5Eco 202 .docx

5
Eco 202
Name ______________________
Exam 2
Spring 2013
Due No Later Than Midnight Sunday April 14
(5 point per day reduction for late submissions)
Multiple Choice: Each of the following questions or incomplete
statements is followed by a series of suggested answers or
completions. Select the one best response for each question. (1
point each) [This exam has a maximum possible point value of
100 – 44 of these points come from the multiple choice
questions, 9 points from fill-in-the-blank questions and 47 of
these points come from the essay questions.]
1.
Which of the following is a long run adjustment?
A. A farmer applies extra fertilizer on his corn crop.
B. An American watch manufacturer leaves the watch industry.
C. A supermarket hires four additional workers.
D. A local bakery lets two of its current employees go. (i.e.,
reduces its workforce)

2.
It is easiest for new firms to enter which of the following
market structures?
A. pure competition
B. monopolistic competition
C. oligopoly
D. pure monopoly
3.
In the short run a firm’s output
A. cannot be increased or decreased.
B. may be altered by changing the size of its plant and
equipment.
C. can vary as a result of new firms entering or leaving the
industry.
D. can vary as a result of using a fixed amount of plant and
equipment more or less
intensely.

E. both B and C are correct.
4.
The long-run average total cost curve for some industries, like
the U.S. apparel industry, have an extended range of constant
returns to scale. This implies that
A. neither economies of scale nor diseconomies of scale exist
in this industry.
B. the U.S. apparel industry is comprised of a very large
number of small firms.
C. the U.S. apparel industry is comprised of a very small
number of very large firms.
D. both relatively small and relatively large firms coexist
in the U.S. apparel industry.
5.
Suppose the total revenue for a firm is $15,000. Explicit costs
are $12,000 and normal profit
is $4,000. Which of the following is correct?
A. Accounting and economic profit both equal $3,000.
B. Accounting profit equals $3,000 while economic profit
equals $4,000.

C. Accounting profit equals -$1,000 while economic profit
equals -$5,000.
D. Accounting profit equals $3,000 while economic profit
equals -$1,000.
E. Accounting and economic profit both equal $3,000.
6.
Normal profits
A. are greater than the opportunity cost to the firm.
B. are zero under pure competition in the long run.
C. are necessary to keep a firm in the industry in the long run.
D. are not included in the firm’s economic costs of production.
7.
A business firm has moved its offices to a new location. It must
continue to pay $3,000 a month rent for the old office space for
six months as long as it remains un-rented; after that its lease
will expire and it will not be required to pay any rent. If the
firm succeeds in renting the old office before the six months is
up, it will not have to pay rent, but it will have to pay $1,000 a
month for local utility services. If the firm wants to lose as
little as possible (or make as much money as possible), it should
rent the old office space for as much as the market will bear

provided the monthly rent is above
A. $1,000.
B. $3,000.
C. $4,000.
D. $5,000.
8.
Marginal product
A. is always less than average product.
B. diminishes continuously as a firm increases production.
C. may initially increase, then diminish, but never becomes
zero as a firm increases
production.
D. may increase, then diminish, and ultimately become
negative as a firm increases
production.

9.
When a purely competitive firm produces 10 units of output, its
average total cost is $20 and its average variable cost is $15.
From this information it can be concluded that
A. this firm’s average fixed cost for 10 units is $5.
B. this firm’s total fixed cost for 12 units is $50
C. this data is valid in the short run.
D. All of the above are correct.
10.
A purely competitive firm’s short-run supply curve is
A. perfectly elastic at minimum average total cost.
B. upward sloping and equal to the portion of the marginal cost
curve which lies

between the average variable cost curve and the average
total cost curve.
C. upward sloping and equal to the portion of the marginal cost
curve which lies above
the average total cost curve.
D. upward sloping and equal to the portion of the marginal cost
curve which lies above
the average variable cost curve.
11.
Diseconomies of scale arise primarily because
A. the short-run average total cost curve rises when marginal
product is increasing.
B. beyond some point marginal product declines as additional
units of a variable
resource (e.g., labor) are added to a fixed resource
(e.g., capital).
C. of the difficulties involved in managing and coordinating a
large business enterprise.

