Spring, 1998,Principles of Microeconomics

Phil Graves
U. of Colorado,EC2010
Second Midterm, V1
Directions: There is one best answer to each question, after
reading all answers; remember that a multiple choice question is just a series
of T-F questions in which one of the responses is true.
1) A firm is deciding whether to produce or shut down in the short run. Its
total costs are $15,000 of which $5,000 are the total fixed costs of
production. The firm should produce in the short run as long as its total
revenues are at least
a. $0
b. $15,000.
c. $10,000.
d. $5,000.
2) If a firm is making zero economic profits, then the firm
a. will exit the market in the long run.
b. is making a loss.
c. will increase output.
d. is making revenue equal to the opportunity cost of the inputs it uses.
3) The inefficiency from monopoly results because
a. monopolists restrict output below the level at which Marginal Revenue is
equal to Marginal Cost for the firm.
b. there is no competition to force down cost.
c. high monopoly prices are not equitable.
d. monopolists underproduce relative to the ideal, at which society's
Marginal Cost is equal to Marginal Benefit.
4) A single-price monopolist sets price
a. where MR=MC.
b. From the demand curve at the quantity for which MC=MR.
c. Where supply=demand.
d. Where MR=demand.
5) As firms enter a perfect competitive industry that is profitable in the
short-run, during the transition from the short run to the long run, the
economic profit of each firm in the industry:
a. decreases and the price falls.
b. decreases and the price rises.
c. increases and the price falls.
d. increases and the price rises.
6) In a perfectly competitive industry, a permanent demand increase results
in a higher price,
a. economic loss and entry.
b. economic loss and exit.
c. profit and entry.
d. profit and exit.
7) A major advantage of a corporation over other types of firms is:
a. limited liability of the owners.
b. better access to markets for financial capital.
c. a corporation is not dissolved when an owner dies.
d. all of the above are advantages of corporations.
8) Marginal revenue equals the change in total:
a. profit as output expands slightly.
b. output from hiring an additional worker.
c. revenue from selling an additional unit of output.
d. tax rates when tax revenue increases a bit.
9) A firm's average variable cost is $60, its total fixed cost is $3,000, and its
output is 600 units. Its average total cost must be:
a. less than $58.
b. between $58 and $62.
c. between $62 and $64.
d. more than $64.
10) Which of the following is the best example of price discrimination:
a. When a landlord can choose tenants on the basis of race or gender
because rent control creates a housing shortage.
b. When citizens of a nation boycott the imports of another nation.
c. When citizens of a nation boycott the commodities produced by a specific
company.
d. When a producer provides discount coupons in the advertisement section
of the local newspaper.
e. When certain goods are rationed during war time because of the reduced
availability of resources for domestic production.
11) Suppose that in the short run, a perfectly competitive firm faces
diminishing marginal returns. Assume that minimum AVC is $5 and
minimum ATC is $10. Now consider an increase in the price from $6 to $7.
a. To maximize profit, the firm should decrease production in the short run
to make the price increase further so that ATC is covered.
b. To maximize profit, the firm should increase production in the short run,
and firms in this market are considered healthy in the sense that they are
making non- negative profit.
c. The firm should shut down in the short run to minimize loss (i.e., avoid
negative economic profit).
d. To maximize profit, the firm should not change the initial level of output.
e. To maximize profit, the firm should increase output, but in the long run,
some firms are expected to exit this industry.
12) Suppose a single-price non-discriminating monopolist sells 4 units of
output at a price of $5, but must lower the price to $4 to sell 5 units. Assume
that the monopolist is initially maximizing profit. What is the marginal
revenue of increasing quantity from 4 to 5 units, and would a profit-
maximizing monopolist do this?
a. Marginal revenue is $1, which is positive, so the monopolist should
definitely lower price to sell the larger quantity.
b. Marginal revenue is $1, but without more information about costs, it is
not possible to make a decision about this pricing policy.
c. Marginal revenue is $0, so the monopolist would definitely lower price so
that consumers are able to pay less, which will increase social efficiency.
d. Marginal revenue is $0, and since marginal costs must always be positive,
the monopolist would not increase her output from 4 to 5.
13) Now suppose that the monopolist in the previous question is a price
discriminator, and the purchasers of the first 4 units are unaware of the price
cut necessary to sell the additional unit. What is the marginal revenue from
selling the 5th unit, and would the profit-maximizing monopolist do this?
a. MR = $4, which is positive, so the monopolist would definitely lower
price.
b. MR = $4, and the price discriminator should lower the price and sell one
more unit only if the MC of producing one more unit is less than $4.
c. MR = $1, so the monopolist would definitely lower price so that
consumers are able to pay less, which will increase social efficiency.
d. MR = $0, but without more information about costs, it is not possible to
make a decision about this pricing policy.
14) Which of the following is a true statement?
a. Monopolies are greedier than perfectly competitive firms, which is why a
monopolist enjoys economic profit that is greater than zero.
b. OPEC, the group of oil-producing nations in the Middle East, is a good
example of a group of perfectly competitive firms.
c. To maximize profit, firms want to produce the level of output where MC
is minimized.
d. Perfectly competitive firms are different from monopolistically
competitive firms because perfectly competitive firms sell differentiated
products.
e. None of the above are true.
