MICRO UNIT 3 PRACTICE QUESTIONS

11) If a firm spends $200 to produce 20 units of output and spends $440 to produce 40 units of output, then the marginal cost of increasing output is: A) $12. B) $20. C) $10. D) $22.

A) $12

5) A residential cleaning company has total costs of $45,000 and total variable costs of $25,000. The cleaning company has total fixed costs that equal to: A) $20,000. B) $45,000. C) $70,000. D) indeterminate because the firm's output level is not known.

A) $20,000

25) A milk company in a perfectly competitive industry is producing 10000 gallons of milk, its profit-maximizing quantity. Industry price for a gallon of milk is $3.50, total fixed costs are $5,000, and total variable costs are $10,000. The firm's economic profit is: A) $20,000. B) $15,000. C) $35,000. D) $30,000.

A) $20,000.

2) You are the owner and only employee of a company that repairs computers. Last year, you earned total revenues of $75,000. Your costs for equipment, rent, and supplies were $10,000. To start this business you quit a job at another computer software firm that paid $40,000 a year. Last year, your economic profits were: A) $25,000. B) $75,000. C) $100,000. D) $50,000.

A) $25,000

8) Refer to Figure 10.9. The deadweight loss of monopoly is: A) BEC. B) ACF. C) FGBC. D) FABE.

A) BEC.

12) Average variable cost and average total costs get closer together as output increases because: A) average fixed costs decrease as output increases. B) diminishing returns set in. C) marginal costs decrease as output increases. D) economies of scale become apparent.

A) average fixed costs decrease as output increases

14) If the prices of inputs do not increase as an industry grows, the industry is a(n): A) constant cost industry. B) decreasing cost industry. C) increasing cost industry. D) nonexistent industry

A) constant cost industry.

18) If the car manufacturer enjoys economies of scale, then an increase in the number of cars manufactured will lead to a(n): A) decrease in average cost. B) decrease in total cost. C) constant average cost D) increase in average cost.

A) decrease in average cost.

5) Suppose we know that a monopolist is maximizing its profits. Which of the following must be true? The monopolist has: A) equated marginal revenue and marginal cost. B) maximized the difference between marginal revenue and marginal cost. C) set price equal to its average cost. D) maximized its total revenue.

A) equated marginal revenue and marginal cost.

6) Assume soybeans are produced in a perfectly competitive industry. A soybean farmer is currently maximizing his profits. If the market price of soybeans falls, after the farmer adjusts to the new price, he will be producing ________ bushels of soybeans and his profit will be ________. A) fewer; lower B) the same number of; the same C) fewer; the same D) more units of output; the same

A) fewer; lower

30) Relative to a perfectly competitive market, a monopoly produces: A) less output, charges higher prices, and earns economic profits. B) less output, charges higher prices, and earns only a normal profit. C) more output, charges higher prices, and earns economic losses. D) more output, charges higher prices, and earns economic profits.

A) less output, charges higher prices, and earns economic profits.

14) Suppose marginal cost is $5. Average variable costs are $10. For the next unit of output produced, average variable costs will be: A) less than $10. B) equal to $10. C) more than $10. D) It is impossible to say.

A) less than $10.

24) Assume a perfectly competitive industry is in long-run equilibrium at a price of $50. If this industry is a constant-cost industry and the demand for the product increases, long-run equilibrium will be reestablished at a price: A) of $50. B) less than $50. C) greater than $50. D) either greater than or less than $50 depending on the magnitude of the decrease in demand.

A) of $50.

6) A firm can effectively practice price discrimination and increase profit if: A) the price elasticity of demand in each market is different. B) the average cost of production in each market is different. C) the product can be produced in two different factories. D) the marginal cost of production in each market is different

A) the price elasticity of demand in each market is different.

4) If marginal product is negative, then: A) total product will decrease if more of the input is hired. B) marginal product will increase if more of the input is hired. C) total product is equal to zero. D) average product will increase if more of the input is hired.

