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MULTIPLE CHOICE

1. Revenue is equal to

a. price times quantity.

b. price times quantity minus total cost.

c. price times quantity minus average cost.

d. price times quantity minus marginal cost.

e. profit minus the product of price and quantity.

2. 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.

3. Every firm maximizes profit where

a. average revenue equals average cost.

b. average revenue equals average variable cost.

c. total revenue equals total cost.

d. marginal revenue equals marginal cost.

e. marginal revenue exceeds marginal cost by the greatest amount.

4. Marginal profit is equal to

a. marginal revenue minus marginal cost.

b. marginal revenue plus marginal cost.

c. marginal cost minus marginal revenue.

d. marginal revenue times marginal cost.

e. marginal revenue divided by marginal cost.

5. 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 more flat than the market demand curve.

d. perfectly horizontal.

e. perfectly vertical.

6. The perfectly competitive firm's marginal revenue curve is

a. downward-sloping, but the value of the slope can vary from curve to curve.

b. downward-sloping, at twice the (negative) slope of the market demand curve.

c. vertical.

d. horizontal.

e. upward-sloping.

7. 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 = AR.

c. AR = MR.

d. P = MC.

e. P = AC.

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8. The amount of output that a firm decides to sell has no effect on the market price in a competitive industry because

a. the market price is determined (through regulation) by the government.

b. the firm supplies a different good that its rivals.

c. the firm's output is a small fraction of the entire industry's output.

d. the short run market price is determined solely by the firm's technology.

e. the demand curve for the industry's output is downward sloping.

For the following eight questions, consider the following diagram where a perfectly competitive firm faces a price of \$40.

9. The profit-maximizing output is

a. 30.

b. 54.

c. 60.

d. 67.

e. 79.

10. The firm earns zero profit at what output?

a. 0.

b. 34 and 79.

c. 54.

d. 60.

e. 67.

11. At the profit-maximizing level of output, AVC is

a. \$22.

b. \$26.

c. \$30.

d. \$32.

e. \$40.

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For the next five questions, consider the following table:

Q P TR MR TC MC

0 \$30 \$ 0 --- \$ 15 ---

1 \$30 \$ 30 \$30 \$ 25 \$10

2 \$30 \$ 60 \$30 \$ 40 \$15

3 \$30 \$ 90 \$30 \$ 60 \$20

4 \$30 \$120 \$30 \$ 85 \$25

5 \$30 \$150 \$30 \$115 \$30

6 \$30 \$180 \$30 \$150 \$35

12. The total revenue graph consistent with the table above is

a. linear and upward-sloping.

b. linear and horizontal.

c. linear and vertical.

d. linear and downward-sloping.

e. concave downwards.

13. 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.

14. If a competitive firm's marginal costs always increases with output, then at the profit maximizing output level, producer surplus is

a. zero because marginal costs equal marginal revenue

b. zero because price equals marginal costs

c. positive because price exceeds average variable costs

d. positive because price exceeds average total costs

e. positive because revenues are increasing faster than variable costs

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For the following eight questions, consider the following figure:

15. At P=\$80, the profit-maximizing output in the short run is

a. 22.

b. 34.

c. 38.

d. 50.

e. 64.

16. As the competitive industry, not just the firm in question, moves toward long-run equilibrium, what will price be?

a. \$60.

b. \$64.

c. \$70.

d. \$71.

e. \$80.

17. As the competitive industry, not just the firm in question, moves toward long-run equilibrium, how much profit will the firm earn?

a. \$0.

b. \$306.

c. \$312.

d. \$1000.

e. \$1024.

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For the next two questions, consider the following information:

Two soft-drink firms, Fizzle & Sizzle, operate on a river. Fizzle is farther upstream, and gets cleaner water, so its cost of purifying water for use in the soft drinks is lower than Sizzle's by \$500,000 yearly.

18. Fizzle and Sizzle

a. might be perfectly competitive despite their differing position on the river.

b. would be perfectly competitive if their purification costs were equal; otherwise, not.

c. would be perfectly competitive if it cost Fizzle \$500,000 yearly to keep that land.

d. may or may not be perfect competitors, but their position on the river has nothing to do with it.

e. cannot be perfect competitors because they are not identical firms.

