Profit Statement Law Firm

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					Summer 2003
MBA 501-01
Economics Survey
Tong

                                              Test #2

Part I. Multiple Choice Questions (One point each)
Identify the letter of choice that best completes the statement or answers the question.


Use the following to answer question 1:




   1. Curve (2) in the above diagram is a purely competitive firm's
      A) total cost curve.
      B) total revenue curve.
      C) marginal revenue curve
      D) total economic profit curve.


   2. A firm is producing an output such that the benefit from one more unit is more than the cost
      of producing that additional unit. This means the firm is:
      A) producing more output than allocative efficiency requires.
      B) producing less output than allocative efficiency requires.
      C) achieving productive efficiency.
      D) producing an inefficient output, but we cannot say whether output should be increased
          or decreased.




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Use the following to answer questions 3-4:

Answer the next question(s) on the basis of the following cost data for a purely competitive seller:
          Total    Total
 Total    fixed   variable   Total
product    cost     cost      cost
   0       $50     $ 0       $ 50
   1        50        70       120
   2        50       120       170
   3        50       150       200
   4        50       220       270
   5        50       300       350
   6        50       390       440



   3. Refer to the above data. At 5 units of output average fixed cost, average variable cost, and
      average total cost are:
      A) $10, $60, and $70 respectively.
      B) $50, $40, and $90 respectively.
      C) $10, $70, and $80 respectively.
      D) $5, $25, and $30 respectively.


   4. Refer to the above data. If product price is $75, the firm will produce:
      A) 3 units of output.
      B) 4 units of output.
      C) 5 units of output.
      D) 6 units of output.


   5. Assume a purely competitive firm is selling 200 units of output at $3 each. At this output its
      total fixed cost is $100 and its total variable cost is $350. This firm:
      A) is maximizing its profit.
      B) is making a profit, but not necessarily the maximum profit.
      C) is incurring losses.
      D) should shut down in the short run.




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Use the following to answer questions 6-8:




   6. Refer to the above diagram showing the average total cost curve for a purely competitive
      firm. Suppose this firm is maximizing its total profit and the market price is $15. The firm's
      per unit profit is:
      A) $5.
      B) $200.
      C) a positive amount less than $5.
      D) a positive amount more than $200.


   7. Refer to the above diagram showing the average total cost curve for a purely competitive
      firm. At the long-run equilibrium level of output, this firm's total revenue:
      A) is $10.
      B) is $40.
      C) is $400.
      D) cannot be determined from the information provided.


   8. Refer to the above diagram showing the average total cost curve for a purely competitive
      firm. Suppose that average variable cost is $8 at 40 units of output. At that level of output,
      total fixed cost:
      A) is $2.
      B) is $40.
      C) is $80.
      D) cannot be determined from the information provided.




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 9. The principle that a firm should produce up to the point where the marginal revenue from
    the sale of an extra unit of output is equal to the marginal cost of producing it is known as
    the:
    A) output-maximizing rule.
    B) profit-maximizing rule.
    C) shut-down rule.
    D) break-even rule.


10. Which of the following is correct?
    A) When total product is rising, both average product and marginal product must also be
       rising.
    B) When marginal product is falling, total product must be falling.
    C) When marginal product is falling, average product must also be falling.
    D) Marginal product rises faster than average product and also falls faster than average
       product.


11. Which of the following definitions is correct?
    A) Accounting profit + economic profit = normal profit.
    B) Economic profit - accounting profit = explicit costs.
    C) Economic profit = accounting profit - implicit costs.
    D) Economic profit - implicit costs = accounting profits.


12. Normal profit is:
    A) determined by subtracting implicit costs from total revenue.
    B) determined by subtracting explicit costs from total revenue.
    C) the return to the entrepreneur when economic profits are zero.
    D) the average profitability of an industry over the preceding 10 years.


