Economics 2106 (Trandel) -- Test III Sample Questions
 

The following 16 questions cover some of the material that is relevant for the third exam.

The exact questions given below will not be on the exam. Questions that are similar to (at least) some of them will be. Understanding the answers to these questions will therefore help you prepare for the exam.

Please note that studying for the third exam should entail more than merely reviewing this page. The exam itself has 17 questions, and while these sample questions cover some of what we've done in class, there will certainly be topics appearing on the exam that do not appear in these example questions. Make sure to also study your class notes and the homework questions, and read the material on the (web-page) outside reading list.

Back to the page that has both questions and answers.

  1. Complete the following statement. If a firm sells the quantity of output at which its marginal revenue _____, then that firm can be absolutely certain that its total revenue _____.
    1. equals its marginal cost   ;   exceeds its total cost by the largest possible amount
    2. equals its marginal cost   ;   equals its total cost
    3. exceeds its marginal cost by the largest possible amount   ;   exceeds its total cost by the largest possible amount
    4. exceeds its marginal cost by the largest possible amount   ;   equals its total cost
    5. Both (a) and (d) are correct.

  2. We know that when Firm XYZ produces and sells 20 units of its product, it earns a larger profit than it would earn if it produced and sold 19 units, or 21 units, or any other quantity. From this fact, we know that the following statement must also be true. The marginal revenue that Firm XYZ receives as a result of selling the 20th unit must _____.
    1. exceed the marginal cost of producing the 20th unit by more than MR exceeds MC for any other unit that XYZ produces
    2. be less than the marginal cost of producing the 20th unit by a greater amount than MR is less than MC for any other unit that XYZ produces
    3. exceed (or be equal to) the marginal cost of producing the 20th unit, while the MR from the 21st unit must be less than the MC of that unit
    4. be less than (or be equal to) the marginal cost of producing the 20th unit, while the MR from the 21st unit must exceed the MC of that unit
    5. equal zero

  3. Quantity Total Cost
    1 $37
    2 $45
    3 $55
    4 $68
    5 $86
    6 $111
    7 $145
    Betty owns a firm, and that firm's total cost of producing various quantities of output are given in the table. If Betty can sell as many units of this output as she wishes at an unchanging price of $20 per unit, Betty would maximize her profits by selling _____ units.
    1. 3
    2. 4
    3. 5
    4. 6
    5. 7

  4. Regardless of the number of days on which he opens his store, Frank pays a set amount of $1200 per month (for an average cost of $40 per day) to rent the building in which his store is located. Frank is committed to making this payment. Frank doesn't actually work at the store, but he does decide what its hours of operation will be. For every day that Frank opens the store, he must both pay wages to his employees and pay for electricity. These costs add up to $100 per day. If Frank decides to open his store on Sunday, the store will collect $300 in revenue; the items it sells that day cost $180 to buy. Frank's business is generally profitable, but he is trying to decide whether to stay open or close down on Sunday. Assume that whether he opens or closes on Sunday has no effect on the store's sales on other days. Given the above numbers, if Frank decides to keep his store open on Sunday, the result will be that his store's total profit will _____.
    1. rise
    2. fall
    3. remain unchanged
    4. definitely fall to zero

  5. A firm sells 300 units of its output at a per-unit price of $10. The firm's marginal cost of producing its 300th unit also equals $10. If the firm's output were to rise above 300 units, its marginal cost would slowly rise above $10. The firm's average total cost of production (when 300 units are produced) equals $8. Based on this information, we know that this firm _____.
    1. would (in the short run) definitely raise its profit by increasing production from 300 to 310 units
    2. is currently earning a (total) profit that is greater than $500
    3. is currently earning a (total) profit that is less than $500
    4. Both (a) and (b) are correct.
    5. Both (a) and (c) are correct.

  6. The accompanying figure illustrates the situation facing one firm in a competitive market. Each of the small marks on the vertical axis measures $1; some values on the horizontal axis are marked. When this firm produces the quantity of output that maximizes its profit, the information in the graph indicates that its (total) profit equals _____.
    1. 88
    2. 90
    3. 120
    4. 352
    5. 480

  7. Suppose that firms originally active in a competitive market are earning positive economic profits. As a result, the number of firms participating in the market will, over time, change. This change causes (i) the quantity produced in the market to move _____ the economically efficient (economic-surplus-maximizing) quantity of output, and (ii) causes _____ in the profits earned by the original firms.
    1. farther from  ;  an increase
    2. farther from  ;  a decrease
    3. closer to  ;  an increase
    4. closer to  ;  a decrease

  8. For this question, assume that the long-run supply curve for a given good is upward-sloping. That curve is _____ than is the short-run supply curve for the same good. Assume that the market for the good is originally in a long-run equilibrium, and that there is an unexpected (and long-lasting) increase in the demand for the product. In response to the demand increase, the market price of the relevant good will rise in the short run, and then (assuming no other shifts in demand, or changes in production cost, occur) will _____ as time passes and the market moves into a long run situation.
    1. flatter   ;   fall back towards the original price
    2. flatter   ;   again rise
    3. steeper   ;   fall back towards the original price
    4. steeper   ;   again rise
    5. steeper   ;   stay unchanged

