ANSWERS To next 16 Multiple Choice Questions below B B B B A E B E C C C E C C D B

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1 1 ANSWERS To next 16 Multiple Choice Questions below B B B B A E B E C C C E C C D B 1. Economic Profits: a) are defined as profits made because a firm makes economical use of its inputs b) are positive if a firm's accounting profit is greater than the BROC c) are profits before we subtract the BROC d) are more likely to be positive than negative or zero e) b) and d) 2. We might have increasing returns (in the short run) for low output in a firm because: a) each additional worker puts in more effort than the one before him making marginal product rise b) as we increase the number of workers each worker's job can be made more specialized c) declining factor proportions more than offset the advantages of division of labour, making the marginal product decline d) the amount of capital is increased as we increase output so each worker has more capital to work with e) all above are possible explanations NOTE: Questions 3, 4 and 5 refer to the diagram at right. 3. The firm has increasing returns for output greater than: a) 2 d) but less than 4 b) but less than 2 e) 6 c) 4 4. The total cost of producing 4 units is: a) $45 c) $4 e) $24 b) $18 d) $2 5. If the company is producing 7 units of output and W = $12 then the marginal product is: a) 2 c) 4.14 e) 12 b) 2.71 d) 6 6. If a monopolist increases its output and finds that total revenue rises by $1 and total cost rises by $15 then it should: a) reduce its price to increase sales and total revenue. b) produce this new higher level of output because MR must now equal MC. c) reduce price until p = MC. d) reduce its price since the increased sales will reduce its costs. e) increase its price and sell less since this will reduce costs by more than revenues. 7. The profit maximizing monopolist always produces in the elastic range of its demand curve because: a) at any specific output in the elastic range total revenue is greater than at any specific output in the inelastic range. b) for outputs in the elastic range marginal revenue is positive marginal cost is positive for all outputs. c) the elastic range gives it the greatest flexibility over price and quantity. d) in the elastic range marginal revenue has been reduced to zero (or less than zero) so that total revenue (and thus total profits) must have been made very large. e) none of the above a profit maximizing monopolist may sometimes produce in the inelastic range of its demand curve. 8. According to our definition in class of a price taking firm, if a price taking firm decides it wants to produce and sell more: a) then it must lower price because the firm's demand slopes down b) it must advertise, because it will already be selling as much as buyers are willing to buy from it c) then it must change its mind because it is a price taker and so cannot sell more d) then it must ask the marketing board or government regulating agency e) it can always do so at the market price because the market will buy all it wants to produce and sell 9. If price is high enough so that a price taking firm can choose some levels of output and make economic profits., then it should produce: a) as much as will be bought from it at that price and therefore maximize profit b) at the minimum point of the ATC (where ATC=MC) since at that output costs are lowest and thus profits highest c) at an output somewhat greater than the low point on ATC d) where P=ATC, as this will maximize profits

2 2 MC 1. If the firm in Fig. 4 was producing 2 units of output at the price of $8 then the $3 difference between MC and price: a) is the extra cost of producing 2 units of output over producing nothing b) is the total profit at 2 units of output c) is the extra profit gained by producing one more unit d) is marginal revenue e) is smaller than the difference between MC and price at 7 units of output so profits are higher at 7 units than at 2 units 11. If price for the firm in Fig. 4 fell to $4. then: a) the firm is making losses and would sell the business in the short run b) the firm's fixed costs will not allow it to produce the output where P=MC c) to minimize losses the firm should produce the output where P=MC d) the firm will not be covering all of its fixed costs so it will reduce the proportion of its fixed costs that it has to pay by selling some of its capital in the short run e) none of the above 12. If there are two identical "competitive" firms facing the demand curve in Fig. 4 then the supply curve for the industry is: a) the entire marginal cost curves of the two firms added together b) the average variable cost curves of the two firms added together c) the average total cost curves (above MC) of the two firms added together d) the marginal revenue curves of the two firms added together e) the marginal cost curves (above AVC) of the two firms added together 13. If there are two identical "competitive" firms facing the demand curve in Fig. 4 then the equilibrium for the whole market is: a) P = $9.5 and Q = 25 (where MR = MC). d) P = $9.1 and Q = 288 (where MC crosses D). b) P = $7. and Q = 25 (where S crosses D). e) P = $1. and Q = 2 (where ATC is lowest). c) P = $7. and Q = 5 (where S crosses D). 14. For any good produced in a perfectly competitive industry, in the long run consumers will be paying a price which: a) will equal average variable cost d) will make average fixed cost be at a minimum b) will exceed marginal cost e) may be in excess of minimum ATC since c) will be as low as it can be without driving out firms this may be necessary to keep firms in the industry 15. Our long run analysis of perfect competition may include effects of all of the following except: a) entry of new firms b) exit of firms c) shifts in short run supply d) changes in technology 16. If, because of an increase in demand, profits exist in a perfectly competitive industry, we predict entry will occur: a) shifting the demand curve to the left until price falls and profits are zero d) both b and c b) shifting the supply curve to the right until price falls and profits are zero e) a, b, and c c) and price will fall some, but never all the way back to the original price

