multiple choice questions

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Multiple-Choice Questions

1. The difference between the short-run and the long-run production function is:

a. three months or one business quarter.

b. the time it takes for firms to change all production inputs.

c. the time it takes for firms to change only their variable inputs.

d. more information is required to answer this question.

2. Which of the following statements about the short-run production function is true?

a. MP always equals AP at the maximum point of MP.

b. MP always equals zero when TP is at its maximum.

c. TP starts to decline at the point of diminishing returns.

d. When MP diminishes, AP is at its minimum point.

e. None of the above is true.

3. Assume a firm employs 10 workers and pays each $15 per hour. Further assume that the MP of the 10th worker is 5 units of output and that the price of the output is $4. According to economic theory, in the short run

a. the firm should hire additional workers

b. the firm should reduce the number of workers employed

c. the firm should continue to employ 10 workers.

d. more information is required to answer this question.

4. A firm using two inputs, X and Y, is using them in the most efficient manner when

a. MPX = MPY

b. PX = PY and MPX = MPY

c. MPX/PY = MPY/PX

d. MPX/MPY = PX/PY

5. Average fixed cost is

a. AC minus AVC

b. TC divided by Q

c. AVC minus MC

d. TC minus TVC

6. Diseconomies of scale can be caused by

a. the law of diminishing returns.

b. bureaucratic inefficiencies.

c. increasing advertising and promotional costs.

d. all of the above.

7. Which of the following cost relationship is not true?

a. AFC = AC – MC

b. TVC = TC – TFC

c. the change in TVC divided by the change in Q = MC

d. the change in TC divided by the change in Q = MC

8. When a firm produces at the point where MR = MC, and the price of its product is higher that the cost per unit, the profit that it is earning is considered to be

a. maximum

b. normal

c. above normal

d. below normal

9. Which of the following is not characteristic of perfect competition?

a. A differentiated product

b. No barriers to entry

c. Large number of buyers

d. Complete knowledge of market price

10. Suppose a firm is currently maximizing its profits (i.e., following the MR = MC rule). Assuming that it wants to continue maximizing its profits, if its fixed costs increase, it should

a. maintain the same price

b. raise its price

c. lower its price

d. not enough information to answer this question

11. Which of the following is true about a monopoly?

a. Its demand curve is generally less elastic than in more competitive markets.

b. It will always earn economic profit.

c. It will charge the highest possible price.

d. It will always be subject to government regulations.

12. If an oligopolistic firm decides to raise its price,

a. other firms will automatically follow.

b. none of the other firms will follow.

c. other firms may follow if it is the price leader.

d. None of the above.

13. If nothing else changes, an increase in fixed cost will

a. decrease the break-even quantity point.

b. increase the break-even quantity point.

c. will have no effect on the break-even point.

d. may either increase or decrease the break-even point.

14. The degree of operating leverage can be defined as

a. the change in profit for a $1 change in quantity.

b. the change in quantity for a $1 change in profit.

c. the percentage change in quantity for a given percentage change in profit.

d. the percentage change in profit for a given percentage change in quantity/sales.

15. If a company wants to break-even at 20,000 units, its variable cost per unit is $3, and its fixed cost per period is $40,000, its selling price per unit will have to be

a. $5

b. $5.50

c. $6

d. $6.50

16. For a given percentage change in sales, the higher the degree of operating leverage,

a. the higher will be the percentage change in profit.

b. the lower will be the percentage change in profit.

c. the higher will be the absolute change in profit.

d. the lower will be the absolute change in profit.

17. Prices under an ideal cartel situation will be equal to

a. monopoly prices.

b. competitive prices.

c. prices under monopolistic competition.

d. marginal cost.

18. Barometric price leadership exist when

a. one firm in the industry initiates a price change and the other may or may not follow.

b. one firm imposes its best price on the rest of the industry.

c. all firms agree to change prices simultaneously.

d. one company forms a price umbrella for all others.

19. When state universities charge higher tuition fees to out-of-state students than to local students, the universities are practicing

a. first-degree discrimination.

b. second-degree discrimination.

c. third-degree discrimination.

d. fourth-degree discrimination.

20. If a product which costs $8 is sold at $10, the mark-up is

a. $2.

b. 25 %.

c. 20 %.

d. impossible to determine.

Short-Answer Questions

21. What are the major sources of risk for the firm?

22. Savings accounts pay very low rates of interest. The average return on the stock market is about 10-12 %, in the long run. Why would anyone put money into a savings account?

23. Why do cartels tend to break?

24. Why would a firm choose to remain in the industry in which it makes an economic profit of zero?

25. The following matrix shows the payoffs for advertising game between Coke and Pepsi.  The firms can choose to advertise or to not advertise.  Number in the matrix represent profits; the first number in each cell is the payoff to Coke. (Numbers in millions.) 

Advertise

Don’t Advertise

Coke (rows)/Pepsi (columns)		Advertise		Don’t Advertise
(10, 10)	(500, -50)
(-50, 500)	(100, 100)

· Explain why this would be describes as a Prisoner’s Dilemma game.

· Explain the probable outcome of this game.

26. When an automaker begins offering low cost financing or rebates, others tend to do the same. What two oligopoly models might offer an explanation of this behavior?

27. Fast-food restaurants tend to cluster together. That is, on one corner, there might be four similar fast-food restaurants. How can this be explained using a location game theory model?

28. Would it ever make sense for a firm to charge a price at or below the cost of the product?

29. McDonald’s charges a higher price for a Big Mac in New York City than it does in a small town in Iowa.  Is this an example of third-degree price discrimination?  Explain.

30. What additional sources of risk come from international investments?

Extra-Credit Question

A firm in an oligopolistic industry has the following demand and total cost equations:

P = 600 – 20Q

TC = 700 + 160Q + 15Q2

Calculate:

a. quantity at which profit is maximized.

b. maximum profit.

c. quantity at which revenue is maximized.

d. maximum revenue.

e. maximum quantity at which profit will be at least $580.

f. maximum revenue at which profit will be at least $580.