Unit 3 Practice Exam

Answer the questions on a separate sheet of paperPlease do not write on this practice test.

1. Which of the following items is most likely to be an 8. During the short-run period of the production process, a
implicit cost of production? firm will be
a. property taxes on a building owned by the firm a. unable to vary any of its factors of production.
b. transportation costs paid to a trucking supplier b. able to vary some of its factors of production.
c. rental payments for a building utilized by the company c. able to vary all of its factors of production.
and rented from another party d. able to vary the size of its plant.
d. interest income foregone on funds invested in the firm
by the owners 9. The long run is a period of
a. at least one year.
2. The law of diminishing returns b. sufficient length to allow a firm to expand output by
a. is reflected in the eventually rising marginal cost curve hiring additional workers.
for the firm in the short run. c. sufficient length to allow a firm to alter its plant size
b. implies that average fixed costs will remain unchanged and capacity and all other factors of production.
as output expands. d. sufficient length to allow a firm to transform economic
c. is true for physical production activities but not for losses into economic profits.
activities such as studying.
d. applies to a capitalist economy but would be irrelevant 10. Which of the following is always true?
if the means of production were owned by the state. a. When marginal costs are less than average total costs,
average total costs will be increasing.
3. In the short run, the marginal cost curve crosses the b. When average fixed costs are falling, marginal costs
average total cost curve at must be less than average fixed costs.
a. a point just below the average fixed cost curve. c. When average fixed costs are rising, marginal costs
b. the minimum point on the average total cost curve. must be greater than average total costs.
c. the maximum point of the average variable cost curve. d. When marginal costs are greater than average total
d. All of the above are correct. costs, average total costs will be increasing.

4. When costs that do not change with the level of output are 11. The marginal cost of a good is
divided by the output level, you have calculated a. lower for competitive firms than for monopolists.
a. total cost. b. the cost of an additional unit.
b. average total cost. c. equal to fixed cost at high output levels.
c. average fixed cost. d. equal to variable cost when the firm is maximizing
d. marginal cost. profit.

5. Which of the following would shift a firm's short-run cost 12. If a firm's per-unit costs fall as it produces a larger output,
curves upward? then
a. an advance in technology a. average variable cost must also decline as output
b. an increase in employees' wages expands.
c. a decrease in the demand for the firm's product b. marginal cost must also decline as output expands.
d. a reduction in excise taxes levied on the firm's product c. average fixed cost must be less than average variable
costs.
6. The most important implicit cost generally omitted from d. marginal cost must be less than average total cost.
the accounting statement of a large corporation is the
a. rental cost of machinery.
b. cost of compliance with government regulations. 13. Use the table below to answer the following question.
c. opportunity cost of the equity capital invested by the Units of Output Total Fixed Cost Total Variable Cost
owners. (dollars) (dollars)
d. accounting cost incurred as the result of tax 1 1,000 1,200
compliance. 2 1,000 2,400
3 1,000 3,400
7. When an economist says a firm is earning zero economic 4 1,000 4,600
profit, this implies that the firm 5 1,000 5,600
a. will be forced out of business in the near future unless
market conditions change. What is the average total cost at an output level of four
b. is earning a zero rate of return on its assets. units?
c. is earning as high a rate of return now as could be a. $1,200
earned in other industries. b. $1,400
d. has an accounting profit of zero. c. $1,500
d. $2,000
14. If a firm is continually applying additional units of a 20. Use the table below to answer the following question.
variable resource to a fixed amount of other resources,
and its output is increasing at a decreasing rate, this Units of Output Total Fixed Cost Total Variable Cost
indicates that (dollars) (dollars)
a. the firm is experiencing diminishing marginal returns. 1 1,000 1,200
b. the firm is producing under conditions of increasing 2 1,000 2,400
returns to scale. 3 1,000 3,400
c. average fixed costs must be rising. 4 1,000 4,400
d. the firm should expand its plant capacity. 5 1,000 5,600