A) total product will decrease if more of the input is hired.

1) A firm's objective is to maximize its economic profit, which is: A) total revenue minus economic cost. B) economic cost minus total revenue. C) total profit minus total cost. D) economic cost minus profit.

A) total revenue minus economic cost.

29) Refer to Figure 9.5. If this farmer is maximizing profits, his profit will be: A) $45. B) $72. C) $48. D) -$24.

C) $48.

8) If Mayo Lawyer Firm's total costs are $7000 when 20 clients' cases are worked and $7600 when 21 clients' cases are worked, the marginal cost of the 21st client's case is: A) $400. B) $500. C) $600. D) $300.

C) $600

22) O'Connor Lamp Factory has total fixed costs of $4500. O'Connor Lamp Factory's average variable cost per lamp is $30 and its average total cost is $45. O'Connor Lamp Factory sells each lamp for $100 each. How many lamps is O'Connor Lamp Factory currently manufacturing: A) 250 lamps. B) 200 lamps. C) 300 lamps. D) a number of lamps that is indeterminate from this information.

C) 300 lamps.

13) UG Tech Inc. is a perfectly competitive firm producing wireless mouses where marginal revenue is equal to marginal cost. The current market price of wireless mouse is $30.00. UG Tech Inc. sells 500 wireless mouses. Its short run average variable cost is $10.00 and its average fixed cost is $5.00. What should UG Tech Inc. do? A) Increase production so that average fixed cost will decrease. B) Decrease production so that short run average variable cost will decrease. C) Continue to produce because price exceeds short run average variable cost. D) Shut down and produce zero sandwiches because price is less than short run average variable cost.

C) Continue to produce because price exceeds short run average variable cost.

22) Which of the following market changes would be expected to occur when a patent expires? A) a decrease in industry output B) an increase in the market price C) an increase in generic products D) all of the above

C) an increase in generic products

9) If the price of an input decreases, each individual firm's marginal cost curve shifts ________ and the industry supply curve ________. A) upward; does not change B) upward; shifts to the left C) downward; shifts to the right D) downward; shifts to the left

C) downward; shifts to the right

7) If a government grants monopoly power through a patent, it may beneficial from a social perspective because: A) it may encourage higher standards of professional ethics. B) it may insure less consumer products. C) it may encourage the development of new products. D) it may keep down monopoly profits.

C) it may encourage the development of new products.

21) The Rare Bird Company has a monopoly in the sale of macaws in Iowa. When the Rare Bird Company sells three macaws its marginal revenue is $30. When the Rare Bird Company sells four macaws its marginal revenue will be: A) equal to $30. B) greater than $30. C) less than $30. D) greater than $30 if demand is elastic and less than $30 if demand is inelastic

C) less than $30

3) Suppose that at Pollo Loco's Restaurant 5 cooks can make 70 meals. Assuming that there are diminishing returns to labor, it will require ________ to make 70 more meals. A) less than an additional 5 cooks B) a total of 10 cooks C) more than an additional 5 cooks D) an additional 5 cooks

C) more than an additional 5 cooks

31) Assume that a smartphone maker operates in a perfectly competitive market producing 25,000 smartphones per day. At this output level, price is less than this firm's marginal cost. It follows that producing one more smartphone will cause this firm's: A) profits to remain unchanged. B) total cost to decrease. C) profits to decrease. D) profits to increase.

C) profits to decrease.

13) Strawberry Inc. has a monopoly on the sale of a specialized smartphone. If it sells 9 of these smartphones its total revenue is $1,800, and if it sells 10 smartphones its total revenue is $1,950. The marginal revenue of the tenth smartphone sold is: A) $1,950. B) $75. C) $1,800. D) $150.

D) $150.

10) Suppose that a donut bakery has $1,500 of variable costs and $2,500 of fixed costs when it produces 1000 donuts and sells them for $1 per donut. Average total cost is equal to: A) $1.5. B) $25. C) $2. D) $4.

