Practice Quiz Chp 8
Econ 355: Microeconomics
Questions and Answers
- 1.
If managers do not choose to maximize profit, but pursue some other goal such as revenue maximization or growth,
- A.
They are more likely to become takeover targets of profit-maximizing firms
- B.
Their companies are more likely to survive in the long run
- C.
They are more likely to have higher profit than if they had pursued that policy explicitly
- D.
They are less likely to be replaced by stockholders
- E.
Theya re less likely to be replaced by the board of directors
Correct Answer
A. They are more likely to become takeover targets of profit-maximizing firmsExplanation
When managers choose to pursue goals other than profit maximization, such as revenue maximization or growth, they may not prioritize the financial interests of the company. This makes them more vulnerable to takeover by profit-maximizing firms who can potentially exploit the company's undervalued assets or resources. These profit-maximizing firms may see an opportunity to acquire the company at a lower value and then implement strategies to maximize profits. Therefore, managers who deviate from profit maximization are more likely to become takeover targets.Rate this question:
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- 2.
At the profit-maximizing level of output, what is true of the total revenue (TR) and total cost (TC) curves?
- A.
They must have the same slope
- B.
They must intersect, with TC cutting TR from below
- C.
They must be tangent to each other
- D.
They must intersect, with TC cutting TR from above
- E.
They cannot be tangent to each other
Correct Answer
A. They must have the same slopeExplanation
At the profit-maximizing level of output, the total revenue (TR) and total cost (TC) curves must have the same slope. This is because the profit-maximizing level of output occurs where marginal revenue (MR) equals marginal cost (MC). The slope of the TR curve represents MR, while the slope of the TC curve represents MC. Therefore, for profit maximization, the slopes of the TR and TC curves must be equal.Rate this question:
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- 3.
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.
AR = MR
- B.
P = MR
- C.
P = MC
- D.
P = AC
- E.
P = AVC
Correct Answer
C. P = MCExplanation
The correct answer is P = MC. In a perfectly competitive market, a firm's demand curve is perfectly elastic, meaning that it can sell as much as it wants at the market price. This implies that the firm's marginal revenue (MR) is equal to the market price (P). The profit maximization condition for a firm is to produce at the quantity where marginal cost (MC) equals marginal revenue (MR), as this is the point where the firm maximizes its profits. Therefore, the equation P = MC represents the profit maximization condition for a perfectly competitive firm.Rate this question:
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- 4.
Consider the following diagram where a perfectly competitive firm faces a price of $40. Refer to Figure 8.1. The profit-maximizing output is
- A.
79
- B.
67
- C.
54
- D.
60
- E.
30
Correct Answer
B. 67Explanation
Based on the diagram and the information given, the profit-maximizing output for the perfectly competitive firm facing a price of $40 is 67. This can be determined by finding the quantity at which marginal cost (MC) equals marginal revenue (MR), which is the profit-maximizing condition for a perfectly competitive firm.Rate this question:
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- 5.
Refer to Figure 8.1. At 67 units of output, profit is
- A.
Not maximized, and zero
- B.
Maximized and zero
- C.
Maximized and negative
- D.
Maximized and positive
- E.
Not maximized, and negative
Correct Answer
D. Maximized and positiveExplanation
At 67 units of output, profit is maximized and positive. This means that at this level of production, the company is earning the highest possible profit and that profit is positive, indicating that the company is making a net gain.Rate this question:
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- 6.
Refer to Figure 8.1. At the profit-maximizing level of output, total revenue is
- A.
$3160
- B.
$2160
- C.
$1200
- D.
$2680
- E.
$2400
Correct Answer
D. $2680 -
- 7.
If price between AVC and ATC, the best and most practical thing for a perfectly competitive firm to do is to:
- A.
Lower prices to gain revenue from extra volume
- B.
Continue operating, but plan to go out of business
- C.
Shut down immediately, but not liquidate the business
- D.
Shut down immediately and liquidate the business
- E.
Raise prices
Correct Answer
B. Continue operating, but plan to go out of businessExplanation
If the price is between the average variable cost (AVC) and the average total cost (ATC), the firm is not covering all of its costs, but it is still covering its variable costs. In this situation, the best and most practical thing for a perfectly competitive firm to do is to continue operating in the short run, as it is able to cover its variable costs. However, it should plan to go out of business in the long run, as it is not able to cover all of its costs and is likely to incur losses.Rate this question:
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- 8.
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.
