Exam Solutions: The solutions to the multiple choice questions are
given below in boldfaced print and the short answer solutions in Part 2 are
given beneath each (italicized) question.
Part 1. Multiple Choice Questions (2 points each question)
1. One advantage of forming a corporation is:
a. corporations do not have to be formed by selling stock (equity)
to prospective investors
b. the owners of a corporation have limited liability
c. corporations are (usually) directly operated by the owners,
rather than paid managers
d. all of the above
2. Which of the following firm types is organized by
selling equity in the firm (e.g. stock):
a. sole proprietorship
b. partnership
c. corporation
d. all of the above
3. When Ford commits to purchasing "specialized resources",
what happens?
a. there is a switching cost that results directly from making
this decision
b. the opportunity cost of purchasing this equipment is too high
c. the firm will increase its marginal cost
d. Ford will increase the price of cars
4. When writing out a contract, is it possible to plan for
every contingency?
a. No, because high production costs prevent firms from planning
b. Yes, because contracts can be long or short
c. No, because gathering that kind of information is too costly
d. Yes, because firms are typically very efficient at monitoring
their contracts
5. What is the best explanation, advanced in lecture, for why
firms exist?
a. creating a firm minimizes labor costs
b. creating a firm minimizes the cost of capital
c. creating a firm minimizes the cost of land
d. creating a firm minimizes transactions costs
e. creating a firm minimizes input costs
6. Which of the following is an example of a transactions cost
(mentioned in lecture):
a. labor cost
b. monitoring cost
c. the cost of capital
d. overhead
7. If a firm doubles in size (scale) but needs less than twice
as many workers, then:
a. the firm experiences decreasing returns to scale
b. the firm experiences increasing long run average costs
c. the firm experiences increasing returns to scale
d. the firm experiences constant returns to scale
e. none of the above is possible
8. The Law of Diminishing Returns states that as increasing
amounts of a variable factor are combined with a fixed factor:
a. output will begin to decrease
b. the changes in output - attributable to the fixed factor -
will be smaller
c. the changes in output - attributable to increasing the
variable factor - will be smaller
d. all of the above
9. What occurs once a firm produces at minimum efficient scale?
a. the firm is producing where its long run average cost is
at a minimum
b. the firm is producing where its short run marginal cost is
at a minimum
c. the firm is producing where its short run average cost is
at a minimum
d. all of the above
10. Over the long run, an increasing cost industry experiences
a. economies of scale
b. diseconomies of scale
c. constant returns to scale
d. none of the above
11. When comparing product and cost curves, which statement
is correct:
a. when a product curve is rising, it's related cost curve is
rising
b. product curves give us information about diminishing returns,
cost curves do not
c. if marginal product and average product intersect at the point
where marginal product is at a maximum, then so do marginal cost
and average cost
d. the product curves are (essentially) inverse mirror images
of the cost curves
Questions #12-20 correspond with the following information for
a perfectly competitive firm. Assume that this firm always
operates as a profit maximizing firm (i.e. produces where its
profits are the highest).
| TC = $170 | if q = 0 |
| TC = 200 + 10q + q2 | if q > 0 |
| MC = 10 + 2q | if q > 0 |
12. What is the value of average cost, when q = 100?
a. $11,200
b. $112
c. $110
d. $2
e. none of the above
13. What is the value of average variable cost, when q = 100?
a. $11,200
b. $112
c. $110
d. $2
e. none of the above
14. What is the value of average fixed cost, when q = 100?
a. $11,200
b. $112
c. $110
d. $2
e. none of the above
15. What are the sunk costs?
a. $200
b. $170
c. $30
d. $1.70
e. none of the above
16. What are the recoverable fixed costs?
a. $200
b. $170
c. $30
d. $3
e. none of the above
17. What is the value of total variable cost, if the price
is $50?
a. $600
b. $200
c. $50
d. $0
e. none of the above
18. How much output should this firm produce if the price
is $100?
a. 100
b. 80
c. 25
d. 0
e. none of the above
19. What are the profits when the output is 25 units?
a. $425
b. $170
c. $60
d. $0
20. What are the profits when the firm produces where MC equals
AC?
a. - $1500
b. $0
c. $23.33
d. $1510
Question #21 corresponds with the following information:
|
K is fixed (constant) at 100.
38. What are the sunk costs for this firm:
Part 2. Short Answer Section (5 points per question)
Use the table (next page) to answer questions #1-4.
The firm's profits should be a loss of $75. This is the best
they can do.
If the firm produces when P = $10, then they produce 4 units of
output. You find this by looking in the row where P = MC = 10.
In this row, the AC is $31.
Profits are:
However, if the firm shuts down, then they only pay their sunk
costs of $75. A loss of $75 is better than a loss of $84, so
the firm will end up shutting down and not producing.
When producing 1 unit of output, the firm's average variable
cost is $3
Yes, there are recoverable fixed costs of $25.
When the firm produces 1 unit, it has AVC of $3 and AC of $103.
Since AC = AFC + AVC, AFC must be $100.
To convert AFC to (total) Fixed Cost, we multiply AFC by output
(which is one in this case). Therefore, (total) Fixed Costs are
also $100.
Since (total) Fixed Cost = Sunk Cost + Recoverable Fixed Cost,
and since Sunk Cost is given as $75, Recoverable Fixed Costs are
$25.
3. If this firm produced 15 units of output, what would be
their profits?
The firm's profits should be $124.50.
In order to produce 15 units of output, the firm must be producing
in the row where P = MC. Therefore, the Price must be $32 and
(in that row) the AC is $23.7.
The firm's profit is then calculated as: p
= ($32 - $23.7)15 = $124.50
4. What happens in the long run if the price is currently
$24?
