ECO 110 Principles of Microeconomics review Exam 3

Dr. Anwar Alshriaan

Use the table below to answer the following TWO questions.

Units of
labor
1
2
3
4

Total
product
10
20
27
25

1.

According to the table above, the average product (AP) of 2 units of labor is
a) 7
b) 9
c) 10
d) 27
Answer : c

2.

According to the table above, the marginal product (MP) of 2rd unit of labor is
a) 7
b) 9
c) 10
d) 27
Answer: c

price, cost
S = MC
$3
$2
D

$1
MR
20

30

3.

Consider the graph above. The profit-maximizing price and output for a firm under monopolistic
competition is
a) a price of $2 and a quantity of 30.
b) a price of $1 and a quantity of 20.
c) a price of $3 and a quantity of 30.
d) a price of $3 and a quantity of 20.
Answer is d
4. I pay only $5 for a large cheese pizza at Little Caesars even though I am willing to pay $20. My
consumer surplus is
a) $50
b) $15
c) $7.50
d) $5
Answer b
14.Complete the following short-run cost table using the information provided.
Q
0
1
2

TC
$ 4
7
9

TFC
$_____
_____
_____

TVC
$_____
_____
_____

AVC
$_____
_____
_____

ATC
$_____
_____
_____

MC
$_____
_____
_____

ECO 110 Principles of Microeconomics review Exam 3

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Dr. Anwar Alshriaan

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15.Consider the two diagrams below. Diagram A represents a typical firm in a purely competitive
industry. Diagram B represents the supply and demand conditions in that industry.
(a) Describe the price, output, and profit situation for the individual firm in the short run.
(b) Describe what will happen to the individual firm and the industry in the long run. Show
the changes on diagrams A and B.

Use the following to answer questions 16-18:

Answer the next question(s) on the basis of the following demand and cost data for a pure monopolist:

16. Refer to the above data. The profit-maximizing price for the monopolist will be:
A) $5.00.
B) $2.90.
C) $3.35.
D) $4.50.
Answer: D

ECO 110 Principles of Microeconomics review Exam 3

Dr. Anwar Alshriaan

17. Refer to the above data. The profit-maximizing level of output will be:
A) 4 units.
B) 7 units.
C) 6 units.
D) 5 units.
Answer: D
18. Refer to the above data. The monopolist will realize a:
A) profit of $8.50.
B) profit of $7.50.
C) profit of $16.
D) loss of $14.
Answer: C
Use the following to answer questions 19-22:

19. Refer to the above diagram. To maximize profits or minimize losses this firm should produce:
A) E units and charge price C.
B) E units and charge price A.
C) M units and charge price N.
D) L units and charge price LK.
Answer: B
20. Refer to the above diagram. At the profit-maximizing level of output, total revenue will be:
A) NM times 0M.
B) 0AJE.
C) 0EGC.
D) 0EHB.
Answer: B
21. Refer to the above diagram. At the profit-maximizing level of output, total cost will be:
A) NM times 0M.
B) 0AJE.
C) 0CGC.

ECO 110 Principles of Microeconomics review Exam 3

Dr. Anwar Alshriaan

D) 0BHE.
Answer: D
22. Refer to the above diagram. At the profit-maximizing level of output, the firm will realize:
A) an economic profit of ABHJ.
B) an economic profit of ACGJ.
C) a loss of GH per unit.
D) a loss of JH per unit.
Answer: A
Use the following to answer questions 23-26:

23. Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium.
This firm's profit-maximizing price will be:
A) $10.
B) $13.
C) $16.
D) $19.
Answer: C
24. Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium.
The profit-maximizing output for this firm will be:
A) 210.
B) 180.
C) 160.
D) 100.
Answer: C
25. Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium.
This firm will realize an economic:
A) loss of $320.
B) loss of $480.
C) profit of $280.
D) profit of $600.
Answer: B
26. Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium.
Assume the firm is part of an increasing-cost industry. In the long run firms will:
A) leave this industry, causing both demand and the ATC curve to shift upward.
B) enter this industry, causing demand to rise and the ATC curve to shift downward.
C) enter this industry, causing demand to fall and the ATC curve to shift upward.
D) enter this industry, causing both demand and the ATC curve to shift upward.

ECO 110 Principles of Microeconomics review Exam 3

Dr. Anwar Alshriaan

Answer: C
Use the following to answer questions 27-29:

27. In short-run equilibrium, the monopolistically competitive firm shown above will set its price:
A) below ATC.
B) above ATC.
C) below MC.
D) below MR.
Answer: A
28. The monopolistically competitive firm shown in the above figure:
A) is in long-run equilibrium.
B) might realize an economic profit or a loss, depending on its choice of output level.
C) cannot operate profitably, at least in the short run.
D) can realize an economic profit.
Answer: C
29. If all monopolistically competitive firms in the industry have profit circumstances similar to
the firm shown above:
A) new firms will enter the industry.
B) some firms will exit the industry.
C) all firms will exit the industry.
D) no firms will exit the industry.
Answer: B
Use the following to answer questions 30-34:
F ir m
A
B
C
D
E
F

