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Microeconomics Final Practice

STUDY
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Jacquelyn is a student at a major state university. Which of the following is not an example of an explicit cost of her attending college?
A. tuition
B. textbooks
C. the salary that she could have earned working full-time
D. computer lab fees
the salary that she could have earned working full-time
The implicit cost of capital is:
A. the expense associated with leasing machines.
B. the expense associated with buying machines.
C. the opportunity cost of capital used by a business.
D. irrelevant for determining economic profit.
the opportunity cost of capital used by a business.
Leroy starts a new business in his garage with Priscilla making scented candles. Which of the following would be considered explicit costs of this new business?
A. Leroy's salary as a welder, his former occupation.
B. the value of storing Leroy's boat in the garage
C. the cost of candle wax
D. Priscilla's income from her old job
the cost of candle wax
Krista sets up a business selling coffee from a coffee cart. She earns $10,000 in revenue a month. She incurs $2,000 per month in supplies (coffee cups, creamer, sugar, pastries, napkins and so on). Her cart and coffee makers depreciate at a rate of $1,200 annually. She used to earn $3,000 per month as a barista. The coffee cart is very specialized and has no other uses. What is Krista's economic profit per month?
A. $3,800
B. $4,900
C. $6,800
D. $7,900
4,900
If economic profit for a firm is negative:
A. the firm should exit the industry in the long run.
B. accounting profit must be negative.
C. the firm should stay in business so long as accounting profit is positive.
D. the firm will not owe any taxes to the government.
the firm should exit the industry in the long run.
During its only year of operation, a firm collected $175,000 in revenue and spent $50,000 on raw materials, labor, and utilities. The owners of the firm spent $100,000 of their own money to build the firm's factory (instead of buying bonds and earning a 10% rate of return), which they sold at the end of the year for $100,000. The firm's economic profit is:
A. $35,000.
B. $125,000.
C. $115,000.
D. $25,000.
115,000
Charges that must be paid for the use of factors of production such as labor and capital are:
A. explicit costs.
B. accounting profits.
C. implicit costs.
D. economic profits
explicit costs.
Profit computed using explicit costs as the only measure of costs is:
A. explicit profit.
B. accounting profit.
C. implicit profit.
D. economic profit
accounting profit.
Scenario: Accounting and Economic Profit
Rather than put the $100,000 that his grandmother left him in a mutual fund and earn 5% each year, Tommy Wang quit his job that paid $60,000 per year and used the $100,000 to start Wang's Wicker Furniture Store. He rented a showroom for $15,000 for the year, purchased $100,000 in capital equipment (an amount that depreciates $5,000 each year), purchased $60,000 in wicker furniture, and incurred costs of $40,000 for sales help and advertising. In his first year, his revenue was approximately $150,000.
Reference: Ref 16-01

(Scenario: Accounting and Economic Profit) The accounting profit of Wang's Wicker Furniture Store is:
A. $200,000.
B. $60,000.
C. $30,000.
D. $0.
30,000
Scenario: Accounting and Economic Profit
Rather than put the $100,000 that his grandmother left him in a mutual fund and earn 5% each year, Tommy Wang quit his job that paid $60,000 per year and used the $100,000 to start Wang's Wicker Furniture Store. He rented a showroom for $15,000 for the year, purchased $100,000 in capital equipment (an amount that depreciates $5,000 each year), purchased $60,000 in wicker furniture, and incurred costs of $40,000 for sales help and advertising. In his first year, his revenue was approximately $150,000.
Reference: Ref 16-01

(Scenario: Accounting and Economic Profit) What is the opportunity cost of Wang's $100,000 inheritance?
A. $0
B. $5,000
C. $10,000
D. $100,000
5,000
Scenario: Accounting and Economic Profit
Rather than put the $100,000 that his grandmother left him in a mutual fund and earn 5% each year, Tommy Wang quit his job that paid $60,000 per year and used the $100,000 to start Wang's Wicker Furniture Store. He rented a showroom for $15,000 for the year, purchased $100,000 in capital equipment (an amount that depreciates $5,000 each year), purchased $60,000 in wicker furniture, and incurred costs of $40,000 for sales help and advertising. In his first year, his revenue was approximately $150,000.
