Mega MCQ's Bank Eco Decesion

7/17/2019 Mega MCQ's Bank Eco Decesion

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MULTIPLE CHOICE PRACTICE QUESTIONS

1. A monopolistic firm may price its product so as to gain less than maximum short-term profit in order toa.

charge what "the traffic will bear" for its product.b. overcome the countervailing power of customers for its product.c. deter the threat of potential competition and/or government regulation.

d. restrict its output to an even greater extent.Answer: c

2. n regulating the prices of monopolists! the traditional standard is that regulatorsshould allow firms to charge rates that will

a. euate marginal revenue and marginal cost.b. cover all allowable operating expenses and yield a #fair return$ for the

stoc%holders.

c. result in the same price and output as would occur under perfectcompetition.d. permit reasonable mar%et share for the regulated firm.

Answer: b

&. 'he theory that monopolists might have lower costs than competitive firms waspresented by

a. (ric%ley! )immerman! and *mith b. (aumol.c. *chumpeter. d. +oasee. none of the above.

Answer: c

,. hen a firm is the only seller of a product for which there is no close substitute!a. it will maximie short-run profits by charging the highest price it can get for

its product.b. its demand-A curve tends to be inelastic.c. total profits will be maximum where price exceeds average total cost by

the greatest vertical distance.d. total profits will be maximum at the output rate corresponding to the

minimum point of the firm0s A+ curve.e. none of these.

Answer: e

. A monopolist is producing a level of output at which price is 34! marginal revenueis 3! average variable cost is 35! and marginal cost is 316. n order to maximie profit!the firm should

a. decrease price. b. increase price.c. %eep price the same. d. increase output.e. shut down.

Answer: b


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5. hen an agent pursues his own interests he is exhibitinga. strategic misrepresentation b. opportunismc. adverse selection d. reneging

Answer: b

7. hen a *avings (an% #screens$ potential borrowers! they are trying to avoidexploitation because of

a. the ris% and return trade-off b. false positive signalingc. asset specificity d. adverse selectione. moral haard

Answer: d

4. hich of the following factors contributed to the moral haard problem in the 8.*.*avings and oan industry during the 1946s

a. ;easurement problems on the part of the s system

of regulationb. ?eposit insurance programs such as


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11. ;onopolistic competition is li%e monopoly in thata. the monopolistically competitive firm must often be regulatedb. the monopolistically competitive firm does not face a horiontal demand

curvec. both industries have the same #robber baron$ heritage

d. both industries have interdependence and uncertaintye. all of the above are true.Answer: b. ow let me explain why other answers are wrong.Answer a: wrong because the level of competition is such that no regulation isnecessary.c is wrong because the #robber baron$ heritage belongs alone to the large! rather anti-social monopolies in the 8.*. of a century ago.d is wrong because interdependence and uncertainty exist in oligopoly! not monopolisticcompetition.

12. ;onopolistic competition is li%e pure competition in that

a. both represent cases of imperfect competitionb. both can be characteried by decreasing costsc. both can bloc% energy only through the granting of patentsd. both industries are characteried by interdependence and uncertaintye. (aumol invented both industries before the invention of game theory.

Answer: b. Answer a is incorrect because of the two types! only monopolisticcompetition is a form of imperfect competition! a term which refers to all industry typesother than pure competition. Answer c is untrue! since of the two industries! onlymonopolistic competition can bloc% entry! but that is only through licensingarrangements! not advertiing. Answer e is a nonsense answerB it is both untrue andirrelevant to this uestion.

1&. Cow many firms are in the product groups of monopolistic competitiona. few enough so that interdependence remains strongb. few enough so that entry is always a problemc. @ust enough so that if a firm reduces its price he will expect noretaliationd. @ust enough so that if a firm reduces its price he will expect uic%

retaliatione. all of the above are true except d

Answer: c Answer a is false because there is no interdependence in monopolisticcompetition.

Answer b is untrue because entry is open Dnot a problemE in monopolistic competition.Answer d is wrong because without interdependence! no retaliation will result.

1,. n monopolistic competition we spea% of a #product group$ as beinga. the set of firms which! through vertical coordination! produce first the

parts! then a common final commodity.b. the set of firms which! through horiontal coordination! produce a group of


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similar products.c. the same #industry$ all producing complementary productsd. different #industries$ all producing roughly substitute productse. none of the above. ;onopolistic competition has nothing to do with

product groups.