15. What is the shape of the average total cost curve for a Given the total fixed cost and total variable cost schedules
normal firm in the short run? presented here, what is the average total cost of an output
a. U-shaped level of five units?
b. a horizontal line a. $1,000
c. a vertical line b. $1,120
d. a curve that slopes upward to the right c. $1,320
d. $6,600
16. Use the table below to answer the following question.
21. In price-taker markets, individual firms have no control
Units of Output Total Fixed Cost Total Variable Cost over price. Therefore, the firm's marginal revenue curve is
(dollars) (dollars) a. indeterminate.
1 150 25 b. a downward-sloping curve.
2 150 48 c. constant at the market price of the product.
3 150 70 d. precisely the same as the firm's total revenue curve.
4 150 100
What is the marginal cost of producing the fourth unit of 22. When market conditions in a price-taker market are such
output? that firms cannot cover their production costs, then
a. $25 a. the firms will suffer long-run economic losses.
b. $30 b. the firms will suffer short-run economic losses that will
c. $62.50 be exactly offset by long-run economic profits.
d. This cannot be determined from the data. c. some firms will go out of business, causing prices to
rise until the remaining firms can cover their production
17. In the short run, if average variable costs equal $20, costs.
average total costs equal $70, and output equals 100, then d. all firms will go out of business, since consumers will
the total fixed cost equals not pay prices that enable firms to cover their production
a. $50. costs.
b. $1,000.
c. $5,000. 23. "Our marginal revenue exceeds our marginal costs at
d. $9,000. current factor prices." This statement indicates that
a. an expansion in output will increase revenues more
18. If fixed costs are $200,000 and variable costs are $50 per than costs.
unit over the relevant range of output, when 10,000 units b. the firm is maximizing its profit.
are produced the average total cost will be c. a larger output will reduce the firm's profit.
a. $20. d. the firm is better at marketing its goods than it is at
b. $30. producing efficiently.
c. $50.
d. $70. 24. If a single firm in a price-taker market lowers its price
below the market equilibrium price, then
19. Bill lives in Montana and likes to grow zucchini. He a. it will get a larger share of the market.
applies fertilizer to his crop twice during the growing b. it will lose revenue without increasing the quantity
season and notices that the second layer of fertilizer sold.
increases his crop, but not as much as the first layer. What c. other firms will lower their prices.
economic concept best explains this observation? d. other firms will be driven out of the industry.
a. the law of diminishing marginal utility
b. the law of diminishing returns
c. return equalization principle
d. the principal-agent problem
25. In a price taker's market, how does the elasticity of the a. bring total revenue into equality with total cost.
market demand curve compare with the elasticity of b. maximize the difference between the revenue received
demand of a firm in the market? from the last unit and the cost incurred in producing the
a. Both demand curves have the same elasticity. last unit.
b. Both demand curves are perfectly elastic. c. result in the lowest possible average total costs of
c. The firm's demand curve is downward sloping, while production.
the industry demand curve is flat. d. maximize the firm's profit.
d. The firm's demand curve is perfectly elastic, while the
industry demand curve is downward sloping. 33. If a firm is making zero economic profit,
a. it will be forced to shutdown and leave the market.
26. A price taker firm will tend to expand its output so long as b. it will also generally be making zero accounting profit.
a. its marginal revenue is positive. c. it is doing as well as typical firms in other markets.
b. its marginal revenue is greater than the market price. d. it will not survive in the long run.
c. its marginal revenue is less than the market price.
d. its marginal cost is less than the market price. 34. Which of the following will be true for a competitive firm
in long-run equilibrium?
27. When the marginal cost of a price-taker firm is less than a. P = MC
the market price of its product, the firm should b. P = ATC
a. expand output. c. ATC = MC
b. reduce output. d. All of the above are correct.
c. maintain output.
d. charge more than the market price. 35. The textile industry is composed of a large number of
small firms. In recent years, these firms have suffered
28. Within the framework of the price-taker model, a price economic losses, and many sellers have left the industry.
taker will always produce a quantity of output that Economic theory suggests that these conditions will
a. minimizes the per-unit cost of production. a. shift the market demand curve outward so that price
b. she expects to provide the largest possible total will rise to the level of production cost.
revenue. b. cause the remaining firms to collude so they can
c. maximizes the difference between total revenue and produce more efficiently.
total cost. c. cause the market supply to decline and the price of
d. brings average total cost and price into equality. textiles to rise.
d. cause firms in the textile industry to suffer long-run
29. Which of the following conditions will necessarily be true economic losses.
in short-run equilibrium for a profit-maximizing firm in a
price-taker market? 36. If an increase in demand for beef leads to economic
a. The firm will earn economic profit. profits for beef producers, then
b. The firm's average total cost will be at a minimum. a. new firms will be drawn into beef production.
c. The firm will produce at an output where marginal b. existing beef producers will exit the industry because of
revenue just equals marginal cost. increased competition.
d. All of the above are true. c. the suppliers of beef will earn long-run economic
profit.
30. The short-run market supply curve in a price-taker d. All of the above are correct.
industry equals the horizontal sum of the individual firm's
a. MC curves above AVC. 37. When a competitive price taker market is in long-run
b. AVC curves above marginal revenue. equilibrium
c. MC curves above ATC. a. the firms in the market will earn zero economic profit.
d. MC curves between AVC and ATC. b. the average total cost of the firms in the market will be
minimized.
31. The price-taker firm should discontinue production c. every unit of the relevant good that is valued more than
immediately if its opportunity costs will be produced and sold.
a. the market price exceeds the firm's average total costs. d. All of the above are true.
b. the market price is less than the firm's average variable
costs.
c. the market price is less than the firm's average total
costs, but greater than its average variable cost.
d. its accounting statement indicates that it is suffering
losses.

