ECON 2000 EXAM 3 REVIEW

Refer to Table 13-8. What is the average variable cost of producing 5 units of output? A. $40 B. $4 C. $5 D. $44

A. $40 average variable cost= variable cost/# of output 200/5= 40

Refer to Figure 13-5. Which of the following statements is correct? A. Average variable cost is declining for quantities less than B because marginal cost is lower than average variable cost B. Marginal cost is minimized at B because at that quantity, marginal cost equals average variable cost C. Average total cost is declining for quantities less than C because average variable cost is less than average total cost D. Marginal cost is rising for quantities higher than D because marginal cost is higher than average total cost

A. Average variable cost is declining for quantities less than B because marginal cost is lower than average variable cost

Refer to Table 13-11. Which firm is experiencing diseconomies of scale? A. Firm C only B. Firm A and B only C. Firm A only D. Firm B only

A. Firm C only

Refer to Figure 13-2. Curve D intersects Curve C A. at the efficient scale B. where the firm maximizes production C. at the minimum of average fixed cost D. where fixed costs equal variable costs

A. at the efficient scale

When marginal cost is greater than average total cost: A. average total cost is rising B. average total cost is falling C. marginal cost must be falling D. average variable cost must be falling

A. average total cost is rising

Which of the following industries is most likely to exhibit the characteristic of free entry? A. dairy farming B. nuclear power C. airport security D. municipal water and sewer

A. dairy farming

If long-run average total cost decreases as the quantity of output increases, the firm is experiencing: A. economies of scale B. diseconomies of scale C. coordination problems arising from the large size of the firm D. fixed costs greatly exceeding variable costs

A. economies of scale

If a firm in a perfectly competitive market triples the quantity of output sold, then total revenue will: A. exactly triple B. more than triple C. be reduced by one third D. less than triple

A. exactly triple

When a new firm enters a perfectly competitive market: A. existing firms may see their costs rise if more firms compete for limited resources B. prices will rise as existing firms raise prices to keep new firms out of the market C. economic profits of existing firms will continue to be zero D. entering firms will earn zero economic profit upon entry to the market

A. existing firms may see their costs rise if more firms compete for limited resources

In which of the following tax systems does total tax liability increase as income increases? A. neither proportional nor progressive B. both proportional and progressive C. proportional but not progressive D. progressive but not proportional

B. both proportional and progressive

A competitive market is in long-run equilibrium. If demand decreases, we can be certain that price will: A. fall in the short run. All, some, or no firms will shut down, and some of them will exit the industry. Price will then rise to reach the new long-run equilibrium. B. not fall in the short run because firms will exit to maintain the price. C. fall in the short run. No firms will shut down, but some of them will exit the industry. Price will then rise to reach the new long-run equilibrium. D. fall in the short run. All firms will shut down, and some will exit the industry. Price will then rise to reach the new long-run equilibrium.

A. fall in the short run. All, some, or no firms will shut down, and some of them will exit the industry. Price will then rise to reach the new long-run equilibrium.

When a factory is operating in the short run: A. it cannot adjust the quantity of fixed inputs B. average fixed costs rises as output increases C. it cannot alter variable costs D. total cost and variable costs are usually the same

A. it cannot adjust the quantity of fixed inputs

A country is using a proportional tax when: A. its marginal tax rate rate equals its average tax rate B. its marginal tax rate is less than its average tax rate C. its marginal tax rate is greater than its average tax rate D. it uses a lump-sum tax

A. its marginal tax rate equals its average tax rate

Refer to Figure 14-1. The firm will earn a negative economic profit but remain in business in the short run if the market price is: A. less than $13 but more than $6 B. less than $6 C. above $13, but less than $18 D. above $13

A. less than $13 but more than $6

A traffic light at an intersection is: A. not rival and not excludable in consumption B. not rival but excludable in consumption C. rival but not excludable in consumption D. rival and excludable in consumption

A. not rival and not excludable in consumption

A good is excludable if: A. people can be prevented from using it B. one person's use can diminish another person's enjoyment of it C. the government can regulate its availability D. it is not a normal good

