 # Economics Questions

## Question

Question 1
So long as a firm is enjoying increasing marginal returns, a one unit increase in output will cause marginal costs to ________ and total costs to ________.
a. increase; decrease
b. decrease; increase
c. decrease; decrease
d. increase; increase

Question 2
Fred is considering opening a ski shop in Colorado. Assume Fred will incur the following costs: building rent = \$100,000/year, inventory = \$250,000/year, energy = \$50,000/year, and labor (one clerk) = \$10,000/year. In addition, Fred's current income as a computer programmer is \$40,000 per year. Assuming Fred would earn \$460,000 in revenues, he could expect to earn:
a. an economic profit of \$10,000 per year.
b. an economic profit of \$50,000 per year.
c. an accounting profit of \$60,000 per year.
d. an accounting profit of \$10,000 per year.

Question 3
Scenario 3:
Total Product (Q): 0 1 2 3 4 5 6
Total Cost (TC): \$50 \$80 \$105 \$125 \$155 \$195 \$250
Refer to Scenario 3. The average variable cost of producing three units of output is:
a. \$75.
b. \$25.
c. \$41.67 (approximate).
d. \$15.

Question 4
Scenario 3:
Total Product (Q): 0 1 2 3 4 5 6
Total Cost (TC): \$50 \$80 \$105 \$125 \$155 \$195 \$250
Refer to Scenario 3. The marginal cost of producing the sixth unit of output is:
a. \$250.
b. \$200.
c. \$33.33 (approximate).
d. \$55.

Question 5
Scenario 3:
Total Product (Q): 0 1 2 3 4 5 6
Total Cost (TC): \$50 \$80 \$105 \$125 \$155 \$195 \$250
Refer to Scenario 3. The average total cost of 5 units of output is
a. \$29.
b. \$39.
c. \$10.
d. \$8.

Question 6
Scenario 3:
Total Product (Q): 0 1 2 3 4 5 6
Total Cost (TC): \$50 \$80 \$105 \$125 \$155 \$195 \$250
Refer to Scenario 3. Diminishing marginal returns are incurred when output is increased from:
a. 2 to 3 units of output.
b. 3 to 4 units of output.
c. 1 to 2 units of output.
d. 4 to 5 units of output.

Question 7
Assume a firm is currently producing 100 units of output, total fixed costs are \$10,000, and average variable costs are \$8. Based on this information we can conclude, with certainty, that the firm's:
a. total variable costs are \$8000.
b. marginal costs are \$8.
c. total costs are \$10,800.
d. average fixed costs are \$2.

Question 8
If a firm experiences constant returns to the variable input in the short run,
a. marginal cost will be less than average variable cost, but the two will become more equal as output increases.
b. marginal cost will be greater than average variable cost, but the two will become more equal as output increases.
c. marginal cost and average variable cost will be equal over the range of output in question.
d. marginal cost will be greater than average variable cost, and the difference between the two will become larger as output increases.

Question 9
Production functions A and B result in the same average total costs of production. However, production function A is twice as capital intensive as production function B. In this case, all else constant:
a. marginal costs will be higher in B than they will in A.
b. marginal costs will be higher in A than they are in B.
c. there is no way to say anything about the relative marginal costs of production in the two production functions without additional information.
d. because total costs are equal, marginal costs will be equal for the two production functions as well.

Question 10
Much of the empirical evidence on the behavior of costs for real-world firms suggests that:
a. average costs functions are U-shaped as suggested by economic theory. ALT: D
b. there is no relationship between the marginal and average variable costs of production.
c. for most firms, marginal costs are declining in the range in which the firms operate.
d. for many firms, marginal and average variable costs are constant over wide ranges of output.

Question 11
Assume a firm uses two inputs, capital and labor. All else constant, an increase in the price of labor would create an incentive for the firm to:
a. substitute labor for capital in its production function.
b. substitute capital for labor in its production function.
c. hire more capital and labor.
d. hire less capital while holding the amount of labor employed constant.

Question 12
A production method that relies on large quantities of machines and equipment and smaller quantities of labor is referred to as a:
a. technology-intensive method of production
b. variable-input-intensive method of production.
c. labor-intensive method of production.
d. capital-intensive method of production.

Question 13
Diseconomies of scale are illustrated by:
a. a flat long-run average cost curve.
b. an upward-sloping long-run average cost curve.
c. an upward-sloping short-run average total cost curve.
d. a downward sloping long-run average cost curve.

Question 14
The “minimum efficient scale” of operation in an industry is defined as:
a. the smallest number of firms that could effectively meet demand for an industry’s output.
b. the smallest plant size that can be operated by firms in the industry.
c. the scale of operation at which economies of scale are exhausted. ALT: B*
d. the scale of operation by firms in an industry that is least efficient.
*MES: “Smallest plant size at which minimum unit cost would be attained.” Sounds like B, but B says nothing about economies of scale. So C appears to be the best answer.

Question 15
The use of surveys of experts to estimate long-run production costs may be undermined by the fact that:
a. it is a time-consuming process.
b. it is dependent on the judgments of individuals closely connected with the industry.
c. reporting biases can occur.
d. all of the above. ALT: C

Question 16
Much of the research on the minimum efficient scale suggests that for many firms the LRAC curve is:
a. flat over a relatively large range of output levels.
b. upward sloping over the relevant range of output.
c. downward sloping over the relevant range of output.
d. U-shaped.