M a r k e t sh a re (% )
20
20
20
20
10
10

30. Refer to the above data. The industry characterized by the above information is:
A) an oligopoly.
B) a monopolistically competitive industry.
C) a purely competitive industry.
D) a pure monopoly.
Answer: A
31. Refer to the above data. The four-firm concentration ratio for the above industry is:

ECO 110 Principles of Microeconomics review Exam 3

Dr. Anwar Alshriaan

A) 100 percent.
B) indeterminate, since we don't know which four firms are included.
C) 80 percent.
D) 20 percent.
Answer: C
35. The study of how people (or firms) behave in strategic situations is called:
A) cost-benefit analysis.
B) recursive analysis.
C) normative economics.
D) game theory.
Answer: D
36. The terms strategic behavior and payoff matrix both relate directly to:
A) the perfect competition model.
B) the monopolistic competition model.
C) game theory.
D) the price leadership model.
Answer: C
37. Game theory is best suited to analyze the pricing behavior of:
A) pure monopolists.
B) pure competitors.
C) monopolistic competitors.
D) oligopolists.
Answer: D
38. Game theory can be used to demonstrate that oligopolists:
A) rarely consider the potential reactions of rivals.
B) experience economies of scale.
C) can increase their profits through collusion.
D) may be either homogeneous or differentiated.
Answer: C

The price of a resource with a perfectly inelastic supply, A .41

.a. is pure economic rent 0
.b. consists of only opportunity cost and has no economic rent 1
.c. cannot change 2
.d. is determined by the supply 3
What does monopolistic competition have in common with perfect competition? A .51
a. a large number of firms and freedom of entry and exit 0
b. a standardized product 1
c. product differentiation 0
d. the ability to earn an economic profit in the long run 1
In the long run, existing firms exit a perfectly competitive market when D .61
.a. economic profits are zero1
.b. economic profits are greater than zero2
.c. normal profits are greater than zero3
.d. they incur an economic loss4
6

ECO 110 Principles of Microeconomics review Exam 3

Dr. Anwar Alshriaan

1
If a firm does not produce any output, its C .82
.a. total fixed cost must be zero1
.b. economic profit must be positive2
.c. total variable cost must be zero3
.d. total costs must be zero4
Economies of scale occurs when the average total cost of production ____ as output .91
____. C
a. increases, increases1
b. decreases, decreases2
c. decreases, increases3
d. remains constant, increases4
5
1.

Which of the following is an explicit cost?

a. The wages a firm pays to its workers.
b. The opportunity cost of an owner/entrepreneur's time invested in the firm.
c. The opportunity cost of the money the business owner/entrepreneur has invested in
the firm.
d. None of the above.
Answer A
2.

For a perfectly competitive firm, marginal revenue (MR)

a. is constant, given that the firm is a price taker.
b. is less than price, given that selling additional units pulls down the price of all units.
c. is greater than price since the firms demand is perfectly elastic.
d. is u-shaped due to the law of diminishing marginal returns.
Answer A
Use the table below to answer the following TWO questions.
Units of
labor
1
2
3
4

Total
product
10
20
27
25

3.

According to the table above, the average product (AP) of 3 units of labor is
a. 7
b. 9
c. 10
d. 27
Answer B
According to the table above, the marginal product (MP) of 3rd unit of labor is
a. 7
b. 9
c. 10
d. 27
Answer A

4.

ECO 110 Principles of Microeconomics review Exam 3

Dr. Anwar Alshriaan

5.

In the short run, a perfectly competitive firm will produce even with an economic loss, as long
as
a. marginal revenue equals marginal cost. (MR=MC)
b. price is less than average total cost. (P < ATC)
c. price is greater than average variable cost. (P > AVC)
d. price is greater than marginal revenue. (P > MR)
Answer C

6.

Which of the following correctly explains why sellers in a perfectly competitive market are
price-takers?
a. There are few sellers, and so they have the power to take whatever price they want.
b. Sellers in a competitive market have the power to influence price by colluding with
one another and using quotas to limit overall market output and thus raise price.
c. Individual buyers in a competitive market have the power to influence price, and thus
can impose prices and other conditions on powerless sellers.
d. There are many small sellers, and so the market process generates an equilibrium
price that cannot be influenced by any one seller. Thus they have no choice but to
take the price generated by the market process.
Answer D

7.

Which of the following represents the key difference between the short run and the long run?
a. In the short run at least one of a firm's resources is fixed, while in the long run all
resources under the firm's control are variable.
b. The short run corresponds to the anticipated remaining life span of the
owner/entrepreneur.
c. In the long run at least one of a firm's resources is fixed, while in the short run all
resources under the firm's control are variable.
d. None of the above.
Answer A

8.

When a firm is experiencing economies of scale

a. the long-run average cost curve is declining.
b. the long-run average cost curve is constant.
c. the long-run average cost curve is rising.
Answer A

9.

