Answer Key on Last Page!
1. In general, the primary goal of business is to ___________.
A)
B)
C)
D)
evade taxes
maximize profit
steal from customers
minimize revenue
2. A firm’s total economic profit is equal to __________.
A)
B)
C)
D)
its total cost minus the price it charges
total revenue minus its accounting costs
total revenue minus its total costs, both explicit and implicit
its quantity produced times the price it charges
3. Richard decides to start his own computer repair company. His next best alternative was to
accept a job with a different computer repair company that would have paid him $50,000 per
year. During its first year in operation, Richard’s new company brings in $170,000 in total
revenue at a total accounting cost of $100,000. Assume that Richard does not take a salary from
his new company. How much did Richard earn in economic profit during his first year in
business?
A)
B)
C)
D)
$50,000
$120,000
$20,000
$70,000
4. Which of the following statements about short and long run costs is true?
A)
B)
C)
D)
In the long run, all costs are variable.
In the short run, all costs are fixed.
In the long run, some costs are fixed and some are variable.
In the short run, all costs are variable.
5. To maximize profit, firms in all market structures produce the quantity of output at which
__________.
A)
B)
C)
D)
total revenue equals total cost
marginal revenue equals marginal cost
marginal revenue equals average total cost
price equals marginal revenue
6. Suppose that an appliance manufacturing company in Xiamen, China produces 10 million
toasters per year at an average total cost of $10 per toaster. The company decides to expand its
factory and workforce and increase production to 20 million toasters per year. As a result, its
long run average total cost falls to $8 per toaster. This firm can be said to be exhibiting
_____________.
A)
B)
C)
D)
diseconomies of scale
constant returns to scale
economies of scale
diminishing marginal returns
Total
Output
0
1
2
3
4
5
6
Total
Cost
$10
$15
$19
$22
$28
$36
$46
The table above represents a firm’s total cost of production at various levels of output. Use it to
answer questions 7-10.
7. What is the marginal cost of producing the 4th unit?
A)
B)
C)
D)
$6
$7
$8
$28
8. What is the firm’s total fixed cost?
A)
B)
C)
D)
$0
$10
$46
$60
9. What is the average variable cost of producing 6 units?
A)
B)
C)
D)
$1.66
$6
$7.66
$46
10. Which of the following types of costs does not change as output increases?
A)
B)
C)
D)
marginal cost
variable cost
total cost
fixed cost
11. Which of the following would most likely be considered a fixed cost for a pizza restaurant in the
short run?
A)
B)
C)
D)
The cost of the cheese used to make the pizza
The cost of the tomato sauce used to make the pizza
The cost of paying the monthly rent to use the building in which the restaurant operates
The cost of the flour used to make the dough for the pizza
12. A perfectly competitive firm’s marginal revenue ____________.
A)
B)
C)
D)
is constant at the market price
decreases as more units are sold
increases as output increases
curve is steeper than its demand curve
13. Which of the following is NOT a characteristic of a perfectly competitive market?
A)
B)
C)
D)
It is easy for new firms to enter the market.
Every firm sells a product that is identical to its competitors’ products.
An individual firm can increase profit by raising its price.
Individual firms have no incentive to advertise because all consumers are aware that every
firm’s product is identical to the next firm’s product.
14. Suppose that many firms in a perfectly competitive market are currently earning short-run
positive economic profits. Which of the following best describes what will happen to bring this
market back to long run equilibrium?
A) Each firm’s average total cost curve will shift downward due to an increase in efficiency.
B) The market price will increase due to a decrease in the number of competitors.
C) The market supply curve will shift to the right due to firms entering the industry, driving
down the market price.
D) The market supply curve will shift to the left due to firms exiting the industry, driving up the
market price.
15. Suppose that many firms in a perfectly competitive market are currently suffering economic
losses in the short run. Which of the following best describes what will happen to bring this
market back to long run equilibrium?
A) The market supply curve will shift to the right due to firms entering the industry, driving
down the market price.
B) The market supply curve will shift to the left due to firms exiting the industry, driving up the
market price.
C) Each firm’s average total cost curve will shift upward to a decrease in efficiency.
D) The market price will decrease due to increased competition.
16. In long run equilibrium, a perfectly competitive firm will earn _________________.
A)
B)
C)
D)
negative economic profit
zero accounting profit
zero economic profit
positive economic profit
A profit-maximizing perfectly competitive firm’s cost curves are depicted in the graph above. Use the
graph to answer questions 17-20.
