Exercise 3

ECON 102, Principles of Micro economics

Summer III. 2009

Answer all questions.

Multiple Choice Questions. Choose the best answer
1. When the marginal and average products of labor are equal to each
other,
a. the average product must be at its maximum value.
b. the marginal product must be at its maximum value.
c. the total product must be at its maximum value.
d. the marginal cost must be at its maximum value
2. Which of the following cost curve(s) will shift downward if the raw
material prices fall?
a. MC
b. ATC and AVC
c. MC and ATC
d. AVC and MC
e. MC, AVC and ATC
3. When the marginal product of labor is greater than the average
product of labor,
A) the marginal product of labor must be increasing as labor increases.
B) the average product of labor must be increasing as labor increases.
C) the total product must be increasing at an increasing rate as labor
increases.
D) All of the above.
4. When MC is less than (or below) ATC,
a. MC must be falling.
b. ATC is falling.
c. ATC is rising.
d. AVC must be falling.
5. MC is equal to ATC when
a.MC is at its minimum.
b.ATC is at its minimum
c.AVC is at its minimum
d.AFC is at its minimum
6. Which of the following cost curve(s) will shift upward if the city
government imposes a one-time fee for homebuilders?
a. MC
b. AVC
c. AVC and ATC
d. ATC
7. A firm has fixed costs
A) in the short run and in the long run.
B) in the short run but not in the long run.
C) in the long run but not in the short run.
D) neither in the long run nor in the short run.

8.
A)
B)
C)
D)

As output increases, AVC approaches ATC because of

diseconomies of scale.
diminishing marginal returns.
decreasing average fixed cost.
increasing marginal cost.

9. Which of the following goods is most likely to fit into the

characteristics of perfect competition?
a. Cameras.
b. Wheat.
c. Automobiles.
d. Designer clothes.
10. The
a.
b.
c.
d.
11. If
a.
b.
c.
d.

length of the short run

can never exceed 3 years.
can never exceed 1 year.
is always less than 6 months.
is different for different types of firms.

12. The
a.
b.
c.
d.

marginal cost is rising

marginal product must be rising.
marginal product must be falling.
average variable cost must be falling.
average fixed cost must be rising.

13.

average fixed cost curve

declines as long as it is above marginal cost.
declines as long as it is below marginal cost.
always declines with increased levels of output.
always rises with increased levels of output.

Which of the following statements is true?

MC = W/MPL
MC = W/APL
ATC = W/MPL
AFC = W/MPL

a.
b.
c.
d.

14. A firms average total cost is $60, its average variable cost is
$30, and its total fixed cost is $600.
Its output is
A) 20 units.
B) 30 units.
C) 40 units.
D) 50 units.

15. In the above table, between what two levels of output does one first
observe the law of diminishing
returns?
A) 0 and 1000
B) 1000 and 3000
C) 3000 and 4000
D) 4000 and 4500

16. The above (incomplete) table provides information about the

relationships between output and various cost measures. The total fixed
cost (TFC) for the firm is
A) Zero.
B) $45.
C) $10.
D) None of the above answers is correct.
17. The above (incomplete) table provides information about the
relationships between output and various cost measures. The total cost
(TC) of producing 9 units of output is
A) $180.
B) $190.
C) $20.
D) None of the above answers is correct.

18. The above (incomplete) table provides information about the

relationships between output and various cost measures. The marginal
cost per unit when increasing output from 14 to 17 units is
A) $20.
B) $30.
C) $380.
D) None of the above answers is correct.
19. When marginal cost is greater than average total cost, the
A) marginal cost decreases as output increases.
B) marginal cost does not change as output increases.
C) average total cost increases as output increases.
D) average total cost decreases as output increases.
20. Which of the following is related to firms short-run decisions?
a. Entry decision.
b. Exit decision.
c. Accumulating more capitals.
d. Shut-down decision
21. When a firm has market power, it can
a. sell as much as it wants at any market price.
b. control the number of firms that will operate in an industry.
c. influence the market price of the good it sells.
d. choose to disregard government regulation.
22. For a firm in a perfectly competitive market the price of the good
is always equal to
a. marginal revenue.
b. average revenue.
c. average variable cost.
d. total cost.
23. In the long run,
A) all inputs can be varied.
B) all inputs are fixed.
C) some inputs are variable and other inputs are fixed.
D) output is fixed.