Firms will enter this market. The market supply curve will increase
and the firm's demand (price) will fall until the market reaches
a "long run equilibrium".
If the price is $24, then P > AC in the row where P = MC.
Whenever there are profits greater than zero, there is an incentive
for firms who are outside the market to enter this market and
take some of these "above-normal" profits for themselves.
As you use these numbers, assume that this firm will always
choose an output level that makes its profits as high as possible
(i.e. the firm maximizes its profits).
21. When L increases from 100 to 200.
a. the marginal product of labor decreases
b. the average product of labor is less than zero
c. the average product of labor decreases
d. the average product of labor increases
22. When marginal cost (MC) equals average cost (AC)
a. AC is at its minimum point
b. MC is at its minimum point
c. AC is at its maximum point
d. MC is at its maximum point
23. Which of a perfectly competitive industry's characteristics
relate to the short run?
a. economic profits end up being equal to zero
b. free entry and exit
c. firms exit if the price remains below average cost
d. homogeneous products
24. Which statement about economic profit is true:
a. economic profit is smaller than accounting profit
b. economic profits are always zero
c. economic profits do not include opportunity costs
d. economic profit is calculated by subtracting total cost from
the price, then multiply by output
25. Falling marginal costs correspond with
a. falling average product
b. rising average costs
c. rising average variable costs
d. increasing marginal product
26. If a firm is minimizing its costs, then:
a. the firm is making profits that are equal to zero
b. the firm is not producing enough
c. the firm is producing too much
d. the firm is making profits that are greater than zero
e. the firm is producing output that maximizes its profits
27. What statement about average fixed cost is always true
a. it increases as output increases
b. it decreases as output increases
c. it is less than average variable cost
d. it is less than marginal cost
28. If a perfectly competitive firm makes greater than zero
economic profits in the short run:
a. other firms will exit the market over the long run
b. other firms will enter the market over the long run
c. the firm's profits will increase over the long run
d. the firm will make losses over the long run
29. Assuming that existing firms do not change their scale
of operations, what happens in the long run when P > AC for
each firm:
a. market supply will increase
b. market supply will decrease
c. each firm's demand will increase
d. each firm's demand will decrease
e. both a and d are correct
30. Which of the following equations is always true:
a. Average Fixed Costs = Total Costs - Variable Costs (AFC =
TC - VC)
b. Fixed Costs = Total Revenue - Total Costs (FC = TR - TC)
c. Variable Costs = Total Costs + Fixed Costs (VC = TC + FC)
d. Average Costs = Average Fixed Costs + Average Variable
Costs (AC = AFC + AVC)
31. What purpose do MC and AC serve when we study perfectly
competitive firms?
a. MC helps us find the profit maximizing level of output,
AC the level of profits
b. MC helps us find out if profits are positive or negative,
AC the level of output
c. both MC and AC help us find out if profits are positive or
negative
d. MC tells us if the firm has any sunk costs, and AC tells us
the level of output
32. Suppose a perfectly competitive firm has no recoverable
fixed costs. What happens in the short run if the firm makes
a loss that is larger than its total fixed cost?
a. the firm will (permanently) exit the industry
b. the firm will (temporarily) cease production and wait for
prices to rise
c. produce and take a loss
d. all of the above
33. If a perfectly competitive firm produces where average
cost is at a minimum:
a. the firm makes positive (greater than zero) economic profit
b. marginal cost is also at its minimum level
c. average variable cost is at its minimum level
d. marginal costs are rising
e. all of the above
34. A perfectly competitive firm's demand curve __________.
a. is negatively sloped
b. is positively sloped
c. is a horizontal line at the market price
d. always intersects the AC curve
e. both c and d are true
35. If a perfectly competitive firm is producing at its profit
maximizing level of output but is making a loss, then:
a. the firm should raise price, to increase profits
b. the firm should raise output, which increases price and, as
a result, profits
c. the firm should shut down if its sunk costs are smaller
than the loss
d. the firm should lower its price, to increase profits
e. all of the above
36. Which of the following industries is closest to perfect
competition:
a. where there are many, small firms producing identical products
b. where there are several firms, producing identical products
c. where there are many firms, each of which can set its own
price
d. where there are several small firms, and the price of their
products is the same
37. Which of the following situations will lead directly to
zero economic profit in the long run
a. each firm produces homogeneous (identical) products
b. when there are no entry or exit barriers associated with
the industry
c. each firm charges the same price as its competitors
d. when there are many firms in the industry
Questions #38 and 39 correspond with this table:
a. $0
b. $5
c. $80
d. $90
e. not enough information is given
39. What will most likely happen to the numbers in the marginal
cost column if we extend the table to higher output levels?
a. they will continue to decrease as output increases
b. they will increase as soon as they are equal to average variable
cost
c. they will increase as soon as there are diminishing marginal
returns
d. they will continue to decrease until marginal cost equals
average cost
40. What will most likely happen to the numbers in the marginal
cost and average variable cost columns if we extend the table to higher output levels?
a. average variable cost will always be greater than marginal cost
b. average variable cost and marginal cost will eventually be equal
c. average variable cost and marginal cost will continually decrease
d. average variable cost will always decrease, but marginal cost will eventually increase
Credit for these problems will come from not only showing you
know the correct answer but also that you know how to get that
answer or why it's correct.
1. If the price is $10, then what should be this firm's profits?
2. Does this firm have any recoverable fixed costs?
This table goes with questions #1-4. Ignore values that would
have gone in either of the two rows that are left blank (e.g.
when output is equal to 13 or 14 units).
Cost | Cost | Cost | |