Midterm from 2003


AED Economics 200 Principles of Food and Resource Economics Spring 2004

Second Midterm Examination from 2003

1. As a percentage of U.S. firms, which type of business firm is most common?

a.	Proprietorships
b.	Partnerships
c.	Corporations
d.	nonprofit organizations

2. Unlimited liability is one of the disadvantages of

a.	partnerships.
b.	corporations.
c.	proprietorships.
d.	partnerships and proprietorships.

3. The term "double taxation" means that both the

a.	sales and the income of a corporation are taxed.
b.	value of the stock and the dividends paid to the stockholders are taxed.
c.	income of a corporation and the dividends it pays to its stockholders are taxed.
d.	sales of a corporation and the dividends the corporation pays its stockholders are taxed.

4. Which of the following statements is true?

a.	Costs are always explicit, never implicit.
b.	Costs are always implicit, never explicit.
c.	George runs a stationery shop; he paid Frank $5,000 for the carpet he installed in the shop. The $5,000 for carpet is an implicit cost.
d.	An implicit cost is a cost that represents the value of resources used in production for which no actual monetary payment is made.
e.	none of the above

5. Economic profit is the difference between total revenue and

a.	explicit costs.
b.	implicit costs.
c.	sunk costs.
d.	the sum of explicit and implicit costs.

6. Joe is the owner-operator of Joe's Haircuts Unlimited. Last year he earned $100,000 in total revenues and paid $65,000 to his employees and suppliers. During the course of the year, he received three offers to work for other barbers, with the highest offer being $40,000 per year. What are Joe's economic profits?

a.	$0
b.	$25,000
c.	-$5,000
d.	$40,000
e.	$35,000

7. If a firm earns normal profit, then it has generated revenues

a.	equal to the sum of implicit and explicit costs.
b.	greater than total opportunity costs.
c.	sufficient to cover explicit costs, but not implicit costs.
d.	sufficient to cover implicit costs, but not explicit costs.

8. Which of the following statements is true?

a.	The short run is always somewhere between six and twelve months.
b.	In the short run, changes in output can only be brought about by a change in the quantity of variable inputs.
c.	The long run is any period of time over one year.
d.	In the short run, there are variable costs but no fixed costs.
e.	b and d

9 Which of the following statements is false?

a.	Since (total) fixed costs are constant as output changes in the short run, it follows that average fixed cost is constant in the short run.
b.	Marginal cost is the cost of producing an additional unit of output.
c.	Changes in variable costs are reflected dollar-for-dollar in total cost.
d.	a and b
e.	a, b, and c

10. "As additional units of a variable input are added to a fixed input, eventually the marginal physical product of the variable input will decline." This is a statement of the

a.	law of supply.
b.	average-marginal rule.
c.	law of diminishing marginal utility.
d.	law of diminishing marginal returns.

11. A rising marginal cost curve is a reflection of a

a.	rising marginal physical product curve.
b.	falling marginal physical product curve.
c.	falling average fixed cost curve.
d.	rising average variable cost curve.

Exhibit 8-1

(1)	(2)	(3)	(4)
Variable Input	Fixed Input	Quantity of Output	MPP of Variable Input
0	1	0
1	1	20	A
2	1	41	B
3	1	63	C
4	1	86	D
5	1	108	E
6	1	129	F

12. Refer to Exhibit 8-1. The numbers that go in blanks A and B are, respectively,

a.	20 and 22.
b.	0 and 21.
c.	20 and 61.
d.	1 and 2.
e.	20 and 21.

13. Refer to Exhibit 8-l. The numbers that go in blanks C and F are, respectively,

a.	22 and 21.
b.	20 and 22.
c.	23 and 24.
d.	22 and 20.
e.	none of the above

14. Refer to Exhibit 8-1. Diminishing marginal returns set in with the addition of which unit of the variable input?

a.	the fourth
b.	the fifth
c.	the sixth
d.	the second

15. Suppose a given marginal cost curve starts out downward sloping and at some point turns upward. The point at which it turns upward is the point at which

a.	marginal physical product increases.
b.	total cost rises.
c.	average fixed cost declines.
d.	average variable cost is below marginal cost.
e.	diminishing marginal returns set in.

16 If the wage rate is constant and diminishing marginal returns have already set in, then

a.	the wage rate must increase.
b.	marginal cost increases.
c.	marginal cost decreases.
d.	the wage rate must decrease.

17. The marginal cost curve cuts the ____________ curve at its lowest point.

a.	average variable cost
b.	average total cost
c.	average fixed cost
d.	a and b
e.	a, b, and c

Exhibit 8-2

(1)	(2)	(3)	(4)	(5)
Variable Input	Price per Variable Input	Total Fixed Cost	Output	Marginal Cost
1	$10	$100	20
2	$10	$100	21	A
3	$10	$100	23	B
4	$10	$100	26	C
5	$10	$100	28	D

18. Refer to Exhibit 8-2. The dollar amounts that go in blanks C and D are, respectively,

a.	$10.00 and $1.00.
b.	$10.00 and $3.33.
c.	$5.00 and $10.00.
d.	$10.00 and $10.00.
e.	$3.33 and $5.00.

