Izmir University of Economics
Department of Economics
Econ 101 - Principles of Microeconomics
PROBLEM SET 7
Multiple Choice Questions
1) Which of the following cost measures does not depend on the level of output chosen?
a. Total cost
b. Variable cost
c. Fixed cost
d. None of the above
2) A factory produces 1,000 radios a year. Average variable cost (AVC) is $10 and total
fixed cost is $5,000. Thus, the factory’s total cost (TC)
a. Equals $5,010.
b. Equals $6000
c. Equals $15000
d. Equals $5,000,000
3) Refer to the graph below. Which distance from point D is equal to total fixed cost?
a. The distance from D to C.
b. The distance from D to A.
c. The distance from D to B.
d. None of the above. Fixed cost cannot be measured from point D.
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Izmir University of Economics
Department of Economics
Econ 101 - Principles of Microeconomics
4) The explanation for why marginal cost is positive and rising in the short run is
_______ marginal product of labor in the production process.
a. a zero
b. a constant
c. an increasing
d. a diminishing
5) If the marginal cost curve is below the average variable cost curve, then
a. average variable costs are increasing.
b. average variable costs are decreasing.
c. marginal cost must be decreasing.
d. average variable costs could either be increasing or decreasing.
6) A characteristic of perfect competition is that
a. It is difficult for new firms to enter the industry
b. The firm can influence the product’s price
c. The firms in the industry produce a homogenous product
d. The firm produces a large share of the industry’s total product
7) In perfect competition, the marginal revenue curve
a. and the demand curve facing the firm are identical.
b. is always above the demand curve facing the firm.
c. is always below the demand curve facing the firm.
d. intersects the demand curve when marginal revenue is minimized.
8) Refer to the graph below. A soybean farmer’s profit-maximizing level of output is
________ units of output.
a. 200
b. 700
c. 1000
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d. 1400
Izmir University of Economics
Department of Economics
Econ 101 - Principles of Microeconomics
9) Refer to the graph in the previous question. If this farmer is producing the profitmaximizing level of output, her profit is
a. $0.
b. $2800.
c. $3000.
d. $12000.
10) Refer to the Table below. Assume that fruit baskets are sold in a perfectly competitive
market. The market price of a fruit basket is $22. To maximize profits, Exotic Fruit
should sell __________ fruit basket(s).
a. Three
b. Four
c. Five
d. Six
11) If a firm's demand curve is perfectly elastic, then at the profit maximizing level of
output
a. P = MR = MC.
b. P > MR > MC.
c. P < MR < MC.
d. P > 0 and MR = 0.
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Izmir University of Economics
Department of Economics
Econ 101 - Principles of Microeconomics
Essay Questions
1) Explain the relationship between marginal cost and average variable cost. Draw the
appropriate graph.
If MC is less than AVC, then AVC is decreasing. If MC is greater than AVC, then
AVC is increasing. If MC = AVC, then AVC is minimized.
2) Refer to the chart below to answer the following questions.
Output
0
1
2
3
4
5
TFC
$25
25
25
25
25
25
TVC
0
10
15
25
45
75
MC
10
5
10
20
30
P=MR
20
20
20
20
20
20
TR
TC
0
20
40
60
80
100
ATC
25
35
40
50
70
100
35
20
16.67
17.5
20
a) Complete the blank columns.
b) How many unit of output firm will sell to maximize its profit? How much profit will it
make?
MR=MC=20 so Output=4 then Profit=TR-TC=80-70=$10
c) Calculate AVC and AFC when output is 4 units.
AVC=TVC/q=45/4= $11.25
AFC=TFC/q=25/4= $6.25
d) Suppose the market price falls to $10 per unit of output. At this price, how many units of
output will the firm sell?
P=MR=MC then Output=3
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