  9. Tou's Company is currently (on a daily basis) selling 40 units of its product at a price of $30 per unit. In order to increase its sales to 41 units, Tou's must reduce the price it charges (all its customers) by 25 cents. If Tou's Company increases its sales from 40 units to 41 units, the marginal revenue it collects as a result will _____.
    1. equal exactly $30
    2. equal exactly $29.75
    3. fall somewhere in the range between $26.00 and $29.75
    4. fall somewhere in the range between $22.00 and $26.00
    5. fall somewhere in the range between $18.00 and $22.00

  10. Suppose that a certain market has all the characteristics of monopolistic competition. Which of the following statements about such a market is correct?
    (i) All firms in the market have perfectly horizontal firm demand curves.
    (ii) When the existing firms are earning economic profits, they can prevent new firms from entering the market.
    (iii) In a long-run equilibrium, the firms in the market are producing the good at the lowest cost that is technologically possible.
    1. Only (i) is true.
    2. Only (ii) is true.
    3. Only (iii) is true.
    4. All of (i), (ii), and (iii) are true.
    5. None of (i), (ii), and (iii) is true.

  11. Quantity Price Total
    Revenue
    1 60 60
    2 57 114
    3 54 162
    4 51 204
    5 48 240
    6 45 270
    7 42 294
    8 39 312
    The accompanying table shows the price that a monopoly firm can charge (each of its customers) in order to sell a certain quantity of units. This firm can produce its product at a constant marginal cost of 40 per unit. Assume that this firm wishes to sell the quantity that maximizes its profit. To do this, the firm should charge a price of _____ per unit.
    1. 54
    2. 51
    3. 48
    4. 45
    5. 42

  12. Suppose that a firm is currently selling 8 units of its output at a price of $10 per unit. If the firm wishes to increase its sales to 9 units, it must lower the price it charges (to all its customers) by 50 cents. Suppose also that the firm's marginal cost of producing the 9th unit equal $7. [When answering this question ignore the possibility that a an externality cost (which we haven't yet covered) could exist.] In this case, we can be sure that producing and selling the 9th unit would _____.
    1. increase this firm's profit
    2. decrease this firm's profit
    3. produce a net benefit for society; in other words, it would be efficient
    4. Both answers (a) and (c) are correct.
    5. Both answers (b) and (c) are correct.

  13. Consider a market that is controlled by a monopoly firm (which charges the same price to all of its customers). Consider also the price-quantity combination that a profit-maximizing monopoly firm would choose. Suppose that for some reason (a profit-maximizing firm wouldn't do this voluntarily) the output produced by this firm rises. Such a change in output would cause the consumer surplus created in the market to _____, would cause the producer surplus created in the market to _____, and would cause the economic surplus created in the market to _____.
    1. remain unchaged   ;   remain unchanged   ;   remain unchanged
    2. rise   ;   remain unchanged   ;   remain unchanged
    3. rise   ;   fall   ;   remain unchanged
    4. rise   ;   fall   ;   rise
    5. rise   ;   fall   ;   fall

  14. Complete the following (unrelated) passages. (i) The (current or potential) existence of monopoly control over a market results in an inferior outcome when the relevant product _____ exist, but could result in a gain for society when the relevant product _____ exist. (ii) Consider a market-system economy, and focus on one particular market into which new firms are always able to enter. Suppose that there is an improvement in the industry's technology -- a rise in productivity -- that has the effect of lowering the average cost of production for all (current and potential) firms. In the long run, those that will probably most benefit from the rise in productivity are the _____ of the good.
    1. does   ;   doesn't currently   ;   producers
    2. doesn't currently   ;   does   ;   producers
    3. does   ;   doesn't currently   ;   consumers
    4. doesn't currently   ;   does   ;   consumers

  15. A certain firm is (to at least some extent) a price setter, and it sells its product in two different markets. The elasticity of demand for the firm's product in Market A is 3; the elasticity of demand for its product in Market B is 5. The firm's marginal cost of producing the product is the same no matter in which market it sells. Which of the following pricing strategies should this firm use in order to maximize its profit? It should charge _____.  
    1. a higher price in Market A
    2. a higher price in Market B
    3. the same price (but one above marginal cost) in both markets
    4. a price equal to marginal cost in both markets
    5. a price equal to zero in both markets

  16. As in the previous question, assume that the elasticity of demand for a firm's product in a given market is 5. Assume also that the firm's Marginal Cost of producing its product is always $10. What price should the firm charge for its product in this market in order to maximize its profit?  
    1. $22.50
    2. $20
    3. $17.50
    4. $15.00
    5. $12.50

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