Practice Test Chapter 10-14 by qi8v8Z


									Practice Test Chapter 10-14

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

____    1. An externality is
           a. the costs that parties incur in the process of agreeing and following through on a bargain.
           b. the uncompensated impact of one person's actions on the well-being of a bystander.
           c. the proposition that private parties can bargain without cost over the allocation of
           d. a market equilibrium tax.

            Figure 10-5

____    2. Refer to Figure 10-5. Which price and quantity combination represents the social optimum?
           a. P0 and Q1.
           b. P2 and Q1.
           c. P1 and Q0.
           d. P2 and Q0.
____    3. The Ogallala aquifer is a large underground pool of fresh water under several western states in the United
           States. Any farmer with land above the aquifer can at present pump water out of it. We might expect that
           a. over time, the aquifer is likely to be overused.
           b. each farmer has a sufficient incentive to conserve the water.
           c. state governments have an incentive to insure that their farmers do not overuse the water.
           d. resources would be used more efficiently if the government paid for the pumps farmers
               use to get the water.
____    4. Before considering any public project, the government should
                  (i) compare the total cost and total benefits of the project.
                 (ii) conduct a cost-benefit analysis.
                (iii) infer that citizens who vote for a project are willing to pay equally for it.

            a. (i) only
            b. (ii) only
          c. (i) and (ii) only
          d. (i), (ii), and (iii)

          Scenario 13-3

          Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons. Due to the popularity of his
          local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to
          also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day,
          he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted
          will yield $300 worth of wheat.

____   5. Refer to Scenario 13-3. Tony's accounting profit equals
          a. $-80
          b. $130
          c. $170
          d. $260
____   6. Jane decides to open her own business and earns $50,000 in accounting profit the first year. When deciding to
          open her own business she turned down three separate job offers with annual salaries of $30,000, $40,000,
          and $45,000. What is Jane's economic profit from running her own business?
          a. $-65,000
          b. $5,000
          c. $10,000
          d. $20,000
____   7. If marginal cost is below average total cost, then average total cost
          a. is constant.
          b. is falling.
          c. is rising.
          d. may rise or fall depending on the size of fixed costs.
____   8. Which of the following statements about costs is correct?
          a. When marginal cost is less than average total cost, average total cost is rising.
          b. The total cost curve is U-shaped.
          c. As the quantity of output increases, marginal cost eventually rises.
          d. All of the above are correct.
____   9. In the long run, when marginal cost is above average total cost, the average total cost curve exhibits
          a. economies of scale.
          b. diseconomies of scale.
          c. constant returns to scale.
          d. efficient scale.

          Table 13-9

                       Output                        Total Cost
                          0                              40
                        10                               60
                        20                               90
                        30                              130
                        40                              180
                        50                              240
____ 10. Refer to Table 13-9. What is the total fixed cost for this firm?
         a. $20
         b. $30
         c. $40
         d. $50
____ 11. Refer to Table 13-9. What is average fixed cost when output is 40 units?
         a. $1.00
         b. $3.32
         c. $5.00
         d. $8.00
____ 12. Because the goods offered for sale in a competitive market are largely the same,
         a. there will be few sellers in the market.
         b. there will be few buyers in the market.
         c. buyers will have market power.
         d. sellers will have little reason to charge less than the going market price.

           Figure 14-1

           The graph below depicts the cost structure for a firm in a competitive market.

____ 13. Refer to Figure 14-1. When price falls from P3 to P1, the firm finds that
         a. fixed cost is higher at a production level of Q1 than it is at Q3.
         b. it should produce Q1 units of output.
         c. it should produce Q3 units of output.
         d. it should shut down immediately.