D. firms must be large both absolutely and relative to the
market in order to employ the
most efficient productive techniques available.
12. The basic characteristic of the short run is that
A. it is no more than two years in duration.
B. the firm does not have sufficient time to reduce its output to
zero.
C. the firm does not have sufficient time to change the size of
its plant.
D. the firm does not have sufficient time to change the amounts
of any resources it
employs.
13.
“I’m losing money, but with my investment in equipment I can’t
afford to shut down at this time.” If this entrepreneur is
attempting to maximize profits/minimize losses, his behavior is
A. rational if the firm is covering all its fixed costs.

B. rational if the firm is covering all its variable costs.
C. irrational since closing the plant is necessary to eliminate all
losses.
D. irrational since fixed costs are eliminated when a firm
closes down.
14.
Marginal cost
A. declines as long as output increases.
B. is defined as the difference between total cost and total
variable cost. .
C. intersects both the average variable cost and the average
total cost curves at their
minimum points.
D. initially rises as output is increased, but then begins to
decline when the point of

diminishing returns is reached.
15.
The market demand “curve” for a purely competitive
industry/market is ____________ while the demand “curve” for
the purely competitive firm is ____________.
A. perfectly inelastic; downward sloping
B. downward sloping; perfectly elastic
C. downward sloping; perfectly inelastic
D. perfectly elastic; downward sloping
16.
An industry which consists of 75 firms, none of which has more
than 0.5 percent of total market sales, and produces a
differentiated product is operating in
A. pure competition.
B. monopolistic competition.

C. oligopoly.
D. pure monopoly.
17.
Assume that a purely competitive firm is producing where MR =
MC = $14. Additionally, data for this firm shows that MC =
AVC at $16 and MC = ATC at $20. On the basis of this
information, this firm should
A. realize an economic profit of $6 per unit of output.
B. maximize economic profits by producing in the short run.
C. minimize economic losses by producing in the short run.
D. close down in the short run to minimize losses.
18.
If a firm’s average total costs of production decrease as the firm
increases its output in the long run, we can conclude that

A. the firm is in the stage of increasing returns.
B. the firm is in the stage of diminishing returns.
C. economies of scale are being encountered.
D. diseconomies of scale are being encountered.
19.
The change in total cost resulting from producing one more unit
of output is called
A marginal cost.
B. fixed cost.
C. total cost.

D. average cost.
20.
The American restaurant industry would be described as
____________ while the restaurant industry in the single-diner
town of Timbuktu would be described by the economist as
___________.
A. purely competitive; monopolistically competitive.
B. a pure monopoly; monopolistically competitive.
C. monopolistically competitive; a pure monopoly.
D. monopolistically competitive; purely competitive.
21.
Price is constant or “given” to the individual firm selling in a
purely competitive market because
A. there are no good substitutes for this firm’s product.
B. each seller supplies a negligible fraction of the
differentiated product sold in this

market.
C. each seller supplies a negligible fraction of the standardized
(homogeneous) product
sold in this market.
D. each purely competitive firm extensively advertises, thus the
consumer has perfect
knowledge of this market.
22.
If economic losses are being incurred in a purely competitive
industry in the short-run, which of the following will occur in
the long run?
A. the economic losses will continue to exist.
B. new firms will enter the industry and the economic losses
will be eliminated.
C. existing firms will leave the industry and economic losses
will be eliminated.

D. the firms in this industry will increase their output in order
to lessen their economic
losses.
23.
Farmer Jones produces and sells soy beans in a purely
competitive market. If there is no change in his costs of
production and the price of soy beans falls, in the short run
Farmer Jones should
A. increase production to offset the decrease in price.
B. stop producing soy beans if the new price is less than
marginal revenue.
C. continue growing soy beans only if the new price covers
average fixed costs.
D. continue growing soy beans only if the new price covers
average variable costs.
E. continue growing soy beans only if the new price covers
average total costs.
24.
Individual firms in a purely competitive industry do not
advertise because

A. these firms do not make long-run profits.
B. the market demand curve cannot be increased.
C. the quantity of the product demanded is very large.
D. they produce a standardized (homogeneous) product.
E. None of the above – purely competitive firms advertise
extensively.
25.
If a purely competitive firm closes down and produces zero
output in the short run
A. its losses will be zero.
B. it will earn a normal profit.
C. it will take a loss equal to its variable costs.
D. it will realize a loss equal to its marginal cost.

