Review Questions and test bank for the final exam.
Part 1: Multiple Choice Questions
The total revenue (TR) is equal
A) (the price per unit of good) x (quantity that produced)
B) (the price per unit of good) x (quantity that sold) √
C) (the cost per unit of good) x (quantity that produced).
D) (the cost per unit of good) x (quantity that sold)
If demand of good is elastic then
A) an increase in price led the decrease in total revenue √
B) an increase in price led the increase in total revenue
C) an increase in price led no change in total revenue
D) none of the above is correct.
If demand of good is inelastic then
A) an increase in price led the decrease in total revenue
B) an increase in price led the increase in total revenue √
C) an increase in price led no change in total revenue
D) none of the above is correct.
If demand of good is unit elastic then
A) an increase in price led the decrease in total revenue
B) an increase in price led the increase in total revenue
C) the total revenue is maximum √
D) none of the above is correct.
If price and total revenue change in the opposite directions
A) demand is inelastic
B) demand is unit elastic
C) demand is elastic √
D) none of the above is correct.
If price and total revenue change in the same directions
A) demand is inelastic √
B) demand is unit elastic
C) demand is elastic
D) none of the above is correct
With the increase of consumption, marginal utility (MU) will
A) initially increase then decrease
B) decrease until zero
C) decrease and it becomes negative √
D) always increase
Let MUa and MUb stand for the marginal utilities of apples and banana. Let Pa and Pb
stand for their prices. One of the conditions for consumer equilibrium is
A) MUa = MUb
B) MUa = MUb and Pa = Pb
C) MUa/Pa = MUb/Pb √
D) MUa/MUb = Pb/Pa
Utility maximization condition is
A) both, budget spent completely and last dollar marginal utility is equal for each good. √
B) only budget spent completely
C) only last dollar marginal utility is equal for each good.
D) none of the above is correct.
If MUpizza/Ppizza > MUbanana/Pbanana then to make it equal, we have to eat
A) more pizza and less banana. √
B) less pizza and more banana.
C) not possible to make it possible.
D) none of the above is correct.
If MUpizza/Ppizza < MUbanana/Pbanana then to make it equal, we have to eat
A) more pizza and less banana.
B) less pizza and more banana. √
C) not possible to make it possible.
D) none of the above is correct
A firm’s economic costs are the opportunity costs of the resources used that
A) owned by others
B) owned by the firm
C) owned by others and by firm√
D) none of the above is correct
Example of explicit cost is
A) wages.
B) rent
C) taxes.
D) all of the above√
Implicit costs refer to the opportunity costs of the resources that
A) owned by others.
B) self-owned and self-employed. √
C) owned by others as well as self-owned and self-employed.
D) none of the above is correct.
Economic profits refer to the difference between
A) total revenue and explicit costs.
B) total revenue and implicit costs
C) total revenue and economic costs.√
D) none of the above is correct.
The short run is a period of time in which
A) the quantity of at least one resource is fixed. √
B) the amount of output is fixed.
C) prices and wages are fixed.
D) nothing the firm does can be altered.
The long run is a time frame in which
A) the quantities of some resources are fixed and the quantities of other resources can be varied.
B) the quantities of all resources can be varied. √
C) the quantities of all resources are fixed.
D) none of the above is correct.
Figure-1
In figure-1, the total fixed cost curve is curve
A) A.
B) B.
C) C. √
D) none of the curves in the figure
In figure-1, the total variable cost curve is curve
A) A.
B) B. √
C) C.
D) none of the curves in the figure
In figure-1, the total cost curve is curve
A) A. √
B) B.
C) C.
D) none of the curves in the figure
In figure-1, the relationship between costs indicates that the distance between curves
A) A and B is equal to the fixed cost. √
B) A and B is equal to the variable cost.
C) B and C is equal to the fixed cost.
D) B and C is equal to the average total cost.
Which of the following statements is correct?
A) ATC = AVC - AFC
B) ATC = AFC - AVC
C) ATC = AVC + AFC √
D) None of the above.
Figure-2
In figure-2, the marginal cost (MC) curve is curve
A) 1. √
B) 2.
C) 3.
D) 4.
In figure-2, the average fixed cost curve is curve
A) 1.
B) 2.
C) 3.
D) 4 √
In figure-2, the average variable cost curve is curve
A) 1.
B) 2.
C) 3. √
D) 4
In figure-2, the average total cost curve is curve
A) 1.
B) 2. √
C) 3.
D) 4
In figure-2, curves 1, 2, 3, and 4 represent the:
A) ATC, MC, AFC, and AVC curves respectively.
