Please study all the following, you will see some of them again on your final exam 1.

In the long run, a firm is said to be experiencing increasing returns to scale if a 10 percent increase in inputs results in : A. an increase in output from 100 to 120. B. a decrease in output from 100 to 90. C. an increase in output from 100 to 105. D. a decrease in output from 100 to 85. Answer: A. an increase in output from 100 to 120. Increasing returns to scale is when output increases more than in proportion to inputs (120-100)/100 = 20% Thus output increases by 20% when the input increases by 10%. 2. MC increases because a. MC naturally increases as firm nears capacity. b. labor is paid overtime wages when volume increases. c. in the short run, MC always increases. d. the law of diminishing returns takes effect. Answer: d. the law of diminishing returns takes effect The law of diminishing return implies eventually increasing marginal cost. 3. Which of the following relationships help determine the optimal amount of variable input (labor) in the short run? a. Marginal Product = Marginal Cost b. Average Product = Marginal Product c. Marginal Product = 0 d. Marginal Revenue Product = Marginal Labor Cost Answer: d. Marginal Revenue Product = Marginal Labor Cost Labor is hired till the marginal revenue product (marginal revenue x marginal product) equals the wage rate. 4. A company can ship its product by train but there is a chance that product may be damaged while in transit. The dollar cost and the probability of damage and no-damage are as follows: Dollar cost of shipping Probability Damage $5000 .5 .5 No damage $4000

The expected value of the cost of shipping by train is

a. b. c. d. e.

$5400 $5000 $4500 $5200 $4040

Answer: c. $4500 Dollar cost of Probability shipping Probability x Cost $2,500 $5,000 0.5
$2,000

Damage No damage

$4,000
Total

0.5
$4,500

5. The main difference between the price-quantity graph of a perfectly competitive firm and a monopoly is a that the competitive firm's demand curve is horizontal, while that of the monopoly is downward sloping. b. that a monopoly always earns an economic profit while a competitive company always earns only normal profit. c. that a monopoly maximizes its profit when marginal revenue is greater than marginal cost. d. that a monopoly does not incur increasing marginal cost. Answer: a that the competitive firm's demand curve is horizontal, while that of the monopoly is downward sloping. 6. Which of the following cost relationships is not true? A. AFC = AC - MC B TVC = TC - TFC C. the change in TVC/the change in Q = MC D. the change in TC/the change in Q = MC Answer: A. AFC = AC - MC Total Cost (TC)= Total Fixed Cost (TFC) + Total Variable Cost(TVC) Therefore TVC= TC-TFC hence B is correct. Definition of MC = change in TC/the change in Q , hence D is correct. change in TC= change in TFC + change in TVC = change in TVC as change in TFC=0 Therefore MC = change in TC/the change in Q= change in TVC/the change in Q; hence C is correct.

7. Which of the following conditions would definitely cause a perfectly competitive company to shut down in the short run? A. P < MC C. P = MC < AC C. P < AVC D. P = MR Answer: A. P < MC The decision rule is that the firm should produce an additional unit of output if the selling price is at least as great as the marginal cost of production. 8. The demand curve which assumes that competitors will follow price decreases but not price increases is called A. an industry demand curve. B. an inelastic demand curve. C. a kinked demand curve. D. a competitive demand curve. Answer: C. a kinked demand curve. 9. The existence of a kinked demand curve under oligopoly conditions may result in A. price flexibility. B. price rigidity. C. competitive pricing. D. none of the above. Answer: B. price rigidity 10. If firms are earning economic profit in a monopolistically competitive market, which of the following is most likely to happen in the long run? A. some firms will leave the market B. firms will join together to keep others from entering C new firms will enter the market, thereby eliminating the economic profit D. firms will continue to earn economic profit Answer: C new firms will enter the market, thereby eliminating the economic profit 11. A monopoly will usually produce A. where its demand curve is inelastic. B. where its demand curve is elastic. C. where its demand curve is either elastic or inelastic. D. only when its demand curve is perfectly inelastic. Answer: B. where its demand curve is elastic Only when the demand curve is elastic will a cut in price and a rise in sales will cause the monopolists total revenue to increase. 12. Which of the following indicate when Stage I ends and Stage II begins in the short run

production? A. When AP = 0 B. When MP = 0 C. When MP = AP D. When MP starts to diminish Answer: D. When MP starts to diminish
Marginal product curve reaches a peak at the end of Stage I and starts to diminish in stage II.

