SL 151                                                                                           Name ______________________________________ CM _____

Bremmer II                                                                                   October 15, 2002

 

                                                                                 2nd In-Class Exam - - Chapters 5-7

 

Part I.  Multiple Choice (3 points each).  For each question, indicate the best answer in the space provided.

 

___ 1.     In the long-run, if firm experiences economies of scale:

        A.    the current plant size is larger than the optimal-sized plant.

        B.    the firm can decrease long-run average cost by decreasing its plant size and producing less output.

        C.    it is using its current plant size under capacity.

        D.    it is using its current plant size over capacity.

        E.     Both A and D.

 

___ 2.     A U-shaped, long-run average cost curve reflects:

        A.    the law of diminishing marginal returns.                  D.    a horizontal, long-run marginal cost curve.

        B.    economies and diseconomies of scale.                    E.     the impact of fixed inputs.

        C.    a decreasing, long-run average fixed cost curve.

 

___ 3.     An increase in fixed cost will cause:

        A.    short-run average total cost to rise.                  D.    Answers A, B, and C.

        B.    short-run average variable cost to rise.            E.     Only A and C.

        C.    short-run marginal cost to rise.

 

___ 4.     To stay in operation during the short run, a firm’s revenue must at least cover:

        A.    its short-run total cost.               D.    its marginal cost.

        B.    its fixed cost.                                 E.     None of these answers.

        C.    its variable cost.

 

___ 5.     If marginal cost is greater than average variable cost:

        A.    average fixed cost must be increasing.             D.    average total cost may be rising or falling.

        B.    average total cost must be increasing.             E.     average variable cost must be falling.

C.    average total cost must be falling.

 

___ 6.     If a firm shuts down in the short run, its:

        A.    marginal cost equals zero.                                  D.    short-run total cost is equal to fixed cost.

        B.    short-run total cost is zero.                                E.     short-run variable cost is positive.

        C.    short-run average total cost is zero.

 

___ 7.     The average product of a variable input falls as more of the input is employed:

A.    over the entire range of diminishing returns.          D.    only if marginal product is less than average product.

        B.    only if marginal product is negative.                        E.     when marginal product is greater than average product.

        C.    when AVC is falling.

 

___ 8.     If the marginal product of a variable input is rising:

A.    marginal cost must be falling.                                    D.    Both A and B.

        B.    average product must be rising.                                E.     Both A and C.

        C.    average product may be falling or rising.

 

___ 9.     The marginal product of labor is zero:

        A.    when average product is zero.                                           D.    when marginal cost is minimized.

        B.    when diminishing returns initially sets in.                       E.     when output is at its short-run maximum.

C.    when short-run average variable cost is minimized.

 

___ 10.  Suppose that an excise tax of $0.25 is placed on producers of cigarettes.  Under what circumstances will cigarette producers pay the full amount of the tax?

        A.    Producers always pay the full amount of the tax.                           D.    If supply is perfectly elastic.

        B.    The consumer and seller always share the burden of the tax.      E.     If supply is perfectly inelastic.

        C.    If demand is perfectly inelastic.

 

___ 11.  Assume a small country, who takes the world price as given, imports a good with free trade.  If the world price falls:

        A.    imports decrease.                                                                 D.    the output of domestic producers increases.

        B.    domestic firms’ total revenue declines.                            E.     the revenues of foreign firms always falls.             

        C.    the price that domestic consumers pay increases.

 

___ 12.  Given a competitive industry, if the last unit produced and sold adds $75 to the firm’s revenue and $100 to the firm’s costs, the firm should:

A.    shut down.                                                    D.    increase the price it charges.

        B.    increase output to increase profit.            E.     decrease the price it charges.

C.    decrease output to increase profit.

 

___ 13.  A purely competitive firm will be willing to produce at a loss in the short run provided:

A.    price exceeds marginal cost.                                       D.    the loss is no greater than its marginal costs.

        B.    the loss is no greater than its variable costs.          E.     None of these answers.

C.    the loss is no greater than its fixed costs.

 

___ 14.  The individual firm in a perfectly competitive industry faces a demand curve:

        A.    that is perfectly elastic.

        B.    that is identical to its marginal revenue curve.

        C.    that is parallel to the output axis and intersects the price axis at the market price.

        D.    All of the above.

        E.     Only A and C.

 

___ 15.  The long-run average cost curve:

        A.    connects the minimum points of all short-run average total cost curves.

        B.    connects the minimum points on the short-run total cost curves.

        C.    identifies the plant size that minimizes the cost of producing each output.

        D.    is U-shaped because of the law of diminishing marginal returns.

        E.     Both A and D.

 

Part II.  Short Answer (55 points).  Give a concise, but complete, answer for each of the following questions.  When appropriate, use math, graphs, or equations to help explain your answers.  Label all graphs.

 

1.     Assume a small country takes the world price as given and imports a good.  Using a demand and supply curve, show domestic production, domestic consumption, and the amount of imports.  Now assume the government imposes a $2 per unit tariff on imported goods.  Using the same demand and supply diagram, show the effect of the tariff on domestic price, domestic production, domestic consumption, and imports.  Indicate the area of government tax revenue on the diagram.  Who bears the burden of the tax - - consumers, producers, or both?  Explain.  (15 points)

 

2.     Below is a table of short-run average costs with several missing entries.  Using the information provided, answer the following questions.  Show your work for partial credit.  (15 points)

 

Q

AFC

AVC

ATC

MC

20

$5.00

$7.00

_____

$6.00

30

_____

_____

9.33

_____

40

_____

_____

_____

6.00

50

_____

6.40

8.40

_____

   

        A.    What is the dollar value of fixed cost?  (2 points)

 

        B.    What is the dollar value of the average total cost of producing 20 units?  (2 points)

 

        C.    What is the dollar value of the average fixed cost of producing 50 units?  (2 points)

 

        D.    What is the dollar value of the variable cost of producing 30 units?  (4 points)

       

        E.     What is the dollar value of the total cost of producing 40 units?  (5 points)

 

3.     Below is a short-run production function which assumes capital is held constant.

 

Labor

0

1

2

3

4

5

6

Output

0

4

8

12

16

20

24

 

Does this production function exhibit the law of diminishing returns?  Why or why not?  Sketch the marginal product (MP) and average product (AP) curves for the above production function.  (10 points)

 

4.     Using a graph of a perfectly competitive firm’s short-run average cost curves, explain why a profit-maximizing firm would produce in the short-run even though it incurs a loss.  In this situation, why wouldn’t the firm shut down in the short run?  Explain.  Given this situation, what would the typical firm do in the long run?  (15 points)