19. Refer to Exhibit 8-2. Diminishing marginal returns set in with the addition of which unit of the variable input?

a.	the first
b.	the second
c.	the third
d.	the fourth
e.	the fifth

20. Refer to Exhibit 8-2. The dollar amounts that go in blanks A and B are, respectively,

a.	$10.00 and $3.33.
b.	$10.00 and $5.00.
c.	$10.00 and $10.00.
d.	$1.00 and $5.00.
e.	$2.00 and $10.00.

21. Refer to Exhibit 8-2. What is the average total cost of producing 28 units of output?

a.	$0.26
b.	$16.92
c.	$4.23
d.	$5.36

22. A "price taker" is a firm that

a.	does not have the ability to control the price of the product it sells.
b.	does have the ability, although limited, to control the price of the product it sells.
c.	can raise the price of the product it sells and still sell some units of its product.
d.	sells a differentiated product.
e.	none of the above

23. In the theory of perfect competition,

a.	the market demand curve is horizontal.
b.	the single firm's demand curve is horizontal.
c.	the single firm's demand curve is downward sloping.
d.	a and b
e.	a and c

24. Marginal revenue is

a.	total revenue divided by the quantity of output.
b.	total profit minus total costs.
c.	the change in total output brought about by using an additional unit of a variable input.
d.	the change in dollar receipts brought about by selling an additional unit of the good.
e.	the change in total revenue minus the change in total costs.

25. If MR > MC, then

a.	profits will be at their maximum.
b.	the firm is producing too much of the good to be maximizing profits.
c.	the firm can increase its profits or minimize its losses by increasing output.
d.	the firm is necessarily incurring losses.

26. If an industry is in long-run competitive equilibrium and experiences a decrease in demand, then as a result the equilibrium price will _________, which will cause the representative firm's _________ curve to shift downward and some firms will _________ the industry.

a.	rise; marginal cost; enter
b.	fall; marginal cost; enter th
c.	rise; marginal revenue; enter
d.	fall; demand; exit
e.	fall; marginal cost; exit

27. As firms exit an industry, the industry supply curve shifts _________ and the equilibrium price _________ until long-run competitive equilibrium is established and the surviving firms are earning ________ economic profits.

a.	leftward; rises; zero
b.	leftward; falls; positive
c.	leftward; rises; positive
d.	rightward; falls; negative
e.	rightward; rises; positive

Exhibit 9-9

28. Refer to Exhibit 9-9. Suppose that the market starts at its long-run competitive equilibrium (P₁, Q₁), and that demand increases from D₁ to D₂. As a consequence, the typical profit-maximizing firm will

a.	increase quantity produced by q₃ - q₂.
b.	decrease quantity produced by q₂ - q₁.
c.	decrease quantity produced by q₁ - q₃.
d.	not change its output level because the demand curve it is facing did not change.

29. Refer to Exhibit 9-9. Following an increase in market demand from D₁ to D₂, the firm's profits in the short run will

a.	remain the same at P₁ times q₁.
b.	remain the same at zero.
c.	increase by less than (P₂ - P₁) times q₂.
d.	increase by (P₂ - P₁) times q₃.

30. Refer to Exhibit 9-9. Assume that demand increases from D₁ to D₂; in the new long run equilibrium, price settles at a level between P₁ and P₂ This means that the industry in question is a(n) ________-cost industry.

a.	decreasing
b.	increasing
c.	constant
d.	marginal
e.	Low

31. Which of the following is an assumption of the theory of monopoly?

a.	There are extremely high barriers to entry.
b.	There are many sellers.
c.	The product has a number of close substitutes.
d.	The product is of extremely high quality.

32. The theory of monopoly assumes that the monopoly firm

a.	faces a downward-sloping supply curve that is the same as its marginal revenue curve.
b.	faces a downward-sloping demand curve.
c.	produces more than the perfectly competitive firm under identical demand and cost conditions.
d.	experiences low barriers to entry.
e.	none of the above

33. If economies of scale are so pronounced in an industry that only one firm can survive in the industry, this firm is called a(n) _________ monopoly.

a.	financial
b.	natural
c.	structured
d.	Independent

34. If a monopolist wishes to sell an additional unit of the good, then

a.	it must raise its price to signal consumers that its product is now a more important part of their budget, and they will purchase more.
b.	like a competitive firm, it can simply make more output available and not lower price.
c.	it must lower price.
d.	it can raise price and not worry that sales will decrease.
e.	a and d

Exhibit 10-2

35. Refer to Exhibit 10-2. The monopolist is maximizing profits at

a.	Q₀ units and charging a price of P_0.
b.	Q₀ units and charging a price of P_1.
c.	Q₀ units and charging a price of P₃.
d.	Q₀ units and charging a price of P₂.
e.	none of the above

36. Refer to Exhibit 10-2. Total revenue at the profit-maximizing quantity of output is the

a.	area 0Q₀AP₀.
b.	area 0Q₀FP₃.
c.	distance from Q₀ to A.
d.	distance from Q₀ to D.
e.	none of the above

37. Refer to Exhibit 10-2. The monopolist is operating at

a.	a zero economic profit.
b.	a positive economic profit.
c.	an economic loss.
d.	a normal profit.