Answer: d is correct! since in this %ind of model! the product of each firm is uniue DbydifferentiationE! so each firm is an industry and all the producers of similar or substituteproducts are a #product group.$ a might describe a group of products! but not a productgroup. don>t what b meansB horiontal coordination is not something that occurs inmonopolistic competition. Answer c can>t be correct! because product groups are madeup of similar or substitute products! not complements. Answer e is incorrect becausemonopolistic competition is the industry for which +hamberlain Dand didn>t evenmention his name to you or as% you to learn itE developed the term #product group.$

1. n monopolistic competition! advertiing has the effect of

a. ma%ing the marginal cost curves slope down in stage of production.b. ma%ing the marginal revenue curve slope downc. wasting money! since the products are all homogeneous anywayd. causing the demand curve of the individual firm to drift downward over

timee. causing the marginal revenue curves to slope upward

Answer: b. 'his reuires noticing that advertiing ma%es the demand curve slope down!which also ma%es the ; curve slope down Dtwice as fastE. ; is a straight line in purecompetition.

Answer a is wrong because marginal cost curves always slope up in stage becauseof diminishing returns. Answer c is wrong since products are homogeneous only in purecompetition. d is wrong because the curve shifts downward due to entry! not advertiing.

Answer d is incorrect because demand curves in this %ind of industry always slopedown! so ; cannot rise.

15. hich of the following does not correspond to the assumptions of the %in%eddemand model

a. A price increase by one producer is matched by other producersb. A price increase by one producer is not matched by other producersc. A price cut by one producer is matched by other producers.

Answer: a

17. hich of the following is not true of oligopolya. 'here are not many firms in the industryb. Froducers of a similar product are not referred to as a #product group$c. 'he firms are generally large and independentd. t is possible for an oligopoly industry to consist of @ust two firmse. 'he managerial environment of oligopoly is characteried by uncertainty

Answer: c


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14. A %in%ed demand curve isa. highly inelastic for price increases and uite elastic for price cutsb. highly elastic for price increases and less elastic for price cutsc. highly elastic for price increases and uite elastic for price decreasesd. infinitely elastic for price increases.

e. none of the above.Answer: b

19. An oligopolist with a %in%ed demand curve has an ; curvea. that rises beyond a certain stage because of diminishing returnsb. that follows twice as fast as the demand curvec. that cuts the A curve at its minimum pointd. that has a discontinuous segmente. that has the same number of %in%s

Answer: d

26. 'he %in%ed demand curve model explainsa. why firms are motivated to price right at the %in%.b. how the price is determined in the first placec. what happens when costs rise to the extent that ;+ is not eual to ; at

the point of the %in%.d. the long-term dynamics of the oligopoly mar%et

Answer: a

8se the diagram below to answer the next five uestions.

21. (etween points A and (a. the A+ curve is falling b. the industry>s output is fallingc. the A+ curve is rising d. the industry>s output is constante. economies of scale permit the larger output

Answer: c

22. 'he above diagram represents

a. monopolistic competition

Part A Part B

A B

M

M


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b. a purely competitive industry with increasing returns to scalec. the welfare loss of a rise in price in a competitive industryd. successive euilibria resulting from the expansion of competitive firmse. a price increase resulting from the law of diminishing returns

Answer: d

2&. 'he position of the *A+ curves show thata. economies of scale are swamping diseconomies of scaleb. consumers are not demanding greater levels of output as time passesc. price increases should have come as a surprise to the individual

entrepreneurd. smaller plant sies and more extensive labor use are popular in this

industrye. a larger scale of plant is a part of the industry>s expansion

Answer: e

2,. t is apparent from the diagram that the industry in uestion is a DanEa. constant cost industry b. decreasing cost industryc. increasing cost industry d. fluctuating cost industrye. expansive cost industry

Answer: c

2. 'he final output of the firm will be ata. A b. (c. ; d. ;> e. none of the above

Answer: (

25. hen an agent see%s to pursue his own interests he can best be described asexhibiting

a. strategic misrepresentation. b. opportunismc. adverse selection d. reneging.

Answer: b

27. hich of the following is not a solution to adverse selection in a contractingenvironment

a. the use of unbiased outside appraisers.b. target mar%eting to identify certain socio-demographic and economic

groups.c. altering the selection! or mix! of potential trading partners.d. incentive-based contracting.

Answer: d

24. hen an agent see%s to pursue his own interests he can best be described asexhibiting

a. strategic misrepresentation b. opportunism


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c. adverse selection d. renegingAnswer: b

29. 'wo types of Gx Ante opportunism area. holdups! strategic misrepresentation

b. holdups! private informationc. adverse selection! strategic misrepresentationd. adverse selection! reneging

Answer: c

&6. A good example of adverse selection is found in the used car mar%et. 'heproblem! in this setting! is due to:a. no optimal price existingb. the ma@ority of used cars being "lemons" which are of low ualityc. an excess supply in the mar%et which is the sign of efficiencyd. sellers having an informational advantage

e. informational asymmetry favoring the buyerAnswer: d

&1. 'he slope of a linea. is unrelated to rates of change. b. is not the ratio rise/run.c. is not the derivative of a function.d. is not the value of a marginal uantity.e. is not constant for a curvilinear function.

