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Solution Set B

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Solution Set Bb,B,BB,set,Set,SET

    Test #2

    Practice Test #2: Answer Key

    thExam number 2 will take place on Monday, April 8, 2013. This, the second of two practice

    exams, will be the subject of class on Wednesday. It will not be graded, but will serve only as practice material accurately representing the content and format of the exam.

    1.) Walter used to work as a high school teacher for $40,000 per year but quit in order to start his own painting business. To invest in his painting business, he withdrew $20,000 from his savings, which paid 3 percent interest, and borrowed $30,000 from his uncle, whom he pays 3 percent interest per year. Last year Walter paid $25,000 for supplies and had revenue of $60,000. Walter asked Tyler the accountant and Greg the economist to calculate his painting business’s costs.

    a. Tyler says his costs are $25,900, and Greg says his costs are $66,500.

    b. Tyler says his costs are $25,000, and Greg says his costs are $65,000.

    c. Tyler says his costs are $66,500, and Greg says his costs are $66,500.

    d. Tyler says his costs are $75,000, and Greg says his costs are $41,500.

    2.) Suppose that a firm has only one variable input, labor, and firm output is zero when labor is zero. When the firm hires 6 workers it produces 90 units of output. Fixed cost of production are $6 and the variable cost per unit of labor is $10. The marginal product of the seventh unit of labor is 4. Given this information, what is the total cost of production when the firm hires 7 workers?

    a. $66

    b. $76

    c. $906

    d. $946

    3.) Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that marginal cost of the third worker hired is $40, and the average total cost when three workers are hired is $50. What is the total cost of production when three workers are hired?

    a. $50

    b. $90

    c. $120

    d. $150

     4.) At Bert's Bootery, the total cost of producing twenty pairs of boots is $400. The marginal cost of producing the twenty-first pair of boots is $83. We can conclude that the

    a. average variable cost of 21 pairs of boots is $23.

    b. average total cost of 21 pairs of boots is $23.

    c. average total cost of 21 pairs of boots is $15.09.

    d. marginal cost of the 20th pair of boots is $20.

     5.) Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that the average total cost when 5 units of output are produced is $30, and the marginal cost of the sixth unit of output is $60. What is the average total cost when six units are produced?

    a. $10

    b. $25

    c. $30

    d. $35

    Table 1

    Eileen’s Elegant Earrings produces pairs of earrings for its mail order catalogue business. Each pair is shipped

    in a separate box. She rents a small room for $150 a week in the downtown business district that serves as her

    factory. She can hire workers for $275 a week. There are no implicit costs.

    Number of Boxes of Marginal Cost of Cost Total Cost Workers Earrings Product Factory of of

    Produced per of Labor Workers Inputs

    Week

     0 0

     1 330 $150 $275 $425

     2 630

     3 150 $825 $975

     4 890

     5 950 60 $1,375

     6 10 $1,800

     6.) Refer to Table 1. What is the marginal product of the second worker?

    a. 110

    b. 200

    c. 260

    d. 300

     7.) Refer to Table 1. What is the total cost associated with making 890 boxes of earrings per week? a. $1,250

    b. $1,325

    c. $1,400

    d. $1,575

     8.) Refer to Table 1. During the week of July 4th, Eileen doesn't produce any earrings. What are her costs during

    the week?

    a. $0

    b. $150

    c. $275

    d. $425

     9.) Refer to Table 1. One week, Eileen earns a profit of $125. If her revenue for the week is $1100, how many

    boxes of earrings did she produce?

    a. 140

    b. 330

    c. 780

    d. 950

     10.) Refer to Table 1. Eileen has received an order for 3,000 boxes of earrings for next week. If she expects that the

    trend in the marginal product of labor will continue in the same direction, it is most likely that her best

    decision will be to

    a. not commit to meeting the order until she can move to a larger room and hire more workers to

    produce the earrings.

    b. close her business until she is able to hire more productive workers.

    c. hire about 12 new workers and hope she can satisfy the order.

    d. commit to meeting the order and then take three weeks to complete the job.

