Dr. Barry Haworth
University of Louisville
Department of Economics
Economics 201-30
Summer 2005
Midterm #2
(Questions and Solutions)
Exam
Solutions: The
multiple choice answers are given in boldfaced print and the short answer
question are given below each question.
Part1. Multiple Choice Questions (2 points
each question)
1. Firms take one of
three different types of organization.
What are the three types?
a. service orientation, business-to-business
orientation, manufacturing orientation
b. manager operator, owner operator, family
operator
c. noncorporate
ownership, private corporate ownership, public corporate ownership
d. sole proprietorship,
partnership, corporation
e. owner-producer, manager-producer,
team-producer
2. Which statement
about firm organization is true:
a. all firms are owner-operated
b. firm types have different
degrees of liability
c. all firms issue equity shares (i.e. stock)
to owners
d. all firms have managers who coordinate
business activity, instead of the owners doing so
3. When a firm’s
average cost curve is below the marginal cost curve, then:
a. marginal cost is decreasing
b. average variable cost is decreasing
c. average cost is decreasing
d. average cost is increasing
e. marginal cost is constant
4. Diseconomies of
scale implies:
a. doubling output (scale) requires less than
double the amount of factors
b. increases in scale are accompanied by no
change in long run average costs
c. doubling the number of
factors will less than double output (scale)
d. total costs are increasing
5. Decreasing costs
occur in an industry when there are:
a. increasing returns to scale
b. constant returns to scale
c. decreasing returns to scale
d. diseconomies of scale
Questions #6-7 correspond with this function
for total product:
(where Q =
output, L = labor)
Assume that K is fixed at 6 units.
6. Calculate the average product of labor when L = 144
a. 144
b. 72
c. 2
d. 0.5
e. none of the above
7. Calculate the marginal product of labor when L
increases from 25 to 26
a. 0.023
b. 0.594
c. 1.177
d. 1.200
8. Which of the
following is consistent with the Law of Diminishing Returns?
a. we observe that the output of all firms
eventually decreases
b. we observe that the marginal
product of each firm eventually decreases
c. we observe that the marginal revenue of
each firm eventually decreases
d. we observe that the marginal product of all
firms is negative
9. If a firm is earning economic profit less
than zero (p < 0), then:
a. the firm’s actual (explicit) costs are
greater than the firm’s total revenues
b. the firm’s actual (explicit) costs are
equal to total revenues
c. the return on the owner’s investment in
this firm is greater than any alternative investment
d. the return on the owner’s
investment in this firm is less than any alternative investment
e. the firm is earning negative accounting
profit
Questions #10-14 correspond with the
information below.
Assume that the wheat market is perfectly competitive and that each
firm has $100 in sunk costs. When a firm
produces q > 0, then the following equations describe their costs:
(Total
Costs) TC = 400 + 4q
+ 2q2
(Marginal
Cost) MC = 4 + 4q
10. When producing five units of output (i.e. when q = 5), average cost
(AC) = ______
a. 470
b. 94
c. 24
d. 14
e. none of the above
11. When producing
five units of output (i.e. when q = 5), average variable cost (AVC) = ______
a. 470
b. 94
c. 24
d. 14
e. none of the above
12. When producing
five units of output (i.e. when q = 5), average fixed cost (AFC) = ______
a. 470
b. 94
c. 24
d. 14
e. none of the above
13. If the market
price is $50, then what is the profit maximizing level of output for this firm?
a. 23
b. 11.5
c. 5.25
d. 10
e. none of the above
14. If a profit
maximizing firm is producing 20 units of output, then what are the profits?