D) $4

35) A local cable company has a monopoly on cable service. If it sells 20 of the services its total revenue is $10000, and if it sells 21 services its total revenue is $10,600. When the local cable company sells 21 programs, the price per service is closest to: A) $500. B) $600. C) $50 D) $505.

D) $505.

10) Assume a non-price discriminating monopolist can sell 45 units of a good for $ 1.50 each and can sell 46 units of that good for $ 1.45 each. The marginal revenue of the 46th unit is: A) $ .08. B) -$ .08 C) $ .80. D) -$ .80

D) -$ .80

16) Suppose that a local gym can divide its customers into two groups with different price elasticities of demand. Which of the following is true? A) Price discrimination will not benefit a local gym. B) If a local gym uses price discrimination, it will charge the higher price to the group with the most price elastic demand. C) Although the different groups have different price elasticities of demand, they have the same willingness-to-pay for gym memberships. D) If a local gym. uses price discrimination, it will charge the lower price to the group with the most price elastic demand

D) If a local gym. uses price discrimination, it will charge the lower price to the group with the most price elastic demand.

23) Suppose Greg's Carpet factory experiences economies of scale up to a certain point and constant returns of scale beyond that point. Its long-run average cost curve is most likely to be: A) downward sloping to the right. B) horizontal. C) upward sloping to the right. D) L-shaped.

D) L-shaped.

15) If a firm is operating in the long run the firm is flexible in the following: A) building a new production facility. B) altering all inputs. C) modifying an existing facility. D) all of the above

D) all of the above

3) Which one of the following is good example of a natural monopoly? A) water systems B) electricity C) cable TV service D) all of the above

D) all of the above

1) The best example of a perfectly competitive industry is: A) music stores. B) cigarettes. C) beer. D) corn

D) corn

15) Which of the following is a result of the monopolization of a perfectly competitive industry, ceteris paribus? A) reduced profits B) greater efficiency C) lower prices D) deadweight loss

D) deadweight loss

33) Patents are barriers to entry created by: A) industry associations. B) contractual agreement. C) consumer associations. D) governments.

D) governments

12) A monopolist can: A) increase the price of his output and the quantity sold at the same time. B) sell as much as he wants at the chosen price since he is the only seller. C) increase the price of his output and still sell the same quantity. D) increase price only if he is willing to reduce output sold.

D) increase price only if he is willing to reduce output sold.

19) You are the manager and owner of E-bulbs Inc. and you know that your factory experiences economies of scale. You want to quantify the extent of scale economies in the production of E-bulbs Inc. so you need to find: A) diminishing marginal returns. B) diseconomies of scale. C) diminishing marginal productivity. D) minimum efficient scale.

D) minimum efficient scale.

16) If a firm's production process exhibits economies of scale for all levels of output, then the firm's long-run average cost curve will be: A) positively sloped. B) horizontal. C) U-shaped. D) negatively sloped.

D) negatively sloped.

25) Deadweight loss from monopoly is: A) the producer surplus loss only. B) the process of using public policy to reduce losses. C) the decrease in productivity. D) the net decrease in the market surplus

D) the net decrease in the market surplus.

27) If a firm is producing where marginal revenue is greater than marginal cost: A) the revenue gained by producing one more unit of output is less than the additional cost incurred by doing so. B) the firm is already maximizing profits because revenue is being increased by more than costs. C) the revenue gained by producing one more unit of output equals the additional cost incurred by doing so. D) the revenue gained by producing one more unit of output exceeds the additional cost incurred by doing so.

D) the revenue gained by producing one more unit of output exceeds the additional cost incurred by doing so.

12) If a firm is indifferent between operating and shutting down in the short run, then it must be true that: A) total revenue equals fixed cost. B) fixed cost is zero. C) total revenue equals total cost. D) total revenue equals total variable cost.

