ECON

6120
BUSINESS ECONOMICS
Quiz 2

Name: _______________________





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ECON 6120
BUSINESS ECONOMICS
QUIZ 2

Instructions: Identify the choice that best completes the statement or answers the question.
1. Suppose Ben buys out Jerry's ownership in the firm but retains him as a salaried employee. If so,
a. economic profit increases
b. economic profit decreases
c. there is no change in economic profit
d. there is no change in accounting profit
e. accounting profit increases
2. Which of the following is a short-run adjustment?
a. Toyota builds an automobile plant in Kentucky.
b. Faced with increasing enrollment, a private college builds a new School of
Business building.
c. Because of staggering losses, three insurance companies exit the industry.
d. People's Bank hires two new tellers to meet increased demand for customer
services.
e. Shaveco enters the razor blade market with a new product, produced in the United
States.
Exhibit 7-2
Labor
0
1
2
3
4
5

Total product
(pairs of shoes)
0
20
50
75
80
75

3. Given the information in Exhibit 7-2, what is the marginal product of the fourth unit of labor?
a. 5 pairs of shoes
b. 10 pairs of shoes
c. 20 pairs of shoes
d. 50 pairs of shoes
e. 80 pairs of shoes

4. As Product Co. adds the first four workers to its production process in the short run, its output rises
from 0 to 12 to 25 to 35 to 43. Addition of the fifth worker will most likely lead to an output rate
a. greater than 51
b. equal to 51
c. less than 51
d. greater than 51 if the firm experiences diseconomies of scale
e. none of the above
5. The law of diminishing returns explains why
a. monopolies have a guaranteed profit margin
b. short-run MC and AVC curves are U-shaped
c. the production possibilities curve is bowed out
d. long run supply curves are downward sloping
e. total product is a straight line
6. Which of the following is true of marginal product?
a. The firm should produce where marginal product is greatest.
b. The firm should produce where marginal product is increasing.
c. When marginal product is falling, total product is falling.
d. The firm should produce where marginal product is zero.
e. When marginal product is increasing, total product is increasing by increasing
amounts.
7. Which of the following best explains why marginal cost eventually increases as output increases?
a. economies of scale occur
b. average cost increases
c. total cost increases
d. marginal product decreases
e. fixed cost is constant
8. If variable cost at each output level doubles,
a. ATC doubles
b. AFC doubles
c. MC remains unchanged
d. MC doubles
e. MC less than doubles
9. Suppose Guild produces 5,000 guitars per year. Its average total cost is $90, and its fixed cost is
$250,000. What is its variable cost?
a. $250,000
b. $450,000
c. $25,000
d. $56,000
e. $200,000

Exhibit 7-5
Output
per day
0
5
15
18
20

Workers
per day
0
1
2
3
4

Total
cost
$10
20
30
40
50

10. In Exhibit 7-5, what are variable costs at 15 units of output?

a. $30
b. $10
c. $1
d. $20
e. it is impossible to calculate variable cost unless we know the daily wage
Exhibit 7-8

11. In Exhibit 7-8, A is marginal cost, B is average variable cost and C is average total cost, the vertical
distance between lines B and C at any level of output represents
a. marginal cost
b. average total cost
c. average variable cost
d. average fixed cost
e. average marginal cost
12. As a firm expands into overseas markets, information problems and the complexity of operating
within many varied cultures and economies may result in
a. constant returns to scale
b. diminishing marginal returns
c. declining long-run marginal cost
d. diseconomies of scale
e. economies of scale
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13. Which of the following correctly describes the relationship between the marginal cost and average
variable cost curves?
a. MC is everywhere above AVC
b. AVC is everywhere above MC
c. MC crosses AVC at AVC's minimum point
d. MC crosses AVC at MC's minimum point
e. both AVC and MC first rise and then fall
14. To maximize profit in the long run, a firm must
a. charge the highest price possible
b. produce where demand is unit elastic
c. sell the most output possible
d. minimize the cost of producing any given amount of output
e. produce at minimum long-run total cost
15. Which of the following is a characteristic of a competitive price-taker market?
a. Profit maximizing firms in the market will expand output until price equals
average variable cost.
b. The market demand curve for the product is a horizontal line.
c. There are many firms in the market, each producing a small share of total market
output.
d. The product produced by each of the firms is differentiated.
16. A firm operating in a perfectly competitive market is a price taker because:
a. no firm has a significant market share.
b. no firm's product is perceived as different.
c. setting a price higher than the going price results in zero sales.
d. all of these.
17. A perfectly competitive firm sells its output for $100 per unit and marginal cost is $100 per unit. To
maximize short-run profit, the firm should:
a. increase output.
b. decrease output.
c. maintain its current output.
d. shut down.
18. In the short run, a firm will stay in business as long as:
a. price equals average revenue.
b. marginal revenue is greater than or equal to marginal cost.
c. price exceeds average variable cost.
d. price is less than average variable cost.
19. In the short run, a firm should shut down its operation if:
a. its losses are less than TFC at the MR = MC point.
b. its losses equal TFC at the MR = MC point.
c. its losses are greater than TFC at the MR = MC point.
d. TR is less than TC.
e. TR exceeds TVC.
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20. Suppose product price is fixed at $24; MR = MC at Q = 200; AFC = $6; AVC = $16. What do you
advise this firm to do?
a. Increase output.
b. Decrease output.
c. Shut down operations.
d. Stay at the current output; the firm is earning a profit of $400.
e. Stay at the current output; the firm is losing $200.
21. A fishing boat owner brings 50,000 fish to market and the market price is $4 per fish. Her average
variable cost of 50,000 fish is $1 and the fixed cost of the boat is $100,000. What is her profit per
fish?
a. $1.
b. $500.
c. $5,000.
d. $25,000.
e. $500,000.
Exhibit 8-3 Cost per unit curves