Figure 1 Cost

    MC

    ATC

    AVC

    QuantityABCD

     11.) Refer to Figure 1 The efficient scale of production occurs at which quantity?

    a. A

    b. B

    c. C

    d. D

     12.) Refer to Figure 1. Quantity C represents the output level where the firm

    a. maximizes profits.

    b. minimizes total costs.

    c. produces at the efficient scale.

    d. minimizes marginal costs.

     13.) Refer to Figure 1 Quantity B represents the output level where the firm

    a. maximizes profits.

    b. minimizes average variable costs.

    c. produces at the efficient scale.

    d. minimizes marginal costs.

     14.) Marcia is a fashion designer who runs a small clothing business in a competitive industry. Marcia specializes in

    making designer dresses. Marcia sells 10 dresses per month. Her monthly total revenue is $5,000. The

    marginal cost of making a dress is $400. In order to maximize profits, Marcia should

    a. make more than 10 dresses per month.

    b. make fewer than 10 dresses per month.

    c. continue to make 10 dresses per month.

    d. We do not have enough information with which to answer the question.

     15.) Marcia is a fashion designer who runs a small clothing business in a competitive industry. Marcia specializes in

    making designer dresses. Marcia sells 10 dresses per month. Her monthly total revenue is $5,000. The

    marginal cost of making a dress is $500. In order to maximize profits, Marcia should

    a. make more than 10 dresses per month.

    b. make fewer than 10 dresses per month.

    c. continue to make 10 dresses per month.

    d. We do not have enough information with which to answer the question.

Scenario 1

    Assume a certain firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals

    $20 and its average total cost equals $25. The firm sells its output for $30 per unit.

     16.) Refer to Scenario. To maximize its profit, the firm should

    a. increase its output.

    b. continue to produce 1,000 units.

    c. decrease its output but continue to produce.

    d. shut down.

     17.) Refer to Scenario 1. At Q = 1,000, the firm's profits equal

    a. $-5,000.

    b. $2,500.

    c. $5,000.

    d. $10,000.

     18.) Refer to Scenario 1. At Q = 999, the firm's total costs equal

    a. $24,970.

    b. $24,975.

    c. $24,980.

    d. $25,025.

     19.) Refer to Scenario 1. At Q = 999, the firm's profits equal

    a. $4,990.

    b. $5,000.

    c. $5,020.

    d. $5,030.

Scenario 2

    Suppose a certain competitive firm is producing Q=500 units of output. The marginal cost of the 500th unit is

    $17, and the average total cost of producing 500 units is $12. The firm sells its output for $20.

     20.) Refer to Scenario 2. At Q=500, the firm’s profits equal

    a. $1,000.

    b. $4,000.

    c. $7,000.

    d. $10,000.

     21.) Refer to Scenario 2. At Q=499, the firm’s total costs equal

    a. $5,983.

    b. $5,988.

    c. $5,995.

    d. $5,999.

     22.) Refer to Scenario 2. At Q=499, the firm’s profits equal

    a. $3,980.

    b. $3,992.

    c. $3,997.

    d. $4,017.

     23.) Refer to Scenario 2. If the marginal cost of producing the 501st unit would be $19, producing and selling the

    501st unit would

    a. decrease the firm’s profit by $19.

    b. decrease the firm’s profit by $2.

    c. increase the firm’s profit by $1.

    d. increase the firm’s profit by $3.

Figure 3

    Suppose a firm operating in a competitive market has the following cost curves: PriceMC

    ATC

    AVCP4

    P3

    P2

    P1

    QuantityQ1Q2Q3Q4Q5

     24.) Refer to Figure 3. When price rises from P2 to P3, the firm finds that

    a. marginal cost exceeds marginal revenue at a production level of Q2.

    b. if it produces at output level Q3 it will earn a positive profit.

    c. expanding output to Q4 would leave the firm with losses.

    d. it could increase profits by lowering output from Q3 to Q2.

     25.) Refer to Figure 3. When price falls from P3 to P1, the firm finds that it

    a. decreases its fixed costs.

    b. should produce Q1 units of output.

    c. should produce Q3 units of output.

    d. should shut down immediately.

     26.) Refer to Figure 3. When price rises from P3 to P4, the firm finds that

    a. fixed costs decrease as output increases from Q3 to Q4.

    b. it can earn a positive profit by increasing production to Q4.

    c. profit is still maximized at a production level of Q3.

    d. average revenue exceeds marginal revenue at a production level of Q4.

