Econ 101, section 5, S01
Schroeter
Exam #4, Red
Choose the single best answer for each question.
1. The amount of money that a firm receives from the sale of its output is called
a. net profit.
*. total revenue.
c. total cost.
d. taxable income.
2. Suppose that, for the year 2000, the firm "Bob's Bagels" generated revenue of $1,850,000, and incurred explicit costs of $1,250,000 and implicit costs of $450,000. For the year 2000, Bob's Bagels had accounting profit of
a. $1,400,000 and economic profit of $150,000.
b. $150,000 and economic profit of $600,000.
*. $600,000, and economic profit of $150,000.
d. none of the above.
3. In the short run, as a firm's quantity of output increases,
*. average fixed cost always decreases.
b. average total cost always increases.
c. average variable cost always decreases.
d. none of the above.
4. Suppose that a production function is characterized by marginal product of labor that is positive but diminishing. Hiring more workers will
a. decrease output.
b. increase output, but only if the marginal product of labor exceeds the average product of labor.
*. increase output, but by smaller and smaller increments with the addition of each worker.
d. none of the above.
5. Which of the following is a correct description of a firm's cost curves?
a. Where average total cost is decreasing, marginal cost must be decreasing.
b. Where marginal cost is increasing, average total cost must be increasing.
*. Where marginal cost is less than average total cost, average total cost must be decreasing.
d. All of the above.
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Questions 6, 7, and 8 refer to the following information. A firm has fixed inputs to which we refer as "factory." The firm uses a variable input, "labor," in combination with the factory to produce output. The opportunity cost of using its factory is $500/day. Labor is hired at a wage of $150/worker/day. The following table shows how much output would be produced at different labor employment levels.
Labor(workers) / Output
(gizmos/day)
0 / 0
1 / 16
2 / 30
3 / 40
4 / 44
6. At an output level of 30 gizmos/day, the firm's average fixed cost is
a. $36.67/gizmo.
b. $28.67/gizmo.
*. $16.67/gizmo.
d. $8.67/gizmo.
7. At an output level of 40 gizmos/day, the firm's variable cost is
a. $150/day.
*. $450/day.
c. $950/day.
d. none of the above.
8. Over the output range from 40 to 44 gizmos/day, the firm's marginal cost is approximately
a. $150.00/gizmo.
*. $37.50/gizmo.
c. $12.50/gizmo.
d. $3.75/gizmo.
9. If, over a given range of output levels, a firm's longrun average total cost increases as the quantity of output increases we say that, for this range of output, the firm is
a. subject to economies of scale.
*. subject to diseconomies of scale.
c. a natural monopoly.
d. both a and c.
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10. When we say that an individual firm in a competitive market is a "price taker," we mean
a. in order to sell more, the firm must cut its price.
b. price is set by government regulation.
*. price is determined, through the interaction of supply and demand, beyond the firm's control.
d. the firm has market power.
11. A competitive firm is currently operating where marginal cost is $8/unit, price is $6/unit, and average total cost is $4/unit. To maximize profit (or minimize loss) in the short run, the firm should
a. maintain its current output.
b. increase output.
*. decrease output, but not shut down.
d. impossible to determine without more information.
12. Under which of the following circumstances would the decision to shutdown in the short run (cease production, at least temporarily) be a profitmaximizing (or lossminimizing) choice for a competitive firm? If the firm were to produce output, revenue would be less than
a. total cost.
*. variable cost.
c. capital cost.
d. sunk cost.
13. A competitive firm's shortrun supply curve is most closely related to which of the following curves?
*. marginal cost.
b. average variable cost.
c. marginal revenue.
d. average total cost.
14. In the zeroprofit equilibrium of a competitive industry, price is equal to the minimum value of
*. average total cost.
b. average variable cost.
c. marginal cost.
d. average fixed cost.
15. A competitive industry is in zeroprofit equilibrium to begin. Then demand shifts permanently to the right. In the shortrun,
a. price will increase.
b. the representative firm's output will increase.
c. industry output will increase.
*. all of the above.
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16. A competitive industry is in zeroprofit equilibrium to begin. Then demand shifts permanently to the right. Which of the following will be a feature of the new zeroprofit equilibrium that will eventually be reached in the longrun?
a. Industry output will be the same as in the original zeroprofit equilibrium.
b. There will be the same number of firms as in the original zeroprofit equilibrium.
c. Price will be higher than in the original zeroprofit equilibrium.
*. None of the above.
17. When the developer of a new and popular product receives a patent, we would expect
a. the product to sell for a "high," monopolylike price as long as the patent protection lasts.
b. competition to drive down the price of the product after the patent expires.
*. both a and b.
d. none of the above.
18. A monopolist can sell 100 widgets/day when it charges a price of $10/widget. At this output level, its marginal revenue is $5/widget. Approximated how much would the monopolist have to reduce its price in order to sell 101 widgets/day?
a. $0/widget (that is, the monopolist could sell one more widget/day at the current price).