22. As shown in Exhibit 8-3, the price at which the firm earns zero economic profit in the short-run is:
a. $1.00 per unit.
b. $1.50 per unit.
c. $4.00 per unit.
d. more than $2.00 per unit.
e. $2.00 per unit.

Exhibit 8-8 A firm's cost and marginal revenue curves

23. In Exhibit 8-8, product price in this market is fixed at $35. This firm is currently operating where MR
= MC. Which of the following is true?
a. Price < AVC and this firm should shut down.
b. This firm is earning a profit of zero.
c. This firm could increase profits by increasing output.
d. Price > ATC and the firm is earning a positive profit.
e. Price > AVC, and the firm should stay at its current output.
Exhibit 8-10 Price and cost data for a firm
Q
0
1
2
3
4

P
$12
12
12
12
12

AVC

3
5
7.3
9.5

ATC

5
6
8
10

MC

5
7
12
16

24. In Exhibit 8-10, the maximum possible total profit is:

a. $36.
b. $24.
c. $20.
d. $12.
e. $8.

Exhibit 8-12 Marginal revenue and cost per unit curves

25. As shown in Exhibit 8-12, if the price is OB, the firm's total cost of producing at its most profitable
level of output is:
a. YF.
b. XL.
c. OYFB.
d. OXEA.

Exhibit 8-17 Marginal revenue and cost per unit curves

26. As shown in Exhibit 8-17, the short-run supply curve for the firm corresponds to which segment of its
marginal cost curve?
a. C and all points above.
b. B and all points above.
c. A and all points above.
d. A to C only.
e. B to D only.
27. In a perfectly competitive industry, assume there is a permanent increase in demand for a product.
The process of transition to a new long-run equilibrium will include:
a. the exit of firms.
b. temporarily lower production costs.
c. both a and b.
d. neither a nor b.
28. Which of the following statements concerning the relationships between total product (TP), average
product (AP), and marginal product (MP) is not correct?
a.
b.
c.
d.

AP continues to rise so long as TP is rising.

AP reaches a maximum before TP reaches a maximum.
TP reaches a maximum when the MP of the variable input becomes zero.
MP cuts AP at the maximum AP.

29. In the above diagram, total product will be at a maximum at:

a. Q3 units of labor
b. Q2 units of labor
c. Q1 units of labor
d. some point that cannot be determined with the above information.

30. Refer to the above diagram. At output level Q total fixed cost is:
a. 0BEQ.
b. BCDE.
c. 0AFQ.
d. 0CDQ.

31. The table above shows cost data for a firm that is selling in a purely competitive market. The lowest
output level on this firm's short-run supply curve is:
a. 10.
b. 12.
c. 16.
d. 20.
e. 14.
32. The Campus Crustacean Company receives $2 per box for its crawfish and is selling 1600 boxes to
maximize its profits. What is the per-unit profit on a box of crawfish at the profit-maximizing level of
output if the variable cost is $1 per box and fixed costs are $1200?
a. $0.25.
b. $0.50.
c. $1.00.
d. $1.25.
e. $1.15.

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33. Refer to the above graph. It shows the cost curves for a competitive firm. If the market price falls to
$0.55, the optimal output rate is:
a. 0.
b. 15.
c. 20.
d. More than 20 but less than 35.

34. Answer the question based on the table above. At what point on the table would a purely competitive
firm cover all of its costs and earn only normal profits?
a. Q=5.
b. Q=10.
c. Q=15.
d. Q=20.
35. A firm sells a product in a purely competitive market. The marginal cost of the product at the current
output of 1000 units is $2.50. The minimum possible average variable cost is $2.00. The market price
of the product is $2.50. To maximize profit or minimize losses, the firm should:
a. continue producing 1000 units.
b. produce less than 1000 units.
c. produce more than 1000 units.
d. shut down.
e. None of the above.

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