17. When the market price is $_____, this firm is in long run equilibrium.
A)
B)
C)
D)
E)
15
20
25
30
40
18. If the market price falls below ______, this firm will shut down in the short run to minimize
losses.
A)
B)
C)
D)
E)
15
20
25
30
40
19. Which of the following points does NOT lie on the firm’s short run supply curve?
A)
B)
C)
D)
E)
J
K
L
M
N
20. If the market price is $25, the firm will earn _________ in total revenue and _________.
A)
B)
C)
D)
E)
$25; earn zero economic profit
$250; earn zero economic profit
$25; earn positive economic profit
$250; earn positive economic profit
$250; suffer an economic loss
21. A firm is productively efficient if it is producing the quantity of output at which ________.
A)
B)
C)
D)
average total cost is at its minimum
marginal cost equals price (demand)
marginal cost is at its minimum
average variable cost is at its minimum
22. A firm is allocatively efficient if it is producing the quantity of output at which ________.
A)
B)
C)
D)
average total cost is at its minimum
marginal cost equals price (demand)
marginal cost is at its minimum
average variable cost is at its minimum
23. In long run equilibrium, a perfectly competitive firm is ___________.
A)
B)
C)
D)
productively efficient but not allocatively efficient
allocatively efficient but not productively efficient
neither allocatively nor productively efficient
both allocatively and productively efficient
24. Collusion and mutual interdependence are typically observed in which market structure?
A)
B)
C)
D)
Perfect competition
Monopoly
Oligopoly
Monopolistic competition
A monopolist’s cost and revenue curves are depicted in the graph above. Use it to answer
questions 25-26.
25. To maximize profit, the monopolist will produce ________ units of output.
A)
B)
C)
D)
E)
4
6
7
8
9
26. When it produces the profit-maximizing output, the monopolist will charge ________.
A)
B)
C)
D)
E)
$12
$14
$16
$18
$20
27. Which of the following is an example of a natural monopoly?
A)
B)
C)
D)
The local public water company
Google
De Beers Diamonds
Filiberto’s Mexican Food
28. Suppose 3M Company currently has a monopoly on the market for Post-It Notes. If 3M were
replaced by a perfectly competitive market, the new market price of Post-It notes would be
__________ and the quantity sold would be ____________.
A)
B)
C)
D)
lower; lower
lower; higher
higher; higher
higher; lower
29. Which of the following is NOT a characteristic of a monopoly?
A)
B)
C)
D)
The firm has no control over the price it charges.
There is only one firm in the market.
The firm faces a downward sloping demand curve.
There are high barriers to entry into the market.
30. A monopolist maximizes profit___________.
A) by charging a price that equals its marginal cost of production
B) by producing the quantity of output at which the average total cost curve intersects the
demand curve
C) by charging a price equal to its average total cost
D) by producing the quantity of output at which marginal revenue equals marginal cost
31. Which of the following is true of a monopolistically competitive market?
A)
B)
C)
D)
Firms are price takers and spend very little, if anything, on advertising.
There is one large firm in the market and it sells a product with no close substitutes.
There are a huge number of firms selling identical products at a constant price.
There are many firms with easy entry and exit but each firm sells a differentiated product.
32. Which of the following statements about a monopolistically competitive market is false?
A) Firms in the market use non-price competition.
B) Firms in the market attempt to differentiate their products from their rivals with unique
product attributes.
C) Firms in the market gain nothing from advertising.
D) There are low barriers to entry into the market.
33. Which of the following statements about an oligopoly market is false?
A)
B)
C)
D)
There are low barriers to entry into the market.
There are only a few large firms in the market.
Firms in the market are mutually interdependent.
Game theory is useful in analyzing the strategies of firms competing in the market.
34. Mutual interdependence means that__________.
A)
B)
C)
D)
each firm’s quantity of output depends on the price that it charges for its product
each firm produces a product identical to the products produced by its rivals
each firm must consider the actions of its rivals when it determines its price policy
each firm faces a perfectly elastic demand curve for its product
35. Which of the following statements about collusion is false?
A)
B)
C)
D)
Collusion often results in the incentive to cheat
Collusion allows firms to increase profits
Collusion is commonly observed in perfectly competitive markets
Collusion involves cooperating with rival firms instead of competing with them
Answer Key
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B
C
C
A
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A
B
B
D
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A
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B
C
D
B
A
E
A
B
D
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C
B
D
A
B
A
D
D
C
A
C
C