Answer: e

&2. hich of the following is notconsidered a public good for citiens in any large8.*. city

a. national defense b. health carec. police protection d. fire protection.

Answer: b&&. hen there is an allocation of goods or services such that there exists no otherfeasible allocation that lowers the well being of any party and raises the well being of DatleastE one party! it Dthat allocationE is said to be:

a. Frofit-maximiing b. A virtual corporationc. Gfficient d. n euilibrium

Answer: c

&,. Hne good example of a public good is national defense. 'he governmentovercomes the mar%et failure problem by:

a. Gxcluding various people from coverageb.


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&. A cost or benefit imposed involuntarily on another party which is not regulated byany system of prices is referred to as:

a. 'ransaction cost b. A tax deductionc. Gxternalities d. ;oral haard e. A bottlenec%

Answer: c

&5. f sellers try to charge a price which is above the euilibrium level! then it can bepredicted that

a. a shortage will result and the uantity supplied will rise.b. competition will be adversely affected.c. surplus conditions will result and forces will be set in motion to cause

prices to fall.d. buyers will refuse to purchase anything.e. none of these.

Answer: c

&7. f ice cream is a normal good and average consumer income in the ice creammar%et increases by 16I then

a. 'here will be a movement down! to the right! along the demand for icecream curve.

b. 'here will be movement up! to the left! along the demand for ice creamcurve.

c. 'he ice cream demand curve will shift up and to the right.d. 'he ice cream demand curve will shift down and to the left.

Answer: c

Sample MCQs for Chapters 9, 1 a!" 11

1. "An oligopoly is an oligopoly.


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dE a. and c.

A!s#er$ A &'ff'()lt*$ Har"

&. 'he +ournot theory of oligopoly assumes

aE rivals will %eep their output constant.bE rivals will increase their output whenever a firm increases its output.cE rivals will decrease output whenever a firm increases its output .dE rivals will follow the learning curve.

A!s#er$ A &'ff'()lt*$ Eas*

,. hich of the following is trueaE n (ertrand oligopoly each firm believes that their rivals will hold their

output constant if it changes its output.bE n +ournot oligopoly firms produce an identical product at a constant

marginal cost and engage in price competition.cE n oligopoly a change in marginal cost never has an affect on output orprice.

dE one of the above are true.

A!s#er$ & &'ff'()lt*$ Me"

. f firms compete in a +ournot fashion! thenaE each firm views the output of the rival as given.bE each firm views the prices of rivals as given.cE each firm views the profits of rivals as given.dE all of the above

A!s#er$ A &'ff'()lt*$ Me"

5. 'wo firms compete in a *tac%elberg fashion and firm two is the leader! thenaE firm one views the output of firm two as given.bE firm two views the output of firm one as given.cE all of the abovedE none of the above

A!s#er$ A &'ff'()lt*$ Har"

7. 'here are many different models of oligopoly because:aE beliefs play an important role in oligopolistic competition.bE firms do not maximie profits in oligopolistic competition.cE oligopoly is the most complicated type of mar%et structure.dE both a and c.

A!s#er$ & &'ff'()lt*$ Eas*


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4. *uppose that the duopolists competing in +ournot fashion agree to produce thecollusive output. =iven that firm two commits to this collusive output! it pays firm one to

aE cheat by producing a higher level of output.bE cheat by producing a lower level of output.cE cheat by raising prices.

dE none of the above.


9. f firms are in +ournot euilibrium:aE Gach firm could increase profits by unilaterally increasing output.bE Gach firm could increase profits by unilaterally decreasing output.cE


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dE none of the above

A!s#er$ % &'ff'()lt*$ Eas*

14. hich of the following is true

aE


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bE not a perfect euilibrium.cE a seuential euilibrium.dE a somewhat perfect euilibrium.

A!s#er$ % &'ff'()lt*$ Me"

2&. hich of the following is a valid critiue of the use of game theory in economicsaE Fayoffs to players may be difficult to measure.bE Flayers may not have complete information about each other0s payoffs.cE =ame theory assumes rational players.dE All of the above.

A!s#er$ & &'ff'()lt*$ Har"

2,. hen analying the behavior of oligopolists! which of the following is crucial forthe success of game theoretic analysis

aE Fayoffs do not need to reflect the true payoffs of the oligopolists! they @ustneed to be greater than or eual to ero.

bE Assume that oligopolists always move simultaneously.cE ?o not construct the payoffs of the oligopolists to be interdependent! as

the payoff of one player usually does not affect the payoff of the otherplayers.

dE ;a%e sure the problem you are considering is of a one-shot or repeatednature! and you model it accordingly because the order in which playersma%e decisions is important.