The profit-maximizing rate of output for a firm in a perfectly competitive market is found
when which of the following occurs?
a. Total revenue equals total cost. (TR =TC)
b. Price equals average total cost. (P=TC)
c. Marginal revenue equals marginal cost. (MR=MC)
d. Price equals average variable cost. (P=AVC)
Answer C

10. The firms demand curve for a product sold in a perfectly competitive market is
a. inelastic, but not perfectly inelastic.
b. perfectly inelastic.
c. elastic, but not perfectly elastic.
d. perfectly elastic.
Answer D

11. Monopolistic competition differs from perfect competition in that

a. monopolistic competition has barriers to entry.
b. monopolistic competition allows for economic profits in the long run.
c. monopolistic competitive firms sell a product differentiated through marketing and
advertising.

ECO 110 Principles of Microeconomics review Exam 3

d.

Dr. Anwar Alshriaan

all of the above.

Answer C

12. A firm will hire a resource

a. until the extra revenue from employing that resource is equal to the extra cost of
hiring that resource.
b. as long as the resource brings in a positive amount of revenue.
c. as long as its marginal product is positive.
d. both b and c.
Answer A
13. The demand for automobile workers will rise if
a. the wage of automobile workers rises.
b. the wage of automobile workers falls.
c. the demand for automobiles rises.
d. both b and c.
Answer C
14. Oligopoly is a market structure characterized by
a. a horizontal demand curve.
b. a large number of small firms.
c. one single firm and many buyers
d. interdependence among firms in decision makin
Answer D
15. If UPS hires another worker, UPS will be able to deliver an additional 20 packages an hour.
The price of each package is $5. The marginal revenue product (MRP) of this additional
worker is equal to
a. $5.
b. $100.
c. $4.
d. 20 packages.
B
16. A permanent price differential for a resources across two alternative uses suggests that
a. there are nonmonetary differences between the two uses.
b. there is a market failure.
c. the resource demand curve has shifted.
d. the resource supply curve has shifted
Answer B

price, cost
S = MC
$3
$2
D

$1
MR
20

30

17. Consider the graph above. The profit-maximizing price and output for a firm under

ECO 110 Principles of Microeconomics review Exam 3

Dr. Anwar Alshriaan

monopolistic competition is
a. a price of $2 and a quantity of 30.
b. a price of $1 and a quantity of 20.
c. a price of $3 and a quantity of 30.
d. a price of $3 and a quantity of 20.
Answer D
18. When the wage increases, a consumer will work more because the opportunity cost of leisure
and nonmarket work have risen. This is known as the
a. substitution effect.
b. income effect.
c. leisure effect.
d. backward-bending effect.
Answer A
19. For a monopoly, the deadweight loss represents
a. the diversion of consumer surplus to producer profits.
b. the loss of consumer surplus due to the lower output of a monopoly relative to perfect
competition.
c. the loss of consumer surplus due to price discrimination.
d. the costs of antitrust regulation.
Answer B
20. All else being equal, earnings are higher for jobs that
a. involve greater risk or injury or layoff.
b. require greater training or education.
c. are unionized.
d. all of the above.
Answer D
21. For a monopoly,
a. marginal revenue is less than price (MR <P) due to a downward sloping demand
curve.
b. marginal revenue equals price (MR=P) due to a perfectly elastic demand curve.
c. marginal revenue is greater than price (MR >P) due to price discrimination.
d. marginal revenue is less than marginal cost (MR < MC), guaranteeing a profit.
Answer A
22. When price discrimination occurs
a. the monopolist charges the same profit-maximizing price to all buyers.
b. the firm attempts to convert consumer surplus to economic profit.
c. the buyers with the most inelastic demand will pay the lowest price.
d. both b and c.
Answer B
23. When firms collude to act as a single monopolist, this is known as
a. price discrimination.
b. a cartel.
c. monopolistic competition.
d. a natural monopoly.
Answer B
24. A natural monopoly will result when
a. a firm is granted by the government a patent for the exclusive right to make and sell a
product.
b. a firm owns most or all of the natural resources needed to produce a product.
c. there are large fixed costs, so the long-run average cost declines over a wide range of
output.
d. all of the above.

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ECO 110 Principles of Microeconomics review Exam 3

Dr. Anwar Alshriaan

Answer C
25. In order for price discrimination to occur
a. a firm must have some pricing power, i.e. not be a price taker.
b. a firm must be able to identify and separate buyers according to their willingness to
pay.
c. a firm must be able to prevent the low-price buyers from reselling to the high-price
buyers.
d. all of the above.
Answer D
26. A legal monopoly results from
a. a patent or copyright.
b. large fixed costs.
c. a cartel
d. price discrimination
Answer A

27. A feature of oligopoly that makes it similar to monopoly is

a. marginal revenue is equal to price.
b. zero economic profit in the long run.
c. barriers to entry into the industry.
d. all of the above.
Answer C

1
Under the substitution effect of a wage change C
.28
a. an increase in the wage leads people to spend more time on leisure and
.nonmarket work
.b. the labor supply curve has a negative slope
.c. an increase in the wage leads to an increase in the quantity of labor supplied
.d. all of the above

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