Economics 101

Fall 1998
Section 3 - Hallam
Exam 4

1. Marginal revenue measures

a. the change in cost required to produce one more unit of output.
b. the change in output that can be obtained from one more dollar of expenditure.
c. the change in output that results from one more unit of an input.
d. the change in revenue from the production of one more unit of output.
e. the level of output divided by the level of input.

2. We say that a firm experiences diseconomies of scale or decreasing returns to size when
a. AC is decreasing.
b. AC > MC.
c. MC > AC.
d. εS (elasticity of scale) > 1.
e. the firm imposes costs on outside firms.

3. Limit pricing is designed to

a. eliminate excessive profits in a monopoly market.
b. lower price below the average total cost of a competitor.
c. limit the access of a competitor to key inputs.
d. prevent the resale of low priced goods to high demand consumers.
e. prevent sales of products at below cost.

4. If a single price monopolist lowers the price of a product in order to sell one more unit, then
a. total revenue will rise by the amount of the price.
b. marginal revenue will be higher than the price.
c. the net effect on total revenue is usually negative because price is falling.
d. some revenue is lost due to the lower price for all previous units, but the unit brings in some new
revenue.
e. revenue stays the same.

5. What is the shutdown rule for a firm in the short-run?

a. In the short-run, the firm should continue to produce if total revenue (TR) exceeds total variable
costs (TVC) and total fixed costs (TFC) are all sunk; otherwise, it should shut down.
b. In the short-run, the firm should continue to produce if total revenue (TR) exceeds total costs
(TC); otherwise, it should shut down.
c. In the short-run, if some fixed costs are not sunk, the firm should continue to produce if
(TR - TVC) > (TFC - sunk fixed costs) > 0; otherwise, it should shut down.
d. In the short-run, the firm should continue to produce if total revenue (TR) is less than total
variable costs.
e. Both a and c are reasonable rules.
For questions 6 and 7, consider the following data on oil and rice production in Indonesia and Thailand where the
data is production per time period. Assume that the production possibility frontier is linear. With no rice
production, Indonesia can produce 10,000 barrels of oil. With 500 tons of rice, Indonesia has no oil production, etc.

Oil Rice

Indonesia 10,000 0

Indonesia 0 500

Thailand 6,000 0

Thailand 0 400

6. Which of the following statements is true?

a. Thailand has an absolute advantage in oil production.
b. Thailand has a comparative advantage in oil production.
c. Indonesia has a comparative advantage in oil production.
d. Cannot say which country has an absolute advantage in either product.
e. Both c and d are correct.

7. If Indonesia produced 4,000 barrels of oil and Thailand produced 3,000 barrels of oil and each used their
remaining resources for rice production, what would total rice production be?
a. 200 tons
b. 350 tons
c. 600 tons
d. 500 tons
e. 400 tons

8. The marginal rate of substitution measures

a. the slope of the production possibility frontier.
b. the slope of the isocost line.
c. the slope of an isoquant.
d. the decrease in the quantity of input 1 (x1) that is needed to accompany a one unit increase in the
quantity of input two (x2), in order to keep production the same.
e. both c and d.

9. For a firm to minimize cost which of the following must hold?

 w2
a. the slope of the isocost line and the slope of the isoquant curve must be equal
w1
MPPx MPPx
b. 2
 1

w2 w1
 w1 ∆ x1
c.  MRSx 
1 x2
w2 ∆ x2

d. both a and b
e. a, b, and c
10. Firm A operates in a perfectly competitive market. Firm B operates in an imperfectly competitive market.
Which of the following statements is correct?
a. the total revenue curve for both firms is linear
b. the total revenue curve first rises and then falls for the imperfectly competitive firm but is linear
for the perfectly competitive firm
c. the total revenue curve first rises and then falls for both firms
d. the total revenue curve first rises and then falls for the perfectly competitive firm but is linear for
the imperfectly competitive firm
e. the total revenue curve is horizontal for the perfectly competitive firm but linear for the
imperfectly competitive firm

11. Marginal (physical) product measures

a. the change in cost from the production of one more unit of output.
b. the change in an input required to produce one more unit of output.
c. the change in output that can be obtained from one more dollar of expenditure.
d. the change in output that results from one more unit of an input.
e. the level of output divided by the level of input.