13. Which of the following statements best represents a difference between short-run and longrun cost? A. Less than one year is considered the short run; more than one year the long run. B. there are no fixed costs in the long run. C. in the short run labor must always be considered the variable input and capital the fixed input. D. all of the above are true. Answer: B. there are no fixed costs in the long run. The short run is defined as the period of time over which the inputs of some factors called FIXED FACTORS cannot be varied. The long run is defined as the period long enough for the inputs of all factors of production to be varied . 14. The following information is to be used in answering the questions below. Company A sells its product for $4 per unit, has variable costs per unit of $2.50, and its fixed cost is $50,000 per period. Company B sells a product similar to A's for $3.80 per unit, has variable costs per unit of $1.80, and its fixed cost is $80,000 per period. If production reaches 70,000 units per period, then A. A's profit will be higher than B's. B. B's profit will be higher than A's. C. both will earn the same profit. D. cannot tell which will make the higher profit. Answer: B. B's profit will be higher than A's. ($60,000 for B > $55,000 for A)
Company A B Selling price $4.00 $3.80 Variable Cost $2.50 $1.80 Margin $1.50 70,000 $2.00 70,000 $140,000 $80,000 $60,000 No of units sold Margin x No of units $105,000 Fixed Cost $50,000 Profit $55,000

15. Which of the following relationships is correct? A. A. When marginal product starts to decrease, marginal cost starts to decrease. B. When marginal cost starts to increase, average cost starts to increase. C. When marginal cost starts to increase, average variable cost starts to increase. D. When marginal product starts to decrease, marginal cost starts to increase. Answer: D. When marginal product starts to decrease, marginal cost starts to increase. Whenever MP is increasing, the marginal cost of producing a good must be falling. Likewise, if MP declines, marginal cost increases 16. Average fixed cost is: A. AC minus AVC. B. TC divided by Q. C. AVC minus MC. D. TC minus TVC. Answer: A. AC minus AVC. Total Cost (TC)= Total Fixed Cost (TFC) + Total Variable Cost(TVC) TC/Q = TFC/Q + TVC/Q Or AC =AFC+ AVC Or AFC= AC-AVC 17. The four-firm concentration ratio: A. indicates the total profitability among the top four firms in an industry. B. is an indicator of the degree of monopolistic competition. C. indicates the presence and intensity of an oligopoly market. D. is used by the government as a basis for anti-trust cases. Answer: D. is used by the government as a basis for anti-trust cases. The four-firm concentration ratio, consists of the market share, as a percentage, of the four largest firms in the industry. 18. The following is not one of the strengths of the Cobb-Douglas production function: A. both marginal product and returns to scale can be estimated from it. B. it can be converted into a linear function for ease of calculation. C. it shows a production function passing through increasing returns to constant returns and then to decreasing returns. D. the sum of the exponents indicates whether returns to scale are increasing, constant or decreasing. Answer: C. it shows a production function passing through increasing returns to constant returns and then to decreasing returns 19. When a company is faced by a kinked demand curve, the marginal revenue curve A. will be upward sloping. B. will be horizontal. C. will always be zero at the quantity produced.

D. will be discontinuous. 20. Which of the following is not true about the law of diminishing returns? A It is a short run phenomenon. B. It refers to diminishing marginal product. C. It will have an impact on the firm's marginal cost. D. It divides Stage I and II of the production process. E. All of the above are true. Answer: D. It divides Stage I and II of the production process.
Stage I: The first stage is increasing marginal returns. Stage II: The second stage is decreasing marginal returns. However the law of diminishing return does not divide Stage

and II of the production process.

21. Which of the following is a reason for economies of scale? A. fixed costs are spread out as volume increases. B. the law of diminishing returns does not take effect. C. input productivity increases as a result of greater specialization. D. there is greater savings in transportation costs. Answer: C. input productivity increases as a result of greater specialization

22. In finance, risk is most commonly measured by A. the probability distribution B. the standard deviation C. the average deviation D. the square root of standard deviation Answer: B. the standard deviation

23. When comparing two projects with different returns and different standard deviations, the risk measure which can be used is called the A. variance B. certainty equivalent C. coefficient of correlation D. coefficient of variation Answer: D. coefficient of variation Coefficient of variation = standard deviation/ mean Therefore for comparing projects with different means and standard deviations, the ratio of mean/standard deviation = Coefficient of variation is a good measure. 24. The company Blue Ribbon has estimated expected cash flows for 1996 to be as follows:

Probability .10 .15 .5 .15

Cash Flow 120,000 140,000 150,000 180,000

.10 210,000 The expected value of cash flow is A $156,000 B. $800,000 C. $160,000 Answer: A $156,000 Probability Cash x cash Probability Flow flow 120,00 0.1 0 12,000 140,00 0.15 0 21,000 150,00 0.5 0 75,000 180,00 0.15 0 27,000 210,00 0.1 0 21,000
Total= 156,000

