Microeconomics

Practical Exercises: Topic 5 - 8

Section 1: Multiple choice questions
Topic 5
1. A budget line
a. shows the prices that a consumer chooses to pay for products he consumes.
b. shows the purchases made by consumers.
c. shows the consumption bundles that a consumer can buy with a given budget.
d. represents the bundles of consumption that makes a consumer equally happy.
2. If a consumers income decreases, the budget line will
a. shift outward, parallel to the old budget constraint.
b. shift inward, parallel to the old budget constraint.
c. rotate outward towards pizza because we can afford more pizza.
d. rotate outward towards Pepsi because we can afford more Pepsi.
3. Economists represent a consumers preferences using
a. demand curves.
b. budget constraints.
c. indifference curves.
d. supply curves.
4. The slope of an indifference curve is
a. the rate of change of consumers preferences.
b. the marginal rate of preference.

c. the marginal rate of substitution.

d. always equal to the slope of the budget constraint.
5. A consumer
a. is equally satisfied with any indifference curve.
b. prefers indifference curves with positive slopes.
c. prefers higher indifference curves to lower indifference curves.
d. is generally unable to place all consumption bundles on an indifference curve.
6. Utility measures
a. the income a consumer receives from consuming a bundle of goods.
b. the satisfaction a consumer receives from consuming a bundle of goods.
c. the satisfaction a consumer places on their budget constraint.
d. All of the above are correct.
7. The goal of the consumer is to
a. maximize utility.
b. be on the highest indifference curve.
c. maximize satisfaction.
d. All of the above are the goals of the consumer.
8. The optimal consumers choice is where
a. MUx/MUy = Py/Px
b. MUx/Py = MUy/Px
c. Px/MUx = Py/MUy
d. MUx/MUy = Px/Py
Topic 6
1. Profit is defined as
a. marginal revenue minus marginal cost.
b. net revenue minus depreciation.
c. total revenue minus total cost.
d. average revenue minus average total cost.
2. Economic profit is equal to
a. total revenue (explicit costs + implicit costs).
b. total revenue economic costs.
c. accounting profit + implicit costs.
d. (a) and (b)
3. Accounting profit is equal to
a. total revenue implicit costs.
b. total revenue economic costs.
c. total revenue explicit costs.
d. total revenue (explicit costs + implicit costs)
4. Explicit costs
a. require an outlay of money by the firm.
b. include all of the firms opportunity costs.
c. include income that is forgone by the firms owners.
d. All of the above are correct.
5. An example of an implicit cost of production would be
a. the income an entrepreneur could have earned working for someone else.
b. the cost of raw materials for producing bread in a bakery.
c. the cost of a delivery truck in a business that rarely makes deliveries.
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d. All of the above are correct.

6. For a firm, the production function represents the relationship between
a. implicit costs and explicit costs.
b. quantity of inputs and total cost.
c. quantity of inputs and quantity of output.
d. quantity of output and total cost.
7. As more units of labor employed, the marginal product of labor increases This indicates
a. increasing marginal returns
b. diminishing marginal returns.
c. Negative marginal returns.
d. None of the above is correct.
8. Total cost can be divided into two types. Those two types are
a. fixed costs and variable costs.
b. fixed costs and marginal costs.
c. variable costs and marginal costs.
d. average costs and marginal costs.
9. Which statement is TRUE? Fixed costs
a. do NOT exist in the long run.
b. depend on the firm's level of output.
c. are zero if the firm is producing nothing.
d. are the difference between total costs and average variable costs.
10. Which of the following costs do not vary with the amount of output a firm produces?
a. Fixed costs.
b. Average fixed costs.
c. Fixed costs and average fixed costs.
d. Marginal costs and average fixed costs.
11. The formula for AVC is
a. Q / TVC.
b. TVC / Q.
c.
d.