19. The long-run supply curve in a constant-cost industry is

a. upward-sloping and linear.

b. downward-sloping and linear.

c. horizontal and linear.

d. vertical and linear.

e. linear, but could have any constant slope.

20. In an increasing-cost industry, expansion of output

a. causes input prices to rise as demand for them grows.

b. leaves input prices constant as input demand grows.

c. causes diseconomies of scale to occur.

d. occurs under conditions of increasing returns to scale.

e. occurs without diminishing marginal product.

For the next two questions, use the following information:

Cigarettes are produced by a perfectly competitive industry in Dystopia. Industry output (Q) is currently 3 million packs per year. The government, in an attempt to raise revenue for medical expenses, places a 50› tax on each pack. Demand is highly, but not perfectly, inelastic.

21. The more inelastic is demand for cigarettes,

a. the more Q will fall and the more P will rise.

b. the more Q will fall and the less P will rise.

c. the less Q will fall and the more P will rise.

d. the less Q will fall and the less P will rise.

e. the closer is the new equilibrium point to the old.

22. Consider the following statements when answering this question

I. If the cost of producing each unit of output falls \$5, then the short run market price falls \$5.

II. If the cost of producing each unit of output falls \$5, then

the long run market price falls \$5.

a. I and II are true.

b. I is true and II is false.

c. I is false and II is true.

d. I and II are false.

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23. Most markets are not contestable because

a. perfect competition is the dominant market structure.

c. fixed costs exist.

d. sunk costs exist.

e. variable costs exist.

24. The textbook for your class was not produced in a perfectly competitive industry because

a. there are so few firms in the industry that market shares are not small, and firms' decisions have an impact on market price.

b. you don't know what's in the book until you read it, so you don't know it's quality before you buy it.

c. upper-division microeconomics texts are not all alike.

d. it is not costless to enter or exit the textbook industry.

e. of all of the above reasons.

25. If any of the assumptions of perfect competition are violated,

a. supply-and-demand analysis cannot be used to study the industry.

b. graphs with flat demand curves cannot be used to study the firm.

c. graphs with downward-sloping demand curves cannot be used to study the firm.

d. there may still be enough competition in the industry to make the model of perfect competition usable.

e. one must use the monopoly model instead.

26. A "contestable market"

a. is another name for a perfectly competitive market.

b. refers to a situation in which there is only one producer in a market, but other firms stand ready to enter if profit becomes positive.

c. refers to a situation in which there are many sellers, but the other conditions of perfect competition have been violated.

d. refers to a situation in which buyers and sellers bargain orally or verbally to determine prices.

e. refers to a situation in which alternate outputs are easily available to all the firms in the market.

27. Conigan Box Company produces cardboard boxes that are sold in bundles of 1000 boxes. The market is highly competitive, with boxes currently selling for \$100 per thousand. Conigan's total and marginal cost curves are:

TC = 3,000,000 + 0.001Q‚

MC = 0.002Q,

where Q is measured in thousand box bundles per year.

a. Calculate Conigan's profit maximizing quantity. Is the firm earning a profit?

b. Analyze Conigan's position in terms of the shutdown condition. Should Conigan operate or shut down in the short-run?

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28. Bud Owen operates Bud's Package Store in a small college town. Bud sells six packs of beer for off-premises consumption. Bud has very limited store space and has decided to limit his product line to one brand of beer, choosing to forego the snack food lines that normally accompany his business. Bud's is the only beer retailer physically located within the town limits. He faces considerable competition, however, from sellers located outside of town. Bud regards the market as highly competitive and considers the current \$2.50 per six pack selling price to be beyond his control. Bud's total and marginal cost functions are:

TC = 2000 + 0.0005Q‚

MC = 0.001Q,

where Q refers to six packs per week. Included in the fixed cost figure is a \$750 per week salary for Bud, which he considers to be his opportunity cost.

a. Calculate the profit maximizing output for Bud. What is his profit? Is this an economic profit or an accounting profit?

b. The town council has voted to impose a tax of \$.50 per six pack sold in the town, hoping to discourage beer consumption. What impact will the tax have on Bud? Should Bud continue to operate? What impact will the tax have on Bud's out-of-town competitors?

