Name: ________________________ Class: ___________________ Date: __________ID: A

2nd midterm practice test

True/False

Indicate whether the statement is true or false.

____1.Economists define the long run as any production time period lasting over one year.____2.In the long run, all costs are variable.____3.When marginal cost exceeds the average variable cost, average variable cost must be increasing.____4.In the long run, firms can vary all inputs in the production process.____5.Diseconomies of scale are present when the long run average total cost of production declines as output

expands.____6.An increase in the price of raw materials will shift both the MC and the ATC curves upward.____7.Whenever marginal revenue is greater than marginal cost, a profit-maximizing firm should reduce its

output.____8.A profit-maximizing monopolist will choose to operate along the inelastic portion of its demand curve.____9.Monopolists, unlike perfectly competitive firms, can continue to earn positive economic profits over time.____10.A monopolist restricts output and charges a higher price relative to what would occur if a market were

perfectly competitive.

Multiple Choice

Identify the choice that best completes the statement or answers the question.

____ 11. Which of the following factors of production is not variable in the long run?

the size of the firm's plant

land

highly skilled labor

All factors are variable in the long run.

1Name: ________________________ID: A

Figure 11-4

____ 12. Refer to Figure 11-4. At output level 0Q, average fixed cost equals:

QF.

ED.

FE.

QD.

both a. and b.

____ 13. When there are economies of scale in production:

long-run average total cost declines as output expands.

long-run average total cost increases as output expands.

marginal cost increases as output expands.

the marginal product of an input diminishes with increased utilization.

____ 14. A firm can produce 840 gallons of paint per day with 6 workers, or 910 gallons per day with 7 workers. The marginal product of labor over this range of output, stated in gallons per worker per day, is

140.

135.

130.

70.

35.

____ 15. A firm in a perfectly competitive industry will expand output as long as:

marginal revenue is less than average revenue.

marginal cost is less than marginal revenue.

marginal cost is less than average total cost.

marginal revenue is less than average total cost.

marginal revenue is less than marginal cost.

____ 16. Toys for Twerps, Inc., sells in a perfectly competitive market, with an equilibrium price of $5. Its marginal revenue:

is greater than $5.

is $5.

is less than $5.

is less than zero.

cannot be determined from the above information.

2Name: ________________________

ID: A____ 17. A key element to preserving a monopoly is:

a.government subsidization of critical enterprises.

b.keeping potential rivals out of the market.

c.guaranteeing the availability of substitute products.d.increased advertising expenditures.

Table 13-1

QuantityTotal RevenueTotal Cost

89590

910593

1011498

11122105

12129114

____ 18. Refer to Table 13-1. The profit-maximizing level of output:

is equal to 9 units of output.

is equal to 10 units of output.

is equal to 11 units of output.

is equal to 12 units of output.

cannot be determined from the information provided.

Figure 13-1

____ 19. Refer to Figure 13-1. The profit-maximizing firm will produce at what level of output?0Q1 0Q2 0Q3 None of the above.

3Name: ________________________ID: A

____ 20. If the demand curve facing a monopoly was 1 unit at $7, 2 units at $6, 3 units at $5, 4 units at $4, and 5 units at $3, the marginal revenue from selling the third unit of output:

is $5.

is $4.

is $3

is $1

cannot be determined from the above information.

Short Answer

Explain why some costs are considered to be variable and some fixed. How does time enter into the definition?

Complete the following table describing the short-run daily costs of the Kangaroo Backpack Company.

TotalTotalTotalTotalAverageAverageAverageMarginalProductFixed CostVariableCostFixed CostVariableTotal CostCost(Backpacks)

Cost

Cost

0

0

------

1

30

2

50

3

60

4

64159

5

90

6

150

7

196

8

240

A one-day ticket to Sea World costs $37, but a two-day pass costs $42. What is the average cost per day for a one-day pass? For a two-day pass? What is the marginal cost of a second day at Sea World? Why might Sea World charge such a price for a second day's entrance to the park?

Explain the cost advantage of a firm operating at constant returns to scale.

4Name: ________________________ID: A

In the short run, if a perfectly competitive firm produced at the quantity of productive efficiency, would it generate the highest profit level possible? Why or why not?

What are the characteristics of a perfectly competitive industry?

Why do short-run profits in a perfectly competitive industry tend to disappear over time?

Table 12-3

The following table shows how the total cost of producing canisters of peanuts varies with output and capital in the long run in a perfectly competitive industry.

Quantity of Peanut012345678

Canisters each hour

Total Cost (K=1)01.001.503.005.007.5010.0012.5016.00

(in dollars)

Total Cost (K=2)1.001.401.702.102.903.805.006.007.20

(in dollars)2.0012.302.502.602.803.604.505.506.70

Total Cost (K=3)

(in dollars)

Refer to Table 12-3. What levels of capital (K=1, K=2, or K=3) would the firm choose in the long run for producing three canisters and five canisters of peanuts per hour, respectively?

Refer to Table 12-3. If firms can freely enter or exit the industry and face the cost structures specified, what is the likely long-run price of a canister of peanuts?

Does the monopolist have an incentive to reduce cost under average cost pricing? How can this be overcome?

5