12. Price discrimination refers to

a. selling the same product at the same uniform price.
b. selling the same product to different customers at different prices as a result of different
production costs.
c. charging a price just above average total cost in order to drive competitors out of the market.
d. charging a higher price to people who are ugly.
e. selling the same product to different customers at different prices for reasons unrelated to
production costs

13. Which is the following products/services is a good candidate for price arbitrage?
a. knee replacement
b. tailored suit
c. silver
d. corn silage
e. repair of plumbing leak

14. Marginal cost measures

a. the change in cost from the production of one more unit of output
b. the change in an input required to produce one more unit of output
c. the change in output that can be obtained from one more dollar of expenditure
d. the change in output that results from one more unit of an input
e. the level of output divided by the level of input
For questions 15-17, consider the following data on output (Q), fixed cost (FC), variable cost (VC), total cost (C),
average fixed (AFC), variable (AVC), and total cost (ATC), marginal cost (MC), marginal revenue (MR), etc. The
column labeled MC ∆ is the change in cost computed as a difference, similarly for MR ∆. MC and MR are exact
marginal cost and marginal revenue respectively.

Q FC VC C AFC AVC ATC MC ∆ MC Price TR MR ∆ MR

0.00 100 0.00 100.00 100.00 340 0 340
82.00 318.00
1.00 100 82.00 182.00 100.00 82.00 182.00 66.00 318 318 296
54.00 274.00
2.00 100 136.00 236.00 50.00 68.00 118.00 44.00 296 592 252
38.00 230.00
3.00 100 174.00 274.00 33.33 58.00 91.33 34.00 274 822 208
34.00 186.00
4.00 100 208.00 308.00 25.00 52.00 77.00 36.00 252 1008 164
42.00 142.00
5.00 100 250.00 350.00 20.00 50.00 70.00 50.00 230 1150 120
62.00 98.00
6.00 100 312.00 412.00 16.67 52.00 68.67 76.00 208 1248 76
94.00 54.00
7.00 100 406.00 506.00 14.29 58.00 72.29 114.00 186 1302 32
138.00 10.00
8.00 100 544.00 644.00 12.50 68.00 80.50 164.00 164 1312 -12
194.00 -34.00
9.00 100 738.00 838.00 11.11 82.00 93.11 226.00 142 1278 -56
262.00 -78.00
10.00 100 1000.00 1100.00 10.00 100.00 110.00 300.00 120 1200 -100
342.00 -122.00
11.00 100 1342.00 1442.00 9.09 122.00 131.09 386.00 98 1078 -144
434.00 -166.00
12.00 100 1776.00 1876.00 8.33 148.00 156.33 484.00 76 912 -188
596.00 -232.00
14.00 100 2968.00 3068.00 7.14 212.00 219.14 716.00 32 448 -276
852.00 -320.00
16.00 100 4672.00 4772.00 6.25 292.00 298.25 996.00 -12 -192 -364

15. If this data represents a monopoly, what level output should they produce?
a. 9
b. 8
c. 7
d. 5
e. 6

16. What price should a monopolist charge?

a. 230
b. 156
c. 208
d. 142
e. 164
17. In a competitive industry, price will be equal to
a. 230.
b. 156.
c. 208.
d. 142.
e. 164.

Consider the table on the next page for questions 18-20 where y is output, TR is total revenue, MR is marginal
revenue, LRTC is long run total cost, LRATC is long run average total cost, LRMC is long run marginal cost,
SRAC is short run average total cost, SRMC is short run marginal cost, and the number after SRAC denotes plant
size.

18. If the price was permanently $332, what size plant should the firm build?
a. 6
b. 10
c. 14
d. 18
e. can’t tell from the data

19. What will be the long run price and marginal cost in this industry if there is free entry and exit and all firms
have the same cost structure?
a. 140
b. 332
c. 220
d. 212
e. 410