29. The following table contains information for a price taking competitive firm. Complete the table and determine the profit maximizing level of output (round your answer to the nearest whole number).

Total Marginal Fixed Average Total Average Marginal

Output Cost Cost Cost Cost Revenue Revenue Revenue

0 5 0

1 7 10

2 11 20

3 17 30

4 27 40

5 41 50

6 61 60

30. The following table contains information for a price taking competitive firm. Complete the table and determine the profit maximizing level of output (round your answer to the nearest whole number).

Total Marginal Fixed Average Total Average Marginal

Output Cost Cost Cost Cost Revenue Revenue Revenue

0 25

1 35

2 30

3 45

4 185

5 57

6 120 240

PAGE 1

ANSWER KEY FOR TEST - UNTITLED

1. a

Chapter:8 QUESTION: 3

2. c

Chapter:8 QUESTION: 4

3. d

Chapter:8 QUESTION: 5

4. a

Chapter:8 QUESTION: 10

5. d

Chapter:8 QUESTION: 12

6. d

Chapter:8 QUESTION: 14

7. d

Chapter:8 QUESTION: 15

8. c

Chapter:8 QUESTION: 16

9. d

Chapter:8 QUESTION: 18

10. b

Chapter:8 QUESTION: 19

11. b

Chapter:8 QUESTION: 22

12. a

Chapter:8 QUESTION: 40

13. d

Chapter:8 QUESTION: 47

14. c

Chapter:8 QUESTION: 49

15. c

Chapter:8 QUESTION: 54

16. a

Chapter:8 QUESTION: 60

17. a

Chapter:8 QUESTION: 61

18. d

Chapter:8 QUESTION: 65

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19. c

Chapter:8 QUESTION: 68

20. a

Chapter:8 QUESTION: 75

21. c

Chapter:8 QUESTION: 77

22. c

Chapter:8 QUESTION: 78

23. d

Chapter:8 QUESTION: 82

24. e

Chapter:8 QUESTION: 83

25. d

Chapter:8 QUESTION: 84

26. b

Chapter:8 QUESTION: 86

Chapter:8 QUESTION: 88

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28. a.

Given the competitive nature of the market, Bud should equate P to MC.

2.50 = 0.001Q

Q = 2500

TR = 2.5 x 2500 = 6250

TC = 2000 + 0.0005(2500)‚

TC = 2000 + 3125

TC = 5125

ã = 6250 - 5125

ã = 1,125

Since the cost function is an economic cost function, we can conclude that this is an economic profit.

b. Tax shifts total cost curve to:

TC = 2000 + 0.0005Q‚ + 0.5Q

MC becomes

MC = 0.001Q + 0.5

setting P = MC

\$2.50 = 0.001Q + 0.5

2.00 = 0.001Q

Q = 2000

TR = 2.50 x 2000

TR = 5000

TC = 2000 + 0.0005(2000)‚ + 0.5(2000)

TC = 2000 + 2000 + 1000

TC = 5000

ã = 5000 - 5000

ã = 0

Given that this is zero economic profit, Bud should continue

operating.

The impact upon Bud's competitors will be favorable or neutral. As

he curtails output, 500 six packs worth of business will either

shift elsewhere or choose temperance.

Chapter:8 QUESTION: 90

29. Total Marginal Fixed Average Total Average Marginal

Output Cost Cost Cost Cost Revenue Revenue Revenue

0 5 - 5 - 0 - -

1 7 2 5 7 10 10 10

2 11 4 5 5.5 20 10 10

3 17 6 5 6 30 10 10

4 27 10 5 7 40 10 10

5 41 14 5 8 50 10 10

6 61 20 5 10 60 10 10

The profit maximizing level of output is either 3 or 4.

Chapter:8 QUESTION: 97

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30. Total Marginal Fixed Average Total Average Marginal

Output Cost Cost Cost Cost Revenue Revenue Revenue

0 25 - 25 - 0 - -

1 35 10 25 35 40 40 40

2 60 25 25 30 80 40 40

3 105 45 25 35 120 40 40

4 185 80 25 46 160 40 40

5 285 100 25 57 200 40 40

6 405 120 25 66 240 40 40

The profit maximizing level of output is 2.

Chapter:8 QUESTION: 98