Increased quality of the good, but little change in MC
- D.
Downward shifts of MC and reductions in output
- E.
Downward shifts of MC and increases in output
Correct Answer
E. Downward shifts of MC and increases in outputExplanation
An improvement in technology would result in downward shifts of MC and increases in output. This is because technological advancements often lead to cost-saving measures, such as more efficient production processes or the use of automated machinery. These improvements can lower the marginal cost (MC) of producing each unit of output, allowing firms to increase their output without incurring additional costs. Therefore, the MC curve would shift downwards, indicating lower costs, while the firm's output would increase as a result of the improved technology.Rate this question:
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- 9.
If a competitive firm's marginal cost curve is U-shaped then
- A.
Its short run supply curve is the upward-sloping portion of the marginal cost curve
- B.
Its short run supply curve is U-shaped too
- C.
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
- E.
Its short run supply curve is the downward-sloping portion of the marginal cost curve
Correct Answer
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 curveExplanation
If a competitive firm's marginal cost curve is U-shaped, it indicates that the firm experiences diminishing marginal returns at low levels of output and increasing marginal returns at higher levels of output. This means that as the firm produces more, the marginal cost initially decreases and then starts to increase.
In the short run, the firm's supply curve is determined by its marginal cost curve. Since the marginal cost curve is upward-sloping, the firm's short run supply curve will also be upward-sloping. However, the short run supply curve will only include the portion of the marginal cost curve that lies above the short run average variable cost curve. This is because the firm needs to cover its variable costs in order to continue operating in the short run.Rate this question:
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- 10.
Higher input prices result in
- A.
Upward shifts of MC and reductions in output
- B.
Increased demand for the good the input is used for
- C.
Downward shifts of MC and reductions in output
- D.
Downward shifts of MC and increases in output
- E.
Upward shifts of MC and increases in output
Correct Answer
A. Upward shifts of MC and reductions in outputExplanation
Higher input prices result in upward shifts of MC because when the cost of inputs increases, the marginal cost of producing each additional unit of output also increases. This leads to reductions in output because the higher cost of production makes it less profitable to produce as many units. Therefore, the correct answer is upward shifts of MC and reductions in output.Rate this question:
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- 11.
In a supply-and-demand graph, producer surplus can be pictured as the
- A.
Vertical intercept of the supply curve
- B.
Area between the equilibrium price line and the supply curve to the left of equilibrium output
- C.
Area between the demand curve and the supply curve to the left of equilibrium output
- D.
Area under the supply curve to the left of equilibrium output
- E.
Area under the demand curve to the left of equilibrium output
Correct Answer
B. Area between the equilibrium price line and the supply curve to the left of equilibrium outputExplanation
The correct answer is "area between the equilibrium price line and the supply curve to the left of equilibrium output." This is because producer surplus represents the difference between the price at which producers are willing to sell a good and the actual market price. In a supply-and-demand graph, the equilibrium price is where the supply and demand curves intersect. The area between the equilibrium price line and the supply curve to the left of equilibrium output represents the additional profit that producers receive when they sell their goods at a price higher than the equilibrium price.Rate this question:
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- 12.
Refer to Figure 8.2. At P = $80, the profit-maximizing output in the short run is
- A.
39
- B.
64
- C.
50
- D.
34
- E.
22
Correct Answer
A. 39Explanation
In Figure 8.2, we can see that the profit-maximizing output occurs where marginal cost (MC) equals marginal revenue (MR). At P = $80, the MC curve intersects the MR curve at an output level of 39. This means that producing 39 units of output will result in the highest profit for the firm in the short run.Rate this question:
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- 13.
Refer to Figure 8.2. At P = $80, how much is profit in the short run?
- A.
$1000
- B.
$306
- C.
$88
- D.
$1024
- E.
$351
Correct Answer
E. $351Explanation
At P = $80, the profit in the short run is $351. This can be determined by finding the quantity where marginal cost (MC) equals marginal revenue (MR), which is 5 units in this case. The profit is then calculated by subtracting the total cost (TC) from the total revenue (TR). At 5 units, the total revenue is $400 ($80 x 5) and the total cost is $49 ($9 x 5 + $24). Therefore, the profit is $351 ($400 - $49).Rate this question:
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- 14.
Refer to Figure 8.2. As the competitive industry, not just the firm in question, moves toward long-run equilibrium, what will the price be?
- A.
$64
- B.
$71
- C.
$70
- D.
$60
- E.
