Final Mirco Econ

Use the following two statements to answer this question:
I. The average cost curve and the average variable cost curve reach their minima at the same level of output.
II. The average cost curve and the marginal cost curve reach their minima at the same level of output. A) Both I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
D) Both I and II are false.

D) Both I and II are false.

30) For any given level of output:
A) marginal cost must be greater than average cost.
B) average variable cost must be greater than average fixed cost. C) average fixed cost must be greater than average variable cost. D) fixed cost must be greater than variable cost.
E) None of the above is necessarily correct.

E) None of the above is necessarily correct.

In a short-run production process, the marginal cost is rising and the average variable cost is falling as output is increased. Thus,
A) average fixed cost is constant.
B) marginal cost is above average variable cost.

C) marginal cost is below average fixed cost.
D) marginal cost is below average variable cost.

C) marginal cost is below average fixed cost.

Which of the following relationships is NOT valid?
A) Rising marginal cost implies that average total cost is also rising.

B) When marginal cost is below average total cost, the latter is falling.

C) When marginal cost is above average variable cost, AVC is rising.

D) none of the above

A) Rising marginal cost implies that average total cost is also rising.

33) Consider the following statements when answering this question:

1. A firm's marginal cost curve does not depend on the level of fixed costs.

2. As output increases the difference between a firm's average total cost and average variable cost

curves cannot rise.
A) I is true, and II is false.

B) I is false, and II is true.

C) I and II are both true.

D) I and II are both false

C) I and II are both true.

Consider the following statements when answering this question:
I. Whenever a firm's average variable costs are falling as output rises, marginal costs must be falling too.
II. Whenever a firm's average total costs are rising as output rises, average variable costs must be rising too.
A) I is true, and II is false.
B) I is false, and II is true.
C) I and II are both true.
D) I and II are both false.

B) I is false, and II is true.

35) In the short run, suppose average total cost is a straight line and marginal cost is positive and constant. Then, we know that fixed costs must:
A) be declining with output.
B) be positive.

C) equal zero.
D) We do not have enough information to answer this question.

C) equal zero.

38) With its current levels of input use, a firm's MRTS is 3 (when capital is on the vertical axis and labor is on the horizontal axis). This implies:

A) the firm could produce 3 more units of output if it increased its use of capital by one unit (holding labor constant).
B) the firm could produce 3 more units of output if it increased its use of labor by one unit (holding capital constant).

C) if the firm reduced its capital stock by one unit, it would have to hire 3 more workers to maintain its current level of output.
D) if it used one more unit of both capital and labor, the firm could produce 3 more units of output.
E) the marginal product of labor is 3 times the marginal product of capital.

E) the marginal product of labor is 3 times the marginal product of capital.

39) Which of the following is NOT an expression for the cost minimizing combination of inputs?

A) MRTS = MPL /MPK
B) MPL/w = MPK/r
C) MRTS = w/r

D) MPL/MPK = w/r E) none of the above

A) MRTS = MPL /MPK

40) A firm employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at a rate of $21 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. The firm:
A) is producing its current output level at the minimum cost.
B) could reduce the cost of producing its current output level by employing more capital and less labor.

C) could reduce the cost of producing its current output level by employing more labor and less capital.

D) could increase its output at no extra cost by employing more capital and less labor.

E) Both B and D are true.

C) could reduce the cost of producing its current output level by employing more labor and less capital.

41) Suppose capital and labor are perfect substitutes in a long-run production process. Particularly, at any level of labor and capital the firm has, it can replace 1 unit of labor with 1 unit of capital (and vice versa). If labor costs $15 per hour and the rental rate of capital is $20 per hour, what can we say about the profit maximizing choice of labor and capital inputs?

A) We will only use labor in the production process.

B) We will only use capital in the production process.

C) We will use equal amounts of capital and labor.

D) The optimal capital-labor ratio is 0.75-to-1.

A) We will only use labor in the production process.

At every output level, a firm's short-run average cost (SAC) equals or exceeds its long-run average cost (LAC) because:
A) diminishing returns apply in the short run.
B) returns to scale only exist in the long run.

