1. You may
use only a calculator, pencils and pens.
2. You will
be given TWO chances to complete the exam.
4. Please read
the paragraph below:

I have read and understand the policies relating to
cheating in the classroom and on exams.
I understand that if caught cheating I will automatically receive a zero
for this assignment. I also understand
if caught with my cell phone on, I will receive a zero for this assignment and
will have to retake the test at some later time.


I. Matching (3 Points Each)

____Economies of
____Short Run

____Opportunity Cost
____Price Taker
____Sunk Cost
of Scale
____Total Cost
____Barriers to

A. The cost of changing the level of output
by one unit.
B. A
period of time when a firm is unable to change all of its factor inputs.
C. A
firm facing the entire market demand curve is in what industry?
D. Any conditions that prevent other firms
from entering a market.
E. Sum
of fixed costs and variable costs.
F. Firm or individual who takes the market
price as given.
G. The foregone benefit of the next-best
H. A
decrease in per-unit cost as a result of an increase in output.
I. The
added revenue from selling an additional unit of output.
J. A
cost that has already been paid and cannot be recovered.
K. Point
at which the firm will gain more by ceasing operations than it will by staying
in business.
L. Technological
conditions under which long-run average cost increases as output increases.

Part II. Multiple Choice (5 Points Each)

1. The costs of a firm
that are paid directly in money are called
___ a. explicit
___ b. implicit
___ c. opportunity
___ d. alternative

2. The firm is producing
an output of 24 and has total costs of 260.
Its average total cost
___ a. Equals
___ b. Equals
___ c. Equals 260.
___ d. Cannot
be determined from the information.

3. Average total costs
are total costs
___ a. per unit of output.
___ b. divided by fixed costs.
___ c. divided by variable costs.
___ d. per unit of labor.

4. In perfect
competition, the marginal revenue of an individual firm
___ a. is zero.
___ b. is positive but less than the price of the product.
___ c. equals the price of the product.
___ d. exceeds
the price of the product.


Quantity Sold Price
5 $15
6 $15
7 $15

5. In
Table 1, if the firm sells 5 units of output, its total revenue is
___ a. $15.
___ b. $30.
___ c. $75.
___ d. $90.

6. Price
in a competitive market is $6. The
firm’s marginal cost is $4 and the marginal cost curve has the normal
shape. What would you advise the firm to
a. Raise
its price.
b. Increase
its output.
___ c. Decrease its output.
d. Lower
its price.


Output Total Revenue Total Cost
0 $ 0 $
1 $ 30 $ 49
2 $ 60 $ 69
3 $ 90 $ 91
4 $120 $117

7. In
Table 2, if the firm produces 2 units of output, it will make an economic
a. profit
of $9.
b. profit
of $60.
___ c. loss of $9.
___ d. loss of $60.

8. In
a competitive market which of the following is the firm’s supply curve?
___ a. The average cost curve.
___ b. The marginal cost curve.
c. The
average variable cost curve.
___ d. The average revenue curve.

9. The
average cost of making 10 cakes is $2.80.
The average cost of making 11 cakes is $3.00. The marginal cost of the 11th cake is:
___ a. $0.20.
___ b. $2.00.
___ c. $3.00.
d. $5.00.

10. If
a firm’s production process exhibits constant returns to scale for all levels
of output, then the firm’s long-run average cost will be:
___ a. horizontal.
___ b. positively
___ c. negatively
d. U-shaped.
11. A
firm in a perfectly competitive market has no control over price because:
___ a. the
government imposes price ceilings on the products produced in perfectly
competitive industries.
___ b. there
are only a few firms in the industry.
___ c. each
firm is producing an identical good.
d. the
market demand for products produced is perfectly elastic.

12. Which of the following is not a
basic characteristic of pure competition?
a. considerable nonprice
b. no barriers to the entry or
exodus of firms
c. a standardized or
homogeneous product
d. a large number of buyers
and sellers

13. Pure monopoly means:
a. any market wherein the
demand curve to the firm is downsloping.
b. a standardized product
being produced by many firms.
c. a single firm producing a
product for which there are no close substitutes.
___ d. a
large number of firms producing a differentiated product.

14. Price discrimination refers to:
a. selling a given product for
different prices at two different points in time.
___ b. any price above that which is equal
to a minimum average total cost.
c. the difference between the
prices a purely competitive seller and a purely monopolistic seller would
d. the selling of a given
product at different prices which do not reflect cost differences.

15. Monopolistic
competition is characterized by:
a. few dominant firms and low
entry barriers.
b. large number of firms and
substantial entry barriers.
c. large number of firms and
low entry barriers.
___ d. few dominant firms and substantial
entry barriers.

16. Monopolistic
competition means:
a. a market situation wherein competition
is based entirely on product differentiation and advertising.
b. a large number of firms
producing a standardized or homogeneous product.
c. many firms producing
differentiated products.
___ d. a few firms producing a standardized
or homogeneous product.

17. A monopolistically competitive industry
combines elements of both competition and monopoly. It is correct to say that the competitive
element results from:
a. product differentiation and
the monopolistic element from high entry barriers.
b. a relatively large number
of firms and the monopolistic element from product differentiation.
c. a perfectly elastic demand
curve and the monopolistic element from low entry barriers.
d. a highly inelastic demand
curve and the monopololistic element from advertising and product promotion.

18. In
the long run new firms will enter a monopolistically competitive industry:
___ a. provided economies of scale are
being realized.
___ b. even though losses are incurred in the short run.
c. until minimum average total
cost is achieved.
___ d. until economic profits are zero.

19. Monopolistically
competitive firms:
___ a. realize normal profits in the short
run but losses in the long run.
___ b. tend to endure persistent losses in both the short run
and long run.
c. may realize either profits
or losses in the short run, but tend to realize a normal profit in the long
___ d. persistently realize economic profits in the short run
and long run.

20. When suppliers are rent-seeking they
a. use the present value
formula to determine what the values of flows of money are.
b. use the present value
formula to determine the value of annuities.
c. attempt to restrict supply
to increase the price they get.
d. attempt to tax land.

Part III. (8 Points Each)

1. What
are the assumptions of perfect competition?

2. Where
does the marginal cost curve intersect the average total cost and average
variable cost curves? Explain why the
relationship between marginal cost and average costs determines the firm’s
profits and the firm’s shutdown point.

Part IV. Complete the following table (18 Points):

Price Quantity Demanded Total Revenue Marginal Revenue

20 0 ____________
18 2 ____________
16 4 ____________
14 6 ____________
12 8 ____________

Part V. Matching (3 Points Each)

____Zero Profit
____Market Models or
Market Structure
____Game Theory


well-known game that nicely demonstrates the difficulty of cooperative behavior
in certain circumstances. It involves
two people and their affinity to cheat.A
box that contains the outcomes of a strategic game under various circumstances..0pt;=””>A
market structure with a few independent firms..0pt;=””>A
market structure in which many firms sell differentiated products.The
general term for the physical characteristics of the market within which firms
name for the application of economic principles to interdependent situations..0pt;=””>In
the long run, there are no economic profits.A
combination of firms that act like a single firm..0pt;=””>The
general term for an agreement between two or more producers to restrict output
so as to increase prices and profits.To
charge different prices to different individuals.



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