TVC / Q
Q / TVC

12. Marginal cost

a. is the increase in total cost resulting from producing one more unit of product.
b. is the average cost of production divided by output.
c. equals the increase in AVC resulting from producing one more unit of product.
d. always equals average cost.
13. If a firm's total costs are $100 when 10 units of output are produced and $103 when 11 units
of output are produced, the marginal cost of the 11th unit is
a. $1
b. $3
c. $5
d. $9.36
14. Diseconomies of scale occur when
a. average fixed costs are falling.
b. average fixed costs are constant.
c. long run average total costs rise as output increases.
d. long run average total costs fall as output increases.
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Topic 7
1. In a competitive market,
a. each seller can sell all he wants to sell at the market price.
b. buyers and sellers are price takers.
c. the goods offered by the different sellers are the same.
d. All of the above are correct.
2. Which of the following is NOT a characteristic of a perfectly competitive market?
a. Firms are price takers.
b. Firms have difficulty entering the market.
c. There are many sellers in the market.
d. Goods offered for sale are the same.
3. For a firm in a perfectly competitive market, the price of the good is always
a. equal to marginal revenue.
b. equal to total revenue.
c. greater than average revenue.
d. All of the above are correct.
4. If an individual perfectly competitive firm charges a price above the industry equilibrium
price, it will
a. sell all that it can produce and gain equal revenue with competitors.
b. sell all that it can produce and gain more revenue than competitors.
c. sell part of what it can produce and gain less revenue than competitors will.
d. not sell any of what it produces.
5. The main decision for a profit maximizing perfectly competitive firm is not what ______ but
what
______.
a. level of output to produce; price to charge
b. price to charge; level of output to produce
c. level of output to produce; total revenue to achieve
d. price to charge; total cost to achieve
6. The added revenue that a firm takes in when it increases output by one additional unit is
______ revenue.
a. total
b. marginal
c. variable
d. fixed
7. For a perfectly competitive firm, at the profit maximizing level of output
a. P = MR = MC
b. P > MR > MC
c. P < MR < MC
d. P > 0 and MR = 0
8. Joes Butcher Shop is producing where MR = MC, Joes Butcher Shop must be
a. earning a zero economic profit.
b. incurring a loss.
c. maximizing profits.
d. maximizing revenue but not maximizing profits.

9. Tommys Tires operates in a perfectly competitive market. If tires sell for $50 each and ATC =
$40 per tire at the profit-maximizing output level, then in the long run
a. more firms will enter the market.
b. some firms will exit from the market.
c. the equilibrium price per tire will rise.
d. average total costs will fall.
10. When price is below average variable cost, a firm in a competitive market will
a. shut down.
b. earn economic profit.
c. earn accounting profit.
d. continue to operate.

a.
b.
c.
d.

11. The short-run supply curve for a firm in a perfectly competitive market is
likely to be horizontal
likely to slope downward.
determined by forces external to the firm.
its marginal cost curve (above average variable cost).
12. The long run equilibrium for a competitive market is where
a. price is equal to average total cost.
b. total revenue is equal to total cost.
c. economic profit is zero.
d. All of the above are correct.

Topic 8
1. To define a monopoly, we cite the following characteristics:
a. The firm is the sole seller of its product.
b. The firms product have many close substitutes.
c. The firm never incurs a loss.
d. None of the above is correct.
2. Which of the following statements is (are) true for monopoly?
a Monopolys demand is the market demand.
b Monopoly benefits from barriers to entry.
c Monopoly has the ability to set the prices of their products.
d All of the above are correct.
3. When the demand curve is a downward sloping straight line, the slope of the marginal revenue
curve is
a. always equal to one.
b. the same as the slope of the demand curve.
c. half as steep as the demand curve.
d. twice as steep as the demand curve.
4. For a monopoly, price
a. equals marginal revenue.
b. is less than marginal revenue.
c. is greater than marginal revenue.
d. can be greater than or less than marginal revenue.
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5. A monopolys marginal cost will