2. Kou are the manager of a ;om and Fop store that can buy mil% from a supplierat 3&.66 per gallon. f you believe the elasticity of demand for mil% by customers at yourstore is -,! then your profit-maximiing price is

aE 2.66. bE 2.6. cE ,.66. dE .66.

A!s#er$ C &'ff'()lt*$ Me"

25. Kou are the manager of a gas station and your goal is to maximie profits. (asedon your past experience! the elasticity of demand by 'exans for a car wash is -,! whilethe elasticity of demand by non-'exans for a car wash is -5. f you charge 'exans 326for a car wash! how much should you charge a man with H%lahoma license plates for acar wash

aE 1.6. bE 1.66. cE 14.66. dE 26.66.

A!s#er$ C &'ff'()lt*$ Har"


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27. +inemas sometimes give senior citiens discounts. hat is the possible privatelymotivated purpose for them to do so

aE Furely because entrepreneurs are benevolent.bE *enior citiens have a more elastic demand for movies than ordinary

citiens.cE *enior citiens lac% recreational activities.dE one of the above.

A!s#er$ % &'ff'()lt*$ Me"

24. hich of the following pricing strategies does not usually enhance the profits offirms with mar%et power

aE price matching. bE cross-subsidies.cE two-part pricing. dE marginal cost pricing.


29. hich of the following statements is true

aE 'he more elastic the demand! the higher is the profit-maximiing mar%up.bE 'he more elastic the demand! the lower is the profit-maximiing mar%up.cE 'he higher the marginal cost! the lower the profit-maximiing price.dE 'he higher the average cost! the lower the profit-maximiing price.

A!s#er$ % &'ff'()lt*$ Eas*

&6. Frice matching strategies may fail to enhance profits when:

aE firms cannot prevent customer0s from deceptive claims.bE firms have different marginal costs.cE either a or b. dE none of the above.


&1. A (roadway theater sells wee%day show tic%ets at a lower price than for awee%end show. 'his is an example of:

aE price discrimination. bE pea%-load pricing.cE all of the above. dE none of the above.


&2. hich of the following statements about a price matching strategy is incorrect


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aE t may be applied in situations besides (ertrand oligopoly.bE t reuires that the firms can monitor their rival0s prices.cE t reduces the incentive for a rival firm to initiate a price war.dE t only guarantees to match prices that are advertised publicly.

A!s#er$ % &'ff'()lt*$ Har"

&&. *uppose two types of consumers buy suits. +onsumers of type A will pay 3166for a coat! and 36 for pants. +onsumers of type ( will pay 37 for a coat! and 37 forpants. 'he firm selling suits faces no competition and has a marginal cost of ero. fthe firm sells coats and pants for 32 each! but offers a bundle containing both a coatand pants for 316! how many bundles will the firm sell

aE 6. bE 1. cE 2. dE insufficient information.


&,. *uppose two types of consumers buy suits. +onsumers of type A will pay 3166for a coat! and 36 for pants. +onsumers of type ( will pay 37 for a coat! and 37 forpants. 'he firm selling suits faces no competition and has a marginal cost of ero. 'heoptimal commodity bundling strategy is:

aE +harge 316 for a suit. bE +harge 37 for a suit.cE +harge 3166 for a suit. dE +harge 312 for a suit.


&.


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1. A %ey assumption about the way firms behave is that they

a. ;inimie costs %. Ma/'m'0e prof'tc. ;aximie mar%et share d. ;aximie revenue

2. A graph that maps output against the input reuired to ma%e that output is calleda/an

a. Average cost function %. A pro")(t'o! f)!(t'o!c. A cost function d. A marginal cost function

&. A graph which maps the total costs of production against the amount made iscalled the

a. Average cost function b. A production functionC. A (ost f)!(t'o! d. A marginal cost function

,. f an input must be increased for output to increase it is called a

a.


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$!gure ".1

7. eferring to


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11. hen firms add wor%ers and find that the additional wor%ers add less to outputthan their predecessors did! they are experiencing

a. 'he division of labor b. 'he law of large numbersC. &'m'!'sh'!4 ret)r!s d. ?iminishing marginal utility

12. +osts which increase with an increase in output are called

a.