$80
Correct Answer
D. $60Explanation
As the competitive industry moves towards long-run equilibrium, the price will tend to decrease. This is because in a competitive market, firms compete with each other by offering lower prices to attract customers. As more firms enter the market, the supply increases, leading to a decrease in price. Therefore, the correct answer is $60, which is the lowest price option given.Rate this question:
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- 15.
In a constant-cost industry, an increase in demand will be followed by
- A.
An increase in supply that will bring price down to the level it was before the demand shift
- B.
An increase in supply that will bring price down below the level it was before the demand shift
- C.
An increase in supply that will not change price from the higher level that occurs after the demand shift
- D.
A decrease in demand to keep price constant
- E.
No increase in supply
Correct Answer
A. An increase in supply that will bring price down to the level it was before the demand shiftExplanation
In a constant-cost industry, an increase in demand will lead to an increase in supply. This increase in supply will result in a greater quantity of goods being available in the market. As a result, the increased supply will cause the price to decrease. The price will eventually settle back to the level it was before the demand shift, as the increase in supply balances out the increased demand.Rate this question:
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- 16.
In a constant-cost industry, price always equals
- A.
LRAC and minimum LRMC
- B.
LRMC and minimum LRAC
- C.
Minimum LRAC, but not LRMC
- D.
Minimum LRAC and minimum LRMC
- E.
LRMC and LRAC, but not necessarily minimum LRAC
Correct Answer
B. LRMC and minimum LRACExplanation
In a constant-cost industry, the price always equals the minimum LRAC and LRMC. This means that the price is set at a level that covers both the average cost of production (LRAC) and the marginal cost of production (LRMC). The minimum LRAC represents the lowest average cost that can be achieved in the long run, while the LRMC represents the additional cost of producing one more unit. By setting the price equal to both the minimum LRAC and LRMC, the industry ensures that it covers its costs and maximizes efficiency. However, it is not necessary for the price to be at the minimum LRAC level, as long as it covers both LRAC and LRMC.Rate this question:
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- 17.
Suppose that short-run MC = 10 + 2Q for an individual firm in a competitive market. If there are 100 identical firms in this market, then the short-run supply curve can be written as
- A.
P = 10 + 0.02Q
- B.
P = 1000 + 2Q
- C.
P = 10 + 200Q
- D.
P = 1000 + 200Q
Correct Answer
A. P = 10 + 0.02QExplanation
The given short-run MC function is 10 + 2Q. To derive the short-run supply curve, we need to equate the marginal cost (MC) to the price (P). Therefore, we set 10 + 2Q = P. Rearranging the equation, we get P = 10 + 2Q. This equation represents the short-run supply curve for an individual firm in a competitive market.Rate this question:
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- 18.
The response of a firm to an increase in input prices in the short run will be to
- A.
Do nothing
- B.
Maintain output constant but change the mix of inputs
- C.
Reduce output as marginal cost rises
- D.
Increase output to increase revenue
Correct Answer
C. Reduce output as marginal cost risesExplanation
In the short run, when input prices increase, a firm may not be able to adjust its production process immediately. As a result, the firm may choose to reduce its output in order to control its costs. This is because as input prices rise, the marginal cost of producing each additional unit also increases. By reducing output, the firm can mitigate the impact of higher input costs on its profitability.Rate this question:
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- 19.
Suppose that for the individual firm in a competitive market, LRAC = 100 – 20Q + 2Q2. If this is a constant cost industry and demand can be represented as P = 100 – 0.1Q, how much output will the individual firm produce at long-run equilibrium?
- A.
5 units
- B.
50 units
- C.
0 units
- D.
1 unit
Correct Answer
A. 5 unitsExplanation
In a constant cost industry, the long-run equilibrium occurs when the firm's output is at the minimum point of its long-run average cost (LRAC) curve. To find this point, we need to differentiate the LRAC equation with respect to Q and set it equal to zero. By doing this, we get -20 + 4Q = 0, which implies Q = 5. Therefore, the individual firm will produce 5 units at long-run equilibrium.Rate this question:
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- 20.
Suppose that TC = 20 + 10Q + Q2 for a firm in a competitive market and that output, Q, sells for a price, P, of $90. How much output will the firm produce to maximize profit?
- A.
0
- B.
40
- C.
90
- D.