           Figure 14-4

           The figure below depicts the cost structure of a firm in a competitive market.
____ 14. Refer to Figure 14-4. When market price is P5, a profit-maximizing firm's profits can be represented by the
         a. P5 Q3.
         b. (P5 - P3) Q2.
         c. (P5 - P4) Q3.
         d. When market price is P5 there are no profits.
____ 15. When a profit-maximizing firm is earning profits, those profits can be identified by
         a. P Q.
         b. (MC - AVC) Q.
         c. (P - ATC) Q.
         d. (P - AVC) Q.

            Scenario 14-2

            Assume a certain firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals
            $15 and its average total cost equals $11. The firm sells its output for $12 per unit.

____ 16. Refer to Scenario 14-2. At Q = 1,000, the firm's profit amounts to
         a. $-200.
         b. $1,000.
         c. $3,000.
         d. $4,000.
____ 17. A competitive firm has been selling its output for $10 per unit and has been maximizing its profit. Then, the
         price rises to $14 and the firm makes whatever adjustments are necessary to maximize its profit at the now-
         higher price. Once the firm has adjusted, which of the following statements is correct?
         a. The firm's marginal revenue is lower than it was previously.
         b. The firm's marginal cost is lower than it was previously.
         c. The firm's quantity of output is higher than it was previously.
         d. All of the above are correct.

            Table 14-5

                                    Marginal            Marginal
                Quantity             Cost               Revenue
                  12                 $5.00               $9.00
                  13                 $6.00               $9.00
                   14                $7.00               $9.00
                   15                $8.00               $9.00
                   16                $9.00               $9.00
                   17               $10.00               $9.00

____ 18. Refer to Table 14-5. This table provides information on a firm’s output, marginal revenue, and marginal cost.
         If the firm is currently producing 14 units, what would you advise them to do?
         a. Decrease quantity to 13 units.
         b. Increase quantity to 17 units.
         c. Continue to operate at 14 units.
         d. Increase quantity to 16 units.
Practice Test Chapter 10-14
Answer Section


      1. ANS:   B              DIF: 1   REF: 10-0   TOP: Externalities
         MSC:   Definitional
      2. ANS:   B              DIF: 2   REF: 10-1   TOP: Negative externalities
         MSC:   Analytical
      3. ANS:   A              DIF: 2   REF: 11-2   TOP: Public goods
         MSC:   Interpretive
      4. ANS:   C              DIF: 3   REF: 11-2   TOP: Cost-benefit analysis
         MSC:   Analytical
      5. ANS:   C              DIF: 2   REF: 13-1   TOP: Accounting profit
         MSC:   Applicative
      6. ANS:   B              DIF: 2   REF: 13-1   TOP: Opportunity cost
         MSC:   Analytical
      7. ANS:   B              DIF: 2   REF: 13-3   TOP: Average total cost
         MSC:   Interpretive
      8. ANS:   C              DIF: 2   REF: 13-3   TOP: Marginal cost
         MSC:   Interpretive
      9. ANS:   B              DIF: 2   REF: 13-4   TOP: Diseconomies of scale
         MSC:   Applicative
     10. ANS:   C              DIF: 2   REF: 13-4   TOP: Fixed costs
         MSC:   Analytical
     11. ANS:   A              DIF: 3   REF: 13-4   TOP: Average fixed cost
         MSC:   Analytical
     12. ANS:   D              DIF: 1   REF: 14-1   TOP: Competitive markets
         MSC:   Interpretive
     13. ANS:   D              DIF: 2   REF: 14-2   TOP: Profit maximization
         MSC:   Analytical
     14. ANS:   C              DIF: 2   REF: 14-2   TOP: Profit
         MSC:   Analytical
     15. ANS:   C              DIF: 2   REF: 14-2   TOP: Profit
         MSC:   Interpretive
     16. ANS:   B              DIF: 2   REF: 14-2   TOP: Profit
         MSC:   Applicative
     17. ANS:   C              DIF: 2   REF: 14-2   TOP: Competitive firms
         MSC:   Interpretive
     18. ANS:   D              DIF: 1   REF: 14-2   TOP: Profit maximization
         MSC:   Applicative

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