3 3 PRACTICE EXERCISE ON COST CURVES: Fill in the table for w = $9 and TFC = $18. Plot the ATC and MC curves. Output Labor MP TFC TVC TC AFC AVC ATC MC ANSWERS TO PRACTICE EXERCISE ON COST CURVES Output Labor MP TFC TVC TC AFC AVC ATC MC PRACTICE EXERCISE ON MONOPOLY Use Fig. 1 to fill in the table. Find P and ATC from the curves and then compute total profit at all seven levels of output. The answers are given below. Draw the MR curve. Output P ATC Profit per unit Total Profit ANSWERS TO MONOPOLY PRACTICE EXERCISE:

4 ANSWERS To Sample FINAL EXAM Multiple Choice questions below B E C E B C D D B B E C B D D C B E C E A D B E B C D E E C C D A B C B B C B B 4 Instructor: Prof. T. Osborne ] ECONOMICS 121a FINAL EXAM King s University College Sample Exam Name: I.D.#: MULTIPLE CHOICE (4 marks 1 mark each) WRITE YOUR ANSWERS ON THE ANSWER SHEET PROVIDED 1. A movement from one point on a demand curve to another point on the same curve would be referred to as: a) a change in quantity supplied c) a change in demand e) none of the above b) a change in quantity demanded d) a change in supply 2. Which of the following might change as we go from one point on a demand curve to another point on the same curve : a) income c) price of other goods e) none of these could change b) population d) the characteristics of good X 3. The quantity demanded of a good is the amount of the good that: a) people are willing to sell for a single price b) sellers actually would sell if they could d) all of the above and a certain set of other demand determinants c) represents the true wishes of potential buyers e) a) and b) 4. Which of the following will shift the supply curve for a particular good: a) price changes caused by a shortage c) buyers find they like the good much more e) none of the above b) price changes caused by a surplus d) all of the above 5. Which of the following means exactly the same as a change in supply : a) a movement along a supply curve c) a change in quantity supplied e) a) and b) b) a shift in a supply curve d) all of the above 6. According to our ICAN steps, we can say that an increase in suppy will cause price to: a) fall and quantity supplied to increase c) fall and quantity supplied to decrease e) either rise or fall, depending on b) rise and quantity supplied to increase d) rise and quantity supplied to decrease what happens to quantity supplied For questions 7 and 8 suppose we begin with demand curve D and supply curve S in equilibrium. Then demand decreases to D 1 : P S 5 7. Which of the following will we observe after the demand decrease: a) a surplus and price remaining at $4 d) a surplus and price will fall to $2 4 b) a shortage and price remaining at $4 e) a shortage and price will fall to $2 c) a surplus and price will fall to $ D D Q 8. One of our basic predictions for this decrease in demand would state that the: a) decrease in equilibrium quantity (2) is less than the initial shortage (4) b) decrease in equilibrium quantity (1) equals the initial surplus (1) c) decrease in equilibrium quantity (1) is less than the initial shortage (2) d) decrease in equilibrium quantity (1) is less than the initial surplus (2) e) decrease in quantity supplied (2) is less than the final quantity (3) 9. Accounting profits will always be: a) greater than economic profits c) less than economic profits b) either greater than or equal to economic profits d) either less than or equal to economic profits 1. Economists have developed their own definition of profits because: a) economic analysis is more complex than accounting b) although accountants might find profits for firms in an industry, firms might still be leaving the industry c) accountants' calculations for costs are usually not precise enough for the economist d) firms may be entering and industry even when economic profit is negative e) they don t want students in economics courses to use what they've learned in their accounting courses

