Econ 300 Practice Test 2

Which of the following is equivalent to average total cost?

a)Fixed cost plus variable cost.

b)Fixed cost and variable cost added together and then divided by output.

c)The change in total cost divided by the change in output.

d)Marginal cost plus variable cost.

b)Fixed cost and variable cost added together and then divided by output.

(Since total costs is equal to variable cost plus fixed costs and average total cost is defined as total costs divided by the quantity produced, therefore fixed cost plus variable costs divided by the quantity produced would equal average total cost.)

When producing jeans, which of the following are not a variable cost in the short run?

a)Wages

b)Zippers

c)Rent for the factory

d)Denim material

c)Rent for the factory

(Factory rent would not normally be related to production volume and would be defined as fixed costs.)

In the short run, when output is zero, total costs are zero.

True of False

False

(Fixed costs exist at all levels of production and when output is zero fixed cost equal total costs.)

The selection of the short-run rate of output is the:

a)Production decision.

b)Investment decision.

c)Marginal decision.

d)Industrial decision.

a)Production decision.

(In the short run a producer can only make changes to variable factors of production.)

The factors of production include:

a)Money.

b)Profit.

c)Land, labor, capital, and entrepreneurship.

d)Output in a production function.

c)Land, labor, capital, and entrepreneurship.

(The four factors of production are land, labor, capital, and entrepreneurship.)

Market structure is determined by:

a)The equilibrium price in a specific market.

b)The level of government regulation in a specific market.

c)Whether or not a firm is able to alter its output.

d)The number and relative size of firms in an industry.

d)The number and relative size of firms in an industry.

(Market structure refers to the number and relative size of the firms in an industry.)

In making a production decision, a business owner:

a)Decides whether to enter or exit the market.

b)Makes a long-run decision about output and revenues.

c)Decides whether to buy or lease new plant and equipment.

d)Decides the short-run rate of output.

d)Decides the short-run rate of output.

(A production decision is short-run and one in which a business owner varies the rate of output.)

If the cost of production rises for all the firms in a perfectly competitive industry:

a)Each firm will supply less output at any given price.

b)Total revenue increases.

c)The marginal cost curve shifts downward.

d)Total profit increases.

a)Each firm will supply less output at any given price.

(If the variable cost of production rises, the marginal cost curve will shift up or to the left, which would cause each firm to supply less at any given price.)

Which of the following market structures has the highest barriers to entry?

a)Perfect competition

b)Monopoly

c)Monopolistic competition

d)Oligopoly

b)Monopoly

(While both monopolistic competition and oligopolies have high barriers to entry the highest barriers are with monopolies.)

If a perfectly competitive firm produces and sells more output, its _______ will definitely increase.

a)Total profit

b)Total revenue

c)Average total cost

d)Marginal revenue

b)Total revenue

(If a firm’s costs rise more than its revenue, profit will decline but total revenue will still increase.)

In a competitive market, economic losses indicate that:

a)Consumers want resources to be reallocated.

b)The barriers to entry are too high.

c)Additional firms will enter the market.

d)More of the product should be produced.

a)Consumers want resources to be reallocated.

(An economic loss indicates that the price is below the average total cost which means that some firms will exit the market which will shift the market supply curve up and to the left which will translate into less product produced at a higher price.)

An oligopolist may decide to coordinate with others in the industry in order to maximize profits.

True of False

True

(When oligopolies coordinate with one another in order to maximize profits, it is called collusion.)

Which of the following is not consistent with a monopoly industry?

a)Production and supplies are constrained.

b)Barriers to entry keep potential competitors out of the market.

c)There is no pressure to reduce costs or improve product quality.

d)Many firms produce identical or similar products.

d)Many firms produce identical or similar products.

(Many firms that produce identical or similar products is a characteristic of a competitive market.)

A text NEWSWIRE article about Microsoft reported: “Microsoft mounted a deliberate assault upon entrepreneurial efforts that…could well have prevented the introduction of competition…” This passage suggests that Microsoft was able to erect barriers to entry and behave like:

a)A perfectly contestable market.

b)A perfectly competitive market.

c)A natural monopoly.

d)A monopoly.

d)A monopoly.

(A monopoly will attempt to erect barriers to entry to keep firms out of the market.)

Suppose two firms dominate a market and control price and output. This type of market is called:

a)A duopoly.

b)A monopoly.

c)Monopolistically competitive.

d)An oligopoly.

a)A duopoly.

(A duopoly is a special form of an oligopoly in which two firms control the market.)

Using Figure 9.1, assume point D represents the optimal mix of output. The market mechanism is likely to produce the mix of output represented by point:

a)C because the market mechanism tends to under produces public goods.

b)E because the market mechanism tends to under produces private goods.

c)D because the market mechanism is efficient.

d)A because full employment can never be reached.

a)C because the market mechanism tends to under produces public goods.

