ECO 204 Exam 3

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Use the following graph to answer the next question. The diagram shows the short-run average total cost curves for five different plant sizes of a firm. If in the long run the firm should produce output 0x, it should do it with a plant of size A) #2. B) #1. C) #4. D) #3.

A) #2.

A monopolist can sell 20 toys per day for $8 each. To sell 21 toys per day, the price must be cut to $7. The marginal revenue of the 21st toy is A) +$21. B) -$10. C) -$13. D) +$7.

C) -$13.

Consumers who clip and redeem discount coupons A) exhibit a higher price elasticity of demand for a given product than consumers who do not clip and redeem coupons. B) cause total revenue to decrease for firms that issue coupons for their products. C) exhibit the same price elasticity of demand for a given product than consumers who do not clip and redeem coupons. D) exhibit a lower price elasticity of demand for a given product than consumers who do not clip and redeem coupons.

A) exhibit a higher price elasticity of demand for a given product than consumers who do not clip and redeem coupons.

The main difference between the short run and the long run is that A) in the short run, some inputs are fixed and some are variable. B) firms earn zero profits in the long run. C) in the long run, all inputs are fixed. D) the long run always refers to a time period of one year or longer.

A) in the short run, some inputs are fixed and some are variable.

One argument for having the government regulate natural monopolies is that without regulation A) these monopolies produce at a level where marginal benefit is greater than marginal cost. B) these monopolies usually produce things that are potentially harmful to our health. C) the industry would become competitive and there would be too many firms in the market to achieve efficiency. D) these monopolies produce at a level where marginal benefit is less than marginal cost.

A) these monopolies produce at a level where marginal benefit is greater than marginal cost.

Suppose that Joe sells pork in a purely competitive market. The market price of pork is $3 per pound. Joe's marginal revenue from selling the 12th pound would be A) 12 lbs. B) $3. C) $36. D) 1 lb.

B) $3.

Use the following information to answer the next question. Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or forgone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10% interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 each. Of the $75, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. The explicit costs of Harvey's firm in the first year were A) $825,000. B) $605,000. C) $150,000. D) $655,000.

B) $605,000

6) The next question is based on the following table that provides information on the production of a product that requires one variable input. Input Total Product 0 0 1 5 2 20 3 32 4 42 5 50 6 55 7 58 8 58 9 56 With the addition of the second unit of input, the marginal product is A) 15 and the average product is 20. B) 15 and the average product is 10. C) 10 and the average product is 15. D) 25 and the average product is 10.

B) 15 and the average product is 10.

Which of the following statements about pure competition in the long run is not true? A) The long-run adjustment in pure competition happens through shifts in the industry supply curve. B) The long-run adjustment in pure competition happens through shifts in the industry demand curve. C) Entry and exit of firms will shift the demand curve facing the representative firm in the industry. D) Entry and exit of firms will push economic profits of firms in the industry towards zero.

B) The long-run adjustment in pure competition happens through shifts in the industry demand curve.

Which statement is correct? A) Marginal cost is the change in average cost when there is a change in output of one unit. B) The marginal cost curve cuts the average variable cost curve at its lowest point. C) If average variable cost is increasing, then average total cost must be increasing too. D) The marginal cost curve cuts the average variable cost curve at an output greater than where the marginal cost curve cuts the average cost curve.

B) The marginal cost curve cuts the average variable cost curve at its lowest point.

One feature of pure monopoly is that the firm is A) a price taker. B) a price maker. C) a producer of products with close substitutes. D) one of several producers of a product.

B) a price maker.

Productive efficiency refers to A) production at a level where P = MC. B) cost minimization, where P = minimum ATC. C) maximizing profits by producing where MR = MC. D) setting TR = TC.

B) cost minimization, where P = minimum ATC.

According to the law of diminishing marginal returns A) output will fall and then rise as additional units of input are employed. B) the additional output generated by additional units of an input will diminish. C) the additional inputs necessary to produce an additional unit of output will diminish. D) employing additional inputs will diminish total output.

B) the additional output generated by additional units of an input will diminish.

The representative firm in a purely competitive industry A) may earn either an economic profit or a loss in the long run. B) will earn zero economic profit in the long run. C) will always earn an economic profit in the long run. D) will always earn a profit in the short run.

B) will earn zero economic profit in the long run.

Use the following graph showing the revenue curves for a monopolist to answer the next question. What price should be charged in order to maximize total revenue? A) P1 B) P2 C) P3 D) P4

C) P3

Which is not true of price discrimination? A) Successful price discrimination requires that different segments of the market have different demand elasticities B) Successful price discrimination will provide the firm with more profit than if it does not discriminate C) Successful price discrimination will generally result in a lower level of output than would be the case under a single-price monopoly D) Successful price discrimination implies that the producer can separate customers into easily identifiable groups

C) Successful price discrimination will generally result in a lower level of output than would be the case under a single-price monopoly

Monopolists are said to be allocatively inefficient because A) at the profit-maximizing output price is greater than AVC. B) they produce only the type of product they desire and do not consider the consumer. C) at the profit-maximizing output the marginal benefit of the product to society exceeds its marginal cost. D) they produce where MR > MC.

C) at the profit-maximizing output the marginal benefit of the product to society exceeds its marginal cost.

If marginal cost is below average variable cost A) both average total cost and average variable cost are increasing. B) average total cost is increasing but average variable cost is decreasing. C) both average total cost and average variable cost are decreasing. D) average variable cost is less than average fixed cost.

C) both average total cost and average variable cost are decreasing.