Reference: Ref 16-01

(Scenario: Accounting and Economic Profit) What are the implicit costs of Wang's Wicker Furniture Store?
A. $7,000
B. $60,000
C. $65,000
D. $69,000
$65,000
Scenario: Accounting and Economic Profit
Rather than put the $100,000 that his grandmother left him in a mutual fund and earn 5% each year, Tommy Wang quit his job that paid $60,000 per year and used the $100,000 to start Wang's Wicker Furniture Store. He rented a showroom for $15,000 for the year, purchased $100,000 in capital equipment (an amount that depreciates $5,000 each year), purchased $60,000 in wicker furniture, and incurred costs of $40,000 for sales help and advertising. In his first year, his revenue was approximately $150,000.
Reference: Ref 16-01

(Scenario: Accounting and Economic Profit) The economic profit of Wang's Wicker Furniture Store is:
A. $67,000.
B. $0.
C. -$20,000.
D. -$35,000.
-$35,000.
Profit is the difference between ________ and ________.
A. total sales; total revenues
B. total profits; total costs
C. total revenues; total costs
D. marginal costs; marginal revenues
total revenues; total costs
Another term for an economic profit of zero is:
A. accounting profit
B. normal profit
C. explicit cost
D. variable profit
normal profit
A cost that does not depend on the quantity of output produced is called a:
A. marginal cost.
B. fixed cost.
C. variable cost.
D. average cost.
fixed cost.
VC = 0 TC = 50

Reference: Ref 19-01

(Table: Cost Data) The table shows some cost data for a firm currently operating in the short run. What is the value of the total fixed cost for this firm?
A. $40
B. $50
C. $100
D. $70
50
If Marie Marionettes is operating under conditions of diminishing marginal product, the marginal costs will be:
A. equal to ATC.
B. decreasing.
C. increasing.
D. constant.
increasing
For every restaurant in Cleveland, the average total cost curve ________ at ________ levels of output, then ________ at ________ levels.
A. falls; low; rises; higher
B. rises; low; falls; higher
C. rises; higher; rises; low
D. falls; higher; falls; low
falls; low; rises; higher
If marginal cost is greater than average total cost, then:
A. average total cost is increasing.
B. average total cost is decreasing.
C. average total cost is unchanged.
D. marginal cost is decreasing.
average total cost is increasing.
If marginal cost is equal to average total cost, then:
A. average total cost is increasing.
B. average total cost is at its maximum.
C. average total cost is at its minimum.
D. marginal cost is increasing.
C. average total cost is at its minimum.
The long-run average total cost curve is tangent to an infinite number of:
A. short-run total cost curves.
B. short-run marginal cost curves.
C. short-run average variable cost curves.
D. short-run average total cost curves.
D. short-run average total cost curves.
When an increase in the firm's output reduces its long-run average total cost, it experiences:
A. economies of scale.
B. diseconomies of scale.
C. constant returns to scale.
D. variable returns to scale.
A. economies of scale.
The long-run average total cost of producing 100 units of output is $4, while the long-run average cost of producing 110 units of output is $4. These numbers suggest that the firm producing this output is experiencing:
A. economies of scale.
B. diseconomies of scale.
C. constant returns to scale.
D. diminishing returns.
C. constant returns to scale.
When an increase in the firm's output reduces its long-run average total cost, it experiences:
A. increasing returns to scale.
B. decreasing returns to scale.
C. constant returns to scale.
D. variable returns to scale.
A. increasing returns to scale.
Decreasing and increasing returns to scale account for the shape of the:
A. short-run average total cost curve.
B. short-run average variable cost curve.
C. long-run average total cost curve.
D. marginal cost curve in both the short run and the long run.
C. long-run average total cost curve.
On Saturday night you plan to attend a movie. You buy a ticket for $7 and then lose it. According to marginal analysis, you should:
A. go home.
B. buy another ticket and attend the movie.
C. buy another ticket and attend the movie only if your marginal benefit of seeing the movie is greater than $14.
D. look for the lost ticket.
B. buy another ticket and attend the movie.
Sunk costs:
A. affect economic profit.
B. are the losses associated with failed business ventures.
C. are an important component of marginal analysis.
D. are the same as fixed costs.
A. affect economic profit.
Market structures are categorized by the following two criteria:
A. the number of firms and the size of the firms
B. whether or not products are differentiated and the extent of advertising
C. the number of firms and whether or not products are differentiated
D. the size of the firms and the extent of advertising
C. the number of firms and whether or not products are differentiated
All except one of the following are characteristics of perfect competition. Which is the exception?