E. it will take a loss equal to its fixed costs.
26.
An example of an implicit cost to a farmer growing wheat on
100 acres of land that he owns (and has been in his family for
50 years) is the amount of money he
A. spends on fuel (gasoline or diesel fuel) for his farm
equipment.
B. must pay a trucking company to transport his harvested
wheat to the market.
C. must pay a part-time farm worker who is not a family
member.
D. would receive if he rented the land to someone else.
E. All of the above are examples of implicit costs.
27.
The most important goal of the purely competitive firm is to

A. minimize costs.
B. maximize total revenue.
C. maximize average (per unit) profits.
D. maximize total normal profits.
E. maximize total economic profits.
28.
One of the economies of scale experienced by the Mauna Loa
Macadamia Nut Farm is
A. use of nut shells as fuel.
B. the small size of their farm.
C. production of a large output.
D. good weather on the Big Island.
E. managerial inefficiencies because of its large size.
29.
The basic difference between the "short run" and the "long run"
is that:

A. all costs are fixed in the short run, but all costs are variable
in the long run.
B. economies of scale are present in the short run, but not in
the long run.
C. the law of diminishing returns applies in the long run, but
not in the short run.
D. at least one resource is fixed in the short run, while all
resources are variable in
the long run.
E. at least one resource is variable in the short run, while all
resources are fixed in
the long run.
30.
Which of the following is correct?
A. There is no relationship between Marginal Product (MP) and
Marginal Cost (MC).
B. When Average Product (AP) is rising MC is falling, and
when AP is falling MC is
rising.
C. When MP is rising MC is rising, and when MP is falling MC
is falling.
D. When MP is rising MC is falling, and when MP is falling
MC is rising.
31. “As a result of recent high coffee prices, the demand for tea
has increased giving tea producers economic profits at the
present time.” If the tea industry is a purely competitive
industry, in the long run what would you expect to happen the
tea industry’s
OUTPUTPRICEECONOMIC PROFIT
A. increase

decrease
increase
B. decrease
increase
increase
C. increase
decrease
disappear
D. decrease
increase
disappear
32. When technology advances, thus improving the purely
competitive firm’s productivity,
the firm will most likely experience
A. a decrease in average fixed costs.
B. an increase in average variable costs.

C. a decrease in marginal costs and an increase in supply.
D. an increase in marginal costs and an increase in supply.
33.
If a firm must always sell its product at the market price and
wants to earn as much profit as
possible, it should
A. produce the quantity of output at which marginal cost is
minimized.
B. keep marginal cost lower than price, so profits will be
greater than zero.
C. produce the quantity of output at which marginal cost has
risen to equality with price.
D. try to sell all the output it can produce so that its fixed costs
are spread across the largest
possible number of units.
34.

Costs that must be paid in the short run even when no output is
produced are called
A.
total costs (TC).
B.
total fixed costs (TFC).
C.
total variable costs (TVC).
D.
marginal costs (MC).
35.
The defining characteristics of a monopoly market are
A.
many suppliers, unique product, and easy entry.
B.
many suppliers, identical products, and easy entry.
C.
single supplier, product with close substitutes, and barriers to
entry.
D.
single supplier, unique product, and barriers to entry.

36.
All of the following are examples of barriers to entry except
A.
patents and copyrights.
B.
government franchises and licenses.
C.
constant returns to scale.
D.
sole ownership of key resources.
37.
Marginal product is
A. the change in total output when the firm employs an
additional unit of a fixed resource.
B. the change in total output when the firm employs an
additional unit of one of its variable
resources.
C. the increase in total output when the firm employs fewer
resources.

D. the change in the physical appearance of a product when a
new model of the
product is developed.
E. Both A and B are correct.
38. If all firms producing a product in a perfectly competitive
market are required to adopt
antipollution devices that increase their costs of production,
one would expect
A. the market demand for the product to fall.
B. the market supply curve to shift to the left.
C. the long run economic profits of the individual firms to fall.
D. the short run economic profits of the individual firms to
remain unchanged.
39.
The purely competitive firm faces a demand schedule that is
A. perfectly inelastic because there are no good substitutes for
the firm's product.
B. perfectly elastic because each seller supplies a negligible
fraction of total supply.
C. of unit elasticity throughout since a standardized product is

being produced..
D. downward sloping and product differentiation is reinforced
by extensive
advertising
40.
The implicit economic, or opportunity, cost of attending school
A.
is the same for all people.
B.
is higher for people with greater earnings potential.
C.
is higher for teenagers than for people in their 30s.
D.
depends only on the amount of tuition charged by the school.
41.
An oligopolistic industry is one in which
A. a large number of small firms sell differentiated products.
B. a large number of small firms sell a homogeneous product.
C. a few large firms dominate the market for a standardized
product.