5 5 11. In the short run: a) no important factors of production can be increased b) a few unnecessary factors can be increased but most factors cannot be increased c) production can be increased with all the factors fixed d) production is increased through the invention of new technology e) production can be increased by increasing some factors even though the remaining factors are held fixed 12. A production function is used in the short run by: a) varying materials and energy keeping labour and capital completely unchanged b) varying labour, materials and energy but allowing only small changes in capital c) varying labour, materials and energy but keeping capital completely unchanged d) varying labour, materials, energy and capital but keeping technology completely unchanged e) varying labour, materials, energy, capital but allowing only small changes in technology 13. For short run analysis in economics we assume that firms might use: a) any of the known ways of producing a given commodity b) only technically efficient ways of producing a given commodity c) only economically efficient ways of producing a given commodity d) only the best way of producing a given commodity (found by varying capital to find the best way) e) only the least costly way of producing a given commodity (found by varying capital to find the least cost way) 14. When we hire one more worker with fixed capital we can say: a) total output will always rise b) marginal product will always fall because each worker has less capital to work with c) marginal product will always rise d) marginal product will be falling if there is diminishing returns e) marginal product will be falling if there is negative returns 15. We might have increasing returns (in the short run) for low output in a firm because: a) more capital could be used as output rises so each extra unit of labour is more productive than the one before it b) newly hired workers tend to work harder when there are fewer workers than if there are many workers c) increasing factor proportions tend to make marginal products rise d) some workers may no longer have to operate two machines if more workers are brought into the firm e) all of the above are possible explanations 16. In general we can say, marginal products could be: a) positive for increasing returns, zero for diminishing returns, negative for negative returns b) always positive because total product is always positive c) equal at two different levels of output d) positive only e) we can say nothing about the marginal products in general because, although we can derive total product from marginal we cannot derive the marginal from the total 17. Any marginal-cost curve and its corresponding average total cost intersect a) at the minimum point of the marginal-cost curve b) at the minimum point of the average total cost curve c) where total product is a maximum d) half way between the point where average total and marginal costs are at their minimum values e) at the maximum value of the marginal product 18. If, in the short run, a firm has diminishing returns for most levels of output then these diminishing returns must eventually cause: a) diminishing total costs c) diminishing marginal costs e) increasing average variable costs b) diminishing average total costs d) increasing fixed costs 19. We have four cost calculations: MC, AVC, AFC and ATC. Which of them must always fall as output rises? a) MC only b) AVC only c) AFC only d) AFC and ATC only e) all four of them 2. We have four cost calculations: MC, AVC, AFC and ATC. Which of them must rise at high output? a) MC only b) AVC only c) AFC only d) AFC and ATC only e) MC, AVC and ATC

6 6 21. If this firm expands output by one unit from 24 to 241: a) total cost will rise by $48 c) MC will rise by $48 b) total cost will rise by $3 d) ATC will rise by $48 e) ATC will rise by $3 Diagram for multiple choice questions MC 22. Suppose the firm has TFC = $18. At 8 units of output: a) total cost is $128 (8 x $16) b) AFC is $13.5 d) b) and c) c) AVC is $12.5 e) MC is $26 4 ATC 23. Where do dimishing returns (DR) and increasing returns (IR) occur for this firm? a) IR from to 12 units of output and DR above 12 units b) IR from to 3 units of output and DR above 3 units c) DR from to 12 units of output and IR above 12 units d) DR from to 3 units of output and IR above 3 units e) none of the above 24. For this firm: a) AFC must be falling up to 12 units, rising thereafter b) AVC must be falling up to 12 units, rising thereafter c) marginal product falls up to 12 units, rises thereafter d) total cost falls up to 3 units then rises thereafter e) marginal product rises up to 3 units, falls thereafter x Q 25. The fact that a monopolist is the only firm in the market means that: a) if the good is a necessity then it can charge a very high price and people will buy as much from it as at lower prices. b) it is still constrained in its actions by the existence of a market demand curve. c) it essentially has unlimited potential profit. d) a and b are both true. e) b and c are both true. 26. If a firm is a monopolist with downsloping demand then it maximizes profit at the output where: a) demand cuts ATC. c) additions to revenue just equal additions to cost for the next unit produced. b) price equals marginal cost. d) the price received just equals the additions to cost for the next unit produced. e) price is less than marginal revenue. 27. The marginal revenue curve is a straight line drawn between two chosen points. In this diagram those points could be: a) Q = 1 at $12 and Q = 2 at $7 b) Q = 1 at $12 and Q = 15 at $7 c) Q = at $12 and Q = 1 at $7 d) Q = 5 at $12 and Q = 1 at $7 e) we cannot tell from the graph because we would need to know total revenue as well 28. If this monopolist wishes to maximize profit it will charge a price of: a) $3 where MR=MC. b) $5.1 where ATC and D cross. c) $5.5 where it can produce 14 and cover costs. d) $5.9 where MC and D cross. e) $1 because this will ensure that it sells If demand increases this monopolist will: a) increase both price and quantity. b) decrease both price and quantity. c) produce more, less or not change quantity but will raise price and thus profits. d) produce more, less or even leave quantity unchanged and may raise price, lower price or not change price. e) sell more but it may raise price, lower price or even leave price unchanged when it does sell more.

