Econ 101, section 6, S05
Schroeter
Exam #4, Red
Choose the single best answer for each question.
1. The amount of money that a firm receives from the sale of its output is called
a. total gross profit.
b. net profit.
*. total revenue.
d. explicit cost.
2. Which of the following costs would be regarded as an implicit cost?
a. wages, salaries, and benefits paid to employees of the firm.
*. the opportunity cost of financial capital invested in the firm.
c. interest paid on a loan that the firm obtained from a commercial bank.
d. the cost of raw materials.
3. Which of the following expressions is correct?
*. accounting profit = economic profit + implicit costs
b. accounting profit = total revenue - implicit costs
c. economic profit = accounting profit + explicit cost
d. economic profit = total revenue - implicit cost.
4. In a factory of fixed size, Gary is able to produce 2500 gizmos per day when he
employs 3 workers and 3200 gizmos per day when he employs 4 workers. Which of the
following is consistent with positive but diminishing marginal product of labor? When
Gary employs 5 workers, he can produce
a. 3000 gizmos per day.
*. 3600 gizmos per day.
c. 4000 gizmos per day.
d. none of the above.
5. A firm's marginal cost curve is upward-sloping. At an output of 50 units/day, marginal
cost = $2.00/unit. At an output of 75 units/day, marginal cost = $3.00/unit. The firm's
average total cost at an output of 75 units/day is
a. less than $2.00/unit.
b. greater than or equal to $2.00/unit and less than $3.00/unit.
c. greater than or equal to $3.00/unit.
*. any one of the above is possible.
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6. At an output rate of 24 units/day, a firm's average total cost and marginal cost are
$50/unit and $75/unit respectively. Which of the following is the best estimate of the
firm's average total cost at an output rate of 25 units/day?
a. $48/unit.
*. $51/unit.
c. $55/unit.
d. $62.50/unit.
7. Which of the following cost concepts is best described as "the increase in total cost that
arises from an extra unit of production?"
a. average variable cost.
*. marginal cost.
c. fixed cost.
d. sunk cost.
The following table contains some figures for a firm's fixed cost (FC), variable cost (VC),
and total cost (TC) for various output levels (Q). Use this information to answer
questions 8, 9, and 10.
Q
units/day
5
10
15
20
25
FC
VC
$/day
2600
TC
4100
3300
8100
8100
2600
13,700
8. Total cost at Q = 10 units/day is
a. $3300/day.
b. $4100/day.
*. $5900/day.
d. none of the above.
9. Average variable cost at Q = 20 units/day is
a. $130/unit.
b. $275/unit.
*. $405/unit.
d. $540/unit.
10. Over the output range from 20 to 25 units/day, the firm's marginal cost is
approximately
a. $444/unit.
b. $535/unit.
c. $548/unit.
*. $600/unit.
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11. Of the following characteristics of competitive markets, which one(s) is(are)
necessary for firms to be price takers?
(i) There are many sellers, each one small relative to the size of the market.
(ii) Firms can freely enter or exit the market.
(iii) The goods offered by the various sellers are largely the same.
a. (i) and (ii) only.
*. (i) and (iii) only.
c. (ii) only.
d. All are necessary.
12. A competitive firm faces a price of $3.00/unit for its product. It is currently operating
where marginal cost is $3.00/unit, average variable cost is $2.50/unit, and average total
cost is $3.50/unit. To maximize profit (or minimize loss) in the short-run, the firm should
*. maintain its current output.
b. shut down.
c. decrease output but not shut down.
d. increase output.
13. At its current production rate of 300 gizmos/day, Gilda's Gizmos has marginal
revenue of $45.00/gizmo and marginal cost of $40.00/gizmo. If the firm's current profit
is $800/day, approximately how much profit would it earn if the production rate were
increased to 301 gizmos/day?
a. $845/day.
*. $805/day.
c. $760/day.
d. Impossible to determine without more information. (We need to know whether or not
Gilda's Gizmos operates in a competitive market.)
14. A profit-maximizing firm's fixed costs are sunk in the short-run. Suppose that the
firm chooses to shut down in the short run. The firm's revenue
a. is less than its fixed cost.
*. is less than its variable cost.
c. is greater than its variable cost but less than its total cost.
d. either b or c, depending on the firm's beliefs about future market conditions.
15. A competitive industry is in long-run (zero-profit) equilibrium to begin. Then there is
a permanent increase in demand. The short-run response to the demand shift will include
a. an increase in price.
b. an increase in the representative firm's output.
c. an increase in the industry's output.
*. all of the above.
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16. A competitive industry is in long-run (zero-profit) equilibrium to begin. Then there is
a permanent increase in demand. Which of the following will be a feature of the new
zero-profit equilibrium that will eventually be reached in the long-run?
a. Industry output will be the same as in the original long-run equilibrium.
b. Price will be higher than in the original long-run equilibrium.
*. There will be more firms in the industry than in the original long-run equilibrium.
d. all of the above.