C) opportunity costs are taken into account in the short run.
D) there are at least as many possibilities for substitution between factors of production in the long run as in the short run.
E) none of the above

D) there are at least as many possibilities for substitution between factors of production in the long run as in the short run.

4) Use the following statements to answer this question:

1. The long-run average cost (LAC) curve is the envelope of the short-run average cost (SAC) curves.

2. The long-run marginal cost (LMC) curve is the envelope of the short-run marginal cost (SMC) curves.

A) I and II are true.
B) I is true and II is false.

C) II is true and I is false. '

D) I and II are false.

B) I is true and II is false.

5) A variable cost function of the form: VC = 23 + Q + 7Q2 implies a marginal cost curve that is:

A) linear.
B) downward sloping.
C) U-shaped.

D) quadratic.

A) linear.

6) A variable cost function of the form: implies a marginal cost curve that is:

A) constant.
B) upward sloping.

C) U-shaped.
D) quadratic.

B) upward sloping.

7) Which of the following is true of cost curves?
A) The ATC curve goes through the minimum of the MC curve.
B) The AVC curve goes through the minimum of the MC curve.
C) The MC curve goes through the minimum of the ATC curve, to the left of the minimum of the AVC curve.
D) The MC curve goes through the minimum of the AVC curve, to the right of the minimum of the ATC curve.
E) The MC curve goes through the minimum of both the AVC curve and the ATC curve.

E) The MC curve goes through the minimum of both the AVC curve and the ATC curve.

8) The key assumption required for us to use a linear variable cost function of the form VC = bq is that:

A) marginal cost must be constant and equal to b.
B) marginal cost must be increasing at rate b.
C) fixed costs must be zero.

D) marginal cost is always greater than average variable cost.

A) marginal cost must be constant and equal to b.

9) A Cobb-Douglas production function:
A) exhibits constant returns to scale.
B) exhibits increasing returns to scale.
C) exhibits decreasing returns to scale.
D) can exhibit constant, increasing, or decreasing returns to scale.

D) can exhibit constant, increasing, or decreasing returns to scale.

16) A price taker is:
A) a firm that accepts different prices from different customers. B) a consumer who accepts different prices from different firms. C) a perfectly competitive firm.
D) a firm that cannot influence the market price.
E) both C and D

E) both c and D

17) Several years ago, Alcoa was effectively the sole seller of aluminum because the firm owned nearly all of the aluminum ore reserves in the world. This market was not perfectly competitive because this situation violated the:
A) price-taking assumption.

B) homogeneous product assumption.

C) free entry assumption.
D) A and B are correct.
E) A and C are correct.

E) A and C are correct.

18) Firms often use patent rights as a:

A) barrier to exit.
B) barrier to entry.
C) way to achieve perfect competition.

D) none of the above

B) barrier to entry.

19) Marginal revenue, graphically, is:
A) the slope of a line from the origin to a point on the total revenue curve.
B) the slope of a line from the origin to the end of the total revenue curve.
C) the slope of the total revenue curve at a given point.
D) the vertical intercept of a line tangent to the total revenue curve at a given point. E) the horizontal intercept of a line tangent to the total revenue curve at a given point.

C) the slope of the total revenue curve at a given point.

20) A firm maximizes profit by operating at the level of output where: A) average revenue equals average cost.
B) average revenue equals average variable cost.
C) total costs are minimized.

D) marginal revenue equals marginal cost.
E) marginal revenue exceeds marginal cost by the greatest amount.

D) marginal revenue equals marginal cost.

21) A firm has an increasing marginal cost curve. If the firm’s current output is two units less than the profit-maximizing output, then the next unit produced
A) will decrease profit.
B) will increase cost more than it increases revenue.

C) will increase revenue more than it increases cost.

D) will increase revenue without increasing cost.
E) may or may not increase profit.

C) will increase revenue more than it increases cost.

22) The demand curve facing a perfectly competitive firm is
A) the same as the market demand curve.
B) downward-sloping and less flat than the market demand curve. C) downward-sloping and flatter than the market demand curve. D) perfectly horizontal.
E) perfectly vertical.

D) perfectly horizontal.

23) The demand curve facing a perfectly competitive firm is:
A) the same as its average revenue curve, but not the same as its marginal revenue curve.