*. $0.05/widget.
c. $0.50/widget.
d. $5.00/widget.
19. A market is competitive to begin. Then the sellers in the market are monopolized. (One investor buys all of the firms and proceeds to manage the assets of those firms as a single, profitmaximizing monopoly firm.) What impact would this have on market price and quantity?
a. Price and quantity would both increase.
b. Price and quantity would both decrease.
*. Price would increase and quantity would decrease.
d. Price would decrease and quantity would increase.
20. Usually commercial airlines require passengers planning roundtrip flights to stay at their destinations for a Saturday night in order to qualify for low, "supersaver" fares. This is because
a. it costs the airlines less to serve roundtrip passengers who stay over a Saturday night.
*. passengers who are willing to stay over a Saturday night are usually the ones with relatively low willingness to pay for air travel.
c. the airlines want to reserve supersaver fares for business travelers because they buy more tickets than passengers who travel on vacation or for personal reasons.
d. the airlines want to promote longer stays away from home because many airlines also own hotels.
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21. At its current output level, a monopolist finds that price is $10/unit, average total cost is $8/unit, marginal cost is $7/unit, and marginal revenue is $6/unit. To maximize profit (or minimize loss) in the shortrun, the monopoly should
a. maintain its current output level.
b. increase its output level.
c. shut down; that is, reduce its output level to zero.
*. reduce its output level but not shut down.
Questions 22 and 23 refer to the following figure showing a payoff matrix for a game that is played by two cigarette manufacturers: A and B. The two firms are faced with lawsuits from states to recover the health care expenses associated with cigarette smoking. The firms have done their own scientific studies and each has evidence that indicates that cigarette smoking causes lung cancer and other related illnesses. Each firm faces a complicated choice. Revealing its evidence might make prosecutors inclined to "go easy" on the firm. But the outcome could also depend on what the firm's rival chooses to do. The entries in the cells of the matrix show the profits, in billions of dollars, to the firms for each combination of strategies. (Of course, a higher profit is better than a lower one.) In each case, the profit to firm A is listed first and the profit to firm B is listed second.
Firm B's strategiesConcede that cigarette smoking causes lung cancer / Argue that there is no connection between smoking and cancer
Firm A's
strategies / Concede that cigarette smoking causes lung cancer / (45, 5) / (55, 10)
Argue that there is no connection between smoking and cancer / (20, 45) / (50, 40)
22. Which of the following is true?
*. "Concede" is a dominant strategy for firm A.
b. "Concede" is a dominant strategy for firm B.
c. "Argue" is a dominant strategy for firm B.
d. both a and b.
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23. In the Nash equilibrium of this game, firm A
a. "Concedes" and firm B "Concedes."
*. "Concedes" and firm B "Argues."
c. "Argues" and firm B "Concedes."
d. "Argues" and firm B "Argues."
Questions 24 and 25 refer to the following information. A gizmo monopolist faces two groups of potential customers. There are 200 customers with a willingness to pay of $10 for the first gizmo and $0 for additional gizmos. Also, there are 400 customers with a willingness to pay of $5 for the first gizmo and $0 for additional gizmos. Gizmos can be made at zero fixed cost and a constant marginal cost of $3/gizmo.
24. If the gizmo monopolist were required to charge a uniform price, the maximum profit it could earn would be
a. $800.
b. $1000.
c. $1200.
*. None of the above.
25. If the gizmo monopolist were allowed to price discriminate, the maximum profit it could earn would be
*. $2200.
b. $2600.
c. $3200.
d. None of the above.
26. In oligopoly markets
a. pursuit of selfinterest by profit maximizing firms tends to achieve maximum collective profits.
b. collusive agreements are always stable because, once the agreements are established, all firms have an incentive to abide by them.
c. joint profit would be lower under a cartel arrangement than in a Nash equilibrium.
*. there is tension between cooperation and selfinterest.
27. As the number of firms in an identical product oligopoly grows larger, the Nash equilibrium for the market looks more and more like
*. a competitive equilibrium.
b. a cartel equilibrium.
c. a jointprofit maximizing equilibrium.
d. both b and c.
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28. A central issue in the Microsoft antitrust lawsuit involved Microsoft's integrating its Internet browser into its Windows operating system, to be sold as one unit. This practice is known as
a. price fixing.
b. resale maintenance.
*. tying.
d. collusion.
29. Monopoly results in a "deadweight loss" because the quantity sold by monopoly
a. exceeds the socially optimal quantity.
*. falls short of the socially optimal quantity.
c. equals the socially optimal quantity.
d. either a or b, depending on the elasticity of demand faced by the monopoly.
30. When we say that firms in an oligopoly are "interdependent," we mean
a. the price charged by any one firm is determined, beyond the control of that firm, by the forces of supply and demand.
*. the profit earned by any one firm depends on its own actions and on its rivals' actions.
c. they are participating in a collusive agreement on the determination of price or output.
d. they have reached the industry's Nash equilibrium.