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of the machinery has been reachedd. 'here is waste

15. n


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d. 'he per unit fixed cost of production

22. Average


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d. ncrease for a while and then decrease

29. =iven the production function and total cost function shown in +hapter ,! asproduction increases! average variable costs

a. ?ecrease constantly

%. &e(rease for a #h'le a!" the! '!(reasec. ncrease constantlyd. ncrease for a while and then decrease

&6. =iven the production function and total cost function shown in +hapter ,! asproduction increases! average total costs

a. ?ecrease constantly%. &e(rease for a #h'le a!" the! '!(reasec. ncrease constantlyd. ncrease for a while and then decrease

&1. =iven the production function and total cost function shown in +hapter ,! asproduction increases! total costsa. ?ecrease constantlyb. ?ecrease for a while and then increaseC. I!(rease (o!sta!tl*d. ncrease for a while and then decrease

&2. =iven the production function and total cost function shown in +hapter ,! asproduction increases! total variable costs

a. ?ecrease constantlyb. ?ecrease for a while and then increase

C. I!(rease (o!sta!tl*d. ncrease for a while and then decrease

&&. =iven the production function and total cost function shown in +hapter ,! asproduction increases! total fixed costs

a. ?ecrease constantly %. Rema'! (o!sta!tc. ncrease constantly d. ncrease for a while and then decrease

8se the following to answer uestions &,-,2:

'able ,.1


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&,. eferring to 'able ,.1 above! (ox A should be filled with

a. 36 b. 316 C. 51 d. 3266

&. eferring to 'able ,.1 above! (ox ( should be filled with

a. 36 b. 31 C. 51 d. 3266

&5. eferring to 'able ,.1 above! (ox + should be filled with

a. 36 b. 32 C. 51 d. 3266

&7. eferring to 'able ,.1 above! (ox ? should be filled with

a. 36 b. 31 C. 3166 d. 3266

&4. eferring to 'able ,.1 above! (ox G should be filled with

a. 36 b. 316 +. 3166 d. 3266

&9. eferring to 'able ,.1 above! (ox < should be filled with

a. 36 b. 316 c. 3166 &. 511

,6. eferring to 'able ,.1 above! (ox = should be filled with

a. 36 b. 3116 C. 5116 d. 312

,1. eferring to 'able ,.1 above! (ox C should be filled witha. 36 b. 3116 C. 5176 d. 316

,2. eferring to 'able ,.1 above! (ox should be filled with

a. 36 b. 311 C. 516 d. 3266

8se the following to answer uestions ,&-56:


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'able ,.2

,&. eferring to 'able ,.2 above! (ox A should be filled with

a. 36 b. 316 c. 326 &. Noth'!4

,,. eferring to 'able ,.2 above! (ox ( should be filled with

a. 36 %. 51 c. 326 d. 3&6

,. eferring to 'able ,.2 above! (ox + should be filled with

a. 36 %. 56 c. 31 d. 32

,5. eferring to 'able ,.2 above! (ox ? should be filled with

a. 36 %. 57 c. 317 d. 327

,7. eferring to 'able ,.2 above! (ox G should be filled with

a. 36 %. 58 c. 326 d. 3&6

,4. eferring to 'able ,.2 above! (ox < should be filled with

a. 36 %. 51 c. 3&6 d. 3,6

,9. eferring to 'able ,.2 above! (ox = should be filled with

a. 36 b. 316 c. 326 &. U!"ef'!e"

6. eferring to 'able ,.2 above! (ox C should be filled with

a. 36 %. 51 c. 326 d. 3&6

1. eferring to 'able ,.2 above! (ox should be filled with

a. 36 %. 5.6 c. 312.6 d. 32

2. eferring to 'able ,.2 above! (ox J should be filled with

a. 36 %. 56.: c. 39.66 d. 317

&. eferring to 'able ,.2 above! (ox M should be filled with

A. 56. b. 37.6 c. 312.6 d. 32


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,. eferring to 'able ,.2 above! (ox should be filled with

A. 5:. b. 34.66 c. 312.6 d. 3&6

. eferring to 'able ,.2 above! (ox ; should be filled with

a. 36 b. 316 c. 326 &. 8ndefined


a. 36 b. 316 C. 57 d. 3&6

7. eferring to 'able ,.2 above! (ox H should be filled with

a. 36 b. 37.6 +. 312.6 d. 32

4. eferring to 'able ,.2 above! (ox F should be filled with

a. 36 b. 357 C. 59. d. 317

9. eferring to 'able ,.2 above! (ox N should be filled with

a. 366 %. 5.6 c. 312.6 d. 32


a. 35.66 %. 5;. c. 312.6 d. 3&6

51. 'he shape of the firm0s marginal revenue curve depends ultimately on whetherthe firm is

A. A mo!opol'st or a perfe(t (ompet'torb. A revenue maximier or a profit maximierc. A mar%et share maximier or a sales maximierd. Hwned by a man or a woman

52. 'he shape of the firm0s marginal revenue curve depends ona. Cow high its costs are b. Cow high production isC. Ho# ma!* (ompet'tors 't has d. hether the firm is a profitmaximier

5&. hether marginal revenue is constant or decreasing depends ona. hether the firm is benefiting from the division of laborb. hether the firm is dealing with diminishing returnsc. Cow much the firm sells&.