Use the information for a competitive firm in the table below to answer
questions 24 through 25.
Quantity
0
1
2
3
4
5
6
7
8
9

Total Revenue
$ 0
9
18
27
36
45
54
63
72
81

Total Cost
$ 10
14
19
25
32
40
49
59
70
82

24. If this firm chooses to maximize profit it will choose a level of

output where marginal cost is equal to
a. 5.
b. 7.
c. 9.
d. 11.
25. If
a.
b.
c.
d.

the firm finds that its marginal cost is $11, it should

increase production to maximize profit.
decrease production to maximize profit.
maintain its current level of production to maximize profit.
advertise to find additional buyers.

26. At higher level of output,____.

A) firms average variable cost, AVC, must fall
B) firms average total cost, ATC, must fall
C) firms average fixed cost, AFC, must fall
D) firms total cost must fall
27. Which of the following would lead firms ATC curve to shift
downward?
A) A decrease in the market wage rate.
B) A removal of liability insurance premium for business.
C) A better or improved technology in producing goods.
D) All of the above.

28. In the above figure, if the price is P1, the firm maximizes its profit by producing
A) nothing.
B) where MC equals ATC.
C) where MC equals P1.
D) where ATC equals P1.
29. In the above figure, if the price is P1, the firm is
A) making an economic profit.
B) incurring an economic loss.
C) breaking even.
D) shut down.

30. Consider the perfectly competitive firm in the above figure. The profit maximizing
level of output
for the firm is equal to
A) 0 units.
B) 14 units.
C) 17 units.
D) 19 units.
31. Consider the perfectly competitive firm in the above figure. At the profit
maximizing level of
output, the firm is earning
A) an economic loss equal to $119.
B) an economic loss equal to $114.
C) an economic loss equal to $102.
D) a normal profit.

profits.
32) The average total cost curves for Plant 1, ATC0, and Plant 2, ATC1,
are shown in the figure above. Over what output range is it efficient to
operate Plant 1?
A) 0-20.
B) 0-25.
C) 20-25.
D) Greater than 25.
33) The average total cost curves for Plant 1, ATC0, and Plant 2, ATC1,
are shown in the figure above. The long-run average cost curve goes
through points
A) C, D, G
B) A, C, E
C) A, B, D, G
D) A, B, D, E, F

34. Which of the following costs do not vary with the amount of output
a firm produces?
a. marginal costs and average fixed costs
b. total fixed costs
c. average fixed costs
d. total fixed costs and average fixed costs
35. In a perfectly competitive market, if a firm finds it is producing
at a level of output such that MR < MC, it will
a. increase output.
b. decrease output.
c. not change its behavior
d. buy more new machines.

36. Which of the following statements is true for firms in perfect

competition?
a.
b.
c.
d.

P > ATC.
MR = P.
P > AVC.
MR > ATC.

37. In long-run equilibrium, free entry and exit in perfect competition

assures that firms will ____.
a. make above normal profits.
b. make normal profits.
c. some firms will bankrupt.
d. make negative economic profits.
38. Changes
___.
a.
b.
c.
d.

in the market price of a perfectly competitive firm will

shift up a firms average total cost curve.
shift down a firms average total cost curve.
change a firms marginal revenue
shift up a firms marginal cost curve.

39. If General Motors doubles the quantity of all the inputs needed to
produce automobiles and the quantity produced increases from 100,000 to
200,000 each month that would be an example of
A) increasing marginal returns.
B) constant returns to scale.
C) constant marginal returns to all returns.
D) zero returns to scale.
40. Increasing marginal returns to labor might occur at low levels of
labor input (or when the firm has a small number of workers) because of
A) increasing average costs.
B) differing factor proportions.
C) increasing specialization of tasks.
D) decreasing use of machinery and increasing use of technology.
41. Which of the following statements is true?
A) Only the marginal variable can affect the average variable.
B) Only the average variable can affect the marginal variable.
C) Both the marginal and average variables can influence each other.
D) The marginal and the average variables are not related to each other.
42. If economic profits are earned in a competitive market, then in the
LR
a. additional firms will enter the market.
b. the market supply curve will shift to the right.
c. equilibrium price will fall as more firms enter.
d. all of the above.

43. In the short run, a rise in United Airlines variable costs can be
due to
a. a rise in its wage rates.
b. a rise in its office insurance fees.
c. a rise in the costs of acquiring new airplanes (capital stocks).
d. a rise in total costs.
44. A firm that must sell all of its goods at the prevailing market
price, ___.
a. is a competitive firm.
b. is a monopoly.
c. faces a downward-sloping demand curve.
d. has a fixed supply.
45. In perfect competition, a decline in industry demand will affect
individual firms ____.
a. MR and ATC
b. MC
c. MR
d. ATC
e. AVC

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