A. people can be prevented from using it

The Pennsylvania Turnpike is a tolled freeway running through the state of Pennsylvania. Motorists must pay tolls at various points along the turnpike based on the distance they traveled on the freeway. Suppose that despite the tolls, many motorists in urban areas use the Turnpike causing traffic to slow during peak times. What type of good would the turnpike be classified as in this case? A. private good B. club good C. public good D. common resource

A. private good

Suppose a firm in a competitive market reduces its output by 20 percent. As a result, the price of its output is likely to: A. remain unchanged B. decrease by more than 20% C. increase D. decrease by less than 20%

A. remain unchanged

Kate is a florist. Kate can arrange 20 bouquets per day. She is considering hiring her husband William to work for her. Together Kate and William can arrange 35 bouquets per day. What is William's marginal product? A. 35 bouquets B. 15 bouquets C. 55 bouquets D. 22.5 bouquets

B. 15 bouquets 35= 20+x (solve for x)

Scenario 12-3 A taxpayer faces the following tax rates on her income: 20% of the first $40,000 of her income 30% of all her income above $40,000 The taxpayer faces: A. a marginal tax rate of 10% when her income rises from $40,000-$40,001 B. an average tax rate of 22% when her income is $50,000 C. a marginal tax rate of 50% when her income rises from $60,000-$60,001 D. an average tax-rate of 22.5% when her income is $30,000

B. an average tax rate of 22% when her income is $50,000 40,000 x 0.2= 8000 10,000 x 0.3=3000 8000+3000= 11,000 11,000/50,000= 22 %

Governments can improve market outcomes for: A. neither public goods nor common resources B. both public goods and common resources C. common resources but not public goods D. public goods but not common resources

B. both public goods and common resources

Four friends decide to meet at a Chinese restaurant for dinner. They decide that each person will order an item off the menu, and they will share all dishes. They will split the cost of the final bill evenly among each of the people at the table. A Tragedy of Commons problem is likely for each of the following reasons EXCEPT: A. there is an externality associated with eating the food off of the table B. each dish would be both excludable and rival in consumption C. each person has an incentive to eat as much as possible since their individual rate of consumption will not affect their individual cost D. when one person eats, he may not take into account how his choice affects his friends

B. each dish would be both excluable and rival in consumption the reason for this is that although it is rival in consumption, it is not excludable because one person cannot be prevented from consuming an item

The following figure depicts average total cost functions for a firm that produced automobiles. At levels of output less than M, the firm experiences: A. both diminishing marginal productivity and coordination problems B. economies of scale C. constant returns to scale D. diseconomies of scale

B. economies of scale

The difference between implicit and explicit cost is: A. implicit costs must be greater than explicit costs B. implicit costs do not require a direct monetary outlay by a firm, whereas explicit costs do C. explicit costs do not require a direct monetary outlay by a firm, whereas implicit costs do D. explicit costs must be greater than implicit costs

B. implicit costs do not require a direct monetary outlay by a firm, whereas explicit costs do

Consider a competitive market with a large number of identical firms. The firms in this market do not use any resources that are available only in limited quantities. In this market, an increase in demand will: A. increase price in the long run, but not in the short run B. increase price in the short run, but not in the long run C. not affect price in either the short or long run D. increase price in both the short and long run

B. increase price in the short run, but not in the long run

In the United States, the marginal tax rate on individual federal income tax: A. decreases as income increases B. increases as income increases C. applied only to payroll taxes D. is constant on all income levels

B. increases as income increases

Refer to the right half of the graph. As the number of workers increases, A. total output increases at an increasing rate B. marginal product decreases C. total output decreases D. marginal product increases but at a decreasing rate

B. marginal product decreases

When marginal revenue equals marginal cost, the firm: A. must be generating positive accounting profits B. may be minimizing its losses rather than maximizing its profit C. should increase the level of production to maximize its profit D. must be generating positive economic profits