(Point C represents what a market mechanism would produce without intervention in that it would still produce some public goods but at a reduced rate.)

Externalities are a type of market failure because:

b)Producers have too much power.

c)Third parties bears the costs or benefits of a market activity.

d)Goods and services are not distributed fairly.

c)Third parties bears the costs or benefits of a market activity.

(Any cost which exists outside of the market mechanism is considered an external cost.)

When firms have the ability to change the market price of a good or service, the market failure involved is:

a)Market power.

b)Public goods.

c)Externalities.

d)Inequities.

a)Market power.

(Market power means that a firm has the ability to alter the product price by changing the amount produced (quantity).)

Income transfers are a government response to the market’s failure to provide an equitable distribution of goods.

True of False

True

(The government uses taxes and transfers as way to address equity issues.)

The demand curve for an individual monopolist:

a)Does not exist.

b)Slopes upward to the right.

c)Is the same as the market demand curve.

d)Is the same as the marginal revenue curve.

c)Is the same as the market demand curve.

(Since the number of firms in a monopolistic industry is one the individual demand curve is the market demand curve.)

In economics, a public good:

a)Is any good produced by the government.

b)Has social costs that are lower than private costs.

c)Is provided in an optimal amount by the market.

d)Cannot be denied to consumers who do not pay.

d)Cannot be denied to consumers who do not pay.

(A good or service that cannot be excluded from people is a public good.)

Which of the following statements concerning the relationship between total product (TP) and marginal physical product (MPP) is not correct?

a)TP will continue to rise even though MPP is falling but greater than zero.

b)TP is increasing at an increasing rate if MPP is increasing.

c)TP will fall if MPP is negative.

d)TP will fall if MPP is falling.

d)TP will fall if MPP is falling.

(So long as MPP is greater than zero, it will be adding to TP at a decreasing rate.)

Ceteris paribus, the law of diminishing returns states that beyond some point the:

a)Return on stocks and bonds diminish as more are purchased.

b)Addition to total utility declines as more units are consumed.

c)Marginal physical product of a variable input declines as more of it is used.

d)Output of any good or service increases as more variable input is used.

c)Marginal physical product of a variable input declines as more of it is used.

(By varying one factor while holding all other factors of production constant less and less additional output will be produced.)

Which of the following will always increase as output increases?

a)Total cost

b)Average total cost

c)Marginal cost

d)Fixed costs

a)Total cost

(Since total cost is composed of fixed cost which do not change in the short-run and variable costs which do change in the short-run, an increase in volume will increase variable cost and therefore total costs.)

If the first, second, third and forth worker employed by the firm add 15, 21, 12 and 8 units of total product respectively, we can conclude that:

a)The marginal product of all four workers is 14.

b)The total product of two workers is 42.

c)That after the second worker marginal product declines.

d)That adding a forth worker will cause total product to decline.

c)That after the second worker marginal product declines.

(At first marginal physical product increases but eventually the law of diminishing returns will cause marginal physical product to decline.)

A firm can be identified as profitable if the:

a)Sum of total revenue and total costs is high.

b)Difference between its total revenue and total costs is negative.

c)Difference between its total revenue and total costs is positive.

d)Total costs and marginal costs are low.

c)Difference between its total revenue and total costs is positive.

(If total revenue is greater than total costs then the profit is positive.)

Assume that for an individual firm MC = AVC at \$6 and MC = ATC = \$10 and MC = price = \$12, then the firm will be operating:

a)at a loss.

b)where economic profits are negative.

c)at a point where firms will leave the market.

d)where economic profits are positive.

d)where economic profits are positive.

(A firm will operate where MC = price and at that point the unit profit would be the difference between the market price and the ATC which would mean that the firm’s economic profits were positive.)

Which of the following is characteristic of a perfectly competitive market?

a)Firms are price setters

b)A few firms dominate the market

c)There are low barriers to entry

d)The market demand curve is flat

c)There are low barriers to entry

(In a perfectly competitive market a lot of capital investment is not necessary in order to go into business.)

A perfectly competitive firm:

a)Can sell all of its output at the prevailing price.

b)Has some market power.

c)Can sell some output at a price above the market price.

d)Can sell more output only if it reduces its price.

a)Can sell all of its output at the prevailing price.

(Since a perfectly competitive firm faces a horizontal demand curve it can sell all of its output at the market price.)

In the perfectly competitive catfish market, the market demand curve is:

a)Flat (horizontal).

b)The same as the demand curve faced by the firm.

c)Vertical.

d)Downward sloping.

d)Downward sloping.