17. Current conditions in the competitive market for widgets are such that an incentive
exists for new widget manufacturing firms to enter the market. The entry of these new
firms will
a. drive up the price of widgets.
*. drive down the profits of firms already in the market.
c. shift the industry supply of widgets to the left.
d. shift the market demand for widgets to the right.
18. A firm's marginal cost is less than its average total cost over the entire range of output
from 100 to 200 units/day. It must be the case that
a. marginal cost is decreasing over this output range.
*. average total cost is decreasing over this output range.
c. average total cost must reach its minimum somewhere between 100 and 200 units/day.
d. marginal cost must reach its minimum somewhere between 100 and 200 units/day.
19. Pharmaceutical companies are given patents on the new drugs they discover in order
to
a. allow them to charge a price that is equal to marginal cost.
b. discourage new firms from entering the market.
*. encourage research on new drugs.
d. all of the above.
20. If a profit-maximizing monopolist faces a downward sloping market demand curve,
its
a. average revenue is less than the price of the product.
b. average revenue is less than marginal revenue.
*. marginal revenue is less than the price of the product.
d. marginal revenue is greater than the price of the product.
21. A monopolist can sell 100 widgets/day when it charges a price of $10/widget. In
order to sell 101 widgets/day, the monopolist would have to reduce its price to
$9.95/widget. What is the monopolist's marginal revenue for the 101st widget/day?
a. $9.95/widget.
b. $7.45/widget.
*. $4.95/widget.
d. $0.05/widget.
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22. At its current output level, a monopolist finds that its price is $5.00/unit, marginal
cost and average total cost are both $4.00/unit, and marginal revenue is $3.00/unit. To
maximize profit (or minimize loss) in the short-run, the monopoly should
a. maintain its current output level.
b. increase its output level.
c. shut down; that is, reduce its output level to zero.
*. reduce its output level but not shut down.
23. When a single firm can supply a product to an entire market at a lower cost than
could two or more firms, the industry is called a
a. patent monopoly.
*. natural monopoly.
c. resource monopoly.
d. constrained monopoly.
24. A competitive industry is monopolized; in other words, all of the firms in the industry
are purchased by one person who proceeds to operate them as a single, profit-maximizing
firm. The effects of this change in market structure would include
a. an increase in price and an increase in the market's total surplus.
b. an increase in the quantity of output and a decrease in the market's consumer surplus.
*. an increase in price and a decrease in the quantity of output.
d. none of the above.
25. In 1998, the U.S. government launched an antitrust case against the software giant,
Microsoft. Which of the following is the best description of the outcome of that case?
a. By court order, the original Microsoft was split into two separate companies.
b. Microsoft was acquitted of all antitrust charges against it.
*. Microsoft agreed to a settlement, accepting some restrictions on their business
practices.
d. None of the above. The federal case against Microsoft is still making its way through
the courts.
26. When a firm sells the same good at different prices to different customers (and there
is no cost-justification for the price differences) we say that the firm is engaging in
a. parity pricing.
b. quality-adjusted pricing.
c. price attenuation.
*. price discrimination.
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Questions 27 and 28 refer to the following diagram of demand, marginal cost, and
marginal revenue curves for a monopolist.
($/unit)
Marginal
cost
20
16
10
Demand
MR
100
140
200
(units/day)
27. To maximize its profit, the monopolist would choose which of the following
outcomes?
a. 100 units/day of output and a price of $10/unit.
b. 140 units/day of output and a price of $16/unit.
c. 200 units/day of output and a price of $10/unit.
*. 100 units/day of output and a price of $20/unit.
28. To maximize total surplus, a benevolent social planner would choose which of the
following outcomes?
a. 100 units/day of output and a price of $10/unit.
*. 140 units/day of output and a price of $16/unit.
c. 200 units/day of output and a price of $10/unit.
d. 100 units/day of output and a price of $20/unit.
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Questions 29 and 30 refer to the following information. A monopolist faces three groups
of potential customers who differ in their willingness to pay (WTP) for their first unit of
the monopolist's product. (No one is willing to pay anything for a second, third, . . . etc.
unit of the monopolist's product.) The "High WTP" group consists of 300 people, each
with WTP = $6. This and corresponding information for the other two groups is
summarized in the table below.
Group
Number of people
in group
"High WTP"
"Medium WTP"
"Low WTP"
300
300
600
WTP for first unit
of monopolist's
product ($)
$6
$4
$2
The monopolist produces the product at zero fixed cost and constant marginal cost =
$1/unit.
29. If the monopolist were required to offer a uniform price, he would charge a price of
a. $6/unit and earn a profit of $2400.
b. $6/unit and earn a profit of $1500.
*. $4/unit and earn a profit of $1800.
d. $2/unit and earn a profit of $2400.
30. If the monopolist were allowed to price discriminate, the maximum profit he could
earn would be
a. $2400.
*. $3000.
c. $3600.
d. $4800.