25. If Coefficient of Output Elasticity (E) is greater than 1, it means that a 10% increase in all inputs will lead to ____________________________ A. a 20% increase of output B. some magnitude of output either increase or decrease which is impossible to know unless we know the production function C. almost 10% increase in output D. a decrease in output by 5% Answer: C. almost 10% increase in output 26. The following production function

exhibits: A. increasing returns to scale B. constant returns to scale

C. decreasing returns to scale D impossible to determine Answer: A. increasing returns to scale Q0= a L2 K 3 When both L and K are doubled ie L becomes 2L and K becomes 2K Q1= a (2L)2 (2K) 3 = 32 (a L2 K 3) = 32 Q0 Therefore proportionate increase in Output (Q) is 32 times the proportionate increase in the inputs. This is increasing returns to scale.

27. In a perfectly competitive industry, if P (price) is greater than ATC (average total cost), in the long run: A. firms would leave the industry to seek higher returns elsewhere B. new firms will enter the industry resulting in lower price and elimination of excess profit C. price will increase as the industry achieves long run equilibrium D. none of the above Answer: B. new firms will enter the industry resulting in lower price and elimination of excess profit Profits in a competitive industry are a signal for the entry of new capital. The industry will expand forcing prices down until the profits earned by firms old and new fall to zero. 28. In which of the markets will the firm be facing the most elastic demand curve? A. Perfect competition B Monopoly C. Monopolistic Competition D. Oligopoly Answer: A. Perfect competition As firms get more and more numerous in an industry, the demand curve each sees gets more and more elastic. 29. The Herfindahl -hirschman Index provides A. info regarding price interaction of oligopolistic firms B. info regarding concentration of market share by the larger companies in an industry C. info regarding price elasticity of demand D. info regarding cost side of oligopolistic firms Answer: B. info regarding concentration of market share by the larger companies in an industry 30. A monopolist's demand, revenue and cost curves are given as: Demand: Q d = 1000 -2P Total Cost: TC = 5000 + 50Q

Marginal Revenue: MR = 500 -Q Marginal Cost: MC = 50 The profit maximizing output for the monopolist is: A. 500 units B. 450 units C. 1000 units D. impossible to determine Answer: B. 450 units At equilibrium MR=MC Thus 500-Q=50 Or Q= 500-50=450 31. Given the total cost function

the fixed cost per unit produced (Average Fixed Cost) when Q = 10 is given by: A. $1000 B. $20 C. $13 D. $100 E. none of the above Answer: D. $100 Fixed cost= 1000 Q= 10 Therefore average fixed cost= 1000/10= $100

32.

Refer to the above diagram for a monopolistically competitive firm. Long-run equilibrium output will be: A. greater than OE. B. OE. C. OD. D. OC At long run equilibrium each firm produces where its demand curve is tangent to its average total cost curve. 33. Suppose the Herfindahl Indexes for industries A, B, and C are 1,200, 5,000, and 7,500 respectively. These data imply that: A. market power is greatest in industry A. B. market power is greatest in industry B. C. market power is greatest in industry C. D. industry A is more monopolistic than industry C. Answer: C. market power is greatest in industry C. Herfindahl-Hirschman Index (HHI) is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of thirty, thirty, twenty and twenty percent, the HHI is 2600 (302 + 302 + 202 + 202 = 2600).

If there is only one firm then the mkt share is 100 % and HHI = 100 2 =10,000 Therefore higher the HHI , greater the concentration.
The higher the Herfindahl number, the more concentrated is market power.

34. Monopolistically competitive firms: A. realize normal profits in the short run but losses in the long run. B. incur persistent losses in both the short run and long run. C. may realize either profits or losses in the short run, but realize normal profits in the long run. D. persistently realize economic profits in both the short run and long run. Answer: C. may realize either profits or losses in the short run, but realize normal profits in the long run. 35. Given the total cost function of a firm as TC = 100 +60Q +3Q^2, The functional form of average variable cost (AVC) is: A. AVC = 60Q +3Q^2 B. AVC = 100/Q + 60 +3Q C. AVC = 60 + 3Q Answer: C. AVC = 60 + 3Q VC= 60Q +3Q^2, AVC= VC/Q= (60Q +3Q^2)/ Q= 60 + 3Q, 36. Given production function Q = 7X2 </SUP - .2X3
the marginal production at X =10 is

A. 70 B. 80 C. 90 D. 100 E. none of the above Marginal production= Q/X= The production function can be differentiated and value of X substituted to give the answer. (Since production function is not clear I am unable to do so)