A. All firms produce the same standardized product.
B. There are many producers and each has only a small market share.
C. There are many producers; one firm has a 25% market share, and all the remaining firms have a market share of less than 2% each.
D. There are no obstacles to entry into or exit from the industry.
C. There are many producers; one firm has a 25% market share, and all the remaining firms have a market share of less than 2% each.
Which of the following is not a characteristic of a perfectly competitive industry?
A. Firms seek to maximize profits.
B. Profits may be positive in the short run.
C. There are many firms.
D. There are differentiated products.
D. There are differentiated products.
Price-takers are individuals in a market who:
A. select a price from a wide range of alternatives.
B. select the lowest price available in a competitive market.
C. select the average of prices available in a competitive market.
D. have no ability to affect the price of a good in a market.
D. have no ability to affect the price of a good in a market.
The perfectly competitive model assumes all of the following except:
A. a great number of buyers.
B. easy entry into and easy exit from the market.
C. complete information on the part of buyers and sellers.
D. that firms attempt to maximize their total revenue.
D. that firms attempt to maximize their total revenue.
Which of the following is a necessary condition for perfect competition?
A. A small number of firms control a large share of the total market.
B. Entry and exit into the market is limited.
C. Firms produce a standardized product.
D. Extensive advertising is used to promote the firm's product.
C. Firms produce a standardized product.
________ almost always take the market price as given, or are considered ________, but this is often not true of ________.
A. Consumers; quantity-minimizers; producers
B. Producers; quantity-takers; consumers
C. Consumers and producers; price-takers; firms that produce a differentiated product
D. Producers; price-searchers; consumers
C. Consumers and producers; price-takers; firms that produce a differentiated product
A monopoly is a market structure characterized by:
A. a single buyer and several sellers.
B. a product with many close substitutes.
C. a large number of small firms.
D. barriers to entry and exit.
D. barriers to entry and exit.
Compared to perfect competition:
A. monopoly produces more at a lower price.
B. monopoly produces where MR > MC, and a perfectly competitively firm produces where P = MC.
C. monopoly may have economic profits in the long run, but in perfect competition in the long run economic profits are zero.
D. perfect competition may have economic profits in the long run, but in monopoly the long run economic profits are zero.
C. monopoly may have economic profits in the long run, but in perfect competition in the long run economic profits are zero.
You own a lemonade stand in a very competitive lemonade market, and as such, you are a price-taking firm. Which of the following events would most likely increase your market share?
A. The government abolishes the system of patents and copyrights.
B. A booming economy increases the demand for lemonade and attracts entry into the market.
C. The average total cost curve for firms in the industry is horizontal.
D. You own exclusive rights to harvest lemons from all domestic citrus orchards.
D. You own exclusive rights to harvest lemons from all domestic citrus orchards.
The land you own has the only known source of aloe needed to make anti-itch lotion. In this case, your monopoly would result from which of the following?
A. government restrictions
B. location
C. sunk costs
D. ownership of inputs
D. ownership of inputs
Which of the following is true?
A. A monopoly firm is a price-taker.
B. MR > P if the demand curve is downward-sloping.
C. MR = MC is a profit-maximizing rule for any firm.
D. In monopoly P = MC when profits are maximized.
C. MR = MC is a profit-maximizing rule for any firm.
The demand curve for a monopoly is:
A. the sum of the supply curves of all the firms in the monopoly's industry.
B. the industry demand curve.
C. horizontal because no one can enter.
D. perfectly elastic.
B. the industry demand curve.
Which of the following is a barrier to entry?