a. $400
b. $350
c. $300
d. $100
e. none of the above
15. What’s directly
implied by “each firm in the market sells homogeneous products”:
a. total (market) output is low
b. each firm in the market sets the lowest price
that that firm can afford
c. each firm in the market will
receive the same price for its product
d. each firm in the market will make zero
economic profit in the long run
e. each firm in the market will make some
economic profit in the short run
16. What’s directly
implied by “there are no barriers to entry in this market”:
a. total (market) output is low
b. each firm in the market sets the lowest
price that that firm can afford
c. each firm in the market will receive the
same price for its product
d. each firm in the market will
make zero economic profit in the long run
e. each firm in the market will make some
economic profit in the short run
17. Perfectly
competitive firms maximize profits where:
a. the revenue from the last unit sold is
greater than zero
b. the cost of producing the last unit equals
the total revenue of selling a large number of units
c. the revenue from the last
unit sold is equal to the cost of producing that unit of output
d. the revenue from the last unit sold is
greater than the cost of producing that unit of output
e. the cost of producing the last unit is
close to zero
18. When currently
producing ____ units of output, each firm has TC = $470. In addition, each firm currently has AFC =
$12.5 and AVC = $11. How much is the
firm producing?
a. 47 units
b. 10 units
c. 20 units
d. 25 units
e. not enough information is given to answer
this question
19. When q > 0,
each perfectly competitive firm has TC = 59.79 + 29.7q + 0.13q2. As output (q) increases between 27 units and 50
units, how does AFC change?
a. as output goes from 27 to 28
and eventually to 50; AFC constantly decreases.
b. as output goes from 27 to 28 and eventually
to 50; AFC constantly increases.
c. as output goes from 27 to 28 and eventually
to 50; AFC rises and then falls.
d. as output goes from 27 to 28 and eventually
to 50; AFC falls and then rises.
20. If a perfectly
competitive firm has some sunk costs when making zero economic profit, then:
a. the firm should set a higher price to
increase profit
b. the firm should shut down
c. the firm should continue to
produce
d. the firm should increase output until the
price is greater than average cost
21. A firm producing
zero units has total cost of $300. If
producing 1 unit of output, then the firm would have total fixed costs of $400
and total variable costs of $250. Given
this information, which of the following must be true:
a. the firm has some recoverable
fixed costs
b. the firm has no recoverable fixed costs
c. all of the firm’s total fixed costs are sunk
d. the firm’s sunk costs are greater than the
firm’s total fixed costs
22. Which of the
following is true about the demand curve facing a perfectly competitive firm:
a. a perfectly competitive firm’s demand curve
decreases as the firm produces more output
b. a perfectly competitive firm’s demand curve
shows a negative relationship between P and Q
c. a perfectly competitive
firm’s demand curve is always equal to the market price
d. a perfectly competitive firm's demand curve
has a positive slope
e. a perfectly competitive firm's demand curve
is also its marginal cost curve
23. If a perfectly competitive firm’s total
fixed costs increase, then what happens?
a. the firm’s average fixed costs and average
variable costs will both increase
b. the firm’s marginal cost will increase
c. the firm’s average fixed costs will
increase
d. the firm’s price will increase
e. all of the above will occur
Questions #24-27 correspond with the
information below.
Assume that this
perfectly competitive firm with the cost information below always chooses an
output level which yields the greatest profit (i.e. the firm maximizes
profits):
TC = 0 if q
= 0
TC = 1000
+ 50q + 5q2 if
q > 0
MC = 50 +
10q if q >
0
24. What are this
firm’s sunk costs?
a. 50
b. 100
c. 1000
d. none of the above
25. What are this firm’s recoverable fixed costs?
a. 50
b. 100
c. 1000
d. none of the above
26. If the market
price is $300, and demand is expected to remain unchanged, then which of the
following events is most likely to occur within this industry in the long run?
a. firms will exit
b. firms will shut down
c. firms will enter
d. no entry or exit will occur
27. If the market
price is $80, and demand is expected to remain unchanged, then which of the following
events is most likely to occur within this industry in the long run?
a. the market supply curve will
decrease
b. the market supply curve will increase
c. firms will experience a decrease in average
costs
d. one firm will eventually increase the price and the
remaining firms will do the same
28. In the short
run, what can we say about the supply curve of a perfectly competitive firm:
a. a perfectly competitive firm’s supply curve
decreases as the firm produces more output
b. a perfectly competitive firm’s supply curve
shows a negative relationship between P and Q
c. a perfectly competitive firm’s supply curve
is always above the market price
d. a perfectly competitive firm's supply curve
is horizontal
e. a perfectly competitive
firm's supply curve is also its marginal cost curve
29. In the short
run, what can we say about the supply curve of a monopoly firm:
a. a monopoly firm’s supply curve is
positively sloped
b. a monopoly firm’s supply curve is
horizontal
c. a monopoly firm’s supply curve is negatively
sloped
d. a monopoly firm does not have
anything that serves as a true supply curve
e. a monopoly firm’s supply curve is u-shaped
30. Suppose a monopolist faces
the following demand and marginal revenue curves:
|
Demand: |
P = 1200 – 5Q |
|
Marginal Rev: |
MR = 1200 – 10Q |
If the monopolist charges the same price for each unit sold, what’s the
most output this monopolist would produce?