a. be less than its average fixed cost.
b. be less than the price for its product.
c. exceed its marginal revenue.
d. equal its average total cost.
6. A monopoly will not produce
a. if marginal revenue is declining.
b. if price is less than average total cost but greater than average variable cost.
c. in the inelastic portion of its demand curve, where marginal revenue is negative.
d. if price is greater than average total cost.
7. For a profit-maximizing monopoly,
a. P > MR = MC.
b. P = MR = MC.
c. P > MR > MC.
d. MR < MC < P.
8. A monopoly is a price
a. taker, and therefore has no supply curve.
b. setter, and therefore has no demand curve.
c. setter, and therefore has no supply curve.
d. setter, and therefore has no variable cost curve.
9. When a monopolist earns positive economic profits,
a. new firms enter the market and increase pressure to lower market price.
b. the monopolist expands production.
c. the industry supply curve shifts to the right.
d. existing barriers to entry prevent new firms entry.
10. Which of the following is an example of a barrier to entry?
a. A key resource is owned by a single firm.
b. The costs of production make a single producer more efficient than a large number of
producers.
c. The government has given the existing monopoly the exclusive right to produce the good.
d. All of the above

Section 2: Exercises
Topic 5
Question 1.
George spends $5 a week on good X and good Y. The price of each good is $1 per
unit.

MU X

MU X / .PX Units

Units

TU of

of good

good X

of

good Y

0
10
18
25

good Y
0
1
2
3

0
16
28
38

X
0
1
2
3

TU of

MU Y

MU Y / .PY

4
5
6

30
34
36

a.
b.

4
5
6

46
52
54

How many units of each good does he purchase to maximize his utility?
What is his total utility?
Question 2.
Alice has an income of I that is spent on two goods X and Y with their prices are

PX

and

PY

a.

On the diagram, draw the budget constraint and the indifference curve.
Indicate the optimal choice for Alice that gains highest utility.
b.
On the same diagram, draw the new budget constraint and the indifference
curve, and indicate the new optimal choice for Alice when
c.
Compare the consumption of two goods.

PX

increases.

Topic 6
Question 1.
Suppose the following data shows the relationship between the number of workers
and output for a firm. The firm has a fixed cost of $100 and can employ each worker at
the wage of $50.
Workers
(L)

Output
(Q)

0
1
2
3
4
5
6
7

0
10
30
70
100
125
140
150

Marginal
Product of
Labor (MPL)

Total Cost
(TC)

Average
Total Cost
(ATC)

Marginal
Cost (MC)

a. Fill in the blanks of the table.

b. What is the relationship between the MPL and MC curves?
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Question 2.
Complete the table.
Q
0
1
2
3
4
5
6
7
8
9
10

TFC
200
200
200
200
200
200
200
200
200
200
200

TVC
0
30
50
60
65
75
95
125
165
215
275

TC

AFC

AVC

ATC

MC

Question 3.
The following table describes the relationship between the number of workers and
number of output produce.
Worker (L)
Output (Q)
Marginal
Product of
Labor (MPL)

0
0

1
10

2
30

3
70

4
100

5
125

6
140

7
150

8
150

9
140

10
128

a. Complete the table.

b. Indicate the range of labor that exhibits increasing, diminishing or negative
marginal returns.
Topic 7
Question 1.
A perfectly competitive firm has total revenue and total cost as given
Q
0
1
2
3
4
5
6
7

TR
0
8
16
24
32
40
48
56

MR

TC
5
6
9
13
18
26
35
46

MC

a. Complete the table.

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b. How many product the firm should produce to maximize its profit?
c. How much is the firms profit?
Question 2.
A perfectly competitive firm faces costs of production as follows
Q
0
1
2
3
4
5
6

TFC
50
50
50
50
50
50
50

TVC
0
20
50
90
140
200
280

TC

MC

a. Complete the table.

b. If the market price for the product is P = 50 then how many product the firm
should produce to maximize its profit?
c. How much is the firms profit?
Topic 8
Question 1.
A monopoly has the following demand, marginal revenue, total cost and marginal
cost functions
P 170 5Q
MR 170 10Q

TC 40 50Q 5Q 2
MC 50 10Q

a. To maximize its profit how much quantity of product the firm should produce
and what price it should charge for its product?
b. How much is the firms profit?
Question 2.
Suppose a monopoly has the following demand schedule and its marginal cost is
MC = 12.
P
24
22
20

Q
10
20
30

TR

MR

MC

18
16
14
12
10

40
50
60
70
80

a. Complete the table.

b. How many product the firm wants to produce to maximize its profit? What price
the firm should charge for its product?

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