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c. ;aximie sales &. Ma/'m'0e prof'ts

5. f the firm has no competitors! the marginal revenue curve is

a.


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72. hen a firm chooses to shutdown! it is

a. ;a%ing a poor decision because it should always produce where marginalcost euals marginal revenue

b. ;a%ing a poor decision because it should always produce where average

costs exceed average revenuec. ;a%ing a good decision as long as the price it is getting is less than itsaverage total costs

&. Ma3'!4 a 4oo" "e('s'o! as lo!4 as the pr'(e 't 's 4ett'!4 's less tha!'ts a-era4e -ar'a2le (osts

7&. 'he result that a firm should produce where ;+O; except when the shutdowncondition is met is based on the assumption that it is attempting to

A. Ma/'m'0e prof't b. ;inimie marginal costsc. ;aximie mar%et share d. ;inimie average costs

7,. hen a firm has many competitors selling the same good! in order to sell more ofthe good

A. It o!l* !ee" pro")(e more of the 4oo"b. t must! ironically! increase pricesc. t must reduce the price it chargesd. t must advertise

7. f a firm can increase output by hiring more wor%ers then

a. t will always do so b. t will never do soC. It #'ll "o so o!l* 'f the (ost of h'r'!4 the #or3ers =a!" p)r(has'!4 the

mater'als> 's less tha! the '!(rease '! re-e!)es asso('ate" #'th the'!(rease '! sales

d. t will do so only if the cost of hiring the wor%ers Dand purchasing thematerialsE is more than the increase in revenues associated with theincrease in sales

75. hen a firm has no competitors! in order to sell more of the good

a. t only need produce more of the goodb. t must! ironically! increase pricesC. It m)st re")(e the pr'(e 't (har4esd. t must %eep prices steady

77. hen a firm shuts down because the mar%et price of its product is less than itsaverage variable cost of producing that product! it suffers a loss eual to

a. ts total revenue b. ts total variable cost


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C. Its total f'/e" (ost d. All of the above

74. hen a firm shuts down because the mar%et price of its product is less than theaverage variable cost of producing that product! the loss it suffers is

a. Gual to its total revenue b. Gual to its total variable costc. Gual to ero&. Less tha! the loss 't #o)l" ear! from (o!t'!)'!4 to operate

79. hen a firm shuts down because the mar%et price of its product is less than theaverage variable cost of producing that product! the shut-down decision is

a. ;ade for the long run %. Ma"e o!l* for the short r)!c.


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7. If the pro")(t'o! of pa!e4*r'(s o(()rs )!"er (o!"'t'o!s of '!(reas'!4 ret)r!sto s(ale, a poss'2le set of lo!4@r)! (ost f)!(t'o!s 's 'll)strate" 2*$

DaE DbE

DcE DdE

8. S)ppose that a ma!)fa(t)rer of ar(h'tra-es '!(reases pro")(t'o! a!" f'!"sthat per@)!'t pro")(t'o! (osts fall. The! the pro")(t'o! pro(ess ma* 2e sa'" toe/h'2't$

DaE decreasing returns to scale.

DbE increasing returns to scale.

DcE constant returns to scale.

DdE diminishing returns to stonemasons.

+. The pr'(es of '!p)ts )se" 2* the me"'('!al lee(h '!")str* "o !ot (ha!4e as the'!")str*s o)tp)t e/pa!"s or (o!tra(ts. I! the lo!4 r)!, the 2)r"e! of a!* ta/


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le-'e" o! the pro")(ers of me"'('!al lee(hes$

DaE falls eually on buyers and sellers.

DbE falls on buyers and sellers in proportions that cannot be determined from theinformation provided.

DcE falls entirely on sellers since they bear the legal obligation to pay the tax.

DdE falls entirely on buyers because the long-run industry supply curve is perfectlyelastic.

Nuestions through 11 refer to the following table of cost data for producersof dithyrambs:

? LAC LMC SATC AC SMC

1 579.8: 57;.8 58+.1 5+.1 587.+;

7 57;.: 57.: 587.6: 51.6: 579.68 57;.7 57:.: 581.11 571.11 57.7

+ 57.:9 576.8 579.;8 577.88 576.7

6 57.77 576. 57;.1 577.1 578.61

: 57:.; 57+.+ 57.6 577.6 577.6

57:.+7 578.98 57:.9: 577.: 571.9

; 57:.9 578.: 57:.88 577.6; 571.98

9 576.; 578.+ 576.;: 577.68 577.89


1 576.6: 578.88 576.6: 577.6: 578.88

11 576.8: 578.+ 576.+7 577.:9 57+.

