Practice Questions: Micro Test 2

 

1. In the short run, as its output increases, a firm's average costs will eventually increase because of…

        a.   economies of scale.

        b.   diseconomies of scale.

        c.   increasing quantities of capital for each worker to use.

        d.   increasing marginal returns.

        e.   diminishing marginal returns.

 

2. Suppose a company’s property tax increased. What effect will this increase have on the firm's short-run costs?

       

                   Marginal Cost           Average Total Cost       Average Variable Cost

        a.              Increase                       Increase                          Increase        

        b.             Increase                       Increase                         No Effect

        c.             No Effect                     No Effect                        No Effect

        d.            No Effect                      Increase                          Increase

        e.             No Effect                       Increase                         No Effect

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3. At which price and quantity would this perfectly competitive firm operate while earning an economic profit?

           Price      Quantity

        a.              P1        Q1

        b.   P2      Q2

        c.              P3        Q3

        d.   P4      Q4

        e.   none of the above

 

4. If the long-run average total cost (LRATC) of production for a firm rises as output rises due to increasing both plant size and the number of workers, then the firm is experiencing…

        a.   increasing marginal returns.     

        b.   economies of scale.

        c.   constant returns to scale.

        d.   diseconomies of scale.

        e.   diminishing marginal returns

 

5. Marginal revenue is the change in revenue that results from a one unit increase in the…

        a.   variable input.

        b.   variable input price.

        c.   output level.

        d.   output price.

        e.   average revenue.

 

6. In the long-run equilibrium, a perfectly competitive firm experiences…

        a.   a positive economic profit.

        b.   an economic loss.

        c.   a normal profit.

        d.   either a positive economic profit or a normal profit.

        e.   either a normal profit or an economic loss.

 

7. The following table sales of a product over a period of two years.

       

                       Year      Quantity Sold          Price

                       1985          40,000             $14.95

                       1986          20,000             $10.95

 

If it is assumed that the supply and demand curves have the usual slopes and the market was in equilibrium both years, the observed changes in price and quantity would be consistent with…

        a.   an increase in both demand and supply.

        b.   an increase in demand, with supply unchanged.

        c.   an increase in supply, with demand unchanged.

        d.   a decrease in supply, with demand unchanged.

        e.   a decrease in demand, with supply unchanged.

 

 

 


 

8.  Refer to the above diagrams, which represent a purely competitive firm and the industry in which it operates. In the long run we should expect which of the following in terms of the entry and exit of firms from the industry, industry supply, and product price?

     

entry/exit                      market supply       product price

a.   firms enter                    increases               falls

b    firms enter                    decreases              rises

c.   firms enter                    increases               rises

d.   firms exit decreases        rises

      e.   firms exit  decreases                           falls

 

9.  Suppose that the marginal utility you derive from the last hotdog purchased is 50 utils and its price is $1.00.  Also, the marginal utility you derive from the last bottle of soda purchased is 200 utils and its price is $2.00.

a.       You are presently maximizing your total utility from consuming hotdogs and soda.

b.      You can increase your total utility by purchasing more hotdogs and less soda.

c.       You can increase your total utility by purchasing more soda and less hotdogs.

d.      You can increase your total utility by purchasing zero units of both goods.

 

10. If we use the dollar as a unit of measurement of utility, then:

  1. the individual’s demand curve is also her marginal utility curve
  2. the reason the demand curve is negatively sloped is because an individual experiences a decrease in marginal utility as she consumes additional units of a good
  3. both a and b
  4. none of the above

 

Questions 11 and 12 refer to the following Table.

 

 

 

Apples

 

Marginal Utility

 

 

 

 

0

 

0

 

 

 

 

1

 

8

 

 

 

 

2

 

6

 

 

 

 

3

 

1

 

 

 

 

4

 

-2

 

 

 

11. The total utility of consuming 2 apples is:

  1. 6
  2. 8
  3. 13
  4. 14

 

12. Assuming an individual behaves consistent with the marginal utility theory of consumer behavior, if apples are free, then she would consume how many?

  1. 1
  2. 2
  3. 3
  4. 4

 

13. If I conclude that I should see more movies and go to fewer soccer games, the marginal utility of the last dollar spent on movies is ________ the marginal utility of the last dollar spent on soccer games.

  1. more than
  2. less than
  3. increasing more rapidly than
  4. diminishing more rapidly than

 

14. Fried Freddie left his job as a salesman that paid $30,000 per year, and invested $100,000 (which he could have otherwise used to purchase a government bond yielding 10% per year) to start a restaurant.  His accounting profits for the year were $60,000.  However, from this information we know that his economic profits were:

  1. $20,000
  2. $30,000
  3. $80,000
  4. -$70,000

Questions 15 and 16 refer to the following table, which represents a firm’s short-run production function.

 

 

 

Capital

 

Labor

 

Output

 

 

 

 

5

 

0

 

0

 

 

 

 

5

 

1

 

20

 

 

 

 

5

 

2

 

52

 

 

 

 

5

 

3

 

75

 

 

 

 

5

 

4

 

92

 

 

 

 

5

 

5

 

105

 

 

 

 

5

 

6

 

96

 

 

 

15. Diminishing marginal returns occurs with the addition of labor unit number:

  1. 3
  2. 4
  3. 5
  4. 6

 

16. Even if workers would work for free, a profit maximizing firm would not hire more than ________ units of labor:

  1. 2
  2. 4
  3. 5
  4. 6

 

17. A car-wash company found that, when it employed 50 workers, its output was such that the average product of workers was 50 cars per hour.  In addition, its marginal product of workers was 50 cars per hour.  If the company were to hire an additional worker, then:

  1. the average product of workers would become greater than 50
  2. the marginal product of workers would become greater than 50
  3. the average product and marginal product of workers would both remain at 50
  4. the average product and marginal product of workers would both become less than 50

 

18. Which of the following characterizes stage 1 of production?

  1. Increasing marginal product
  2. Increasing average product
  3. Decreasing total product
  4. All of the above

 

19. The owner of a construction company decreases the amount of capital that his workers use.  The average product of labor will ________ and the marginal product of labor will ________.

  1. increase, increase
  2. decrease, decrease
  3. increase, decrease
  4. decrease, increase

 

Questions 20 and 21 refer to the following table.

 

 

 

Output

 

Total Fixed Cost

 

Total Variable Cost

 

 

 

 

0

 

$500

 

$0

 

 

 

 

1

 

$500

 

$200

 

 

 

 

2

 

$500

 

$360

 

 

 

 

3

 

$500

 

$500

 

 

 

 

4

 

$500

 

$700

 

 

 

 

5

 

$500

 

$1,000

 

 

 

 

6

 

$500

 

$1,800

 

 

 

20. The average total cost of producing 4 units of output is:

  1. $800
  2. $700
  3. $300
  4. $175

 

21. The marginal cost of producing the 6th unit of output is:

  1. $800
  2. $700
  3. $300
  4. $175

 

Question 22 refers to the following table.

 

 

 

Output

 

Total Cost

 

 

 

 

0

 

$100

 

 

 

 

2

 

$196

 

 

 

 

4

 

$212

 

 

 

 

6

 

$310