) It will rise if marginal cost is less than average variable cost. (B) It will never equal the firm's marginal cost. (C) It will decline, when the firm's marginal product declines. (D) It will be negative if marginal revenue declines. (E) It will equal average total cost when fixed costs are zero.

(E) It will equal average total cost when fixed costs are zero.

Assume that a profit-maximizing firm is perfectly competitive in both the output and the factor markets and is at its long-run equilibrium. The firm's output is 100 units, its total revenue is $600.00, and the fixed cost of production is $50.00. Based on this information, which of the following is true for the firm? (A) Its marginal cost is $5.50, and its average total cost is $5.50. (B) Its marginal cost is $5.50, and its average variable cost is $5.50. (C) Its marginal cost is $6.00, and its average total cost is $5.50. (D) Its marginal cost is $6.00, and its average fixed cost is $5.50. (E) Its marginal cost is $6.00, and its average variable cost is $5.50.

(E) Its marginal cost is $6.00, and its average variable cost is $5.50

Price discrimination occurs when (A) the supply of the products is elastic (B) a product's average cost is greater than its average revenue (C) a product's average cost is less than its average revenue (D) differences in a product's price reflect differences in marginal costs (E) differences in a product's price do not reflect differences in costs of production

(E) differences in a product's price do not reflect differences in costs of production

If total revenue is increasing as output increases, marginal revenue is always (A) equal to average revenue (B) less than average revenue (C) increasing (D) decreasing (E) greater than zero

(E) greater than zero

The short-run supply curve for a firm in a perfectly competitive industry is (A) its entire marginal cost curve (B) its average variable cost curve above its marginal cost curve (C) its average total cost curve above its marginal cost curve (D) its marginal cost curve above the minimum point of its average total cost curve (E) its marginal cost curve above the minimum point of its average variable cost curve

(E) its marginal cost curve above the minimum point of its average variable cost curve

In a perfectly competitive firm, explain why the relationship between demand and marginal revenue exists.

The firm is a price taker and can sell all output at the market price; D = MR

In a monopoly firm, explain why the relationship between demand and marginal revenue exists.

The monopoly has control over price. To sell additional unit, price must be lowered on all units.