17 576.7 578.: 576.++ 577.9+ 57:.:9

18 576.9 578.98 576.:7 578.87 579.11

1+ 576.7 57+.+ 576.9 578.;8 587.1

16 576. 576. 57:.+9 57+.+9 586.+1

1: 576.7 576.8 57.1: 576.79 589.79

1 576.9 57:.: 57;. 57:.7+ 5+8.:


1; 576.7 57.: 579.1 57.8+ 5+;.6+

19 576.8: 57;.8 58.1 57;.69 568.;9

7 576.6: 58. 581.6 58. 569.+

71 576.; 581.+ 588. 581.6 5::.

77 57:.9 587.98 58+.:6 588.79 57.9

78 57:.+7 58+.: 58:.+ 586.1 5;.77

7+ 57:.; 58:.+ 58;.+: 58.71 5;;.8


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76 57.77 58;.88 5+.: 589.+ 59:.87


6. Refer to the (ost ta2le a2o-e.


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DdE 3&6.66.

9. Refer to the (ost ta2le pre(e"'!4 ?)est'o! 6. S)ppose that the pr'(es of '!p)ts)se" '! "'th*ram2 pro")(t'o! "o !ot (ha!4e as the '!")str* e/pa!"s or

(o!tra(ts. If the "'th*ram2 '!")str* 's '! lo!4@r)! e?)'l'2r')m, the! areprese!tat'-e f'rm pro")(es o)tp)t at the rate of$

DaE .

DbE 16.

DcE 1.

DdE 26.

1. Refer to the (ost ta2le pre(e"'!4 ?)est'o! 6. Co!t'!)e to ass)me that thepr'(es of '!p)ts )se" '! "'th*ram2 pro")(t'o! "o !ot (ha!4e as the '!")str*e/pa!"s or (o!tra(ts. S)ppose that the mar3et "ema!" for "'th*ram2s 's"es(r'2e" 2* the e?)at'o! P ;6 @ .7 Q, #here Q 's the total o)tp)t of the'!")str*.


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DbE will raise the price buyers pay by 316 in the long run but by less than 316 in theshort run.

DcE will raise the price buyers pay by 316 in both the long run and the short run.

DdE will raise the price buyers pay by less than 316 in both the long run and theshort run.

18. U!less e(o!om'( prof'ts are 0ero, f'rms ha-e a! '!(e!t'-e$

DaE to enter or leave the industry.

DbE to change the level of capital employed.

DcE to change the level of labor employed.

DdE to change the uantity of output produced.

1+. The (ost a!"re-e!)ef)!(t'o!s for "o@'t@*o)rself 2o"*@p'er('!4 3'ts are'll)strate" atr'4ht. Ass)methat the mar3et

pr'(e 's P a!" af'rm '! the'!")str* 'spro")('!4Q)!'ts ofo)tp)t. Toma/'m'0e prof't,the f'rm sho)l"$

DaE change output.

DbE change capital.DcE change labor.

DdE change to a more wholesome product.


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16. If the pr'(es of fa(tors of pro")(t'o! '!(rease as the o)tp)t of the '!")str*r'ses, the! the lo!4@r)! '!")str* s)ppl* ()r-e$

DaE euals the horiontal sum of the firms0 long-run marginal cost functions.

DbE is perfectly elastic and lies at the height eual to the minimum value of the

long-run average cost function of a representative firm.DcE does not exist because the set of firms that are operating in the industry varieswith mar%et conditions.

DdE slopes upward.

1. C

2. B

3. B

4. D

5. D

6. B7. D

8. B

9. C

10. D

11. A

12. B

13. A

14. B

15. D


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M)lt'ple Cho'(e Q)'0D*ee related pagesE

Do)r Res)lts$

'he correct answer for each uestion is indicated by a .1 A production function measures the relation betweenP

A> input prices and output prices.

%> input prices and the uantity of output.

C> the uantity of inputs and the uantity of output.

&> the uantity of inputs and input prices.

7 A short-run production function assumes thatP

A> the usage of at least one input is fixed.

%> the level of output is fixed.

C> all inputs are fixed inputs.

&> both aand b

E> both bandc

8 f average product is decreasing! then marginal productPA> must be greater than average product.

%> must be less than average product.

C> must be increasing.

&> cannot be decreasing.

E> both aand c
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http://wps.pearsoned.co.uk/ema_uk_he_griffiths_econbus_3/201/51561/13199805.cw/conten

t/inde.htm!

Multiple choice questions

Try the multiple choicequestions below to test your knowledge of this chapter. Once you have

completed the test, click on 'Submit Answers for rading' to get your results.

This activity contains 20 questions.