(Even though the individual firm in the catfish market faces a horizontal demand curve the market demand curve is still downward sloping.)

Refer to Figure 6.1 for a perfectly competitive firm. This firm earns zero economic profit at a price of:

a)\$8.

b)\$20.

c)\$30.

d)\$46.

c)\$30.

(If the market price is \$30 the price it tangent to the low point on the average total cost curve and the economic profit would equal zero.)

Marginal costs:

a)Are the additional costs incurred in producing one more unit of output.

b)Fall as the rate of output increases.

c)Are constant for a perfectly competitive firm.

d)Are equal to total costs divided by total output.

a)Are the additional costs incurred in producing one more unit of output.

(Marginal cost is the extra cost of producing one more unit of output or equal to the change in total cost divided by the change in output.)

A profit-maximizing competitive firm wants to _____ the rate of output when price _____ marginal cost.

a)Expand; exceeds

b)Reduce; exceeds

c)Expand; is less than

d)Reduce; equals

a)Expand; exceeds

(If price is greater than marginal cost an increase in output will add more additional revenue than additional cost.)

Economies of scale occur when the long-run average cost curve slopes downward.

True or False

True

(One of the advantages of a monopoly is that it can accumulate large amounts of capital in order to keep long-run average cost low.)

In Figure 7.1, at the profit maximizing level of output for a monopolist, marginal cost is:

a)\$5.00.

b)\$7.00.

c)\$9.00.

d)Between \$6.00 and \$7.00.

a)\$5.00.

(At 3 units of output the marginal cost would equal the marginal revenue of \$5.)

In Figure 7.1, if this industry is competitive, the profit-maximizing price is:

a)\$5.00.

b)\$7.00.

c)\$9.00.

d)Between \$6.00 and \$7.00.

d)Between \$6.00 and \$7.00.

(If this industry was competitive then all of the firms would see a flat demand curve at the market price of between \$6 and \$7 and produce a collective output of between 3 and 4 units.)

In monopolistic competition there is more price-setting power than in perfect competition.

True or False

True

(In monopolistic competition considerable emphasis is placed on advertising, brand names and trademarks in order to have more price-setting power.)

In Figure 7.1, the profit-maximizing level of output for a monopolist is:

a)2 units.

b)3 units.

c)4 units.

d)Between 3 and 4 units.

b)3 units.

(At 3 units of output profit is maximized because that is the point where marginal revenue and marginal cost intersect.)

Which of the following is most likely a private good?

a)Police protection

b)Cars

c)Highways

d)Parks

b)Cars

(Since cars can be withheld from the consumer it would be a private good.)

The term externalities refers to:

a)The inequitable distribution of output.

b)All costs and benefits of a market activity borne by a third party.

c)The impact that imported goods have on domestic markets.

d)Free-riders who benefit but do not pay.

b)All costs and benefits of a market activity borne by a third party.

(Any cost which exists outside of the market mechanism is considered an external cost.)

A private good is unique because:

a)Nonpayers can be prevented from consuming it.

b)It can be enjoyed exclusively by free riders.

c)The market is likely to produce too little of it.

d)It is provided most efficiently by government.

a)Nonpayers can be prevented from consuming it.

(A private good can be produced by a firm because its use can be excluded from non payers.)

Market failure implies that a policy of laissez-faire:

a)Leads the economy to a point beyond the production possibilities curve.

b)Leads the economy to an undesirable point on the production possibilities curve.

c)Is superior to government intervention.

d)Causes government failure.

b)Leads the economy to an undesirable point on the production possibilities curve.

(Laissez-faire capitalism means that privately owned resources and the price system are the single method to direct economic activities.)

Government intervention in the economy:

a)Always fixes macroeconomic market failures.

b)Always fixes microeconomic market failures.

c)Always makes the economy worse off.

d)May fix market failures or make the economy worse off.

d)May fix market failures or make the economy worse off.

(When government intervention does not fix market failures or makes the economy worse off we call that government failure.)

Other things being equal, if a perfectly competitive firm is forced to switch to a more expensive, nonpolluting production process:

a)The average cost curve will shift downward.

b)The profit-maximizing level of output will be increased.

c)The marginal cost curve will shift downward.

d)Total profits will decrease.

d)Total profits will decrease.

(Since the marginal cost curve will shift up and to the left the firm will have to cut back on output until marginal revenue again equals marginal costs.)

One News Wire article in the text carries the headline “Forced Recycling Is a Waste.” If the city forces people to recycle, which type of market failure is it attempting to correct?

a)Public goods.

b)Externalities.

c)Market power.

d)Inequity.

b)Externalities.

(When government implements a policy that does not produce the results that were intended it is called government failure.)

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