B) MC, AFC, AVC, and ATC curves respectively.
C) MC, ATC, AVC, and AFC curves respectively. √
D) ATC, AVC, AFC, and MC curves respectively.
A market is perfectly competitive if
A) there are many companies in it, each selling different product.
B) there are only one company which is selling different product.
C) there are many companies in it, each selling identical product. √
D) there are few companies in it, which is selling identical product.
A perfectly competitive market in which
A) firms are price taker.
B) no restrictions to entry and exit in the industry .
C) many sellers and buyers and each firm produce similar product.
D) all of the above. √
The goal of a perfectly competitive firm is to maximize its
A) normal profit.
B) revenue.
C) output.
D) economic profit. √
A perfectly competitive firm maximizes its economic profit if it produces that number of
products where:
A) total revenue (TR) = total cost (TC).
B) average total cost(ATC) = average variable cost (AVC).
C) average revenue (AR) = average total cost (ATC).
D) marginal revenue (MR) = marginal cost (MC). √
An example of a fixed cost (FC) in the short run is
A) a building rent.
B) machine purchase. √
C) an employee salary.
D) none of the above.
An example of a variable cost in the short run is
A) raw materials costs.
B) labor costs.
C) utilities bills
D) all of the above. √
Which of the following is always true for a perfectly competitive firm?
A) P = MR√
B) P = ATC
C) MR = ATC
D) P = AVC
If MR > MC then
A) economic profit increases if output increases.√
B) economic profit decreases if output increases
C) no change in economic profit if output increase
D) none of the above
If MR < MC then
A) economic profit increases if output increases.
B) economic profit decreases if output increases √
C) no change in economic profit if output increase
D) none of the above
If MR = MC then
A) economic profit decreases if output increases.
B) economic profit decreases if output decreases
C) economic profit maximum
D) all of the above √
ATC
Figure-3
The figure-3 indicates that the firm is
A) in loss.
B) making profit.
C) in break-even point √
D) none of the above
Figure-4
The figure-4 indicates that the firm is
A) in loss.
B) making profit. √
C) in break-even point
D) none of the above
Figure-5
The figure-5 indicates that the firm is
A) in loss. √
B) making profit.
C) in break-even point
D) none of the above
Part-2: Answer the Following with True or False and
Correct the Underlined Part in if it is False
a.
In a perfectly competitive market, many firms sell an identical product. (True)
b.
A perfectly competitive firm maximizes its profit by producing the level of output where
MR (marginal revenue) equals the MC (marginal cost). (True)
c.
In perfect competition, AR (average revenue) for the firm equals P (the market price).
(True)
d.
A perfectly competitive firm definitely will shut down in the short run if its price (P) is
below its average total cost (ATC). (False) Correction: below AVC
e.
Variable cost (TVC) is equal Total cost (TC) divided by Total fixed cost (TFC). (False,
correction: TVC = TC-TFC)
f.
Average variable cost (AVC) is equal to the change in Total variable cost (TVC) divided
by change in output (Q). (True)
g.
A firm's total cost (TC) in the short run is the sum of its total fixed cost (TFC) plus its
total variable cost (TVC). (True)
h.
The long run is a period of time during which all costs are variable costs. (True)
i.
The short run is a period of time during which all costs are fixed costs. (False, Correction:
at least one cost is fixed cost)
j.
At zero units of output a firm's variable costs are zero. (True)
k.
At zero units of output a firm's fixed costs are zero. (False, correction: fixed costs are not
zero)
l.
In the figure mentioned below: The average product of the second worker is 5 units.
(True)
m.
In the figure above, the marginal product of the second worker is 5 units. (True)
n.
In the figure above, the marginal product of 1st worker is 5 units. (True)
o.
At point d in the above figure, the average product of labor equals 3.75units. (True).
p.
Perfectly competitive firms are price takers. (True).
q.
A perfectly competitive firm produces so that its marginal revenue (MR) equals the price
(P). (True).
r.
A perfectly competitive firm produces so that its marginal cost (MC) equals the price (P).
(True).
s.
A perfectly competitive firm definitely will shut down in the short run if its price (P) is
below its average total cost (ATC). (False, Correction: average variable cost (AVC)
t.
At the shutdown point, the firm is indifferent between producing and shutting down
temporarily. The firm incurs a loss equal to TC. (False, Correction: Total fixed costs
(TFC)
u.
In Perfect Competition market, firm will produce in the short-run if it can realize a loss
less than its total fixed costs (TFC). (True)
v.
When the marginal product of labor (MP) more than the average product of labor (AP),
the average product (AP) must increase when employment increases. (True)
w.