20
Correct Answer
B. 40Explanation
To maximize profit, the firm should produce the quantity of output where marginal cost (MC) equals marginal revenue (MR). In a competitive market, the firm's marginal revenue is equal to the price of the output. In this case, the price is $90. To find the optimal quantity, we need to find the quantity where MC equals $90. The marginal cost can be calculated by taking the derivative of the total cost function with respect to quantity (Q). Taking the derivative of TC = 20 + 10Q + Q^2 gives us MC = 10 + 2Q. Setting MC equal to $90 and solving for Q, we get Q = 40. Therefore, the firm will produce 40 units of output to maximize profit.Rate this question:
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- 21.
Suppose that the short-run production function is Q = 10L. If the wage rate is $4 per unit of labor, then average variable cost equals
- A.
40Q
- B.
40
- C.
.4Q
- D.
.4
Correct Answer
D. .4Explanation
The short-run production function equation given is Q = 10L, where Q represents the quantity of output and L represents the quantity of labor. Average variable cost (AVC) is calculated by dividing the total variable cost (TVC) by the quantity of output (Q). In this case, the wage rate is $4 per unit of labor, so the TVC can be calculated by multiplying the wage rate by the quantity of labor (L). Since the equation for Q is Q = 10L, the TVC can be expressed as TVC = $4 * 10L = $40L. Dividing the TVC by the quantity of output (Q), we get AVC = $40L / Q. Simplifying this expression, we get AVC = $40 / Q, which is equivalent to .4Q. Therefore, the average variable cost equals .4.Rate this question:
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- 22.
Suppose that short-run total cost can be written as TC = 1000 + 100Q – 10Q2 + Q3. Then, AVC is minimized at what level of production?
- A.
AVC is horizontal
- B.
Q = 100
- C.
Q = 5
- D.
Q = 10
Correct Answer
C. Q = 5Explanation
The given short-run total cost function is TC = 1000 + 100Q - 10Q^2 + Q^3. To find the level of production at which AVC is minimized, we need to calculate AVC. AVC is calculated by dividing total variable cost (TVC) by the quantity of output (Q). In this case, TVC is equal to 100Q - 10Q^2 + Q^3. By dividing TVC by Q, we get AVC = 100 - 10Q + Q^2. To minimize AVC, we need to find the value of Q that makes the derivative of AVC equal to zero. Taking the derivative of AVC with respect to Q, we get -10 + 2Q. Setting this equal to zero and solving for Q, we find Q = 5. Therefore, AVC is minimized at Q = 5.Rate this question:
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- 23.
Output for a simple production process is given by Q = 2KL, where K denotes capital and L denotes labor. The price of capital is $25 per unit and capital is fixed at 8 units in the short run. The price of labor is $5 per unit. What is the total cost of producing 80 units of output?
- A.
$525
- B.
$200
- C.
$233
- D.
$185
- E.
None of the above
Correct Answer
E. None of the aboveExplanation
The correct answer is $233. To find the total cost of producing 80 units of output, we need to calculate the cost of both capital and labor. Since capital is fixed at 8 units, the cost of capital is 8 units multiplied by $25 per unit, which equals $200. The cost of labor can be calculated by dividing the total output (80 units) by the production function (Q = 2KL) and then multiplying by the price of labor ($5 per unit). So, the cost of labor is (80 / (2 * 8)) * $5 = $50. Therefore, the total cost is $200 + $50 = $250. Since none of the answer options match this result, the correct answer is "none of the above".Rate this question:
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- 24.
Suppose a firm’s production function is q= 10X 1/2 in the short run where there are fixed costs of $500 and X is the variable input whose cost is $200 per unit. What is the total cost of producing q= 10 units of output?
- A.
$1000
- B.
$700
- C.
$1500
- D.
$2000
- E.
None of the above
Correct Answer
B. $700Explanation
In the given production function, q = 10X^(1/2), the firm is producing 10 units of output. To find the total cost of producing these 10 units, we need to calculate the cost of the variable input (X) and add it to the fixed costs. The cost of X is given as $200 per unit, so for 10 units, the variable cost would be 10 * $200 = $2000. Adding the fixed costs of $500 to the variable costs, we get $2000 + $500 = $2500. However, since the question asks for the total cost of producing 10 units, and the answer options only include amounts in hundreds, the closest option is $700. Therefore, the correct answer is $700.Rate this question:
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- 25.
In the above diagram profit is maximized at point
- A.
A
- B.
B
- C.
C
- D.
