Practice Test for the Final Exam Question 1: Complete the following table.

At what point does diminishing marginal return set in?

Units of the Variable Resource 0 1 2 3 4 5 Total Product 0 10 22 34 Marginal Product

9 4

Question 2: Complete the following table, assuming that each unit of labor costs $75 per day.
Quantity of Labor per Day 0 1 2 3 4 5 Output per Day 5 11 15 18 20 Fixed Cost $300 75 150 300 600 15 12.5 25 37.5 Variable Cost Total Cost Marginal Cost

a. Graph the fixed cost, variable cost, and total cost b. What is the marginal product of going from two to three units of labor c. What is average total cost when output is 18 units per day? Question 3: Nimbus, Inc., makes brooms and then sells them door-to-door. Here is the relationship between the
number of workers and Nimbuss output in a given day: Workers 0 1 2 3 4 5 6 7 Output 0 20 50 90 120 140 150 155 Marginal Product Total Cost Average Total Cost Marginal Cost

a. Fill in the column of marginal products. What pattern do you see? How might you explain it? b. A worker costs $100 a day, and the firm has fixed cost of $200. Use this information to fill in the column
for average total cost.

c. Fill in the column for average total cost. What pattern do you see?

d. Now fill in the column for marginal cost. What pattern do you see? e. Compare the column for marginal product and the column for marginal cost. Explain the relationship. f. Compare the column for average total cost and column for marginal cost. Explain relationship. Question 4: Use the following data to answer the questions below:
Q 1 2 3 4 5 6 7 8 9 VC 10 16 20 25 31 38 46 55 65 MC AVC

a. b. c. d.

Calculate the marginal cost and average variable cost for each level of production. How much would the firm produce if it could sell its product for $5? For $7? For $10? Explain your answer for part b. Assuming that its fixed cost is $3, calculate the firms profit at each of the production levels in part (b).

Question 5: Draw the cost curves for a typical firm. For a given price, explain how the firm chooses the level of
output that maximizes profit. At that level of output, show on your graph the firms total revenue and total costs.

Question 6: Draw the demand, marginal revenue, average total cost, and marginal cost curves for a monopolist.
Show the profit-maximizing level of output, the profit maximizing price, and the amount of profit.

Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. ____ 1. Which of the following is not characteristic of perfect competition? a many buyers and sellers . b brand name advertising . c homogeneous products . d fully informed buyers and sellers . e free entry and exit of firms .

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2. In perfect competition, if one firm raises its price, a others will follow . b that firm will increase its revenues . c that firm will lose revenues because other firms will not follow . d all consumers will be adversely affected . e the market demand curve will shift .

Exhibit 1

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3. If the price-taking firm in Exhibit 1 is currently producing 6 units, then to maximize profit in the short run, it should a keep producing 6 units . b increase production to 12 units . c increase production to 14 units . d increase production to 8 units . e shut down .

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4. In the short run, producer surplus at each output level equals a P - MC . b TR - AVC . c TR + VC . d TR - AFC . e TR + TC .

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5. The short run is a period of time a equal to or less than six months .

b . c . d . e .

during which all resources may be varied during which all resources are fixed during which at least one resource is fixed during which at least one resource may be varied

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6. When diminishing marginal returns set in, total product a is negative . b decreases at an increasing rate . c decreases at a decreasing rate . d increases at an increasing rate . e increases at a decreasing rate .

Exhibit 2

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7. Fixed cost in Exhibit 2 equals a $20 . b $30 . c $50 . d $280

. e we cannot calculate fixed cost .

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8. If marginal cost exceeds average variable cost, a average variable cost is negative . b average variable cost is increasing . c marginal cost is greater than average total cost . d average variable cost is decreasing . e average fixed cost is increasing .

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9. Which of the following is true of the MC curve? a It intersects the ATC curve at its minimum, but it does not intersect the AVC curve at its . minimum. b It intersects the AVC curve at its minimum, but it does not intersect the ATC curve at its . minimum. c It intersects both the ATC and the AVC curves at their minimums. . d It intersects both the ATC and the AFC curves at their minimums. . e It intersects both the AVC and the AFC curves at their minimums. .

____ 10. The marginal product of labor in the production of chairs is 30 per hour. The marginal rate of technical substitution is of hours of labor for hours of machines-capital is 1/3. The marginal product of capital is: a 90 b 1 c 27 d 3 e 10 . . . . .

____ 11. In the long run all inputs of production are______. This allows the firm to produce at a _______ than in the short run a fixed; lower average cost . b fixed; higher average cost .

c variable; lower average cost . d variable; higher average cost .

____ 12. When we have economies and diseconomies of scale, the long run average cost curve: a envelopes all short run average cost curves from the lowest points . b envelopes all short run average cost curves . c lies above short run average cost curves . d lies below and does not touch the short run average cost curves . e can be above or below the short run average cost curves .

____ 13. The short run supply curve of a firm in perfectly competitive market is: a the portion of the marginal cost curve that lies above average variable cost . b the portion of the marginal cost that lies above average total cost . c the portion of the marginal cost that lies above average fixed cost . d the rising portion of the marginal cost curve . e the rising portion of the average variable cost .

____ 14. A firm in perfectly competitive market should shut down if : a price is above average total cost . b price is above average variable cost . c price is below average total cost but above average variable cost . d price is equal to average variable cost . e price is below average variable cost .

____ 15. A firm maximizes profit where: a price = marginal cost . b marginal cost = average total cost .

c marginal cost = average variable cost . d marginal cost = average fixed cost . e marginal revenue = average variable cost .

____ 16. At which price and quantity is profit maximized for the perfectly competitive firm represented in the figure above? a $40 and 70 . b $40 and 80 . c $8 and zero output . d $4 and 40 . e $8 and 70 .

____ 17. When marginal product of labor is greater than average product of labor: a average product of labor must be increasing . b average product of labor must be decreasing . c marginal product of labor must be increasing . d marginal product of labor must be decreasing . e None of the above . ____ 18. A production function a shows the functions of production such as income, consumption, and employment . b is a theoretical concept having no relevance to real-world production .

c is the quota a firm manager expects the workers to meet . d shows the relationship between quantities of inputs used and quantity of output produced . e quantifies the amounts of variable inputs needed to produce fixed inputs . _____ 19. An important difference between a perfectly competitive firm and a monopolist is that a the perfectly competitive firm faces a horizontal demand curve and the monopolist faces . a downward-sloping demand curve b the perfectly competitive firm tends to be larger . c only the monopolist attempts to maximize profit . d only the monopolist maximizes profit at the quantity where marginal cost equals . marginal revenue e only the perfectly competitive firm maximizes profit . _____ 20. Which of the following does a monopoly control, that a perfectly competitive firm does not control? a plant size . b what price to charge . c technology . d how much to produce . e what inputs to use .

Answer Section
MULTIPLE CHOICE 1. ANS: B 2. ANS: C 3. ANS: B 4. ANS: A 5. ANS: D 6. ANS: E 7. ANS: C 8. ANS: B

9. ANS: C 10. ANS: A 11. ANS: C 12. ANS: B 13. ANS: A 14. ANS: E 15. ANS: A 16. ANS: E 17. 18. 19. 20. ANS: A ANS: D ANS: A ANS: B