15) What does the following formula imply: MC = W / MP
L
(where MC =
marginal cost, W = wages, MP
L
= marginal product of labor)
a. only labor inputs to production are allowed to change
b. the Law of Increasing Marginal Costs implies (and is implied by) the Law
of Decreasing Marginal Product
c. the firm is producing optimally
d. a and b
e. all of the above are implied by the formula
16) A firm, which produces a patented, high-tech telecommunications
product, maximizes profits and produces the socially optimal quantity. What
can you say about this firm?
a. It is a price-taker and sole-producer of the product
b. It is a price-maker who perfectly price discriminates
c. It is a monopolist who receives zero profit
d. The firm type is unknown, and it produces inefficiently
e. none of the above
17) A firm is producing where its marginal costs are at the lowest level.
What can one most likely infer from this?
a. there is either lost opportunity for further profits by producing more, or
the firm should shut-down if it is competitive and price is at that low level.
b. It is a price-taker who is producing too much.
c. It is a monopolist who is producing the socially optimal quantity.
d. The firm is producing rationally.
e. Any of the above are equally likely inferences.
18) Consider the following production data for the Tickle-Me-
Elmo company. What would you, an economic consultant, conclude about
this firm?
Current output = 1000 Elmos, MR[at 1000 Elmos] = $3.50
MC[at 1000 Elmos] = $4.00, MC[at 1001 Elmos] = $4.25
a. It is producing too little, and it is producing where marginal costs are
falling.
b. It is producing too much, and it is producing where marginal costs are
rising.
c. It is producing rationally.
d. Wages are too high.
e. It is a monopolist.
Answer questions 19-21 with the following information for Mary's Donut
Shop, a proprietorship in Denver.
All data were taken from a week when a policemens' convention was in
Denver.
Cost of supplies = $15,000
Rent = $3,500
Wages paid to Mary's employees = $3,500
Mary's foregone income elsewhere = $3,000
Total Revenues = $50,000
19) What are Mary's total economic profits during this week?
a. $35,000
b. $50,000
c. $22,000
d. $-25,000
e. $25,000
20) What are Mary's implicit costs and explicit costs during this week?
a. Her implicit costs are $6,500 and her explicit costs are $18,500.
b. Her implicit costs are $50,000 and her explicit costs are $25,000.
c. Her implicit costs are $3,500 and her explicit costs are $21,500.
d. Her implicit costs are $3,000 and her explicit costs are $22,000.
e. Her implicit costs are $22,000 and her explicit costs are $3,000.
21) If Mary forgot about the policemen's convention, closed her donut shop
and went on vacation, what is the opportunity cost of her vacation?
a. $3,000
b. $50,000
c. $25,000
d. $15,000
e. $00.00
22) Suppose that the own price demand elasticity for frisbees is 2.3
(remember that we ignore the negative). If the monopolistic firm of frisbees
wants to increase its revenues, what should it do?
a. simply increase the price
b. increase the quantity of output, thus forcing the price to decrease a bit
c. decrease output, thus forcing the price to increase substantially
d. do anything: with an elasticity of 2.3, revenue will increase regardless of
whether price is raised or lowered
e. none of the above
23) Assume that the Law of Diminishing Marginal Product applies at the
current output level of a perfectly competitive firm. The price is $20 and, at
the current output level, marginal cost is $16 and average cost (total cost
divided by output, or "cost per unit") is $20. To maximize profits the firm
should:
a. produce the current output level, since average revenue (price) = average
cost.
b. produce more since marginal revenue exceeds marginal cost at current
output.
c. produce less since marginal revenue is always below average revenue.
d. any of the above is possible, without further information.
24) A firm operating in a perfectly competitive industry:
a. always operates in the elastic range of the market demand curve.
b. always tries to minimize marginal cost in order to maximize profit.
c. confronts a demand curve where price is larger than marginal revenue.
d. has considerable influence over the market price level.
e. none of the above.
25) A member of a cartel (e.g. OPEC) would be most likely to increase its
profits by:
a. undercutting the prices of other cartel members to sell more, as long as it
did not get caught.
b. setting the price above that of other cartel members.
c. insisting that the cartel continually raise the price it charges.
d. all of the above are equally likely methods of increasing profits.

ANSWERS:
1) c
2) d
3) d
4) b
5) a
6) c (assumes initial LR equilibrium, should have said that)
7) d
8) c
9) d (65, of course, is more than 64)
10) d
11) e
12) d
13) b
14) e
15) b or d (The wording is poor...other things *are* held constant, but this
line of reasoning applies to all variable inputs)
16) b
17) a (actually this is a bad question...a monopolist *could* have MR = MC
at the latter's minimum)
18) b (although, given the specific name--and probable patent--I'm
sympathetic to e; didn't need the data for that, though.
19) e
20) d
21) c or a (it's what she gave up, but that depends on whether that is the
"usual" $3K or the $25K--$3K is better)
22) b
23) b
24) e
25) a