13. The relationship between the marginal cost and the average total cost schedule is such that:
    A) the behavior of one schedule does not affect the other.
    B) if ATC exceeds MC, MC must be rising.
    C) if MC is declining, ATC may be either declining or rising.
    D) if MC is declining, ATC must also be declining.


14. "If a variable input is added to some fixed input, beyond some point the resulting extra
    output will decline." This statement describes:
    A) economies and diseconomies of scale.
    B) X-inefficiency.
    C) the law of diminishing returns.
    D) the law of diminishing marginal utility.



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Use the following to answer question 15:

Answer the next question(s) on the basis of the following cost data:
         Average    Average
           fixed    variable
Output      cost      cost
  1       $50.00    $100.00
  2        25.00      80.00
  3        16.67      66.67
  4        12.50      65.00
  5        10.00      68.00
  6          8.37     73.33
  7          7.14     80.00
  8          6.25     87.50




  15. Refer to the above data. The marginal cost of the fifth unit of output is:
      A) $3.
      B) $62.
      C) $80.
      D) $78.


  16. If a firm decides to produce no output in the short run, its costs will be:
      A) its marginal costs.
      B) its fixed plus its variable costs.
      C) its fixed costs.
      D) zero.


  17. The basic characteristic of the short run is that:
      A) barriers to entry prevent new firms from entering the industry.
      B) the firm does not have sufficient time to change the size of its plant.
      C) the firm does not have sufficient time to cut its rate of output to zero.
      D) a firm does not have sufficient time to change the amounts of any of the resources it
         employs.




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18.




      In the above figure, curves 1, 2, 3, and 4 represent the:
      A) ATC, MC, AFC, and AVC curves respectively.
      B) AFC, MC, AVC, and ATC curves respectively.
      C) MC, ATC, AVC, and AFC curves respectively.
      D) ATC, AVC, AFC, and MC curves respectively.


19. A manufacturer of frozen pizzas found that total revenue decreased when price was
    lowered from $5 to $4. It was also found that total revenue decreased when price was
    raised from $5 to $6. Thus,
    A) the demand for pizza is elastic above $5 and inelastic below $5.
    B) the demand for pizza is elastic both above and below $5.
    C) the demand for pizza is inelastic above $5 and elastic below $5.
    D) $5 is not the equilibrium price of pizza.


20. The price of product X is reduced from $100 to $90 and, as a result, the quantity demanded
    increases from 50 to 60 units. Therefore demand for X in this price range:
    A) has declined.
    B) is of unit elasticity.
    C) is inelastic.
    D) is elastic.


21. The larger the positive cross elasticity coefficient of demand between products X and Y,
    the:
    A) stronger their complementariness.
    B) greater their substitutability.
    C) smaller the price elasticity of demand for both products.
    D) the less sensitive purchases of each are to increases in income.




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  22. An income elasticity coefficient of -1.8 means the product is a normal good.
      A) True               B) False


  23. Other things the same, if a price change causes total revenue to change in the opposite
      direction, demand is:
      A) perfectly inelastic.
      B) relatively elastic.
      C) relatively inelastic.
      D) of unit elasticity.


  24. Suppose a firm's total economic cost in producing 1,000 aluminum baseball bats is $10,000.
      These bats are then sold by the firm for $12,000. Thus:
      A) the firm is necessarily using the least-cost production technique because it is realizing
          an economic profit.
      B) the firm's normal profit is $2000.
      C) the firm's economic profit is $2000.
      D) there is no economic reason for the aluminum bat industry to expand or contract.


Use the following to answer question 25:




  25. On the basis of the above information and assuming trade occurs between the three states
      we can expect:
      A) Washington to exchange apples with Texas and receive money in return.
      B) Washington to exchange apples with Michigan and receive money in return.
      C) Texas to exchange lettuce with Michigan and receive autos in return.
      D) Texas to trade lettuce directly for Washington apples.


