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42 riir C.oiiijXliln;111,1 S. If the firm is producing where MC = MR, then: (a) it is definitely making a profit (b) it may be minimizing a loss (c) it should shut down (d) it must be causing externahdes (e) it should operate provided price exceeds AFC. T. The total cost curve: (a) first increases at an increasing rate and then at a decreasing rate (b) first increases at a constant rate and then at a decreasing rate (c) first increases and then decreases (d) first decreases at a decreasing rate and then decreases at an increasing rate (e) first increases at a decreasing rate and then increases at an increasing rate. U. The point of diminishing returns occurs where: (a) MC is positive (b) MC stops falling and starts rising (c) the slope of the total cost curve stops becoming flatter and starts becoming steeper (d) the slope of the total variable cost, cur\e stops becoming flatter and starts to become steeper (e) all of the above. V. If AVC exceeds MC, dien: (a) AVC is falling and is failing (b) only AVC is falling (c) only AVC is falling and may be rising or falling (d) AVC is rising and is falling (e) both and AVC may or may not be falling. W. The portion ofthe total cost curve where loia cost is increasing at a decreasing rate is associated with (a) crowding (b) decreasing renirns to scale (c) .sp cializadon (d) profii maximizadon fe) gains from uade X. In the long run: (a) firms can enter or leav( the industry (b) the amount of both labor and capi tal is variable (c) the firm faces no fixed costs (d) th, firm has more opportimities for reducing its cost (e) all of the above. Y The lotal cost of producing a given level of out put in an induslry will be at a minimum when: (a) the average total cost is the same for all firms (b) the .M( is the same for all firms (c) the . \ is the .same fo all firms (d) the AFC is the same for all firms (e) a] of the above. Z. Average fixed cost: (a) is never zero in th short run (b) is TFC/q (c) always decreases wit: output (d) is the difference between and AV( (e) all of the above.
QUESTIONS FOR SECTION V 1. Profits in the pricetaking firm are: (a) Pq (ATC)q (1>) the sum of the MR up to the equilibrium level of output (c) always nonexistent (d) equal to the quantit) minus the area under the average total cost curve up to the equilibrium quantity (e) none of the above. 2. Gary, a pricetaking pineapple grower finds that his opumal output lies beyond that at which his short run is minimized. Then: (a) Gary is enjoying short run profits (b) the firm is making a normal return (c) Gary is minimizing shortrun losses (d) Gary is making a mistake: he cannot be maximizhig profit (e) Gary should shut down in the long run. 4. If in the prerious question Gary were originally producing at the minimum of his long run curve then: (a) it would be in Garys interest to continue producing pineapples (b) the price of pineapples would equal the marginal cost of producing them (c) the value society attaches to more pineapples would equal the cost to society of producing them (d) the marginal and average cost of producing more pineapples would be the same (e) all of the above. 5. The change in total cost resulting from a one unit production increase is: (a)average revenue (b) variable cost (c) average variable cost (d) increasing cost (e) none of the above. 6. Mart)s firm has only the following assignable contractual commitments: a five year lease on a fleet of cars, a one year building lease, and a union contract that requires a twoweek nodce before any employees can be laid off Ifit would take six months to sell the business and three to declare bankruptcy, the short run for this firm is: (a) 3 months (b) 6 months (c) 5 years (d) one year (e) two weeks. 7. If the average total cost curves are "U" shaped, then in the region of economies of scale: (a) MC is alwa)s falling (b) MC is negative (c) MC is rising and then failing (d)MC is below (e) bodi (b) and (d). 8. Ifa firms average fixed cost associated with 500 units of output is $2 per unit, then (a) its MC at 500 units is $2 (b) its AFC at 400 units is greater than $2 (c) its AFC rises beyond 500 units (d) its AFC at 400 units is also $2 (e) its MC at 500 units is greater than $2. 9. If MC is increasing, then we know: (a) is increasing (b) AFC is increasing (c) is falling (d) AVC is falling (e) none ofthese are valid inferences. 10. If TC increases as Q increases, then: (a) MC is falling (b) MC is rising (c) is falling (d) MC is zero (e) MC is positive. 11. If the MC of producing each widget in your pricetaking firm increases, you are: (a) better off (b) worse off (c) unchanged (d) possibly better off, possibly worse off (e) operating at die efficient level of production. 12. ProfitMax Inc. has a total fixed cost of SI500. Its average fixed cost at 1, 10, and 15 units yiiW be respectively: (a) $1500, $1500. $1500 (b) $1500, $150.000, and $225,000 (c) $1500, $150, $100 (d) none of the above (e) none of the above and it cant be calculated from the information given. 