Sample Questions for Quiz 4

Costs of Production and Economic Profits

Let TR be total revenue, TC be total costs, and Q be quantity produced.

  1. Economics Profits is defined as
  1. TR-TC
  2. TR+TC
  3. TC-TR
  4. None of the above.
  1. The difference between economic and accounting profits is
  1. Total revenue is higher for economic profits.
  2. Total costs include opportunity costs for economic profits
  3. Total costs do not include fixed costs for accounting profits.
  4. None of the above
  1. Total cost is equal to fixed costs plus variable costs.
  1. True
  2. False
  1. Which of the following is average total cost
  1. ATC = TC/TR
  2. ATC = TR/Q
  3. ATC = TC/Q
  4. None of the above
  1. Average variable cost is always less than average total cost.
  1. True
  2. False
  1. Marginal cost is defined as
  1. The change in total cost when quantity produced increases by one.
  2. The change in fixed cost when quantity produced increases by one.
  3. The change in total revenue when quantity produced increase by ohe.
  4. None of the above
  1. Marginal cost rises as quantity rises because of the law of diminishing returns.
  1. True
  2. False
  1. If marginal cost is equal to average cost, then the average cost must be at its lowest point.
  1. True
  2. False

Consider the graph below when answering questions 9 – 11.

  1. Which curve is the average total cost curve?
  1. Curve A
  2. Curve B
  3. It does not appear in the graph.
  1. Which curve is the marginal cost curve?
  1. Curve A
  2. Curve B
  3. It does not appear in the graph
  1. At which quantity is average cost at the lowest point?
  1. Q1
  2. Q2
  3. Q3
  4. None of the above

Perfect Competition

  1. Which of the following are the assumptions of the perfect competition model?
  1. Many sellers and buyers
  2. Each seller is selling identical goods
  3. Free entry and exit of firms in the industry
  4. All of the above
  1. The assumptions of the perfect competition model imply
  1. Each firm can charge the price it wants
  2. Each firm takes the market price as given
  3. Each firm must have zero profits at all time
  4. None of the above
  1. The goal of the firm is to maximize profits. Profits are maximized by producing the quantity where
  1. Total revenue equal total cost
  2. Marginal revenue equals average cost
  3. Marginal revenue equals marginal cost
  4. Marginal revenue equals average revenue
  1. In the short-run the number of firms in the industry is fixed.
  1. True
  2. False
  1. In the long-run the number of firms in the industry will ______if economic profits are positive.
  1. Increase
  2. Decrease
  3. Remain constant
  4. All the Above
  1. A long-run equilibrium occurs when economic profits are
  1. Positive
  2. Negative
  3. Zero
  4. All the above
  1. If the market price is equal to the average total cost, then economic profits are
  1. Positive
  2. Negative
  3. Zero
  4. None of the above
  1. For each graph below, identify the profit maximizing quantity and whether profits are positive, negative, or zero.
  1. The short-run supply curve in a competitive market is the summation of the individual firm’s marginal cost curves.
  1. True
  2. False
  1. Suppose demand rises. Then in the short-run
  1. Price rises
  2. The number of firms in the industry is constant
  3. Firms will earn positive economic profits.
  4. All the above
  1. After the demand increase, in the long-run one would expect
  1. The number of firms to increase
  2. Price to continue to increase
  3. Profits to rise more
  4. All the above
  1. A constant cost industry is an industry for which the ATC curve does not shift as the industry output expands or contracts.
  1. True
  2. False
  1. An increasing cost industry is an industry for which the ATC curve will shift as industry output expands or contracts.
  1. True
  2. False
  1. For a constant cost industry, the long-run supply curve is
  1. Downward sloping
  2. Upward sloping
  3. A flat line, at the minimum of the ATC curve
  4. All the above
  1. For an increasing cost industry, the long-run supply curve is
  1. Upward sloping
  2. Downward sloping
  3. A flat line, at the minimum of the ATC curve
  4. None of the above

SOLUTIONS

1. a / 8. a / 15. a / 22. a
2. b / 9. b / 16. a / 23. a
3. a / 10. a / 17. c / 24. a
4. c / 11. b / 18. c / 25. c
5. a / 12. d / 19. see below / 26. a
6. a / 13. b / 20. a
7. a / 14. c / 21. d

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