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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)