Economics Practice Test #3

For two goods, A and B, the rational spending rule is expressed as:

(MUA/PA) = (MUB/PB).

defining characteristic of all perfectly competitive markets

All firms sell the same standardized product.

Let MUc denote the marginal utility that Pablo receives from a cup of coffee, and let Pc denote the price of a cup of coffee. We typically expect that as Pablo buys more coffee:

MUc/Pc will fall.

A firm's profit equals:

P − ATC) × Q [(price minus average total cost) times the quantity sold]. Correct

Suppose a perfectly competitive firm is producing 77 units of output, and the marginal cost of the 77th unit is 11. If the firm can sell each unit of output for $8 and the firm's revenue is sufficient to cover its variable cost, the firm should:

decrease production.

It is impossible for total utility to be ______ when marginal utility is ______.

decreasing; positive

Suppose a profit-maximizing firm in a perfectly competitive market is earning an economic profit of $1,345. If the firm's fixed cost increases from $200 to $300, the firm will:

earn a smaller profit.

If a perfectly competitive firm can sell each unit of output for $9, and the marginal cost of the last unit produced is $8.50, then the:

extra benefit of the last unit produced is greater than the extra cost.

When the price of a good rises, marginal utility per dollar spent on that good ______, leading consumers to purchase ______ of that good.

falls; less

One implication of the shape of the demand curve facing a perfectly competitive firm is that:

if the firm increases its price above the market price, it will earn zero revenue.

A variable factor of production:

is variable in both the short run and the long run.

According to the law of diminishing returns, when some factors of production are fixed, in order to increase production by a given amount, a firm will eventually need to add successively:

larger and larger quantities of the variable factors of production.

When plotting marginal and average cost curves, the ______ cost curve always crosses the ______ cost curve at its ______.

marginal; average total; minimum

If the market for butter is perfectly competitive, then the demand curve facing a firm that produces butter will be:

perfectly elastic.

The goal of utility maximization is to allocate your ______ in order to maximize your ______.

resources; satisfaction

The law of demand indicates that as the cost of an activity:

rises, less of the activity will occur.

Assume that the production technology required to produce goods X and Y is very similar. If a firm that is producing good X notices that the market price of good Y is rising, it will:

shift into producing good Y

Suppose that when a firm produces the level of output at which price equals marginal cost, the firm's total revenue is less than its variable cost. In this case, the firm should:

shut down.

Your neighbors have offered to pay you to look after their dog while they are on vacation. It will take you one hour per day to feed, walk, and care for the dog, which you can do either before or after you go to work. Your regular job pays $10 per hour, and you can work up to eight hours per day. The smallest amount of money you would accept to look after your neighbor's dog each day is equal to:

the value you place on one hour of leisure.

If the marginal utility of the 3rd cup of coffee is 23 and the marginal utility of the 4th cup is 15, then:

there is evidence of diminishing marginal utility.

One reason that variable factors of production tend to show diminishing returns in the short run is that:

there is only so much that can be produced using additional variable inputs when some factors of production are fixed.

Individual supply curves generally slope ______ because ______.

upward; of increasing opportunity costs.