A. control of scarce resources
B. economies of scale
C. government-created barriers such as patents and copyrights
D. control of scarce resources, economies of scale, and government-created barriers (i.e., patents and copyrights)
D. control of scarce resources, economies of scale, and government-created barriers (i.e., patents and copyrights)
An oligopoly knows that its ________ affect its ________ and that the ________ of its rivals will affect it.
A. actions; rivals; reactions
B. price changes; total revenue in a positive way; reactions
C. actions rarely; rivals; actions
D. price increases; total revenue in the long run only; large but not small price changes
A. actions; rivals; reactions
Which of the following scenarios best describes an oligopolistic industry?
A. A single cable company serves customers in a small town.
B. Thousands of soybean farmers sell their output in a global commodities market.
C. Coca-Cola and Pepsi sell most of the soft drinks consumed around the world.
D. A college has one bookstore selling textbooks to students.
C. Coca-Cola and Pepsi sell most of the soft drinks consumed around the world.
Assume an industry is dominated by a few firms. Each of these firms acknowledges that its own choices affect the choices of its rivals. Each firm also recognizes that its rivals' choices affect the decisions it makes. This industry is an example of a(n):
A. monopoly.
B. oligopoly.
C. monopolistic competition.
D. perfect competition.
B. oligopoly.
The sum of the squared market shares of each firm in an industry is the:
A. concentration ratio.
B. employment rate.
C. Herfindahl-Hirschman Index.
D. market number.
C. Herfindahl-Hirschman Index.
A monopoly will have a Herfindahl-Hirschman Index (HHI) equal to about:
A. 1.
B. 100.
C. 1,000.
D. 10,000.
D. 10,000.
The HHI for ________ where ________ have (has) ________ of the market is ________ .
A. monopolistic competition; four firms each; 25%; 10,000
B. oligopoly; three firms each; 50%; 5,000
C. oligopoly; two firms each; 50%; 5,000
D. monopoly; one firm; 100%; 100,000
C. oligopoly; two firms each; 50%; 5,000
Which of the following industries is most likely to be monopolistically competitive?
A. automobiles
B. fresh bagel shops
C. corn
D. an electric utility
B. fresh bagel shops
A monopolistically competitive industry such as baked goods and a perfectly competitive industry like wheat farming are alike in that:
A. firms in both types of industries produce identical products.
B. firms in both types of industries produce similar but not identical products.
C. barriers to entry in both industries are large.
D. there are many firms in each industry.
D. there are many firms in each industry.
In perfect competition:
A. a firm's total revenue is found by multiplying market price by the firm's quantity of output.
B. the firm's total revenue curve is a linear, downward-sloping line.
C. at any price, the greater the quantity sold, the greater is a firm's marginal revenue.
D. the firm's total revenue curve is nonlinear.
A. a firm's total revenue is found by multiplying market price by the firm's quantity of output.
Marginal revenue:
A. is the slope of the average revenue curve.
B. equals the market price in perfect competition.
C. is the change in quantity divided by the change in total revenue.
D. is the price divided by the change in quantity.
B. equals the market price in perfect competition.
If a perfectly competitive firm sells 30 units of output at a price of $10 per unit, its marginal revenue is:
A. $10.
B. more than $10.
C. less than $10.
D. $300.
A. $10.
Which of the following is true?
A. If price falls below average total cost, the firm will stop producing in the short run.
B. Price and marginal revenue are the same in perfect competition.
C. Economic profit per unit is found by subtracting AVC from price.
D. Economic profit is always positive in the short run.
B. Price and marginal revenue are the same in perfect competition.
Firms in the model of perfect competition will:
A. maximize total revenue by using the marginal decision rule.
B. increase output up to the point that the marginal benefit of an additional unit of output is greater than the marginal cost.
C. increase output up to the point that the marginal benefit of an additional unit of output is equal to the marginal cost.
D. always attempt to minimize average variable cost.
C. increase output up to the point that the marginal benefit of an additional unit of output is equal to the marginal cost.
