Name: ________________________ Class: ___________________ Date: __________ ID: A

2nd midterm practice test

True/False
Indicate whether the statement is true or false.
____ 1. Economists define the long run as any production time period lasting over one year.
____ 2. In the long run, all costs are variable.
____ 3. When marginal cost exceeds the average variable cost, average variable cost must be increasing.
____ . In the long run, firms can vary all inputs in the production process.
____ !. "iseconomies of scale are present #hen the long run average total cost of production declines as output
expands.
____ $. %n increase in the price of ra# materials #ill shift both the &' and the %(' curves up#ard.
____ ). Whenever marginal revenue is greater than marginal cost, a profit*maximi+ing firm should reduce its
output.
____ ,. % profit*maximi+ing monopolist #ill choose to operate along the inelastic portion of its demand curve.
____ -. &onopolists, unli.e perfectly competitive firms, can continue to earn positive economic profits over time.
____ 1/. % monopolist restricts output and charges a higher price relative to #hat #ould occur if a mar.et #ere
perfectly competitive.
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____ 11. Which of the follo#ing factors of production is not variable in the long run0
1. the si+e of the firm1s plant
2. land
3. highly s.illed labor
4. %ll factors are variable in the long run.
1
Name: ________________________ ID: A
Figure 11-
____ 12. 2efer to Figure 11-. %t output level /3, average fixed cost e4uals5
1. 36.
2. E".
3. 6E.
4. 3".
5. both a. and b.
____ 13. When there are economies of scale in production5
1. long*run average total cost declines as output expands.
2. long*run average total cost increases as output expands.
3. marginal cost increases as output expands.
4. the marginal product of an input diminishes #ith increased utili+ation.
____ 1. % firm can produce ,/ gallons of paint per day #ith $ #or.ers, or -1/ gallons per day #ith ) #or.ers.
(he marginal product of labor over this range of output, stated in gallons per #or.er per day, is
1. 1/.
2. 13!.
3. 13/.
4. )/.
5. 3!.
____ 1!. % firm in a perfectly competitive industry #ill expand output as long as5
1. marginal revenue is less than average revenue.
2. marginal cost is less than marginal revenue.
3. marginal cost is less than average total cost.
4. marginal revenue is less than average total cost.
5. marginal revenue is less than marginal cost.
____ 1$. (oys for (#erps, Inc., sells in a perfectly competitive mar.et, #ith an e4uilibrium price of 7!. Its
marginal revenue5
1. is greater than 7!.
2. is 7!.
3. is less than 7!.
4. is less than +ero.
5. cannot be determined from the above information.
2
Name: ________________________ ID: A
____ 1). % .ey element to preserving a monopoly is5
a. government subsidi+ation of critical enterprises.
b. .eeping potential rivals out of the mar.et.
c. guaranteeing the availability of substitute products.
d. increased advertising expenditures.
Ta!le 1"-1
#uantit$ Total %e&enue Total Cost
, -! -/
- 1/! -3
1/ 11 -,
11 122 1/!
12 12- 11
____ 1,. 2efer to Ta!le 1"-1. (he profit*maximi+ing level of output5
1. is e4ual to - units of output.
2. is e4ual to 1/ units of output.
3. is e4ual to 11 units of output.
4. is e4ual to 12 units of output.
5. cannot be determined from the information provided.
Figure 1"-1
____ 1-. 2efer to Figure 1"-1. (he profit*maximi+ing firm #ill produce at #hat level of output0
1. /Q
1

2. /Q
2

3. /Q
3

4. 8one of the above.
3
Name: ________________________ ID: A
____ 2/. If the demand curve facing a monopoly #as 1 unit at 7), 2 units at 7$, 3 units at 7!, units at 7, and !
units at 73, the marginal revenue from selling the third unit of output5
1. is 7!.
2. is 7.
3. is 73
4. is 71
5. cannot be determined from the above information.
'hort Ans(er
21. Explain #hy some costs are considered to be variable and some fixed. 9o# does time enter into
the definition0
22. 'omplete the follo#ing table describing the short*run daily costs of the :angaroo ;ac.pac. 'ompany.
Total Total Total Total A&erage A&erage A&erage Marginal
)roduct Fi*ed Cost +aria!le Cost Fi*ed Cost +aria!le Total Cost Cost
,-ac.pac.s/ Cost Cost
/ / ** ** **
1 3/
2 !/
3 $/
$ 1!-
! -/
$ 1!/
) 1-$
, 2/
23. % one*day tic.et to <ea World costs 73), but a t#o*day pass costs 72. What is the average cost per day
for a one*day pass0 6or a t#o*day pass0 What is the marginal cost of a second day at <ea World0 Why
might <ea World charge such a price for a second day1s entrance to the par.0
24. Explain the cost advantage of a firm operating at constant returns to scale.

Name: ________________________ ID: A

25. In the short run, if a perfectly competitive firm
produced at the 4uantity of productive efficiency,
#ould it generate the highest profit level possible0
Why or #hy not0
26. What are the characteristics of a perfectly competitive
industry0
27. Why do short*run profits in a perfectly competitive
industry tend to disappear over time0
Ta!le 12-"
(he follo#ing table sho#s ho# the total cost of
producing canisters of peanuts varies #ith
output and capital in the long run in a perfectly
competitive industry.
#uantit$ o0 )eanut / 1 2 3
Canisters each hour
Total Cost ,121/ / 1.// 1.!/ 3.// !.//
,in dollars/
Total Cost ,122/ 1.// 1./ 1.)/ 2.1/ 2.-/
,in dollars/
2.// 12.3/ 2.!/ 2.$/ 2.,/ Total Cost ,12"/
,in dollars/
28. 2efer to Ta!le 12-". What levels of capital =:>1,
:>2, or :>3? #ould the firm choose in the long run
for producing three canisters and five canisters of
peanuts per hour, respectively0
29. 2efer to Ta!le 12-". If firms can freely enter or
exit the industry and face the cost structures
specified, #hat is the li.ely long*run price of a
canister of peanuts0
30. "oes the monopolist have an incentive to
reduce cost under average cost pricing0
9o# can this be overcome0
!