32. In general, firms will produce at a rate of output such that

marginal revenue equals marginal cost because this output
rate will
38. The diagram below illustrates a firm 41. The cost conditions for a profit-maximizing firm
a. in a price-taker market earning economic profit. operating in a price-taker market are indicated in the
b. in a price searcher market earning a profit. graph below. If the market price were $3, what output
c. that can break even when it maximizes profit. should the firm produce and what would be the firm's
d. that should shut down immediately. maximum profit?

Output Maximum Profit

a. 3 $3 loss
b. 5 zero
c. 5 $5 profit
d. 6 $6 profit

39. The diagram below illustrates a firm

a. capable of earning economic profit.
b. that is only able to break even when it maximizes
economic profit.
c. making economic losses. 42. If the market price increases to $4, what output should the
d. that should shut down immediately. firm produce and what would be the firm's maximum
profit?
Output Maximum Profit
a. 3 $3 loss
b. 5 zero
c. 5 slightly less than $5 profit
d. 6 slightly less than $6 profit

43. If the market price fell to $2.50, what should the firm do?
a. raise its price
b. shut down and wait for conditions to improve
c. continue operating in the short run if it expects
40. The graph below indicates the cost conditions for a firm conditions to improve
operating in a price-taker market. If the market price of d. go out of business immediately
the firm's product is $6, what should the firm do?
a. go out of business since it cannot make a profit Use the graph below to answer the following THREE
b. produce an output of 3 million questions.
c. produce an output of 5 million
d. produce an output of 6 million 44. The average total cost (ATC) and marginal costs (MC) of
a firm producing in a price-taker industry are depicted
below. If the current market price of the firm's product is
$15, what output should this firm produce?
a. 10
b. 15
c. 20
d. 25
45. If the market price increases to $20, what should the firm
do?
a. produce an output of 15
b. expand output to 20
c. expand output to 25
d. increase its price to $25

46. When the market price is $20, the firm's maximum profit
will be approximately
a. zero.
b. $3.
c. $60.
d. $400.

Use the graph below to answer the following THREE

questions.

47. If the current market price for the firm depicted below is
OC, given the firm's cost conditions, which output should
it produce?
a. OM
b. OL
c. OK
d. OI

48. Which of the following represents the firm's total cost of

producing the profit-maximum output?
a. OCFK
b. OBGK
c. OAEL
d. OCHI

49. Which of the following indicates the firm's profit (or loss)
at the profit maximum output?
a. profit BCFG
b. profit OCDM
c. the firm is making zero economic profit
d. loss AEFC
 ANSWER KEY FOR TEST
1. d. 44.b.
2. a. 45.b.
3. b. 46.c.
4. c. 47.c.
5. b. 48.b.
6. c. 49.a
7. c.
8. b.
9. c.
10.d.
11. b
12.d
13.b.
14.a.
15.a
16.b.
17.c.
18.d.
19.b.
20.c.
21.c.
22.c
23.a.
24.b
25.d.
26.d.
27.a
28.c
29.c.
30.a.
31.b
32.d.
33.c
34.d
35.c.
36.a
37.d.
38.d
39.a.
40.c
41.b.
42.d
43.c.