  26. The Ajax Manufacturing Company is selling in a purely competitive market. Its output is
      100 units which sell at $4 each. At this level of output total cost is $600, total fixed cost is
      $100, and marginal cost is $4. The firm should:
      A) reduce output to about 80 units.
      B) expand its production.
      C) continue to produce 100 units.
      D) produce zero units of output.


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  27. Average fixed costs can be determined graphically by:
      A) summing the marginal costs of any number of units of output and dividing the sum by
         that output.
      B) the vertical distance between TC and TVC.
      C) the vertical distance between AVC and MC.
      D) the vertical distance between ATC and AVC.


Use the following to answer question 28:




  28. The above diagram shows two product supply curves. It indicates that:
      A) over range Q1Q2 price elasticity of supply is greater for S1 than for S2.
      B) over range Q1Q2 price elasticity of supply is greater for S2 than for S1.
      C) over range Q1Q2 price elasticity of supply is the same for the two curves.
      D) not enough information is given to compare price elasticities.


  29. The market system's answer to the fundamental question "How will the goods and services
      be produced?" is essentially:
      A) "With as much machinery as possible."
      B) "Using the latest technology."
      C) "By exploiting labor."
      D) "At least-cost production."


  30. The division of labor means that:
      A) labor markets are geographically segmented.
      B) unskilled workers outnumber skilled workers.
      C) workers specialize in various production tasks.
      D) each worker performs a large number of tasks.




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Part II. Short Questions (Total 35 points)
If a question requires calculation, then show all your work for full credit. If you just simply write
down an answer and it happens to be wrong, then no partial credit will be given.


1.

The Mesa Redbirds football team plays in a stadium with a seating capacity of 80,000. However,
during the past season, attendance averaged only 50,000. The average ticket price was $30.

a)     If price elasticity is -4, what price would the team have to charge in order to fill the
       stadium? (10 points)

b)     If the price were to decrease to $27 (from $30) and the average attendance increased to
       60,000 (from 50,000), what is the price elasticity? (5 points)


2.

a)     Complete the following table by finding the average and marginal product. (10 points)

             Inputs of Total         Average     Marginal
               labor   product       product     product
                 0        0           _____
                 1        8           _____        _____
                 2       18           _____        _____
                 3       25           _____        _____
                 4       30           _____        _____
                 5       33           _____        _____
                 6       34           _____        _____

b)     At what input-output level will average variable cost begin to rise? Briefly explain. (10
       points)


                                      ***** The End *****




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                                    Suggested Answer

Answer Key -- Test #2 Summer 2003

   1.   C
   2.   B
   3.   A
   4.   B
   5.   B
   6.   C
   7.   C
   8.   C
   9.   B
  10.   D
  11.   C
  12.   C
  13.   D
  14.   C
  15.   C
  16.   C
  17.   B
  18.   C
  19.   A
  20.   D
  21.   B
  22.   False
  23.   B
  24.   C
  25.   A
  26.   D
  27.   D
  28.   A
  29.   D
  30.   C




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1
a)    If price elasticity is -4, and the Redbirds wish to increase attendance from 50,000 to 80,000,
       the price (p2) must be:

      80 ,000  50 ,000 P2  30
4                    *         P2  26 .73 #
      50 ,000  80 ,000 30  P2


b)     If price is lowered from $30 to 27, and attendance rises from 50,000 to 60,000, price
       elasticity is:

              60 ,000  50 ,000 27  30
       Ed                     *         Ed  1.727 #
              50 ,000  60 ,000 30  27



2)

              Inputs of Total       Average       Marginal
                labor   product     product       product
                  0        0          0
                  1        8          8                   8
                  2       18          9                  10
                  3       25          8.33                7
                  4       30          7.50                5
                  5       33          6.60                3
                  6       34          5.67                1

        With equal pay for each worker, average variable cost will begin to rise for the third
        worker’s output because that is the point where diminishing returns begin.




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