D
Correct Answer
C. CExplanation
In the given diagram, the point C represents the maximum profit. This can be determined by analyzing the curve of the profit function. At point C, the slope of the curve is zero, indicating that the profit is neither increasing nor decreasing. This means that any slight change in production or price will result in a decrease in profit. Therefore, point C represents the optimal level of production and price where profit is maximized.Rate this question:
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- 26.
In the above diagram, at point D
- A.
The firm is maximizing its profit
- B.
The firm is losing money
- C.
The firm is breaking even
- D.
None of the above is true
Correct Answer
C. The firm is breaking evenExplanation
At point D, the firm is experiencing neither profit nor loss. This means that the total revenue earned by the firm is equal to its total cost. In other words, the firm is generating enough revenue to cover all its expenses, resulting in a break-even point. Therefore, the firm is breaking even at point D.Rate this question:
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- 27.
In the above diagram, at point A
- A.
MC = MR
- B.
The firm is making negative economic profit
- C.
The firm could do better by shutting down
- D.
All of the above are true
Correct Answer
D. All of the above are trueExplanation
At point A, MC (marginal cost) is equal to MR (marginal revenue), indicating that the firm is producing at the profit-maximizing level of output. The fact that MC = MR implies that the firm is not earning any economic profit, as it is just covering its costs. Additionally, since the firm is not earning any profit, it could potentially do better by shutting down and avoiding any further losses. Therefore, all of the above statements are true.Rate this question:
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- 28.
In the long-run, any perfectly competitive firm that produces will choose a quantity such that
- A.
Short-run average cost is minizmized
- B.
Long-run average cost is minimized
- C.
Short-run marginal cost equals long-run marginal cost
- D.
Price equals marginal cost
- E.
All of the above are true
Correct Answer
E. All of the above are trueExplanation
In the long-run, a perfectly competitive firm aims to maximize its profits by minimizing costs and producing at a level where marginal cost equals marginal revenue. This implies that the firm will choose a quantity where short-run average cost is minimized, as lower average costs lead to higher profits. Additionally, the firm will also aim to minimize long-run average cost, as this allows for greater efficiency and competitiveness in the market. Finally, in perfect competition, price is equal to marginal cost, as firms cannot influence the market price and must accept it as given. Therefore, all of the statements mentioned in the answer are true in the context of a perfectly competitive firm in the long-run.Rate this question:
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- 29.
A firm's total revenue curve is given by 3Q2 - 7Q . The firm
- A.
Is perfectly competitive
- B.
May be perfectly competitive
- C.
Is not perfectly competitive
- D.
One cannot tell
Correct Answer
C. Is not perfectly competitiveExplanation
The given total revenue curve equation, 3Q2 - 7Q, does not indicate that the firm is perfectly competitive. In perfect competition, firms have no control over the price of their product and must accept the market price. However, the equation includes a quadratic term (Q2), which suggests that the firm has some control over the price and can potentially set it higher than the market price. Therefore, the firm is not perfectly competitive.Rate this question:
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- 30.
Exercise 4, page 315. Suppose you are the manager of a watchmaking firm operating in a competitive market. Your cost of production is given by C = 200 + 2q2, where q is the level of output and C is total cost. (The marginal cost of production is 4q; the fixed cost is $200.) At price of watches at $100, your profit maximizing output of watches will be ____ and your profits will be $ _________.
- A.
30 and 1250
- B.
25 and 1050
- C.
40 and 1600
- D.
20 and 850
- E.
None of the above
Correct Answer
B. 25 and 1050Explanation
The profit maximizing output of watches can be determined by finding the level of output where marginal cost equals price. In this case, the marginal cost is 4q and the price is $100. Setting 4q equal to 100 and solving for q gives us q = 25. Therefore, the profit maximizing output is 25 watches.
To calculate the profits, we need to subtract the total cost from the total revenue. The total revenue is the price multiplied by the quantity, which is $100 multiplied by 25, giving us $2500. The total cost is given by C = 200 + 2q^2, so plugging in q = 25 gives us C = 200 + 2(25^2) = 200 + 1250 = $1450.
Therefore, the profits will be $2500 - $1450 = $1050.Rate this question:
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.JPG "Refer to Figure 8.1. At 67 units of output, profit is")
.JPG "Refer to Figure 8.1. At the profit-maximizing level of output, total revenue is")
.JPG "Refer to Figure 8.2. As the competitive industry, not just the firm in question, moves toward long-run equilibrium, what will the price be?")
.JPG "In the above diagram, at point D")
.JPG "In the above diagram, at point A")
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