Econ 101, Sections 4 and 5, S09

Schroeter
Exam #4, Red

Choose the single best answer for each question. Do all of your scratch work in the
margins or in the blank space on page 6.

1. Economic models of business firms usually assume that the firm's goal is to maximize
a. revenue.
*. profit.
c. costs.
d. tax deductions.

2. In 2008, the "LawnMan" lawn service company had revenue of $3,500,000, explicit
costs of $2,300,000, and implicit costs of $750,000. In 2008, LawnMan's accounting
profit was
a. $2,750,000 and its economic profit was $1,550,000.
b. $450,000 and its economic profit was $3,050,000.
*. $1,200,000 and its economic profit was $450,000.
d. none of the above.

3. On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires
2 workers. When he increases employment to 3 workers, holding other inputs fixed, he is
able to produce 4,400 bushels of wheat. Which of the following possibilities is consistent
with a marginal product of labor that is positive but diminishing? If the farmer increased
employment to 4 workers, again holding other inputs fixed, output would be
a. 5,600 bushels of wheat.
b. 5,400 bushels of wheat.
c. 5,200 bushels of wheat.
*. Any of the above would be consistent with positive but diminishing marginal product.

4. A firm has total fixed costs of $100,000 per year. The firm's average variable cost is
$5 per unit at an output level of 10,000 units/year. At that level output, the firm's average
total cost is
a. $10/unit.
*. $15/unit.
c. $20/unit.
d. $50/unit.

5. For the Wondrous Widget Company, labor is the only variable input. Average total
cost at an output level of 5 widgets/day is $30/widget. The marginal cost of the sixth
widget is $60/widget/day. What is average total cost when 6 widgets/day are produced?
a. $10/widget.
b. $25/widget.
c. $30/widget.
*. $35/widget.
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The table reports a firm's average total cost (ATC) for three different output levels. Use
this information to answer questions 6 and 7.

Output (widgets/day) ATC ($/widget)
40 150
50 160
60 175

6. At an output level of 50 widgets per day, the firm's total cost is
a. $4,000/day.
b. $6,000/day.
*. $8,000/day.
d. impossible to determine without more information.

7. Over the output range from 50 to 60 widgets/day, the firm's marginal cost is
approximately
a. $167.50/widget.
b. $175.00/widget.
c. $200.00/widget.
*. $250.00/widget.

8. At an output level at which marginal cost is less than average total cost, the average
total cost curve
a. is horizontal.
b. is upward sloping.
*. is downward sloping.
d. could be horizontal, or upward or downward sloping, depending on the size of fixed
costs.

9. To say that a firm is a "price-taker" means that
a. the firm would have to take a price cut in order to sell more.
b. the firm's marginal revenue is less than its average revenue.
*. the firm has no influence on market price.
d. both b and c.

10. A competitive firm faces a price of $2.00/unit for its product. It is currently operating
where marginal cost is $2.00/unit, average variable cost is $3.00/unit, and average total
cost is $4.00/unit. To maximize profit (or minimize loss) in the short-run, the firm should
a. maintain its current output.
b. increase output.
c. decrease output, but not shut down.
*. shut down.
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11. For a certain firm, the 100th unit of output that the firm produces in a given week has
a marginal revenue of $10 and a marginal cost of $7. It follows that the production of the
100th unit
*. increases the firm's profit by $3/week.
b. increases the firm's average total cost by $7/unit.
c. increases the firm's average revenue by $10/unit.
d. all of the above.

12. A firm in a competitive industry operates in the short-run at a price above its average
total cost of production. In the long run, the firm should expect
a. new firms to enter the market.
b. the market price to fall.
c. its profits to fall.
*. all of the above.

13. A competitive industry is in long-run (zero-profit) equilibrium to begin. Then
demand decreases and stays at the new lower level. After firms make the appropriate
short-run adjustment to the demand shift, the typical firm will
*. face a lower price than before the demand shift.
b. produce the same output as before the demand shift.
c. still earn zero economic profit.
d. immediately shut down.

14. A competitive industry is in long-run (zero-profit) equilibrium to begin. Then
demand decreases and stays at the new lower level. After the industry has made its long-
run adjustment to the demand shift, there will be
a. the same number of firms in the industry as before the demand shift.
b. the same industry output as before the demand shift.
c. both a and b
*. none of the above.

15. For a perfectly competitive firm, marginal revenue is _______ price. For a
monopoly, marginal revenue is ________ price.
a. equal to; equal to.
b. less than; equal to.
c. equal to; greater than.
*. none of the above.

16. The practice of granting a patent to the inventor of a new product is intended to
a. keep the price of the product low during the period of patent protection.
b. speed the entry of competitors into the market for the new product.
*. provide an incentive for the development of new products.
d. all of the above.