B. may be minimizing its losses rather than maximizing its profit

Which of the following is NOT a reason why government agencies subsidize basic research? A. the private market devotes too few resources to basic resources B. the government wants to attract the brightest researchers away from private research firms C. the general knowledge developed through basic research can be used without charge D. the social benefit of additional knowledge is perceived to be greater than the cost of the subsidies

B. the government wants to attract the brightest researchers away from private research firms

A person's marginal tax rate equals: A. the increase in taxes if her average tax rate were to rise by 1 percent B. the increase in taxes she would pay as a percentage of a rise in her income C. her tax obligation divided by her average tax rate D. her tax obligation divided by her income

B. the increase in taxes she would pay as a percentage of a rise in her income

The following table shows the production costs for the Flying Elvis Copter Rides. What is the value of C? A. $25 B. $200 C. $100 D. $50

C. $100 Marginal cost= Change in cost/Change in quantity Change in cost=150-50=100 Change in quantity= 1 100/1=100

In a competitive market, the price is $8. A typical firm in the market has ATC= $6, AVC=$5, and MC= $8. How much economic profit is the firm earning in the short run? A. $0 per unit B. $3 per unit C. $2 per unit D. $1 per unit

C. $2 per unit $8 (price)- $6 (ATC)= 2

Suppose the government imposes a tax of 10% on the first $40,000 of income and 20% on all income above $40,000. What is the average tax rate when income is $50,000? A. 10% B. 20% C. 12% D. 15%

C. 12% AVERAGE TAX RATE total tax bill/ total income $40,000 x 0.1= 4000 $10,000 x 0.2= 2000 4000+2000= 6000 (total tax) 6000/50000= 0.12= 12%

The income tax requires that taxpayers pay 10 percent on the first $40,000 of income and 20 percent on all income over $40,000. Karen paid $6,000 in taxes. What were her marginal and average tax rates? A. 20% and 50% respectively B. 10% and 12% respectively C. 20% and 12% respectively D. 10% and 15% respectively

C. 20% and 12% respectively $40,000 x 0.1= 4,000 MARGINAL TAX $10,000 x 0.2= 2000 TOTAL TAX AMOUNT= 6,000 6000/50,000= 12% (AVERAGE TAX RATE) marginal tax is the tax on the last 10,000 of income, therefore it is 20%.

Refer to Table 14-8. If the firm's fixed cost of production is $3, and the market price is $10, how many units should the firm produce to maximize profit? A. 1 unit B. 2 units C. 3 units D. 4 units

C. 3 units

Refer to Table 14-6. In order to maximize profits, the firm will produce: A. 1 unit of output because the marginal cost is minimized B. 7 units of output because total revenue is maximized C. 5 units of output because marginal revenue equals marginal cost D. 4 units of output because marginal revenue exceeds marginal cost

C. 5 units of output because marginal revenue equals marginal cost

Refer to Table 13-3. The marginal product of the 2nd worker is: A. 90 units B. 85 units C. 80 units D. 20 units

C. 80 units 170-90=80

Average total cost is very high when a small amount of output is produced because: A. marginal product is high B. average variable cost is high C. average fixed cost is high D. marginal cost is high

C. average fixed cost is high

Marginal cost is equal to average total cost when: A. average variable cost is falling B. average fixed cost is rising C. average total cost is at its minimum D. marginal cost is at its minimum

C. average total cost is at its minimum

A firm produces 300 units of output at a total cost of $1,000. If the fixed costs are $100, A. average total cost is $5 B. average total cost is $4 C. average variable cost is $3 D. average fixed cost is $100

C. average variable cost is $3 1000=300x+100 (solve for x) x=3

For a firm, marginal revenue minus marginal cost is equal to: A. average total cost B. change in average revenue C. change in profit D. profit

C. change in profit

An efficient tax system is one that imposes small: A. administrative burdens and transfers of money B. marginal rates and deadweight losses C. deadweight losses and administrative burdens D. marginal rates and transfers of money