D) total revenue equals total variable cost

24) If a restaurant charges seniors one price and nonseniors another price, the restaurant will apply the marginal principle: A) only to the seniors because they consume the most. B) once, because the two groups have the same demands. C) by averaging the price charged to both groups. D) twice, because the two groups have different demands.

D) twice, because the two groups have different demands.

36) Average fixed costs rise continuously as the quantity of output rises. True or false?

False

36) Price discrimination is best described as a firm charging different prices from other firms selling the same product or service

False

36) When price is sufficient to cover average variable cost, firms suffering short-run losses should shut down.

False

37) Price discrimination can be an effective way to increase a firm's profit if the price elasticity of demand is the same across all buyers the firm serves

False

37) The opportunity cost of an entrepreneur's time is an explicit cost. True or false?

False

38) For a monopolist, price is equal to marginal revenue.

False

39) Economic costs are measured by all monetary payments. True or false?

False

39) Rent seeking will lower the social cost of monopoly

False

39) Sunk costs are important to consider when determining to shut down or to operate a business.

False

40) Firms in perfectly competitive markets are able to price discriminate.

False

41) A monopoly firm cannot affect the price therefore it is a price taker

False

41) If there is an increase in demand in the long run for an increasing cost industry, the market price will fall.

False

42) Compared to a monopoly market, a perfectly competitive market will produce more output at a higher price

False

42) For oligopolistic industries the demand is more elastic than demand facing monopolistically competitive industries.

False

43) Economic costs include only the implicit costs to a firm. True or false?

False

43) Monopolistic industries are characterized by a homogeneous product.

False

44) Input prices fall as entry occurs in an increasing-cost industry

False

45) The marginal cost curve of a firm below AVC is also its short-run supply curve.

False

48) If each firm in a perfectly competitive industry is earning zero economic profit, firms will have an incentive to leave the industry.

False

49) Decreasing marginal product implies decreasing marginal costs. T or F?

False

49) The long-run industry supply curve is positively sloped for a decreasing cost industry

False

50) A cost that has already been paid but can be recovered is a sunk cost.

False

47) If a firm's long-run average cost curve is horizontal the firm is experiencing economies of scale. T or F?

False. Constant economies of scale.

38) A firm's accounting cost is always higher than its economic cost. True or false?

False. Economic > accounting

44) Economic profits are determined by subtracting total revenue and implicit costs. T or F?

False. Economic is total revenue - implicit+explicit costs

40) The law of diminishing returns applies only in the long run when the fixed cost can be flexible. True or false?

False. Long run has VARIABLE costs. Also the law of diminishing returns is an economic principle stating that as investment in a particular area increases, the rate of profit from that investment, after a certain point, cannot continue to increase if other variables remain at a constant. (Every additional input will give you a slower gain in output).

42) The long run is when at least one cost is fixed. T or F?

False. Long run has variable costs!!

41) Accounting costs include explicit and implicit costs. True or False?

False. Only includes explicit!

34) In a monopoly, the firm specific demand curve is the same as: A) the market price. B) the market demand curve. C) the market supply curve. D) none of the above.

B) the market demand curve.

37) As more firms leave an industry the market price will increase.

True

38) In a perfectly competitive market, an individual firm cannot charge any price it wants

True

40) At all prices below the shutdown point, optimal short-run output is zero.

True

43) Because the marginal revenue curve for a monopolist lies below its demand curve, the profit-maximizing price of the monopolist will be above marginal cost.

True

44) Patents encourage innovation

True

45) The gap between average total cost and the average variable cost is always the average fixed cost. T or F?

True

46) If each firm in a perfectly competitive industry is in market equilibrium, the market price is equal to the break-even price

True

46) When the long-run cost curve is negatively sloped the firm is experiencing economies of scale. T or F?

True

47) The long-run supply curve can be used to determine the long-run price after an increase in demand.

True

48) Whenever the marginal cost is less than the average cost, the average cost is falling. T or F?