38. Refer to Exhibit 10-2. This monopolist is earning

a.	an economic loss of area P₂CFP₃.
b.	an economic loss of area P₀ACP₂.
c.	an economic profit of area P₂CFP₃.
d.	an economic profit of area P₀ACP₂.

39. In a monopolistically competitive industry,

a.	each firm in the industry produces a slightly differentiated product.
b.	there are barriers to entry.
c.	there are barriers to exit.
d.	there are few sellers.

40. The monopolistic competitor faces a _________ demand curve.

a.	horizontal
b.	vertical
c.	downward-sloping
d.	upward-sloping

41. In long-run equilibrium, the monopolistic competitor will most likely

a.	be earning zero economic profit.
b.	be operating at the lowest point on its average total cost curve.
c.	be able to sell all it produces at the current price.
d.	charge a price that is equal to marginal cost.

42. A concentration ratio indicates the

a.	number of firms in an industry.
b.	number of large firms in an industry compared to the number of large firms in another related industry.
c.	percentage of total sales accounted for by the (for example) four largest firms.
d.	percentage of sellers in an industry relative to the number of buyers.
e.	percentage of sellers in an industry protected by barriers to entry relative to the number of sellers that wish to enter.

43. Total industry sales are $20 million. The top four firms, A - D, account for sales of $2 million, $1.2 million, $0.8 million and $0.5 million, respectively. What is the four-firm concentration ratio?

a.	0.225
b.	0.45
c.	0.60
d.	0.056
e.	none of the above

44. A cartel is an organization of firms

a.	dominated by one firm, which is usually referred to as the price leader.
b.	that attempts to increase total (or industry) demand for their product.
c.	that reduces output and increases price in an effort to increase joint profits.
d.	that deliberately attempts to disrupt the market for political reasons.

45. Antitrust law is legislation passed for the stated purpose of

a.	reducing the profits of chain stores.
b.	promoting U.S. banking practices in foreign countries.
c.	controlling labor union practices in the states of New York, California, and Texas.
d.	controlling monopoly power and preserving and promoting competition.
e.	none of the above

46. If government regulators want a natural monopolist to earn only zero economic profits, then they will set a price

a.	equal to average total cost (ATC).
b.	equal to marginal cost.
c.	such that marginal revenue equals marginal cost.
d.	none of the above

47. In the Microsoft antitrust case

a.	the issue of relevant market did not come up.
b.	Microsoft argued that it competed in a broad market, while the government claimed the relevant market was a monopolized narrow one.
c.	Microsoft argued that it operated in a narrow, but competitive, market, while the government claimed that the relevant market was the broad monopolized market for computer software of all kinds.
d.	both Microsoft and the government argued that the market was a narrow one, but did not agree on whether it was monopolized.

48. Agricultural price supports refer to

minimum prices set by the government on certain farm products.

maximum prices set by the government on certain farm products.

supply-restricting policies imposed by the government on certain farm products.

b and c

none of the above

49. If deficiency payments are combined with a target price that exceeds the competitive-equilibrium price, then

The price at which farmers actually sell output will exceed the competitive-equilibrium price and the amount they produce will exceed competitive-equilibrium output.

The price at which farmers actually sell output will be lower than the competitive-equilibrium price and the amount they produce will exceed competitive-equilibrium output.

The price at which farmers actually sell output will exceed the competitive-equilibrium price and the amount they produce will be less than competitive-equilibrium output.

The price at which farmers actually sell output will be lower than the competitive-equilibrium price and the amount they produce will be less than competitive-equilibrium output.

50. During much of this century, agricultural product prices have

Risen relative to other prices.

Fallen relative to other prices.

Neither risen nor fallen relative to other prices.

Risen as agricultural productivity increased.

Answers

MULTIPLE CHOICE

1.    ANS:        A

2.    ANS:        D

3.    ANS:        C

4.    ANS:        D

5.    ANS:        D

6.    ANS:        C

7. ANS: A

8. ANS: B

9. ANS: A

10. ANS: D

11. ANS: B

12. ANS: E

13. ANS: A

14. ANS: B

15. ANS: E

16. ANS: B

17. ANS: D

18. ANS: E

19. ANS: E

20. ANS: B

21. ANS: D

22. ANS: A

23. ANS: B

24. ANS: D

25. ANS: C

26. ANS: D

27. ANS: A

28. ANS: A

29. ANS: C

30. ANS: B

31. ANS: A

32. ANS: B

33. ANS: B

34. ANS: C

35. ANS: C

36. ANS: B

37. ANS: B

38. ANS: C

39. ANS: A

40. ANS: C

41. ANS: A

42. ANS: C

43. ANS: A

44. ANS: C

45. ANS: D

46. ANS: A

47. ANS: B

48. ANS: A

49. ANS: B

50. ANS: B

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