When the marginal product of labor (MP) is below the average product of labor (AP), the
average product must increase when employment increases.(FALSE, correction:
more)
x.
When marginal product (MP) is at its minimum point, marginal cost (MC) is at its
minimum point. (False, correction: maximum)
y.
A firm's total cost (TC) in the short run is the sum of its total fixed cost (TFC) plus its
marginal cost (MC). .(FALSE, correction: Total variable costs (TVC)
z.
In the short run, average fixed cost (AFC) is constant as output increases. .(FALSE,
correction: decrease)
aa.
The vertical distance between the average variable cost (AVC) curve and the average
total cost (ATC) curve equals average fixed cost (AFC).(TRUE)
bb.
Total variable cost (TVC) is the same at each output level. (False, correction: total fixed
cost (TFC)
cc.
In the graph shown above, the ‘Economic Loss’ is at the output from 4 to 12 units. (False,
correction: economic profit)
dd.
In the graph shown above, the ‘Economic Loss’ is after the output level 12 units. (True)
ee.
The satisfaction that a person receives from consuming a good or service is called utility.
(True)
ff.
The less the substitutes for a good or service, the more elastic are the demand for it.
(False, correction: less elastic)
gg.
A consumer's total utility is maximized when the marginal utility per dollar (the marginal
utility from a good divided by its price) for all goods are equal. (True)
hh.
The total revenue does not change for the Unit elastic demand. (True)
ii.
The price elasticity of demand measures the responsiveness of the quantity demanded to
changes in income. (True/False) (correction: price)
jj.
If the income elasticity of demand is greater than 1, demand is income elastic and the
good is a normal good. (True)
kk.
The cross elasticity of demand for a substitute is negative and for a complement is
positive. (True/False) (correction: positive, negative)
Part-3: Short Answer Questions
A. What is utility and Marginal utility?
The satisfaction that a person receives from consuming a good or service is called utility (total
utility).
Additional utility from an additional unit of consumption is called marginal utility.
Al-Baik
Khalid's total
(Units per week)
utility
0
0
1
10
2
16
3
20
4
23
5
25
B. From the above table, calculate the marginal utility (MU) from the fifth unit of AlBaik
MU for 5th unit of Al-Baik = Change in total utility/ Change in total units = (25-23)/(5-4) = 2
utils.
Labor
Total product
(workers)
0
0
1
10
2
25
3
45
4
60
5
70
C. Using the data in the above table, calculate the marginal product (MP) of the 3rd
worker, the average product (AP) of 4 employees?
MP for 3rd worker = Change in total products/ Change in total workers = (45-25)/(3-2) =
20units
AP for 4 workers = Total products/Total workers = 60/4 = 15units
Al-Baik
(Units per
week)
1
2
3
4
5
Price of
Al-Baik
(P al-baik = $8)
Marginal
utility from
Al-Baik
(MUal-baik)
56
32
24
18
12
Quantity of
Pizza
1
2
3
4
5
Price of
Pizza
(P pizza = $4)
Marginal
utility from
Pizza
(MUpizza)
40
28
20
12
8
D. Given the data in the above table, income of $40 per week, what are the marginal
utilities per dollar spent on the 5th Al-Baik and 5th Pizza.
MUal baik/Pal-baik for 5th unit of Al-Baik = 12/8 = 1.5 utils
MUpizza/Ppizza for 5th unit of Pizza = 8/4 = 2 utils
Quantity sold
Price
5
$15
6
$15
7
$15
E. In the above table, if the firm sells 6 units of output, how much its total revenue is?
Total revenue = $15 x 6 = $90
F. In the above table, if the quantity sold by the firm rises from 6 to 7, how much its
marginal revenue (MR) from 7th unit?
The marginal revenue (MR) from 7th unit = (change in total revenue/ change in total
sells)
Here total revenue from 7 units = 15 x 7 = $105
Total revenue from 6 units = 15 x 15 = $90
The marginal revenue (MR) from 7th unit = (105 – 90)/(7-6) = 15/1 = $15
G. What is the relationship between MP and MC?
Whenever MP increase then MC must decrease.
Whenever MP decrease then MC must increase.
Whenever MP is maximum then MC is minimum.
H. What is diminishing marginal utility?
The principle of diminishing marginal utility implies a decrease in marginal utility as the
quantity consumed increases
I.
i.
ii.
iii.
What is the effect on the economic profit due to the changes in the output? If
MR > MC
MR < MC
MR = MC
Answer:
J. Explain break-even point, economic profit and economic loss in short-run perfect
competition market.
Answer: