EC 102 Bernasek

Practice Test 2

Multiple Choice 1. The assumption that "more is better" implies

(a) that a person's total utility increases as they consume more of a good.

(b) that a person's total utility decreases as they consume more of a good.

(c) that a person's marginal utility increases as they consume more of a good.

(d) that a person's marginal utility decreases as they consume more of a good.

Use the following information to answer questions 2, 3, and 4. A person has $200 per month to spend on two goods; pizza and beer. Suppose that the price of a pizza is $10 and the price of a beer is $2. Assume that the person spends all her/his money on these two goods. If you want to draw the budget line put pizza on the horizontal axis and beer on the vertical axis.

2. This person's real income in terms of pizza is

(a) $10.

(b) $200.

(c) $20.

(d) 20 pizzas.

3. If the person wants to buy one more pizza how many beers must s/he give up?

(a) none.

(b) 100 beers.

(c) 5 beers.

(d) 1/5 of a beer.

4. If the price of a beer increases to $5 then the budget line will

(a) shift in parallel.

(b) shift in at the beer axis.

(c) shift out at the beer axis.

(d) shift out parallel.

5. Which best explains the relationship between the market demand curve and the demand curves of individual consumers?

(a) The market demand curve is the average of all of the individual's demand curves.

(b) The market demand curve is the horizontal sum of all of the individual's demand curves.

(c) The market demand curve is the vertical sum of all of the individual's demand curves.

(d) The market demand curve is the mean of all of the individual's demand curves.

6. The short run is best described as the period of time during which

(a) all of the firm's inputs are fixed.

(b) at least one of the firm's inputs is fixed.

(c) all of the firm's inputs are variable.

(d) at least one of the firm's inputs is variable.

7. If a firm exhibits constant returns to scale in production then if all inputs into production are doubled

(a) output will exactly double.

(b) output will more than double.

(c) output will less than double.

(d) output will be left unchanged.

Make reference to the following table to answer question 8. Table 1 Production Function

K=1

L=0 Q=0 MP= N/A AP=0

L=1 Q=40 MP=40 AP=40

L=2 Q=90 MP=50 AP=45

L=3 Q=150 MP=60 AP=50

L=4 Q=200 MP=50 AP=50

L=5 Q=240 MP=40 AP=48

8. How much additional output can the firm produce if it is initially hiring 1 worker then it hires 2 workers?

(a) 60 units of output.

(b) 50 units of output.

(c) 40 units of output.

(d) 45 units of output.

9. If all the firms in an industry are making zero (normal) economic profits, then in the long run we would expect

(a) to see new firms entering the industry.

(b) to see firms leaving the industry.

(c) to see some firms entering and some firms leaving the industry.

(d) to see firms neither leaving nor entering the industry.

Make reference to the following table to answer question 10. Table 2 Cost Function

Q FC VC TC MC AFC AVC ATC

Q=0 TFC=300 TVC=0 TC=300 MC=N/A AFC=N/A AVC=N/A ATC=N/A

Q=40 TFC=300 TVC=400 TC=700 MC=10.00AFC=7.50 AVC=10.00 ATC=17.50

Q=90 TFC=300 TVC=800 TC=1100 MC=8.00 AFC=3.33 AVC=8.89 ATC=12.22

Q=150 TFC=300 TVC=1200 TC=1500 MC=6.67 AFC=2.00 AVC=8.00 ATC10.00

Q=200 TFC=300 TVC=1600 TC=1900 MC=8.00 AFC=1.50 AVC=8.00 ATC=9.50

Q=240 TFC=300 TVC=2000 TC=2300 MC=10.00 AFC=1.25 AVC=8.33 ATC=9.58

10. If the firm produces 200 units of output then the firm's total cost per unit of output will be,

(a) $10.00

(b) $1.50

(c ) $8.00

(d) $9.50

11. If a profit maximizing firm is producing at q* in the short run and it knows the following: P=$10, ATC=$10, AVC=$8, then this firm should

(a) keep producing because it is making positive economic profits.

(b) keep producing because it is making normal economic profits.

(c) shut-down because it is making zero economic profits.

(d) keep producing even though it is making a loss.

12. Every profit maximizing firm will choose to produce where

(a) P=MC

(b) P=ATC

(c) MR=MC

(d) P=AVC

True or False Questions

1. When money income falls and the price level falls by a larger percentage, real income falls.

2. Total fixed costs (TFC) increase with output.

3. The law of diminishing returns states that a doubling of all inputs will less than double output.

4. Accountants include opportunity costs in their definition of profits but economists do not.

5. An increase in the wage will shift the firm's cost curves up.

6. Improvements in technology will shift a firm's cost curves down.

Definitions1. The cost of using resources for a certain purpose, measured by what is given up by not using them in their best alternative use.

____________________________

2. Shows the maximum output that can be produced from different quantities of the inputs.

____________________________

3. The difference between a firm's revenues and its costs.

____________________________

4. The additional utility obtained from consuming an additional unit of a good.

____________________________

5. When a doubling of all inputs into production leads to a more than doubling of output.

____________________________

6. Shows all the combinations of two goods that a person can afford using all of their income and given the prices of the goods.

____________________________

Note: I am not giving you a practice essay question because you know what kind of questions to expect from your essay question on Test 1 and you know the article I will ask you about.

Answers:

MC: 1.A 2. D 3. C 4. B 5. B 6. B 7. A 8. B 9. D 10. D 11. B 12. C

T/F: 1. F 2. F 3. F 4. F 5. T 6. T

Definitions: 1. Opportunity Cost 2. Production Function 3. Profit 4. Marginal Utility 5. Increasing Returns to Scale 6. Budget Line