Practice Exam 2
1.
Profits are maximized (or losses minimized) at the output level where
a. marginal revenue exceeds marginal cost by the largest amount
b. fixed costs are minimized
c. marginal revenue is equal to marginal cost
d. marginal cost is at a minimum
Data for PDQ Aviation
Number of flights per day
Daily Total Costs
0
$1000
1
$1100
2
$1150
3
$1250
4
$1400
5
$1600
6
$1850
7
$2150
8
$2500
9
$2900
10
$3400
Use the above information to answer questions 4 - 6.
2.
What are PDQ Aviation's fixed costs?
a. $1100 per day
b. $100 per day
c. $1000 per day
d. $1150 per day
e. fixed costs cannot be determined from the information given.
3.
What is the marginal cost of the 5th daily flight?
a. $200
b. $520
c. $250
d. $150
e. $320
4.
Suppose PDQ is currently operating 4 flights a day and is considering increasing the
number of daily flights to 5. Regardless of the number of flights offered each day, each
flight carries 5 passengers who pay $70 each for tickets. Should the firm offer the
additional flight?
a.
b.
c.
d.
e.
Yes, the 5th daily flight would generate $350 in additional revenue but add only
$200 to costs
Yes, the 5th daily flight would generate $200 in additional revenue but add $350
to costs
No, the 5th daily flight would generate $350 in additional revenue but add only
$200 to costs
No, the 5th daily flight would generate $200 in additional revenue but add $350
to cost
No, the firm should shut down and limit its loss to its fixed costs
5.
Fixed costs
a. increase as output increases
b. decline as output increases
c. can be avoided by reducing output to zero
d. do not vary with output
e. graph as a "U" shaped curve
6.
If a purely competitive firm were to raise the price of its product by a small amount, it
would
a. lose all of its customers to other sellers in the industry
b. lose some of its customers but not all of them, since some customers would still
prefer its product
c. earn a slightly higher profit
d. force other sellers to raise their prices
e. earn a much higher profit
7.
If, at the present output level, price exceeds marginal cost, the purely competitive firm
a. is maximizing its profit or minimizing its loss
b. should increase output to maximize its profit or minimize its loss
c. should reduce output to maximize its profit or minimize its loss
d. should increase its price to maximize its profit to minimize its loss
e. is clearly incurring a loss and should leave the industry
8.
Under conditions of pure competition, if the representative firm is earning a short run
profit
a. additional firms will tend to enter the industry in the long run, shifting the
industry supply curve to the left
b. firms will tend to eave the industry in the long run, shifting the industry supply
cure to the left
c. additional firms will tend to enter the industry in the long run, depressing the
equilibrium price
d. industry demand will tend to decline in the long run until all economic profits
have been eliminated
e. firms will tend to leave the industry in the long run, increasing the equilibrium
price
9.
In the short run, a firm should shut down rather than produce output
a. whenever it cannot cover all of its costs, fixed and variable
b. whenever it is incurring a loss
c. if the price it receives for its product is less than average variable cost
d. if the price it receives for its product is less than average total cost
e. whenever the firm is unable to cover its fixed costs
10. Utilizing a graph, it is impossible to determine whether a firm is earning a profit or a loss
without including the firm's
a. average fixed cost curve, average total cost curve and average variable cost
curve.
b. average total cost curve, average variable cost curve, demand curve and marginal
costs curve.
c. average total cost curve, demand curve and marginal costs curve.
d. average variable cost curve, demand curve and marginal costs curve.
e. total revenue curve, total cost curve, demand curve and marginal costs curve.
11. The essence of allocative efficiency is
a. the production of the most-desired products in the proper quantities
b. production at the lowest average total cost
c. achieving an economic profit
d. production at the lowest average variable cost
e. production of the fairest mix of products
12. Total revenue can be computed by
a. Multiplying the selling price of the product by the number of units sold.
b. Subtracting total cost from total revenue.
c. Multiplying average total cost by the number of units sold.
d. Subtracting total variable cost from total revenue.
e. Multiplying the profit per unit by the number of units sold.
13. Which of the following is true?
a. The average variable cost curve intersects the marginal cost curve at the latter’s
minimum.
b. The marginal cost curve intersects the average total cost curve at the latter’s
minimum.
c. The average fixed cost curve graphs as a horizontal straight line.
d. The average fixed cost curve intersects the average variable and average total
cost curves at their minimums.
Answer the next 3 questions on the basis of the following information
Quantity
0
1
2
3
4
Total Cost
$10
$18
$23
$30
$42
14. The firm’s fixed cost is
a. $5
b. $42
c. $23
d. $10
e.
15. The marginal cost of the third unit would be
a. $30
b. $7
c. $10
d. $5
e.
16. If the firm produced three units, average total cost would be
a. $10
b. $30
c. $7
d. None of the above.
17. If hiring an additional worker yields a negative marginal return, this means that
a. hiring the additional worker will still raise total output, but at a diminishing rate.
b. hiring the additional worker will actually reduce total output.
c. hiring the additional worker will increase average product.
d. the additional worker will be paid a lower wage than other employees.
Use Figure 2 to answer questions 2 and 3.
18. Going from 8 workers to 9 workers illustrates
a. decreasing average returns.
b. diminishing marginal returns.
c. negative returns.
d. d. increasing returns.
19. Rational firms would never hire more than how many workers?
a. 8
b. 12
c. 22
d. Indeterminate
Use the following diagram to answer the next 3 questions
20) At output level Q, total cost equals:
a) area ADQO
b) area ADEB
c) area ADFC
d) area BEQO
21) At output level Q, average fixed cost equals:
a) QF
b) ED
c) FE
d) QD
e) both a) and b)
22) At output level Q, average variable cost equals:
a) QF
b) FE
c) QD
d) QE
23) A firm's average fixed cost when producing 2,000 units of output equals $10. When only
1,000 units of output are produced:
a) AFC must still equal $10
b) APC must equal $20
c) APC must equal $5
d) marginal cost must equal $20
e) marginal cost must equal $10
Use the following diagram to answer the next two questions
24) When the market price equals P5, the firm should produce output:
a) Q5, operating at a loss
b) Q5, earning an economic profit
c) Q6, operating at a loss
d) Q6, earning a normal profit
e) Q6, earning a positive economic profit
25) When the market price equals P1, the firm should produce output:
a) Q1
b) Q2
c) Q3
d) Q4
e) none of the above
Answers
1.c
2.c
3.a
4.a
5.d
6.a
7.b
8.c
9.c
10.c
11.a
12.a
13.b
14.d
15.b
16.a
17. b
18. a
19. c
20. a
21. e
22. d
23. b
24. e
25. e