Consider the following data for a perfectly competitive firm: price is $9, output is 30 units, and average total cost is $7. The firm's profits are equal to:
A. $60.
B. $270.
C. $2.
D. $210.
A. $60.
Firms will make a profit in the long run or short run if price is:
A. equal to marginal revenue.
B. greater than ATC.
C. less than MC.
D. greater than AVC.
B. greater than ATC.
If a perfectly competitive firm is producing a quantity that generates MC > MR, then profit:
A. is maximized.
B. can be increased by increasing production.
C. can be increased by decreasing production.
D. can be increased by decreasing the price.
C. can be increased by decreasing production.
Which of the following is true?
A. A monopoly firm is a price-maker.
B. MR = P if the demand curve is downward-sloping.
C. MR = MC is a profit-maximizing rule for firms in perfect competition only.
D. Monopolies tend to charge lower prices than perfectly competitive firms.
A. A monopoly firm is a price-maker.
The demand curve for a monopoly is:
A. above the marginal revenue curve.
B. below the marginal revenue curve.
C. horizontal due to economics of scale.
D. infinitely elastic.
A. above the marginal revenue curve.
The practice of charging different prices to different customers for the same good or service even though the cost of supplying those customers is the same is:
A. privatization.
B. monopolization.
C. output competition.
D. price discrimination.
D. price discrimination.
monopolist or an imperfectly competitive firm practices price discrimination primarily to:
A. increase profits.
B. expand plant size.
C. lower total costs.
D. reduce marginal costs.
A. increase profits.
An industry with two firms producing is generally called:
A. a monopoly.
B. monopolistic competition.
C. a duopoly.
D. perfect competition.
C. a duopoly.
When firms openly agree on price, output, and other decisions aimed at achieving monopoly profits, those firms are practicing:
A. overt collusion.
B. tacit collusion.
C. leadership price.
D. competitive game.
A. overt collusion.
A cartel is an example of:
A. price extortion.
B. price leadership.
C. overt collusion.
D. tacit collusion.
C. overt collusion.
In an oligopolistic market structure, collusion between firms usually leads to higher profits than noncooperative behavior. However, formal, overt collusion doesn't usually occur in the United States because:
A. it is illegal.
B. there is an incentive for each firm to cheat on a collusive agreement.
C. an oligopolistic firm will typically prefer lower profits if the only way to make higher profits is to improve the profit position of its rivals.
D. it is illegal and because there is an incentive for each firm to cheat on a collusive agreement.
D. it is illegal and because there is an incentive for each firm to cheat on a collusive agreement.
The airline industry often engages in Bertrand behavior. This means that firms often ________ prices until profits ________.
A. raise; are maximized
B. lower; are maximized
C. lower; approach zero
D. raise; approach zero
C. lower; approach zero
In the classic prisoners' dilemma with two accomplices in crime, the Nash equilibrium is for:
A. both individuals to not confess.
B. both individuals to confess.
C. one to confess and the other not confess.
D. This game does not have a Nash equilibrium.
B. both individuals to confess.
Gary's Gas and Frank's Fuel are the only two providers of gasoline in Smalltown. Gary and Frank decide to form a cartel. Later, Gary summarizes his pricing strategy as, "I'll cheat on the cartel because regardless of what Frank does, cheating gives me the best payoff." This is an example of:
A. a dominant strategy.
B. a tit-for-tat strategy.
C. an irrational strategy.
D. product differentiation.
A. a dominant strategy.
If a monopolistically competitive firm is in long-run equilibrium, we can assume that price ________.
A. equals marginal revenue.
B. equals average total cost.
C. is greater than average total cost.
D. equals marginal cost.
B. equals average total cost.
In the long run, monopolistically competitive firms:
A. produce output at the level that minimizes average total cost.
B. set marginal revenue equal to price.
C. cannot earn an economic profit.
D. produce so that marginal cost equals price.
C. cannot earn an economic profit.
Monopolistically competitive firms have zero economic profits in the long run because of:
A. excess capacity.
B. price wars among firms.
C. easy entry and exit.
D. excessive advertising.
C. easy entry and exit.
The profit-maximizing rule MC = MR is followed by firms under:
A. monopolistic competition, but not perfect competition.
B. perfect competition, but not monopolistic competition.
C. either monopolistic competition or perfect competition, depending on the costs of production.
D. both monopolistic competition and perfect competition.
D. both monopolistic competition and perfect competition.
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