B) the same as its average revenue curve and its marginal revenue curve.
C) the same as its marginal revenue curve, but not its average revenue curve.
D) not the same as either its marginal revenue curve or its average revenue curve.
E) not defined in terms of average or marginal revenue.

B) the same as its average revenue curve and its marginal revenue curve.

24) Because of the relationship between a perfectly competitive firm's demand curve and its marginal revenue curve, the profit maximization condition for the firm can be written as:
A) P = MR.
B) P = AVC.

C) AR = MR.

D) P = MC.

E) P = AC.

D) P = MC.

25) If the market price for a competitive firm's output doubles, then:
A) the profit maximizing output will double.
B) the marginal revenue doubles.
C) at the new profit maximizing output, price has increased more than marginal cost.

D) at the new profit maximizing output, price has risen more than marginal revenue.

E) competitive firms will earn a positive economic profit in the long-run.

B) the marginal revenue doubles.

26) Suppose the state legislature in your state imposes a state licensing fee of $100 per year to be paid by all firms that file state tax revenue reports. This new business tax:
A) increases marginal cost.
B) decreases marginal cost.

C) increases marginal revenue.

D) decreases marginal revenue.

E) none of the above

E) none of the above

28) If a graph of a perfectly competitive firm shows that the point occurs where MR is above AVC but below ATC,

A) the firm is earning negative profit, and will shut down rather than produce that level of output.

B) the firm is earning negative profit, but will continue to produce where in the short run.’

C) the firm is still earning positive profit, as long as variable costs are covered.
D) the firm is covering explicit, but not implicit, costs.

E) the firm can cover all of fixed costs but only a portion of variable costs.

B) the firm is earning negative profit, but will continue to produce where in the short run.’

If price is between AVC and ATC, the best and most practical thing for a perfectly competitive firm to do is:
A) raise prices.
B) lower prices to gain revenue from extra volume.

C) shut down immediately, but not liquidate the business.

D) shut down immediately and liquidate the business.
E) continue operating, but plan to go out of business.

E) continue operating, but plan to go out of business.

31) An improvement in technology would result in:
A) upward shifts of MC and reductions in output.
B) upward shifts of MC and increases in output.
C) downward shifts of MC and reductions in output.
D) downward shifts of MC and increases in output.
E) increased quality of the good, but little change in MC.

D) downward shifts of MC and increases in output

32) In the short run, a perfectly competitive firm earning positive economic profit is: A) on the downward-sloping portion of its ATC.
B) at the minimum of its ATC.
C) on the upward-sloping portion of its ATC.

D) above its ATC.

E) below its ATC.

C) on the upward-sloping portion of its ATC.

33) If a competitive firm's marginal cost curve is U-shaped, then:
A) its short-run supply curve is U-shaped too
B) its short-run supply curve is the downward-sloping portion of the marginal cost curve
C) its short-run supply curve is the upward-sloping portion of the marginal cost curve
D) its short-run supply curve is the upward-sloping portion of the marginal cost curve that lies above the short-run average variable cost curve
E) its short-run supply curve is the upward-sloping portion of the marginal cost curve that lies above the short-run average total cost curve

D) its short-run supply curve is the upward-sloping portion of the marginal cost curve that lies above the short-run average variable cost curve

34) In the short run, a perfectly competitive profit maximizing firm that has not shut down: A) is operating on the downward-sloping portion of its AVC curve.
B) is operating at the minimum of its AVC curve.
C) is operating on the upward-sloping portion of its AVC curve.

D) is not operating on its AVC curve.
E) can be at any point on its AVC curve.

C) is operating on the upward-sloping portion of its AVC curve.

35) In the short run, a perfectly competitive firm earning negative economic profit is:

A) on the downward-sloping portion of its ATC curve.
B) at the minimum of its ATC curve.
C) on the upward-sloping portion of its ATC curve.

D) above its ATC curve.

A) on the downward-sloping portion of its ATC curve.

36) A firm never operates:
A) at the minimum of its ATC curve.
B) at the minimum of its AVC curve.
C) on the downward-sloping portion of its ATC curve.

D) on the downward-sloping portion of its AVC curve.

E) on its long-run marginal cost curve.

D) on the downward-sloping portion of its AVC curve.