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17. A monopolist can sell 20 widgets/day when it charges a price of $5.00/widget. In
order to see 21 widgets/day, the monopolist would have to reduce its price to
$4.90/widget. The monopolist's marginal revenue of the 21st widget is
a. $4.95/widget.
b. $3.50/widget.
*. $2.90/widget.
d. -$0.10/widget.

18. At its current output level, a monopolist's marginal revenue, marginal cost, average
total cost, and price are $2/unit, $3/unit, $4/unit, and $5/unit, respectively. To maximize
profit (or minimize loss) in the short-run, the monopolist should
a. increase output.
b. maintain its current output.
*. decrease output, but not shut down.
d. shut down.

19. Imagine an industry consisting of 100 identical factories manufacturing identical
products. Consider two different cases for the economic organization of the industry:

A. Each factory is a separate firm that behaves as a price-taker and maximizes profit.

B. All 100 factories are operated as a single profit-maximizing monopoly firm.

The market's consumer surplus will be ______ in case A than in case B. The market's
total surplus will be ______ in case A than in case B.
*. higher; higher.
b. higher; lower.
c. lower; higher.
d. lower; lower.

20. In order to get the lowest available fare on a round-trip airline ticket, a passenger
normally has to book the flight well in advance and schedule the trip to include a
Saturday night stay at the destination. These pricing rules are an effort on the part of the
airlines to make the low fare available only to
a. the customers who can be served at low cost.
*. the customers who would not buy a ticket at the (higher) regular fare.
c. senior citizens.
d. business travelers.

21. When the merger of two firms results in lower costs through more efficient joint
production, the merger is said to involve
a. sunk costs.
*. synergies.
c. arbitrage.
d. in-kind transfers.
5
Questions 22 and 23 refer to the following information. A monopolist faces two groups
of potential customers. There are N potential customers with a willingness-to-pay (WTP)
of $4 for the first unit and $0 for additional units. Also, there are M potential customers
with a WTP of $3 for the first unit and $0 for additional units. The monopolist produces
the product at zero fixed cost and a constant marginal cost of $1/unit.

22. If the monopolist is required to charge a uniform price, it would be indifferent
between a price of $3 and a price of $4 if
a. M = 3 x N
b. M = 2 x N.
c. M = N.
*. M = 0.5 x N.

23. If the monopolist is allowed to price discriminate, the maximum profit it could earn is
a. (4 x N) + (3 x M).
*. (3 x N) + (2 x M).
c. 3 x (N + M).
d. 2 x (N + M).

24. A group of firms acting in unison is called
a. an oligopoly.
b. a compatible cohort.
c. a Nash group.
*. a cartel.

25. In general, game theory is the study of
a. how people behave when the actions of other people are irrelevant.
*. how people behave in strategic situations.
c. how firms behave in competitive markets.
d. how monopolists behave.

26. In the Prisoners' Dilemma game we studied in lecture, the likely outcome is that
a. exactly one prisoner confesses.
*. both prisoners confess.
c. neither prisoner confesses.
d. b and c are equally likely.

27. There are only two firms producing widgets, a homogeneous product. Market
demand is given by the formula: P = 35 - 0.2Q, where Q is market quantity in
widgets/day and P is the price in $/widget. Each firm has zero fixed cost and marginal
cost that is constant at $5/widget. If firm 2 produces 50 widgets/day, which of the
following output levels for firm 1 results in the highest profit for firm 1?
a. 40 widgets/day.
*. 50 widgets/day.
c. 60 widgets/day.
d. All of the above result in the same profit for firm 1.
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28. Which actor played the role of John Nash in the 2001 movie "A Beautiful Mind?"
a. Hugh Jackman.
*. Russell Crowe.
c. Tom Cruise.
d. Tim Robbins.

Questions 29 and 30 refer to the following payoff matrix describing a game between two
players, A and B. Player A chooses among strategies "Up," "Middle," and "Down."
Player B chooses among strategies "Left," "Center," and "Right." The entries in the cells
of the table give the payoffs, in dollars, to each player for each combination of strategies.
(More dollars are better than fewer. In each cell, Player A's payoff is listed first and
Player B's payoff is listed second.)

Player B's strategies
Left Center Right
Player
A's
strategies
Up (4, 2) (2, 5) (3, 3)
Middle (3, 1) (5, 3) (5, 2)
Down (1, 3) (4, 4) (6, 1)

29. Which of the following is true?
a. Both players have dominant strategies.
b. Neither player has a dominant strategy.
c. Only Player A has a dominant strategy.
*. Only Player B has a dominant strategy.

30. Which of the following strategy pairs is a Nash equilibrium?
*. Middle-Center.
b. Down-Center.
c. Up-Left.
d. More than one of the above is a Nash equilibrium.