Which of the following is true under conditions of pure competition? A) each individual firm has the ability to set its own price B) there are differentiated products C) no single firm can influence the market price by changing its output D) the market demand curve is perfectly elastic

C) no single firm can influence the market price by changing its output

Pure monopolists may obtain economic profits in the long run because A) marginal revenue is constant as sales increase. B) of advertising. C) of barriers to entry. D) of rising average fixed costs.

C) of barriers to entry.

An exclusive legal right as sole producer for 20 years granted to an inventor of a product is called a A) franchise. B) copyright. C) patent. D) license.

C) patent.

Which characteristic would best be associated with pure competition? A) few sellers B) nonprice competition C) price takers D) product differentiation

C) price takers

T-Shirt Enterprises is selling in a purely competitive market. It is producing 3,000 units, selling them for $2 each. At this level of output, the average total cost is 2.50 and the average variable cost is $2.20. Based on these data, the firm should A) increase output to 3,500 units. B) continue to produce 3,000 units. C) shut down in the short run. D) decrease output to 2,500 units.

C) shut down in the short run.

Price discrimination for concessions at ball parks is not applied to adults and children because A) adults' demand for food is elastic and children's demand for food is inelastic. B) there can be exchange of the product from adults, who buy it at a lower price, to children. C) there can be exchange of the product from children, who buy it at a lower price, to adults D) children's demand for food is elastic and adults' demand for food is inelastic.

C) there can be exchange of the product from children, who buy it at a lower price, to adults

Which of the following constitutes an implicit cost to the Johnston Manufacturing Company? A) economic profits resulting from current production B) rent paid for the use of equipment owned by the Schultz Machinery Company C) use of savings to pay operating expenses instead of generating interest income D) payments of wages to its office workers

C) use of savings to pay operating expenses instead of generating interest income

Implicit costs are A) composed entirely of variable costs. B) always greater in the short run than in the long run. C) equal to total fixed costs. D) "payments" for self-employed resources.

D) "payments" for self-employed resources.

Use the following table to answer the next question. Output Total Cost 0 $10 1 20 2 28 3 38 4 53 5 73 6 98 The total variable cost of producing 5 units is A) $73. B) $14.60. C) $10. D) $63.

D) $63.

Use the following cost table to answer the next question. Output Average Variable Cost Average Total Cost Marginal Cost 10 $5.00 $15.00 $3 12 4.00 13.00 4 14 4.75 11.50 6 16 5.75 9.00 9 20 9.00 12.00 14 The table shows cost data for a firm that is selling in a purely competitive market. If the price of the product is $6, what output level will the firm produce? A) 0 B) 16 C) 12 D) 14

D) 14

A monopoly most likely results in productive inefficiency because at the profit-maximizing output level A) P > AVC. B) MR is not zero. C) MC is not at its minimum level. D) ATC is not at its minimum level.

D) ATC is not at its minimum level.

In pure competition, the demand for the product of a single firm is perfectly A) elastic because the firm produces a unique product. B) inelastic because many other firms produce the same product. C) inelastic because the firm produces a unique product. D) elastic because many other firms produce the same product.

D) elastic because many other firms produce the same product.

Economic profits are A) equal to the difference between total revenues and implicit costs. B) always larger than accounting profits. C) the sum of accounting profits and implicit costs. D) equal to the difference between accounting profits and implicit costs.

D) equal to the difference between accounting profits and implicit costs.

Which of the following is most likely to be a variable cost? A) interest on business loans B) real estate taxes C) rental payments on IBM equipment D) fuel and power payments

D) fuel and power payments

Marginal product of labor refers to the A) smallest unit of the output produced by labor. B) total output divided by the number of labor employed. C) last unit of output produced by labor at the end of each period. D) increase in output resulting from employing one more unit of labor.

D) increase in output resulting from employing one more unit of labor.

A purely competitive firm does not try to sell more of its product by lowering its price below the market price because A) its demand curve is inelastic, so total revenue will decline. B) this would be considered unethical price chiseling. C) its competitors would not permit it. D) it can sell all it wants to at the market price.

D) it can sell all it wants to at the market price.

20) A purely competitive firm's output is currently such that its marginal cost is $4 and marginal revenue is $5. Assuming profit maximization, the firm should A) raise its price and cut output. B) leave price unchanged and cut output. C) cut its price and raise its output. D) leave price unchanged and raise output.

D) leave price unchanged and raise output.

When compared with the purely competitive industry with identical costs of production, a monopolist will produce A) more output and charge a higher price. B) less output and charge the same price. C) more output and charge the same price. D) less output and charge a higher price.

D) less output and charge a higher price.

Round Things, Inc.'s production process exhibits economies of scale. Currently their long-run average cost is $1/unit. If Round Things doubles its use of all inputs, its new long-run average total cost will be A) greater than $1/unit but less than $2/unit. B) $1/unit. C) greater than $2/unit. D) less than $1/unit.

D) less than $1/unit.

Assume that the market for soybeans is purely competitive. Currently, firms growing soybeans are experiencing economic profits. In the long run, we can expect A) some firms to exit causing the market price of soybeans to fall. B) some firms to exit causing the market price of soybeans to rise. C) new firms to enter causing the market price of soybeans to rise. D) new firms to enter causing the market price of soybeans to fall.

D) new firms to enter causing the market price of soybeans to fall.

One major barrier to entry under pure monopoly arises from A) diseconomies of scale. B) the price taking ability of the firm. C) the availability of close substitutes for a product. D) ownership of essential resources.

D) ownership of essential resources.

Natural monopolies result from A) patents and copyrights. B) control over an essential natural resource. C) extensive economies of scale in production. D) pricing strategies.

extensive economies of scale in production.


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