27.) . Use a graph to demonstrate the circumstances that would prevail in a competitive market where firms are

    earning economic profits. Offer a clear analysis of both the market and the individual firm, and be clear in

    emphasizing the definition of profit that supports your graphs. Can this scenario be maintained in the long run?

    Explain your answer.

     28.) Which of the following is an example of a barrier to entry?

    a. Dawn charges a higher price than her competitors for her landscape-architecture services. b. Rhianna obtains a copyright for a short story that she wrote and published. c. Debbie offers free samples of her chocolate chip cookies to attract new customers. d. Bev charges a lower price than her competitors for her desktop-publishing services.

     29.) Which of the following is a characteristic of a natural monopoly?

    a. Average cost exceeds marginal cost over large regions of output.

    b. Increasing the number of firms increases each firm’s average total cost. c. One firm can supply output at a lower cost than two firms.

    d. All of the above are correct.

     31.) When a monopolist decreases the price of its good, consumers

    a. continue to buy the same amount.

    b. buy more.

    c. buy less.

    d. may buy more or less, depending on the price elasticity of demand.

     32.) Competitive firms differ from monopolies in which of the following ways? (i) Competitive firms do not have to worry about the price effect lowering their total revenue. (ii) Marginal revenue for a competitive firm equals price, while marginal revenue for a

    monopoly is less than the price it is able to charge.

    (iii) Monopolies must lower their price in order to sell more of their product, while competitive

    firms do not.

    a. (i) and (ii) only

    b. (ii) and (iii) only

    c. (i) and (iii) only

    d. (i), (ii), and (iii)

     33.) Which of the following statements is correct for both a monopolist and a perfectly competitive firm? i) The firm maximizes profits by equating marginal revenue with marginal cost. ii) The firm maximizes profits by equating price with marginal cost. iii) Demand equals marginal revenue.

    iv) Average revenue equals price.

    a. i), iii), and iv) only

    b. i) and iv) only

    c. i), ii), and iv) only

    d. i), ii), iii), and iv)

    Figure 2 Price

    Curve CCurve DP5

    P4P3

    P2

    P1

    P0

    Curve BCurve A

    QuantityQ1Q2Q3Q4

     34.) Refer to Figure 2. A profit-maximizing monopoly will produce an output level of

    a. Q1.

    b. Q2.

    c. Q3.

    d. Q4.

     35.) Refer to Figure 2. A profit-maximizing monopoly will charge a price of

    a. P5.

    b. P4.

    c. P3.

    d. P2.

     36.) Refer to Figure 2. A profit-maximizing monopoly's total revenue is equal to

    a. P4 x Q3.

    b. P5 x Q1.

    c. P3 x Q4.

    d. (P4-P2) x Q3.

     37.) Refer to Figure 2 A profit-maximizing monopoly's total cost is equal to

    a. P4 x Q3.

    b. P2 x Q3.

    c. P1 x Q3.

    d. (P4-P1) x Q3.

     38.) Refer to Figure 2. A profit-maximizing monopoly's profit is equal to

    a. P4 x Q3.

    b. (P4-P2) x Q3.

    c. (P4-P1) x Q3.

    d. (P5-P0) x Q1.

     39.) Refer to Figure 2. Profit on a typical unit sold for a profit-maximizing monopoly would equal

    a. P5-P0.

    b. P4-P2.

    c. P4-P1.

    d. P4-P3.

     40.) Refer to Figure 2. At the profit-maximizing level of output,

    a. marginal revenue is equal to P3.

    b. marginal cost is equal to P3.

    c. average revenue is equal to P4.

    d. average total cost is equal to P0.

     41.) Suppose when a monopolist produces 50 units its average revenue is $8 per unit, its marginal revenue is $4 per

    unit, its marginal cost is $4 per unit, and its average total cost is $3 per unit. What can we conclude about this

    monopolist?

    a. The monopolist is currently maximizing profits, and its total profits are $200.

    b. The monopolist is currently maximizing profits, and its total profits are $250.

    c. The monopolist is not currently maximizing its profits; it should produce more units and charge a

    lower price to maximize profit.

    d. The monopolist is not currently maximizing its profits; it should produce fewer units and charger a

    higher price to maximize profit.

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