True

50) The long-run average-cost curve shows how the average cost of production varies when the firm is perfectly flexible in choosing its inputs. T or F?

True

30) In the short run, individual firms want to maximize their ________. A) marginal cost B) profit C) total revenue D) marginal revenue

B) profit

7) Tom's landscaping service has only one variable input which is labor. Tom's landscaping service labor costs are $300 a day and Tom's landscaping service does 9 yards per day. To do 10 yards per day, Tom's landscaping service labor costs increase to $325 a day. The marginal cost of doing that 10th yard is: A) $45. B) $25. C) $32.5. D) indeterminate from the information given.

B) $25

9) At Fresh Hot Bakery, the average cost of making 20 baguettes is $1.00. The average cost of making 21 baguettes is $1.10. The marginal cost of the 21st baguettes is: A) $2.10. B) $3.10. C) $0.10. D) $3.00.

B) $3.10

27) A product's patent lasts for ________ years. A) 7 B) 20 C) 17 D) 27

B) 20

28) Suppose that Carol is the owner of a candle factory. Carol wants to know what will happen if the price of the candles being sold drops below the shut-down price. A) Carol's total revenue will be equal to total fixed costs. B) Carol's total revenue will be less than total variable costs. C) Carol's total revenue will be maximized. D) Carol's total revenue will exceed total variable costs.

B) Carol's total revenue will be less than total variable costs.

23) Which of the following is true for both a monopolist and a perfectly competitive firm when each is maximizing profit? A) Marginal revenue is less than price. B) Marginal revenue is equal to marginal cost. C) Price equals marginal costs. D) all of the above

B) Marginal revenue is equal to marginal cost.

11) For a firm in a perfectly competitive market, at the profit maximizing level of output: A) Price > Marginal Revenue > Marginal Cost. B) Price = Marginal Revenue = Marginal Cost. C) Price < Marginal Revenue < Marginal Cost. D) Price > 0 and Marginal Revenue = 0.

B) Price = Marginal Revenue = Marginal Cost.

26) For any an increasing-cost industry, the long-run supply curve has: A) an undefined slope. B) a positive slope. C) a negatively slope. D) a zero slope.

B) a positive slope.

13) If marginal cost is above average variable cost, then: A) average variable cost is decreasing. B) average variable cost is increasing. C) marginal cost must be decreasing. D) average variable cost is constant

B) average variable cost is increasing

20) The manager of HDG Computers reports that if output expands in the long run then average costs will rise. This is an example of: A) economies of scale. B) diseconomies of scale. C) constant returns to scale. D) minimum efficient scale

B) diseconomies of scale.

15) In an increasing-cost industry, the average cost of production increases as the total output increases due to: A) price equals marginal cost. B) increasing input prices. C) increasing in demand for outputs. D) all of the above.

B) increasing input prices.

6) Marginal cost: A) always equals average cost. B) is the increase in total cost resulting from producing one more unit of output. C) equals the increase in average variable cost resulting from producing one more unit of output. D) is the average cost of production divided by output.

B) is the increase in total cost resulting from producing one more unit of output

8) If a firm in a perfectly competitive market tries to raise its price above the going market price, then: A) it will sell some output, but not as much as before. B) it will not be able to sell any output. C) it will sell more output. D) it will sell the same amount of output as before.

B) it will not be able to sell any output.

9) On any given day, Disney World can price discriminate and charge local visitors a ________ price for a ticket than out of state visitors because local visitors have a more ________ demand. A) lower; inelastic B) lower; elastic C) higher; elastic D) higher; inelastic

B) lower; elastic

17) If a firm's production process exhibits diseconomies of scale for all levels of output, then the firm's long-run average cost curve will be: A) horizontal. B) positively sloped. C) U-shaped. D) negatively sloped.

B) positively sloped.

21) The firm's short-run cost curves shows how ________ vary with the quantity produced when at least one input is fixed. A) economy of scales B) production costs C) technology D) none of the above

B) production costs