20. If the price is $246 and the current plant is size 14, how much output should the firm produce?
a. 10
b. 12
c. 13
d. 14
e. 15
 Long Run 6 6 10 10 14 14 18 18
y Price TR MR LRTC LRATC LRMC Profit SRAC 6 SRMC 6 SRAC 10 SRMC 10 SRAC 14 SRMC 14 SRAC 18 SRMC 18
0 332 0 332 0.00 0.00
1 332 332 332 454.00 454.00 410.00 -122.00 704.00 310.00 1264.00 230.00 2144.00 3344.00
2 332 664 332 824.00 412.00 332.00 -160.00 492.00 252.00 732.00 172.00 1132.00 1692.00
3 332 996 332 1122.00 374.00 266.00 -126.00 404.00 206.00 537.33 126.00 777.33 1124.00
4 332 1328 332 1360.00 340.00 212.00 -32.00 350.00 172.00 430.00 92.00 590.00 830.00
5 332 1660 332 1550.00 310.00 170.00 110.00 312.00 150.00 360.00 70.00 472.00 648.00
6 332 1992 332 1704.00 284.00 140.00 288.00 284.00 140.00 310.67 60.00 390.67 524.00
7 332 2324 332 1834.00 262.00 122.00 490.00 263.43 142.00 274.86 62.00 332.00 434.86
8 332 2656 332 1952.00 244.00 116.00 704.00 249 156.00 249.00 76.00 289.00 369.00
9 332 2988 332 2070.00 230.00 122.00 918.00 240.00 182.00 231.11 102.00 257.78 22.00 320.00
10 332 3320 332 2200.00 220.00 140.00 1120.00 236.00 220.00 220.00 140.00 236.00 60.00 284.00
11 332 3652 332 2354.00 214.00 170.00 1298.00 236.73 270.00 214.91 190.00 222.18 110.00 258.55 30.00
12 332 3984 332 2544.00 212.00 212.00 1440.00 242.00 332.00 215.33 252.00 215.33 172.00 242.00 92.00
13 332 4316 332 2782.00 214.00 266.00 1534.00 251.69 406.00 220.92 326.00 214.77 246.00 233.23 166.00
14 332 4648 332 3080.00 220.00 332.00 1568.00 265.71 492.00 231.43 412.00 220.00 332.00 231.43 252.00
15 332 4980 332 3450.00 230.00 410.00 1530.00 284.00 590.00 246.67 510.00 230.67 430.00 236.00 350.00
16 332 5312 332 3904.00 244.00 500.00 1408.00 306.50 700.00 266.50 620.00 246.50 540.00 246.50 460.00
17 332 5644 332 4454.00 262.00 602.00 1190.00 333.18 822.00 290.82 742.00 267.29 662.00 262.59 582.00
18 332 5976 332 5112.00 284.00 716.00 864.00 364.00 956.00 319.56 876.00 292.89 796.00 284.00 716.00
19 332 6308 332 5890.00 310.00 842.00 418.00 398.95 1102.00 352.63 1022.00 323.16 942.00 310.53 862.00
20 332 6640 332 6800.00 340.00 980.00 -160.00 438.00 1260.00 390.00 1180.00 358.00 1100.00 342.00 1020.00
22 332 7304 332 9064.00 412.00 1292.00 -1760.00 528.36 1612.00 477.45 1532.00 441.09 1452.00 419.27 1372.00
23 332 7636 332 10442.00 454.00 1466.00 -2806.00 579.65 1806.00 527.48 1726.00 489.22 1646.00 464.87 1566.00
25 332 8300 332 13750.00 550.00 1850.00 -5450.00 694.40 2230.00 640.00 2150.00 598.40 2070.00 569.60 1990.00
26 332 8632 332 15704.00 604.00 2060.00 -7072.00 757.85 2460.00 702.46 2380.00 659.38 2300.00 628.62 2220.00
28 332 9296 332 20272.00 724.00 2516.00 -10976.00 896.86 2956.00 839.71 2876.00 794.00 2796.00 759.71 2716.00
30 332 9960 332 25800.00 860.00 3020.00 -15840.00 1052.00 3500.00 993.33 3420.00 945.33 3340.00 908.00 3260.00
21. Consider two perfectly competitive firms with the following marginal cost functions
MC (y1)  12  4 y1
MC (y2)  12  y2

where yi is the output of the ith firm? What is the supply equation for firm 1?

1
a. y1  p  12
4
1
b. y1  p  6
2
c. y1  p  12
1
d. y1  p  3
4
e. y1  2 p  24

22. For the industry made up of the two firms in question 21, what is the industry supply equation?

a. Q  y1  y2  2 p  24
5
b. Q  y1  y2  p  15
4
c. Q  y1  y2  p  15
3
d. Q  y1  y2  p  9
4
3
e. Q  y1  y2  p  18
2
For questions 23-25, consider a monopolist with the following demand, cost, and marginal cost functions:
1
q  D(p)  80  p
2
C(q)  500  10 q  q 2
MC(q)  10  2 q

23. What is the inverse demand function?

1
a. q  80  p
2
b. p  160  2 q
1
c. p  80  q
2
d. q  160  2 p
e. p  80  q

24. What is marginal revenue for this monopolist?

a. MR  80  p
b. MR  160  2 q
c. MR  160  4 q
d. MR  160  q
e. MR  160  4 q

25. How much output should the monopolist produce?

a. 20
b. 25
c. 37.5
d. 30
e. 50
 Economics 101
Exam 4

Question Correct # Right Question Correct # Right

Answer Answer

1 d 14 a

2 c 15 e

3 b 16 c

4 d 17 e

5 e 18 c

6 c 19 d

7 d 20 c

8 e 21 d

9 d 22 b

10 b 23 b

11 d 24 c

12 e 25 b

13 c