The long run is a period of time in which:

econom!c e##!c!ency !s ach!e)ed

the #!rm may want to bu!%d a b!gger p%ant* but cannot do so

the #!rm !s ab%e to ma+!m!se tota% pro#!t

the #!rm can h!re a%% the workers that !t wants to emp%oy* but !t does not ha)e su##!c!ent t!me to buy more

e&u!pment

the &uant!t!es o# a%% !nputs can be )ar!ed.

The 'law of diminishing marginal returns' refers to the general tendency

for ___to eventually diminish as more of the variable input is employed,given the quantity of fixed inputs.

cap!ta%

marg!na% product

a)erage tota% cost

marg!na% cost

a)erage product

"ook carefu!!$ at the tab!e which represents a firm%s short&run tota! cost schedu!e. 'hen outputgoes up from four to fi(e shirts the margina! cost is:

)utput *ota! cost +,-

, -

" --

- -
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(

".00

".-

-.00

0.00

,0.00

Which one of the following statements is false

A)erage tota% cost !s tota% cost per un!t o# output.

Marg!na% cost depends on the amount o# %abour h!red.

A)erage #!+ed cost p%us a)erage )ar!ab%e cost e&ua%s a)erage tota% cost.

ota% cost e&ua%s tota% #!+ed cost p%us tota% a)erage cost.

Marg!na% cost !s the !ncrease !n tota% cost resu%t!ng #rom a un!t !ncrease !n output.

Which one of the following statements is false

he )ert!ca% gap between cur)es B and C !s e&ua% to a)erage )ar!ab%e cost.

he )ert!ca% gap between cur)es B and C !s e&ua% to a)erage #!+ed cost.

Cur)e 2 represents marg!na% cost.

A)erage #!+ed cost decreases w!th output.

Cur)e B comes c%oser to cur)e C as output !ncreases because o# a decrease !n a)erage #!+ed costs.


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!n the figure above the average variable cost curve is represented by thecurve labelled:

2

A

3one o# the abo)e.

C

B

When the marginal product of labour is greater than the average product

of labour:

the tota% product cur)e !s negat!)e%y s%oped

the a)erage product o# %abour !s !ncreas!ng

the marg!na% product o# %abour !s !ncreas!ng

the #!rm !s e+per!enc!ng d!m!n!sh!ng returns

the #!rm !s e+per!enc!ng constant returns

"conomies of scale exist when:

the #!rm !s too %arge and too d!)ers!#!ed

the %ong4run cost o# produc!ng a un!t o# output #a%%s as the output !ncreases

a #!rm5s dec!s!on to h!re add!t!ona% !nputs does not resu%t !n an !ncrease !n the pr!ce o# !nputs

the cost o# #!nd!ng a trad!ng partner !s %ow.

the #!rm !s too sma%% and too spec!a%!sed


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"conomies of scope exist when:

greater e+per!ence !n produc!ng the product reduces a)erage cost

a #a%% !n wages reduces a)erage cost

doub%!ng #actor !nput doub%es output

chang!ng the m!+ o# product!on reduces a)erage cost.

!ncreas!ng returns app%!es !n the short run

The marginal cost #$%& curve intersects the:

AC* A6C and A$C cur)es at the!r m!n!mum po!nts

AC and A$C cur)es at the!r m!n!mum po!nts.

AC cur)e at !ts ma+!m!s!ng po!nt

AC and A6C cur)es at the!r m!n!mum po!nts

A6C and A$C cur)es at the!r m!n!mum po!nts

The supply of toys is relatively elastic, which suggests that the factors ofproduction used in producing toys can easily be switched between

different uses.

rue$a%se

!n the longrun time period it is variable costs that the firm must be ableto cover in order to remain solvent #avoid ban(ruptcy&.

rue

$a%se

')ormal profit' is that profit which is more than sufficient to (eep the

firm in the industry in the long run.

rue

$a%se


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!f the firm earns more profit than is necessary to (eep it in the industry

in the long run, we call this 'supernormal' profit.

rue

$a%se

When the 'longrun average cost' curve starts to rise we refer toeconomies of scale having set in.

rue

$a%se

* rise in cumulative output leading to a reduction in average costs is an

example of economies of scope.

rue

$a%se

The marginal cost curve must cut the average variable cost curve at itslowest point.

rue

$a%se

When the producer receives a price higher than that needed to bring

about his+her supply of the product, we call the difference 'producersurplus'.

rue

$a%se

The 'indivisibility of large scale, more efficient processes of production' is


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a source of technical economies of scale.

rue

$a%se

!f a - increase in scale of output results in a /- fall in average cost,

we spea( of a steep 'cost gradient'.

rue

$a%se

7ee a%sohttp://h!ghered.mcgraw4h!%%.com/s!tes/00,"0818/s!temap.htm%9u!
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