Exam 1

Suppose that the firm's marginal cost decreases. What is the effect on the firm's optimal price and quantity? -Both will increase. -Both will be unchanged. -Price will decrease, quantity will increase. -There is not enough information to determine how price and quantity will change. -Price will increase, quantity will decrease.

Price will decrease, quantity will increase.

Which of the following is likely to be a cause of increasing returns to scale? -A change to production methods not feasible at low levels of output. -Increased specialization of labor. -A one-time fall in labor costs. -Answers a and b are both correct. -Answers a, b, and c are all correct.

Answers a and b are both correct.

In the long-run, a profit-maximizing firm produces such that -The marginal products of all inputs are zero. -The ratios of marginal products to input prices are equal across all inputs. -Each input's marginal revenue product equals the input's marginal cost. -Marginal products are equal for all inputs. -Both b and c are correct.

Both b and c are correct.

If fixed costs increase, what will happen to marginal revenue and marginal cost? -Both will increase. -Both will decrease. -Marginal cost will increase; marginal revenue will be unchanged. -Both will be unchanged. -Marginal cost will increase; marginal revenue will decrease.

Both will be unchanged.

Suppose that the demand for a product increases. What is the most likely effect on the firm's price and quantity? -Both will increase. -Both will be unchanged. -Both will decrease. -Management can choose to hold one of them constant and increase the other. -Price will decrease, quantity will increase.

Both will increase.

A firm produces a good in two factories. The marginal product of an input is higher at one plant than at the other. How can the firm reallocate the input to increase profitability? -Increase use of the input at the plant with the lower marginal product; decrease use of the input at the other plant. -Increase use of the input at the plant with the higher marginal product; decrease use of the input at the other plant. -Increase use of the input at the plant with the greater amount of excess capacity, decrease use of the input at other plant. -Increase input use at both factories as long as marginal products are positive. -No reallocation is necessary.

Increase use of the input at the plant with the higher marginal product; decrease use of the input at the other plant.

If the price of a substitute good increases significantly, demand for the competing good will -Increase. -Remain unchanged. -Decrease. -Increase or decrease, depending on the difference between the two prices. -The effect is uncertain. It depends on the price elasticity of demand.

Increase.

When the price of smart phones decreases, the demand for data plans will -Increase. -Remain unchanged. -Decrease. -Increase or decrease, depending on the difference between the two prices. -The effect is uncertain. It depends on the price elasticity of demand.

Increase.

In the short run, a firm should expand the use of a variable input until -Its marginal product is zero. -Its marginal revenue product is zero. -Its marginal revenue product is at a maximum. -Its marginal revenue product equals the input's marginal cost. -None of the above answers is correct.

Its marginal revenue product equals the input's marginal cost.

Suppose that demand decreases. What is the most likely effect on the marginal revenue and marginal cost curves? -Marginal revenue will decrease, marginal cost will not change. -Marginal revenue and marginal cost will both decrease. -Neither will change. -Marginal revenue will not change, marginal cost will decrease. -Marginal revenue will increase, marginal cost will decrease.

Marginal revenue will decrease, marginal cost will not change.

In the short run, the firm should continue to produce if and only if -Price exceeds marginal cost. -Marginal revenue equals marginal cost. -Price exceeds average fixed cost. -Price exceeds average variable cost. -Price exceeds average total cost.

Price exceeds average variable cost.

If the price of a good is in the inelastic range and the firm raises price, -Quantity will be unchanged and revenue will increase. -Quantity will fall just enough to leave revenue unchanged. -Quantity will fall, but revenue will increase. -Quantity will fall, but the revenue change cannot be determined without more information.

Quantity will fall, but revenue will increase.

A firm experiences economies of scope when -The cost of producing multiple goods is less than the aggregate cost of producing each item separately. -The cost of producing an additional unit of output is falling. -The cost of producing multiple goods is more than the cost of combining output in one production facility. -The cost of producing an additional line of goods is less than the cost of the previous additional line of goods. -All of the above answers are correct.

The cost of producing multiple goods is less than the aggregate cost of producing each item separately.

In which case is demand likely to be more elastic, the long run or the short run? -The long run, because there are fewer chances to find substitutes. -The short run, because buyers are able to adjust quickly to changes. -The long run, because buyers can find more numerous substitutes. -The short run, because in the long run there are fewer substitutes. -The long run because income increases will tend to outweigh price changes.

The long run, because buyers can find more numerous substitutes.

The minimum efficient scale is -The lowest output at which the firm can break even. -The lowest output at which minimum long-run average cost can be achieved. -The lowest fixed cost under which the firm can operate. -The lowest variable cost for that level of production. -The lowest output at which minimum short-run average cost can be achieved.

The lowest output at which minimum long-run average cost can be achieved.

The point of intersection between the LAC and LMC curves indicates -The point of maximum profit. -The largest possible plant size. -The beginning of economies of scale. -The plant size where LAC is a minimum. -Answers a and d are both correct.

The plant size where LAC is a minimum.