Economics 2306 Name_____________________________

Principles of Economics I

Baylor in Great Britain

I. Multiple Choice. Circle the best answer.

1. Accounting profit is equal to
a. total revenue minus opportunity costs.
b. total revenue plus opportunity costs.
c. total revenue minus imputed costs.
d. total revenue minus explicit costs.
e. total revenue minus explicit and implicit costs.

2. Economic profit is equal to
a. total revenue minus accounting profit.
b. total revenue minus explicit costs.
c. total revenue plus accounting profit.
d. total revenue plus opportunity costs.
e. accounting profit minus implicit costs.

3. Normal profit is defined as
a. accounting profit.
b. economic profit.
c. profit necessary to ensure that opportunity costs are covered.
d. accounting profit minus economic profit.
e. economic profit minus accounting profit.

4. A variable costs is one that changes
a. in the long run only.
b. in the short run only.
c. year to year.
d. month to month.
e. as quantity changes.

5. If fixed cost at Q = 100 is $130, then
a. fixed cost at Q = 0 is $0.
b. fixed cost at Q = 0 is less than $130.
c. fixed cost at Q = 200 is $260.
d. fixed cost at Q = 200 is $130.
e. it is impossible to calculate fixed costs at any other quantity.

6. Suppose Toyota produces 100,000 cars per year at its California plant at an average cost of $6,000 and it doubles output and total costs by building an identical plant in Kentucky. Toyota has exhibited
a. diminishing marginal returns.
b. economies of scale.
c. constant average costs.
d. an upward-sloping planning curve.
e. production inefficiency.

7. Perfectly competitive firms respond to changing market conditions by varying their
a. price.
b. output.
c. market share.
d. information.
e. advertising campaigns.

8. Which of the characteristics of perfect competition assures that economic profit will be zero in the long run?
a. Each firm is small with respect to the market.
b. Each firm has access to perfect information.
c. Goods produced in the market are homogeneous.
d. Each firm is a price taker.
e. There is freedom of entry and exit in the market.

9. A perfectly competitive firm is a price taker. Therefore, it faces a
a. perfectly elastic supply curve for its output.
b. perfectly elastic demand curve for its output.
c. perfectly inelastic supply curve for its output.
d. perfectly inelastic demand curve for its output.
e. unit-elastic demand curve for its output.

10. If a firm in perfect competition charges the market price of $14 per unit,
a. its marginal revenue is $14, and its average revenue is less.
b. it will sell no output.
c. its average revenue is $14, and its marginal revenue is less.
d. its average revenue is $14, and its marginal revenue is $14.
e. its average and marginal revenue are $14 only for the first unit sold.

11. What is always true at the quantity where average total cost equals average revenue?
a. Profit is zero
b. Marginal cost equals marginal revenue
c. Profit is maximized
d. Revenue is maximized
e. Cost is minimized

12. A perfectly competitive firm that should not shut down in the short run will maximize profit where
a. TVC = 0
b. TFC = 0
c. AFC = MC
d. P = MC
e. ATC = 0

13. In the short run, if a firm shuts down, its loss is equal to
a. $0
b. its variable costs
c. its fixed costs
d. fixed costs minus variable costs
e. fixed costs minus total revenue

14. The short-run supply curve of a perfectly competitive firm is
a. its average fixed cost curve.
b. the part of its marginal cost curve rising above the average variable cost curve.
d. the part of its marginal cost curve below the average variable cost curve.
d. marginal physical product curve.
e. its average total cost curve.

15. For a monopolist, marginal revenue is
a. equal to price
b. greater than price
c. less than price
d. represented by a horizontal curve
e. equal to average revenue

16. A profit-maximizing monopolist
a. never produces in the inelastic portion of the demand curve, because it can increase profit by increasing output.
b. never produces in the inelastic portion of the demand curve, because marginal revenue exceeds marginal cost.

c. always produces in the inelastic portion of the demand curve.
d. never produces in the elastic portion of the demand curve, because there are no substitutes for the good it produces.
e. never produces in the inelastic portion of the demand curve, because marginal revenue is negative there.

17. An important difference between a perfectly competitive firm and a monopolist is that
a. the perfectly competitive firm tends to be larger.
b. only monopolists attempt to maximize profit.
c. only the perfectly competitive firm maximizes profit.
d. the perfectly competitive firm faces a horizontal demand curve and the monopolist faces a downward-sloping demand curve.
e. only the monopolist maximizes profit at the quantity where marginal cost equals marginal revenue

18. A monopolistically competitive firm has some market power based on
a. product differentiation.
b. barriers to entry.
c. product similarity.
d. its homogeneous product.
e. high tariffs.

19. What do monopolistic competition, pure monopoly, and perfect competition have in common?
a. Free entry
b. Long-run economic profits
c. Differentiated product
d. Price taking
e. They all maximize profit where MR=MC.

20. As new monopolistically competitive firms enter the market, the demand facing each firm in the market ______, causing the price received by each firm to ______. In the long run, each firm will earn a ______ profit.
a. falls; rise; positive
b. rises; fall; positive
c. falls; rise; normal
d. rises; fall; normal
e. falls; fall; normal

II. Answer True, False, or Uncertain. Explain.

1. Because it is small relative to the market, a perfectly competitive firm faces an inelastic demand curve for its output.

2. In the long run in perfect competition, no firm can earn a normal profit.

3. Something is called a barrier to entry only if it makes entry into an industry absolutely impossible.

4. It is more difficult to form a successful cartel when there are only a few firms in the industry.

5. Monopoly power is inefficient because large firms will produce too much product and dump it onto the market at artificially low prices.

III. Short Answer

1. Explain why the marginal revenue curve facing a firm in a perfectly-competitive industry differs from the marginal revenue curve facing a monopolist.

2. Your mother probably always told you to avoid "tit-for-tat" behavior. What did she mean by that? In what sense is that the way firms in an oligopolistic industry behave? Why does it make sense for them to practice this kind of behavior?