D. a few large firms dominate the market for a differentiated
product.
E. a few large firms dominate the market for a standardized or a
differentiated
product.
42.
Product differentiation can be
A. an actual difference in one product versus another.
B. due to consumers’ perception of product differentiation due
to brand names.
C. both A and B.
D. None of the above – all products are identical.
43.
Fixed costs
A. exist even if the firm produces zero output.
B. are equal to total variable costs minus total costs.

C. decrease continuously as the firm produces more output.
D. increase continuously as the firm produces more output.
44.
In pure competition, the marginal revenue of a firm always
equals
A. marginal cost.
B. average total cost.
C. average variable cost.
D. the price of the product.
E. None of the above.
(Fill-In-The-Blank and Essay Questions Are on the Next Pages)
Fill- In-The-Blank: In the space provided to the left of each
description place the name of the concept being described.
There is only one correct response for each description. (1.5
points each)
_________________ 1. Cause of increasing short-run marginal
cost
_________________ 2. Fire Insurance Premiums
_________________ 3 Total Revenue - (Explicit + Implicit
Costs)
_________________ 4. Market structure where the firm and the
industry are synonymous
_________________ 5. The amount the entrepreneur could earn

elsewhere
_________________ 6. Change in total variable cost as output
changes by one unit
ESSAYS: Answer the following 3 essay questions. Answer all
parts to each question, and answer each question as fully and
carefully as you can. Use complete sentences and a logical
economic thought process in each of your answers. These
questions are not so much essay questions as they are a series of
short answer questions. Thus, you may feel more comfortable
answering each part separately rather than trying to create one
single essay answer. (Question 1 = 11 points; question 2 = 17
points; question 3 = 19 points)
1.
Output
Total
Variable
Cost
Average
Variable Cost
Total Cost
Average
Total Cost
Marginal
Cost
0
$ 0
--
$ 24.00
--
--
1

12.00
$ 36.00
$ 12.00
2
20.00
8.00
3
12.00
60.00
20.00
4
56.00
20.00
20.00
5
16.20
105.00
A. Complete the above cost schedule. (3 points)
B. Sam Student believes the above data is long-run cost data.
Do you agree with him? Why or why not? Explain fully. How do
you know if this is short run data or long run data? (4 points)
C. Suppose that the firm for which the above data exists
represents the “average” firm in this industry. Furthermore,

suppose that the “average” firm in this industry has a minimum
efficient scale (MES) which represents 25 percent of the total
sales in this market.
· What does minimum efficient scale (MES) mean? (2 points)
· In which of the four market structures do you think an
industry with an MES of 25 will operate? Why? (2 points)
(Essay Questions #2 and #3 are on the following pages)
2.
A. Introductory economics students often contend that the
concept of Increasing Marginal Returns is the same as the
concept of Economies of Scale and that the concept of
Decreasing Marginal Returns is the same as the concept of
Diseconomies of Scale. Do you agree or disagree?
· Compare and contrast Increasing Marginal Returns and
Economies of Scale concentrating on: (6 points)
· when each occurs,
· what causes each to occur, and
· how each affects a firm’s cost curves (and what cost curves
each affects).
(Do not simple list the causes of each, but explain why those
factors cause Increasing Marginal Returns or Economies of
Scale.)
· Compare and contrast Decreasing (Diminishing) Marginal
Returns and Diseconomies of Scale concentrating on: (6 points)
· when each occurs,
· what causes each to occur,
· and how each affects a firm’s cost curves (and what cost
curves each affects).

(Do not simple list the causes of each, but explain why those
factors cause Decreasing (Diminishing) Marginal Returns or
Diseconomies of Scale.)
B.
Economists and accountants view costs of production somewhat
differently. Compare and contrast these two views of costs in
the following scenario.
Cinderella has been offered an executive position in a shoe
factory at a salary of $130,000 per year.
Currently Cinderella has her own business producing and selling
glass slippers. Her total revenues for the past year were
$260,000. Her production costs included $50,000 for labor,
$10,000 for rent, $30,000 for materials, and $10,000 for
utilities. She has also used $100,000 of her own money to start
her business. She was earning 5% interest per year on this
money in a money market account.
· Calculate Cinderella’s accounting profit (loss) and explain
how you determined her accounting profit (loss). (To receive
credit for your answer you must show your work.)
· Calculate Cinderella’s economic profit (loss) and explain how
you determined her economic profit (loss). (To receive credit
for your answer you must show your work.)
· Based on your calculations, would you advise Cinderella to
continue making her own glass slippers or to go to work for the
shoe company? Why?
Explain your answer to each part fully in terms of logical
economic thought. (5 points)
(Essay Question #3 IS on the following page)
3. Answer the following questions using the cost data below.
The data is for a single firm in a