C. deadweight losses and administrative burdens

Whenever a perfectly competitive firm chooses to change its level of output, its marginal revenue: A. always increases B. always decreases C. does not change D. increase if MR<ATC and decreases if MR>ATC

C. does not change

Refer to Figure 14-1. Suppose that a firm in a competitive market has the following cost curves. The firm should shut down if market price is: A. above $13 B. above $6, but less than $13 C. less than $6 D. above $6, but less than $18

C. less than $6

A free rider is a person who: A. rides public transit regularly B. can produce a good at no cost C. receives the benefit of a good but avoids paying for it D. will only purchase a product on sale

C. receives the benefit of a good but avoids paying for it

Suppose the firm in a competitive market produces and sells 150 units of output and earns $1800 in total revenue from sales. If the firm increases its output to 200 units, the average revenue of the 200th unit will be: A. zero B. more than $12 C. less than $12 D. $12

D. $12

Jane was a partner at a law firm earning $223,000 per year. She left the firm to open her own law practice. In the first year of business she generated revenues of $347,000 and incurred explicit costs of $163,000. Jane's economic profit from her first year in her own practice is: A. 184,000 B. 124,000 C. 163,000 D. -39,000

D. -39,000 347,000-223,000-163,000= -39000

In the long run, a company that produces and sells popcorn incurs total cost of $1050 when output is 90 canisters and $1200 when output is 120 canisters. The popcorn company exhibits: A. diseconomies of scale because average total cost is rising as output rises B. economies of scale because total cost is rising as output rises C. diseconomies of scale because total cost is rising as output rises D. economies of scale because average total cost is falling as output rises

D. economies of scale because average total cost is falling as output rises 1050/90= 11.66 1200/120= 10 (falling)

Which of the following explains why long-run average total cost at first decreases as output increases? A. less efficient use of inputs B. fixed costs become spread out over more units of output C. diseconomies of scale D. gains from specialization of inputs

D. gains from specialization of inputs

Imagine a 2000-acre park with picnic benches, trees, and a pond. Suppose it is publicly owned, and people are invited to enjoy its beauty. When the weather is nice, it is difficult to find parking, and trash cans overflow with food wrappers on summer afternoons. Otherwise, it is a great place. The park is a common resource because: A. people can be prevented from using it B. anyone can use it without affecting anyone else C. access is limited due to driving distances D. if too many people use it, one person's use diminishes other peoples' use

D. if too many people use it, one person's use diminishes other peoples' use

Refer to Table 13-9. For a firm whose production function and costs are specified in the table, its total cost curve is: A. increasing at a decreasing rate B. constant C. unknown because there is no relationship between a firm's production function and its total-cost curve D. increasing at an increasing rate

D. increasing at an increasing rate

Ms. Joplin sells colored pencils. The colored-pencil industry is competitive. Ms. Joplin hires a business consultant to analyze her company's financial records. The consultant recommends that Ms. Joplin increase her production. The consultant must have concluded that, at her current level of production, Ms. Joplin's: A. total revenue equals her total economic costs B. marginal cost exceeds her marginal revenue C. marginal revenue exceeds her total costs D. marginal revenue exceeds her marginal costs

D. marginal revenue exceeds her marginal costs

With a lump-sum tax, the: A. marginal tax rate rises as income rises B. marginal tax rate falls as income rises C. average tax rate is always less than the marginal tax rate D. marginal tax rate is always less than the average tax rate

D. marginal tax rate is always less than the average tax rate

If a firm uses labor to produce output, the firm's production function depicts the relationship between: A. fixed inputs and variable inputs in the short run B. marginal product and marginal cost C. the maximum quantity that the firm can produce if it adds more capital to a fixed quantity of labor D. the number of workers and the quantity of output

D. the number of workers and the quantity of output

Refer to Figure 13-2. Curve C is always declining because: A. marginal product first increases, then decreases B. marginal product first decreases, then increases C. of diminishing product D. we are dividing fixed costs by higher and higher levels of output

D. we are dividing fixed costs by higher and higher levels of output