Part I. Multiple Choice (3 points each). Indicate the best answer for each question.

1. Referring to Figure 1, diminishing marginal returns sets in at:
   1. labor level A.
   2. labor level B.Answer
   3. labor level C.
   4. labor level D.
   
   

2. According to Figure 1, output is maximized at:
   1. labor level A.
   2. labor level B.
   3. labor level C.
   4. labor level D.Answer
   
   
3. In Figure 1, a profit-maximizing firm will never hire labor beyond:
   1. labor level A.
   2. labor level B.
   3. labor level C.
   4. labor level D.Answer
   
   
4. In Figure 1, average variable cost will be ____ if the firm hires labor at point ___ .
   1. maximized; B
   2. minimized; B
   3. maximized; C
   4. minimized; CAnswer
   
   
5. If you know that with 8 units of output, average fixed cost is $12.50 and average variable cost is $81.25, then total cost at this output level is:
   1. $93.75.
   2. $97.78.
   3. $750.Answer
   4. $880.
   
   
6. If marginal cost is greater than average variable cost for a given level of output, then:
   1. average total cost must be increasing.
   2. average fixed cost must be increasing.
   3. average variable cost must be increasing.Answer
   4. Both A and C.
   5. None of the above.
   
   
7. Because the marginal product of a variable input at first increases and then decreases as the output of the firm is increased:
   1. average fixed cost will rise beyond the point of diminishing returns.
   2. average total cost at first increases and then decreases.
   3. variable cost at first increases at an increasing rate and then increases at a decreasing rate.
   4. total cost at first increases at a decreasing rate and then increases at an increasing rate.Answer
   
   
8. Other things being equal, if the wage rates paid to a firm's labor inputs were to fall, we would expect:
   1. the ATC, AFC, and MC curves to fall.
   2. the ATC and AFC curves to fall.
   3. the ATC, AVC, AFC, and MC curves to fall.
   4. the ATC, AVC, and MC curves to fall.Answer
   
   
9. Which of the following would contribute most to a firm experiencing "economies of scale"?
   1. Rising long-run average cost.
   2. Deterioration of information and control within a firm.
   3. The law of diminishing marginal returns.
   4. Increased specialization of production within a firm.Answer
   
   
10. Given Figure 2, which of the following statements is true?
    1. At output level Q₁, the marginal product of labor is increasing.
    2. At Q₁, total cost is equal to area 0BEQ₁.
    3. If the firm shuts down in the short run, it will lose area BADE.Answer
    4. If the firm shuts down in the short run, its loss equals line segment DE.
    5. All of the above except D.
    
    
11. A purely competitive firm's output is currently such that its marginal cost is $4 and marginal revenue is $5. Assuming profit maximization, the firm should:
    1. cut its price and raise its output.
    2. raise its price and cut output.
    3. leave price unchanged and raise output.
    4. leave price unchanged and cut output.Answer
    
    
12. If the input prices increase when new firms enter a perfectly competitive market:
    1. the long-run industry supply must be downward sloping.
    2. the long-run industry supply curve must be perfectly elastic.
    3. the long-run industry supply curve must be upward sloping.Answer
    4. the long-run industry supply curve is that portion of the MC curve above the AVC curve.
    
    
13. If a purely competitive industry is in long-run equilibrium and property taxes (a fixed cost) decrease, which of the following will happen in the short run?
    1. Market price will decrease, market output will increase, the output of the typical firm will decrease, and firms earn economic profits.
    2. Market price will increase, market output will decrease, the output of the typical firm will increase, and firms incur losses.
    3. Market price, market output, and the output of the typical firm remains unchanged; but, firms earn economic profits.Answer
    4. Market price, market output, and the output of the typical firm remains unchanged; but, firms incur losses.
    
    
14. If a purely competitive industry is in long-run equilibrium and property taxes (a fixed cost) decrease, which of the following will happen in the long run?
    1. Firms exit the industry, market price will increase, market quantity will decrease, the output of the typical firm will increase, and the firms in the industry earn only normal profits.
    2. Firms enter the industry, market price will decrease, market quantity will increase, the output of the typical firm will decrease, and the firms in the industry earn only normal profits.Answer
    3. The firms will continue to incur losses in the long run.
    4. The firms will continue to earn economic profits in the long run.
    
    
15. Which of the following statements is true?
    1. A monopolist faces a perfectly elastic demand curve.
    2. For a monopolist, MR = P.
    3. If demand is elastic, a monopolist's MR is negative.
    4. All of the above.
    5. None of the above.Answer

Part II. Short Answer Questions (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 answer.

1. Why would a firm be interested in knowing its long-run average cost curve? Using a graph, explain in words and illustrate how the long-run average cost curve is derived. Using your graph, identify:
   1. the optimal size of the firm,
   2. a plant size that the firm would use undercapacity,
   3. a plant size that the firm would use over capacity,
   4. when the firm experiences economies of scale, and
   5. when the firm experiences diseconomies of scale. (10 points).
   
   
2. Compare and contrast the assumptions of the perfectly competitive model and the pure monopoly model. (10 points)
   
   
3. Illustrate graphically and explain why a competitive firm would shut down in the short run if P < AVC. (10 points)
   
   
4. Fill in the missing blanks of the following table. (10 points)
    

   Q	AFC	VC	TC	ATC	MC
   10	10				10
   20		180
   30
   40			430		9
   50				10.80

   
   
   
5. Assume a perfectly competitive, decreasing-cost industry is in long-run equilibrium. Using two graphs - - one showing the market demand and supply curves, and the other showing the average cost curves of the typical firm - - explain what happens in the short run and in the long run if demand decreases. (10 points)

   6. Does the following short-run production function exhibit the law of diminishing marginal returns? Explain. (5 points)
    

   Q	0	5	20	32	42	50	55	58	58	56
   L	0	1	2	3	4	5	6	7	8	9