Micro Final – Sample Exam 2

What is the substitution effect of a price change?

A) Consumers will buy more of the good whose relative price has risen and less of the good whose relative price has fallen.
B) When prices fall, consumers will have more purchasing power and buy more of the good whose price has fallen.
C) When prices fall, consumers will have more purchasing power and buy more of all goods.
D) Consumers will consume less of the good whose relative price has risen and more of the good whose relative price has fallen.

Which situation will likely give rise to diminishing marginal product of labor?

A) Plasma television manufacturers are going out of business because of increased competition from LCD televisions.
B) Hell's Kitchen, which has enough counter space for three cooks per shift, decides to hire a fourth cook per shift.
C) Nevaeh's Kitchen undertakes a massive expansion, doubling both the size of its kitchen and number of cooks.
D) A landscaping firm replaces all of its self-propelled lawnmowers with push mowers.

Which of the following statements is (are) TRUE?

I. The firm's total cost is the sum of its fixed and variable costs.
II. Over the long term, the costs of the firm's inputs tend to become fixed.
III. In the long run, the firm can adjust the use of all of its inputs.

A) II
B) I
C) I and III
D) I, II, and III

An entrepreneur gathers the following information to make a decision on whether to stay open for business or to shut down permanently:
Future operating revenues = $18 million
Future operating costs = $14 million
Sunk costs = $8 million

The entrepreneur should:
A) continue to operate because the operating revenues exceed the operating costs.
B) shut down because the operating revenues are insufficient to cover the operating costs and sunk costs.
C) shut down because the sunk costs are greater than zero.
D) continue to operate to help pay off the sunk costs.

Which of the following statements is (are) TRUE?

I. If marginal cost is rising, the average total cost must be rising.
II. The marginal cost curve intersects both the average total and average variable cost curves at their minimum points.
III. If marginal cost is less than average variable cost, the average variable cost curve is negatively sloped.

A) I, II, and III
B) I and III
C) II
D) II and III

Which of the following characteristics relate(s) to perfect competition?

I. An industry is dominated by several large firms.
II. Consumers cannot distinguish one firm's product from another.
III. New firms can easily enter the industry.

A) I and II
B) II and III
C) II
D) III

A firm should _____ output whenever MR exceeds MC because _____.

A) reduce; revenues will rise by more than costs, increasing the firm's profit
B) reduce; total revenues exceed total costs
C) expand; revenues will rise by more than costs, increasing the firm's profit
D) not change; selling more output will increase marginal revenue by less than marginal cost

To maximize profits, a firm should produce where:

A) MR = MC.
B) TR/Q = TC/Q.
C) P = AVC.
D) ATC < P < AVC.

Which of the following statements is (are) TRUE of price-taking firms?

I. ΔTR/ΔQ = P = MR
II. Price takers must lower their price to sell additional units of output because demand curves slope downward.
III. If a price taker decides to increase output, the market price will decrease.
IV. Examples of price takers include McDonald's, Burger King, Wendy's, and SONIC Drive-in.

A) II and III
B) I, II, III, and IV
C) I
D) II and IV

The perfectly competitive firm's short-run supply curve is:

A) the portion of its marginal cost curve that lies above average variable cost.
B) the portion of its marginal cost curve that lies above average total cost.
C) its average variable cost curve, which lies above marginal revenue.
D) its average total cost curve, which lies above marginal revenue.

Pitch (a sticky black substance made from petroleum) is a key input in the production of clay targets. If the price of pitch falls, clay target manufacturers will encounter a(n) _____ shift of their marginal cost curve and a(n)_____ shift of their average variable cost.

A) inward; inward
B) outward; outward
C) inward; outward
D) outward; inward