7 3. A price taking firm will choose to shut down in the short run if price is below the low point on the: a) ATC curve b) AFC curve c) AVC curve d) ATC curve but above the low point on AVC curve If the price given to a price taking firm falls in the short run so that it is below ATC but above AVC then the firm is making economic losses. In the short run: a) it should cease production d) the firm is not making enough revenue to cover all of its b) fixed costs will not allow it to produce where P=MC costs so it will have to reduce some of its fixed costs c) to minimize losses it should produce where P=MC e) none of the above Use Figs. 5 and 6 below for questions Suppose that, in a perfectly competitive market, the short run market supply is S and the demand curve is D (in Figure 6). If the market price is $18 then, in the short run: a) ordinarily price would rise, but because price is below ATC firms will drop out and price will fall b) price will rise to $24 and the increased output will be produced by new firms which are entering c) price will not change because the market is in short run equilibrium at $18 d) price will rise to $24 and each existing firm will increase output by 3 units e) price will rise to $24 and each existing firm will increase output by 15 units 33. If the market in Figure 6 is in equilibrium for supply curve S and demand curve D then: a) each firm has accounting profit equal to BROC c) some firms will be considering dropping out of business b) each firm is making some economic profit d) none of the above 34. If demand shifts from D to D 1 then, in the short run: a) the excess demand at $24 will not be eliminated in the short run b) we will move up the short run supply curve to a new price (like $36) c) price will rise somewhat due to the excess demand but not all the way to $36 because of the fixed number of firms d) price will rise but firms will continue to produce the same output (at the low point on ATC) 35. The short-run supply curve S in Figure 6 starts at an output of 3 because, at prices below $12: a) we don't know how much firms will produce so we don't plot those points b) firms will continue to produce 3 so the supply curve drops straight down c) firms will shut down in the short run d) price is so low buyers would buy far more than is reasonable 36. If demand shifts from D to D 1 then, in the short run, price must rise to $36 because: a) individual firms are always trying to raise price whenever they can and the increased demand gives them an opportunity b) marginal cost is rising as firms expand their output c) there has been a shift in supply to match the demand d) the additional capital used at 9 units increases costs thus pushing up price e) the higher price is needed because firms produce where P=ATC and ATC is higher at higher output 37. How many firms are there in the market in Figure 6? a) 12 b) 5 c) 6 d) cannot tell from Fig. 5 and 6 alone 48 Fig. 5 MC 48 Fig. 6 S ATC 3 24 AVC D D q Q

8 8 38. If we have demand curve D 1 and initial short run supply curve S then, in the long run: a) we can't tell exactly what price will be in the long run because we do not have the long run supply curve in Figure 6 b) price will remain at $36, which is a stable equilibrium c) price will fall to $24 d) price will fall to $ In a perfectly competitive market, in the long run, economic profits are eliminated as price is forced to the lowest possible price. This occurs because: a) each competitive firm is continually trying to lower its price below other firms to attract customers b) potential new firms' desire for profit actually ends up eliminating all economic profit c) profits are hard to sustain because costs are always rising d) new firms which enter sell products which are more attractive than the older existing firms 4. Comparing each firm s profit in the short run and the long run in a perfectly competitive industry, we can say that, in the long run, each firm s profit: a) will be zero but in the short run it will be positive b) will be zero but in the short run it could be positive or negative c) will be positive and in the short run it will be positive also d) will be positive but in the short run it could be positive or negative e) could be positive or negative in the long run and could be positive or negative in the short run also Name: ESSAY (1 marks) I.D.#: How does a competitive supply-demand type market respond to an increase in demand? Be sure to discuss the diagrams below in your essay. You may wish to draw other diagrams in your essay as well. Each firm Entire Market