purely competitive industry and is valid in the short-run.
Explain all of your answers fully.
TOTAL OUTPUT
AVERAGE FIXED
COST
AVERAGE VARIABLE COST
AVERAGE TOTAL
COST
MARGINAL COST
0
--
--
--
--
1
$ 60.00
$ 40.00
$ 100.00
$ 40.00
2
30.00
38.00
68.00
36.00
3
20.00
36.00
56.00
32.00
4
15.00
35.00
50.00

32.00
5
12.00
35.00
47.00
35.00
6
10.00
36.00
46.00
41.00
7
8.57
37.43
46.00
46.00
8
7.50
39.00
46.50
50.00
A. Assume that the market price for this firm’s product is
$47.00and that the firm is currently producing 6 units of output.
Is this firm maximizing its profits (minimizing its losses) by
producing 6 units of output? If so why and what amount of
profit is it earning (loss is it incurring)? If 6 units is not the
profit maximizing output for this firm, what output does yield
maximum profit (minimum loss) and what will its total
economic profit or loss be? (To receive credit you must use the
marginal revenue-marginal cost analysis and show your
calculations.) (4 points)
B. If the market price for this firm’s product decreases $36.00
to, will it be advantageous for this firm to produce in the short-
run? Why or why not? If it will produce, what amount of
output will the firm produce? What will its total economic

profit or loss be? (To receive credit you must use the marginal
revenue-marginal cost analysis and show your calculations.) (4
points)
C. What is this firm’s short-run supply schedule? (You may
use a chart relating possible prices to quantities supplied; you
may use a graph highlighting the supply schedule; or you may
verbally explain what the firm’s short-run supply schedule is.)
(3 points)
D. Suppose that in the short-run the price of this firm’s product
is $55.00. What series of actions will take place in the long run
in this industry? How much economic profit (or loss) will the
average purely competitive firm earn in the long run? Why?
(4 points)
E. The purely competitive market structure is the only market
structure to achieve both allocative efficiency and productive
efficiency.
· What is allocative efficiency and when is it achieved? (2
points)
· What is productive efficiency and when is it achieved? (2
points
Explain your answer to each part fully in terms of logical
economic thought.
PAGE
10
Extra Credit
Pure Competition Worksheet

(Due No Later Than Midnight Sunday April 7)
(Maximum Point Value = 7 Points)
Answer the questions below on the basis of the cost data given
in the following table.
Assume that the data is valid for a single firm in a purely
competitive industry and is valid in the short run.
In order to receive credit for this assignment you must use the
marginal revenue-marginal cost analysis and you must explain
how you arrived at your answers and show your work /
calculations. You will receive only partial credit if you use the
total revenue-total cost analysis to determine you answers.
TOTAL
OUTPUT
AVERAGE
FIXED COST
AVERAGE
VARIABLE COST
AVERAGE
TOTAL COST
MARGINAL
COST
0
--
--
--
--
1
$ 50.00

$ 40.00
$ 90.00
$ 40.00
2
25.00
36.00
61.00
32.00
3
16.67
30.00
46.67
18.00
4
12.50
30.00
42.50
30.00
5
10.00
32.00
42.00
40.00
6
8.33
35.00
43.33
50.00
7
7.14
40.00
47.14
70.00
8
6.25
47.50

53.75
100.00
A. The market price for this firm’s product is $38.00. Will it be
advantageous for this firm to produce in the short-run? Why or
why not? If it will produce, what amount of output will the
firm produce? What will its total economic profit or loss be
(whether the firm produces or closes down)?
B. Market demand has decreased and the market price for this
firm’s product now decreases to $29.00. Now will it be
C. Market demand has now increased and the market price for
this firm’s product increases to $71.00. Now will it be
It is worthwile to produce if the price is above your average
variable costs.
If the price is between the average variable costs and average
total costs, you are losing money, but you are losing less money
than if you shut down.
If the price is below your average variable costs, then producing
nothing and eating your fixed costs will lose less money than
producing something and paying costs of production.
If you choose to produce, it is wortwhile to produce an
additional unit if the marginal costs are less than or equal to the
marginal revenue (price).

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