Question 17
Which of the following statements about production isoquants is correct?
a. They are usually concave to the origin.
b. They represent lower levels of output the farther they are from the origin.
c. They show all the combinations of two inputs that result in the same level of output.
d. They show all the combinations of two inputs that yield the same cost of production.

Question 18
For the simple case of a production function with two inputs in which the inputs are perfect complements, each isoquant is represented by:
a. a downward sloping straight line.
b. a line that forms a right angle.
c. a vertical line.
d. a horizontal line

Question 19
All else constant, an increase in the price of labor would cause the total amount of output that can be produced with a fixed amount of spending to ________. This would result in a movement to a ________ isoquant.
a. increase; higher
b. decrease; lower
c. increase; lower
d. decrease; higher

Question 20
If a market is perfectly competitive and is in long-run equilibrium, which of the following conditions does not hold?
a. Economic profit equals zero.
b. The value of the last unit of output produced is equal to the value of the resources used to produce it.
c. There is an incentive for additional firms to enter the market because existing firms are earning revenues in excess of the explicit costs of production.
d. Price is equal to the minimum long-run average cost of production.

Question 21
Assume there is a decrease in the market demand for a good sold by price-taking firms that are initially producing the profit-maximizing level of output. How will the market adjust over time?
a. Firms will exit the market, causing price to rise until losses are eliminated.
b. Firms will enter the market, causing price to fall until positive profits are eliminated.
c. Firms will exit the market, causing price to fall until positive profits are eliminated.
d. Firms will enter the market, causing price to rise until losses are eliminated.

Question 22
Assume a perfectly competitive firm is in long-run equilibrium and there is a decrease in market demand for the firm's output. Which of the following will occur?
a. Existing firms will raise price to cover the reduction in quantity demanded and maintain total revenue in the short run.
b. Market price will be above its original level.
c. Existing firms will reduce output in the short run.
d. Existing firms will maintain the original level of output, but they will shift their cost functions down in the short run.

Question 23
Assume that goods X and Y are substitutes and are produced in perfectly competitive markets. If there is a decrease in the supply of good X, which of the following will happen in the market for good Y in the long run?
a. Firms will enter, causing market price to fall.
b. Firms will exit, causing market price to rise.
c. Price will be higher at the new long-run equilibrium as a result of entry into the market.
d. The firms that were already in the industry will continue to earn positive economic profit.

Question 24
Assume that there is an improvement in the technology used by firms in a perfectly competitive industry that is initially in long-run equilibrium. In the short run this would cause:
a. no change in the firm's economic profit.
b. a decrease in the firm's economic profit.
c. cannot be determined with the information given.
d. an increase in the firm's economic profit.

Question 25
Assume goods X and Y are complements and are produced in perfectly competitive markets. All else constant, an increase in demand for good X would cause:
a. a decrease in the number of firms that produce good X.
b. a decrease in the number of firms that produce good Y.
c. an increase in the number of firms that produce good Y.
d. no effect on the number of firms that produce either good.

Question 26
Suppose a perfectly competitive firm is in long-run equilibrium and there is a decrease in demand. Suppose also that the firm operates in an industry in which the prices of productive inputs vary with the level of output, increasing when output increases and decreasing when output decreases. Which of the following will occur at the new long-run equilibrium?
a. Price will be lower than it was at the initial long-run equilibrium.
b. Price will be the same as it was at the initial long-run equilibrium.
c. Price will be higher than it was at the initial long-run equilibrium.
d. The industry supply function will shift to the right.

Question 27
The term "industry concentration:"
a. is a measure of how many firms produce the total output of an industry.
b. is a measure of how many customers purchase the total output of an industry.
c. refers to how capital or labor intensive a particular industry is.
d. refers to the degree of product differentiation in an industry.

Question 28
The elasticity of supply is measured by:
a. the percentage change in quantity supplied divided by the percentage change in quantity demanded.
b. the quantity supplied divided by price.
c. the change in quantity supplied divided by the change in price.
d. the percentage in quantity supplied divided by the percentage change in price.

Question 29
Assume the elasticity of of supply for a particular good has been estimated to equal 1.8. In this case, a 10 percent increase in product price would cause the quantity supplied to:
a. decrease by 18 percent.
b. decrease by 1.8 percent.
c. increase by 1.8 percent.
d. increase by 18 percent.

## Solution Preview

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Question 1
So long as a firm is enjoying increasing marginal returns, a one unit increase in output will cause marginal costs to ________ and total costs to ________.

The answer is option b. decrease; increase

Question 2
Fred is considering opening a ski shop in Colorado. Assume Fred will incur the following costs: building rent = \$100,000/year, inventory = \$250,000/year, energy = \$50,000/year, and labor (one clerk) = \$10,000/year. In addition, Fred's current income as a computer programmer is \$40,000 per year. Assuming Fred would earn \$460,000 in revenues, he could expect to earn:

The answer is option a. an economic profit of \$10,000 per year....

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