a. 0 units of output
b. 1200 units of output
c. 120 units of output
d. 240 units of output
e. not enough information is given to answer this question
31. What is the best example of a natural barrier to entry:
a. patents
b. government granted monopoly rights
c. health regulations
d.
economies of scale
32. Which of the following is true about a monopoly firm setting one
price for each unit sold:
a.
monopolies do not produce on the inelastic section of the demand curve
b. monopolies will not make negative economic profit in the short run
c. monopolies are best off producing where P = MC
d. monopolies always earn profits greater than zero in the long run
33. Which of the following is the best
example of price discrimination:
a. when a firm charges more for higher quality
products
b. when firms charge a low price
c. when a firm charges a entry fee and one (same) price for all units sold
d. when firms issue coupons to consumers
34. To make price discrimination successful,
a monopolist must:
a. charge high prices and not worry about
deadweight loss
b. reduce overall output until MR = MC
c. prevent resale of the good between
different groups of consumers
d. set prices that are lower than AC and MC
35. How does using a two-part
tariff change a firm’s profits?
a. by charging different prices to different consumers, the firm can
increase its market share
b.
by charging a membership or hookup fee to each potential consumer, the firm can
add revenues to any sales the firm gets
c. by placing these tariffs on foreign firms and reducing their profits,
two-part tariffs protect domestic firms against cheap imports
d. because tariffs are like a tax, two-part tariffs decrease a firm’s
profits
36. What limits the size of fixed fee revenues within the two-part
tariff pricing strategy?
a. situations where the firm sets a low price
b. situations where marginal cost is too low
c.
the amount of potential consumer surplus
d. when the firm can prevent resale
37. The game tree (below) shows the strategies and payoffs for two
firms, X and W. In this game, firm X moves
first by deciding on a level of advertising expenditure, and then firm W makes
their strategy choice. These firms each
have 2 strategies - high advertising expenditure or low advertising expenditure
(high or low respectively).
The profits for firm X and firm W are px and pw (respectively) and given for each possible outcome below. Which of these four outcomes (outcome (a),
outcome (b), etc.) will occur if the players choose strategies so as to
maximize their own benefit in this one period game?
38. As discussed in class, what feature characterizes oligopoly and
most distinguishes that type of market structure from the other types of market
structure:
a. firms in oligopoly markets produce
heterogeneous products
b. firms in oligopoly markets produce where MR
= MC
c. firms in oligopoly markets produce
homogeneous products
d. oligopoly markets can be associated with a
high degree of strategic interaction among firms
e. there are many firms in an oligopoly market
39. As discussed in class, what feature
characterizes monopolistic competition and most distinguishes that type of
market structure from the other types of market structure:
a. firms in monopolistically competitive
markets have heterogeneous products
b. firms in monopolistically competitive
markets have firms producing where MR = MC
c. firms in monopolistically competitive
markets produce homogeneous products
d. monopolistically competitive markets can be
associated with a high degree of strategic interaction among firms
e. firms in monopolistically competitive
markets face high entry barriers
40. One type of product differentiation
approach is called horizontal differentiation.
What is true about that approach:
a. if the price of each horizontally
differentiated product were the same, then only the high quality goods would be
purchased
b. horizontal differentiation appeals to
differences in tastes
c. horizontal differentiation appeals to
differences in income
d. horizontal differentiation is only possible
when a firm has economies of scale
Part 2. Short Answer Questions (20 pts overall)
Grading will consider how accurately and
clearly you answer each question and, if computation is required, whether you
show your work and how you got your answer.
The equations below represent a
monopolist and correspond with questions #1-2 only. Full credit on question #1 is only
possible if you show all your work.