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

 

 

 

 

8

 

$430

 

 

 

 

10

 

$570

 

 

 

22. When 8 units of output are produced, the average variable cost is:

  1. $53.75
  2. $41.25
  3. $15
  4. $34.40

 

23. At 80 units of output, a firm’s marginal cost and average total cost each equal $30.  Therefore, at 81 units of output:

  1. marginal cost and average total cost are each less than $30
  2. marginal cost and average total cost are each greater than $30
  3. marginal cost is less than $30 and average total cost is greater than $30
  4. marginal cost is greater than $30 and average total cost is less than $30

 

24. When the diminishing returns set in:

  1. total variable cost begins to rise
  2. average total cost begins to rise
  3. average variable cost begins to rise
  4. marginal cost begins to rise

 

25. Suppose that you pay $100 for season tickets to 5 University of Michigan home football games.  Without season tickets, the ticket price for each single home football game is $25.  The marginal cost to you of going to any one game is:

  1. $25
  2. $20
  3. $5
  4. $0

 

26. Corporation X and corporation Y produce the same amount of output and have identical total variable costs.  However, corporation X’s total fixed costs are $5,000 per month lower than corporation Y’s.  Which of the following is true?

  1. Corporation X and corporation Y have the same marginal cost
  2. Corporation X has a higher marginal cost than corporation Y
  3. Corporation X has a lower marginal cost than corporation Y
  4. None of the above

 

27.  Use the information in the following table to answer the following questions

  about a single firm in a perfectly competitive market.

 

                   Output     Total Cost      Product Price

                       0              $10                    

                       1              $30                  $25

                       2              $40

                       3              $60

                       4              $90

                       5             $130

 

  a)   What is the firm’s fixed cost?

  b)   What is the firm’s average fixed cost at 4 units of output?

  c)   What is the firm’s variable cost at 3 units of output?

  d)   What is the firm’s average variable cost at 5 units of output?

  e)   What is the firm’s marginal cost for the 5th unit of output?

  f)    What is the firm’s best operating output?

  g)   At this output, what is the firm’s profit/loss situation?

 

28. A family will be away from its house for six months. The monthly mortgage payment on the house is $300. The local utility bill, to be paid by the owner, and an allowance for "wear and tear" cost $100 per month, only if the house is occupied; otherwise only the mortgage has to be paid.  The lowest amount of rent the family would be willing to accept would be at least

a.       $0.

b.      $100.  

c.       $300.  

d.      $400.

 

29. If increasing quantities of a variable factor are applied to a given quantity of fixed factors, we can predict that

a.       Marginal Cost will continue to decrease.           

b.      The firm will always experience economies of scale.

c.       Marginal Product will equal total product.

d.      Eventually, the firm will experience diminishing returns.

e.       Profits will continue to increase.

 

30. The most profitable rate of output for any firm, whether perfectly competitive or not, is that output at which 

a.       marginal revenue exceeds marginal cost by the highest amount.

b.      marginal revenue equals marginal cost.

c.       price exceeds average cost by the highest amount.

d.      price equals average variable cost.

e.       price equals average total cost.

 

The next three questions refer to the following table.                 

 

Output              Total Cost

0                      $24

1                      $33

2                      $41

3                      $48     

4                      $54                                         

5                      $61     

6                      $69

 

31. What is the firm’s average fixed cost for producing four units of output?

a.       $54     

b.      $16     

c.       $6       

d.      $24

 

32. What is the firm’s average variable cost for producing six units of output?

a.       $69     

b.      $7.50  

c.       $11.50

d.      $4       

e.       $8

 

33. What is the firm’s marginal cost for producing five units of output?

a.       $37     

b.      $7       

c.       $13.50

d.      $1.75

e.       $8

 

34. Which of the following is NOT true of a perfectly competitive market?

a.       a single firm's demand is perfectly elastic

b.      many firms are in the market

c.       there are no barriers to entry or exit

d.      there is no product differentiation          

e.       total revenue is greater than total cost in the long run

 

35. Which of the following is always true of the relationship between average variable cost and marginal costs?

a.       Average variable costs are higher than marginal costs.

b.      Marginal costs are higher than average variable costs.   

c.       Average variable costs are increasing when marginal costs are increasing.

d.      Average variable costs are rising when marginal costs are higher than average variable costs.

e.       Average variable costs are constant when marginal costs are decreasing.

 

36. What is the difference between implicit and explicit costs? Explain and give examples.

 

 

 

 

 

 

 

37. What is the difference between a variable cost and a fixed cost? Explain and give examples.

 

 

 

 

 

 

 

38. What is the difference between the short run and the long run?

 

 

 

 

 

 

 

39. When will a perfectly competitive firm earn economic profits? At what level of output will they produce?

 

 

 

 

 

 

 

40. Draw a set of ATC and MC curves. Then explain how an increase in variable cost would influence these curves. (Illustrate on your graph)

 

 

 

 

 

 

 

Sample Written Response Question:

 

Assume that the market for milk is perfectly competitive and in long-run equilibrium, and that most people like to drink milk when they eat cookies.

 

I. Draw a set of diagrams that illustrate the long run equilibrium for the milk industry and for one milk producer (Dairy Farmer Deets).

 

II. Assume that the price of cookies decreases:

 

A.        Explain the short run impact on (Illustrate on your graph)          

i)          The milk industry's output.

ii)         The milk industry's price.

 

B.         Explain the short run impact on (Illustrate on your graph)                      

i)          Dairy Deets’ output.

ii)         Dairy Deets’ profit / loss situation.

 

III. Given the short run changes that occurred in Part II, describe the long run impact on each of the following (Illustrate on your graph):

 

A.        i)          The milk industry's output.

ii)         The milk industry's price.

 

B.         i)          Dairy Deets’ output.

ii)         Dairy Deets’ profit / loss situation.

 

Given the long run situation, should Dairy Deets stay in business? Explain.