Second In-Class Exam -- Spring 1996

Part A. Multiple Choice (3 points each). In the space provided, indicate the best answer for each question.
1. The total output of a firm will be at a maximum where:
A. AP is zero.
B. MP is at a maximum.
C. AP is at a minimum.
D. MP is zero.
E. AP is at a maximum.
2. Which of the following is correct?
A. The AFC increases as output increases.
B. When AVC is rising, AP is rising; and when AVC is falling, AP is falling.
C. The MC cuts both the ATC and AVC at their maximum points.
D. When MP is rising, MC is falling; and when MP is falling, MC is rising.
3. If the average product rises as more of a variable resource is employed, then:
A. the marginal product must be greater than average product.
B. the marginal product must be less than the average product.
C. the marginal product must be equal to the average product.
D. None of the above.
4. Average fixed cost can be determined graphically by:
A. summing the marginal costs for all levels of output and dividing the sum by that output.
B. the vertical distance between ATC and MC.
C. the vertical distance between TC and VC.
D. the vertical distance between ATC and AVC.
5. Everything else held constant, if the fixed costs of a firm were to decrease, which one of the following would happen?
A. The AVC, ATC, AFC, and MC curves all shift downward.
B. The ATC, AFC, and MC curves all shift downward, while the AVC curve would be unchanged.
C. The ATC and AFC would shift downward, while the MC and AVC curves are not affected.
D. The ATC and AFC shift downward, while the FC curve shifts upward.
6. The law of diminishing returns explains:
A. why the long-run average cost curve is U-shaped.
B. why fixed costs increase as output increases.
C. why the short-run ATC, AVC and MC are U-shaped.
D. Both A and C.
7. In long run equilibrium, a purely competitive firm will operate where price is:
A. greater than MR, but equal to MC and minimum ATC.
B. greater than MR and MC, but equal to minimum ATC.
C. greater than MC and minimum ATC, but equal to MR.
D. equal to MR, MC, and minimum ATC.
8. In general, the short-run supply curve of a purely competitive firm is:
A. identical to the marginal cost curve.
B. a horizontal line equal to the market price.
C. the rising portion of the average total cost (ATC) curve.
D. the rising portion of the marginal cost curve above the average variable cost curve.
9. Assume a purely competitive, decreasin-cost industry is initially in long-run equilibrium, and that an increase in consumer demand occurs. After all economic adjustments have been completed, the new long-run price will be:
A. higher, and total output will be larger than originally.
B. lower, but total output will be larger than originally.
C. the same as the initial price, but total output will be larger than originally.
D. higher, but total output will be smaller than originally.
10. At the short-run, profit-maximizing level of output, a monopolist will always operate where:
A. price is equal to marginal cost.
B. price is greater than marginal cost.
C. price is greater than ATC.
D. price is equal to ATC.
E. Both B and C.
11. Under which of the following conditions would a profit-maximizing monopolist necessarily raise price?
A. If MC decreased.
B. If it wanted to sell more output.
C. If MC is greater than MR.
D. If MR was greater than MC.
E. If product demand was price-elastic.
12. Given a downward-sloping, linear demand curve, when total revenue is decreasing, then marginal revenue is:
A. positive and demand is elastic.
B. negative and demand is elastic.
C. positive and demand is inelastic.
D. negative and demand is inelastic.
Part B. Short Answer Questions (64 points). When appropriate use graphs, equations, or math to help explain your answers. Label all axes and all graphs.
1. What is meant by economies of scale and diseconomies of scale? List four factors that contribute to economies of scale. What is the cause of diseconomies of scale? (10 points)
2. The table below shows the output (Q) of a firm as the quantity of labor (L) employed increases. The quantities of all other resources employed are constant. Does this production function exhibit the law of diminishing marginal returns? Explain. (10 points)
 L 0 1 2 3 4 5 6 7 8 Q 0 40 100 160 200 225 240 245 240
3. Answer the questions below on the basis of the following diagram. Show your calculations or provide brief explanations for partial credit. (10 points)
A. What is the TC at 10,000 units of output?
B. What is the VC at 6,000 units of output?
C. What is the fixed cost for all levels of output?
D. When does diminishing returns set in?
E. How can you tell if these cost curve are for the short run or the long run?

4. Using a graph depicting a monopolist's demand curve, marginal revenue curve, and average cost curves, show a profit-maximizing monopolist that earns only normal profits. If you carefully draw your graph, no other explanation is necessary. (10 points)
5. Suppose a perfectly competitive, constant-cost industry experiences a decrease in demand. Using a graph, thoroughly explain what happens in the short and long run. (12 points)
6. Answer the following questions based on the following diagram of a perfectly competitive firm. Assume the firm's goal is to maximize profits or minimize losses. (12 points)
A. Suppose the market price is equal to P4.
i. What is the firm's optimal level of output in the short run?
ii. What will happen in the long-run? Why?
B. Suppose the market price is equal to P3.
iii. What is the firm's optimal level of output in the short run?
iv. What will happen in the long-run? Why?
C. Suppose the market price is equal to P2.
v. What is the firm's optimal level of output in the short run?
vi. What will happen in the long-run? Why?
D. Suppose the market price is equal to P1.
vii. What is the firm's optimal level of output in the short run?
viii. What will happen in the long-run? Why?