13. MC = MR on farmer Browms pricetaking avocado farm at 5000 avocados per week. The price of avocados is $1, his total variable cost is $3000 at this output and his fixed cost is $2500. We predict hell: (a) operate at an output greater than 5000 (b) shut down and experience a loss of $2500 (c) shut down and exjaerience a loss of $3000 (d) produce "5000"avdcaaos and"" take a loss of $500 per week (e) insufficient information to make a prediction. 14. Lightiiing Bolt Company, the only supplier of electricity in an area, produces a good subject to economies of scale at all outputs. If it were forced by regulation, to sell at a price equal to a certain point along its average total cost curve then: (a) the cost of an addidonal unit of electricity will be less than the price charged (b) the firm will be making positive economic profits (c) more electricit) will be produced than if price were set equal to marginal cost (d) the price will be lower than it would be if price were set equal to marginal cost (e) consumer surplus will be maximized. 15. If die total cost of producing 15 units is 575 and if the average total co.st of producing 16 units is S4.90, dien marginal cost is definitely: (a) increasing (b) falling (c) greater than average total cost (d) less than average total cost (e) equal to average total cost. 16. The following table shows the cost of producing various quantities of cassette tapes in a certain period:
Quantity of Tapes (thousands/period) 0 1 2 3 4 5 6 Total Cost of Production (thousands of dollars) A 8 11 15 19 24 30 At what level of output is average total cost minimized? (a) 1 (b) 2 (c) 3 (d) 4 (e) 5. 17. From question 16, at what level of output is average variable cost minimized? (a)l (b) 2 (c) 3 (d)4 (e)5. 18. From que.sdon 16, how many units would be produced if the market price was $6? (a) 2 (b) 3 (c) 4 (d)5 (e)6. 19. If average fixed cost is $10 and average variable cost is $5 in producing 100 units and if the price of each unit is $17, then profit is: (a) $1,000 (b) $0 (c) $100 (d) $200 (e) S500. 20. If total fixed cost of producing 50 units is $500, total variable cost is $2000, and total revenue is $5000, profit per unit is: (a) $0 (b) $10 (c> $25 (d) $50 (e) $100. 21. If total fixed cost is $100, and average total co.st is constant over a range of output at $10, then in this range: (a) marginal cost is $10 (b) marginal cost is constant and less than $10 (c) average cost is minimized at zero output (d) the firm cannot make a prof it (e) the firm should be regulated. 22. In the long run, a compeddve firm can incur total costs which vary with the amount of producdon (Q) and capital (K) it uses in the following way: Qiiantity/period Q: Total cost (K=0) in S: Toul cost (K=l) ill S: Total cost (K2) in S: 0 1 2 3 4 .T 6 7 0 100 l.iO 300 500 750 1000 1250 100 140 170 210 290 380 500 600 200 230 2.=i0 260 280 360 J50 550 What levels of capital would the firm choose for producing two units and five units of output respectively? (a) 0 and 1 (b) 0 and 2 (c) 1 and 1 (d) 1 and2 (e) 2 and 2. 23. For the same firm as question 22, how many units would be produced at a market price of $90? (a) 3 (b) 4 (c) 5 (d) 6 (e) 7 24. Assuming entry has not yet reduced the price fiom $90, total profit would be: (a) $200 (b) $0 (c) $60 (d) $100 (e) none ofthe above. 25. In the circumstances of the previous question the firms profit per unit will be: (a) S28 (b) S80 (c) $75 (d) $8 (e) $15. 26. If in #23 the firm sets out to maximize profit per unit instead of total profit, its profit per unit would be: (a) $8 (b) $20 (c) $9 (d) $12 (e).noneof the above. 27. If firms can enter or leave the industry with the cost structures given in #22, die long run price would be about: (a) $50 (b) $60 (c) S70 (d) S80 (e) none of the above. 28. A certain compedtive industry consists of many firms each with idendcal long run a\erage total cost curves. Minimum long run average total cost is $50 per unit and occurs at an output of 100 units per month. Demand is unit elasdc and consumers expenditure when die price was $60 was $600,000 per month. In this case the compeddve price after all adjustments would be: (a) $80 (b) $70 (c) $60 (d)$50 (e)$40. 29. In the circumstances of the above quesdon, the long run equihbrium number of firms in the industry would be: (a) 120 (b) 175 (c) 125 (d) 100 (e) 50. 30. Total variable costs: (a) are costs which vary from firm to firm in the same industry (b) are costs commonly associated with the short run rariable factor of capital (c) increase and decrease as producdon increases and decreases (d) do not affect profit (e) none of the abo\e. 31. Subtraction of AVC from AIC will gi\e us back: (a) economic profit (b) average fixed cost (c) increasing cost (d) marginal cost, (e) none of the above. 32. The short run supply curve of a firm in perfect competition is best described as: (a) the average cost curve (b) the average variable cost curve (c) the marginal cost curve (d) the marginal cost curve above minimum average variable cost (e) the marginal cost curve above minimum average total cost. 33. In which of the following situadoiis is it definitely desirable for a pricetaking firm ro cease production endrely? (a) when the firm is making a loss
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