Saint Louis University

School of Accountancy, Business Management, Computing and Information Studies

Department of Business Economics and Financial Management

BEPMC 311 (BASIC MICROECONOMICS)

FINAL EXAMINATION

I. MULTIPLE CHOICE (Choose the CAPITAL LETTER of the correct answer.)

1. Which of the following is most likely to be an implicit cost?

A. rental income foregone on assets owned by the firm
B. salaries paid to the firm’s board of directors
C. transportation cost on raw materials
D. interest payments on an outstanding loan of the firm
2. Economic profit is frequently
A. greater than total revenue.
B. defined as total revenue minus total fixed cost.
C. irrelevant to the owner of a firm who is concerned instead with accounting profits.
D. less than accounting profit.
3. From an economics perspective, accounting methods tend to
A. overstate profits and losses. C. understate profits and overstate losses.
B. overstate profits and understate losses. D. understate profits and losses.
4. Your aunt is thinking about opening a hardware store. She estimates that it would cost $500,000 per year to rent
the location and buy the stock. In addition, she would have to quit her $50,000 per year job as an accountant. Your
aunt’s opportunity costs comprise
A. the accounting costs. C. all economic costs.
B. the accounting costs and the implicit costs. D. none of the above
5. Referring to #4: The implicit cost/s that your aunt can incur is/are:
A. foregone rental value, foregone interest income, foregone wages
B. foregone rental value and foregone wages
C. foregone interest income and foregone wages
D. foregone wages.
6. Referring to #4: What is your aunt’s opportunity cost (in value) of running a hardware store for a year?
A. $500,000 B. $50,000 C. $550,000 D. cannot be determined
7. Referring still to #4: If your aunt thought she could sell $510,000 worth of merchandise in a year, what is your
aunt’s accounting profit?
A. $10,000 B. –$40,000 C. $460,000 D. $0
8. Given the above situation, what is your aunt’s economic profit?
A. $10,000 B. –$40,000 C. $460,000 D. $0
9. Should your aunt open the store?
A. Yes, since its economic profit is more than cover all opportunity cost.
B. Yes, implicit costs are covered by the accounting profit.
C. No, since the economic profit is negative; there are more values for
D. None of the above
10. The feature that distinguishes short-run from the long-run is the
A. length of time it takes to produce 1 unit. C. amount of variable resources used to produce 1 unit.
B. existence of fixed costs. D. the amount of profit the firm can expect to earn.
11. The short-run is
A. less than a year.
B. when a firm is unable to change some of its inputs.
C. when a firm is unable to change output.
D. when a firm is unable to change its price.
12. The production function tells the firm
A. which input combination has the lowest total cost.
B. which input combination produces a given output at the lowest possible cost.
C. the maximum output that can be produced from a given amount of inputs.
D. which output is the most profitable.
13. In the short run
A. all costs are variable. C. there may be fixed and variable inputs.
B. all inputs are fixed. D. all production decisions must be made on a daily basis.
14. The law of diminishing marginal returns says that as units of labor are added to the production of an output
when all other inputs are fixed, eventually
A. total product is always declining C. total cost rises.
B. marginal product declines D. marginal costs decline.
15. Diminishing returns
A. characterize all stages of production.
B. eventually occur in all short-run production situations.
C. are always associated with declining average product in the short-run.
 D. exist in the short run, because as additional units of an input are hired, the firm has to accept less satisfactory
units.
16. Total product curve in the first stage of production shows that it is increasing at an increasing rate because
A. the marginal product is positive and increasing. C. the marginal product is negative.
B. the marginal product is positive and decreasing. D. the marginal product is zero.
17. A negative MP
A. is consistent with a falling TP. C. may be consistent with rising or falling TP.
B. is associated with a negative AP. D. indicates that TP is increasing at a decreasing rate.
18. If the average output per worker in a firm is 7 units per hour, then the average output will rise as a result of
hiring another worker if
A. the marginal worker produces 7 units. C. the marginal output of the next worker exceeds 7.
B. more workers are hired. D. the last worker produced less than 7 units.
19. When the MP is rising
A. the MC is rising. C. the MC must be falling.
B. MP is equal to AP. D. MC is minimum.
20. If the marginal value of some variables is above the average value of the variable;
A. the marginal value must be rising. C. the average value must be rising.
B. the marginal value must be falling. D. the average value must be constant
21. The fixed costs of a firm are costs that stay the same regardless of
A. the amount of output produced. C. the amount of the fixed input employed.
B. the price of the fixed input. D. whether the firm is in the short-run or the long-run.
22. In the short run, TVC
A. is positive when output is zero. C. decreases when the firm is experiencing diminishing returns.
B. increases with increasing output. D. decreases when the firm is experiencing increasing returns.
23. In the short-run, when output is zero
A. TC is zero. C. TVC is zero.
B. TFC is zero. D. AFC is zero.
24. The MC curve must be
A. rising when TC is rising.
B. less than AFC when the average cost is rising.
C. greater than ATC when the average curve is rising.
D. falling when the ATC curve lies below the marginal curve.
25. The marginal cost curve crosses the
A. average total cost curve at the maximum of the average total cost curve.
B. average variable cost curve at the minimum of the average variable cost curve.
C. total cost curve at the minimum of the total cost curve.
D. average fixed cost curve at the minimum of the average fixed cost curve.
26. The average variable cost curve and average total cost curve tend to converge as output rises because
A. the marginal cost curve intersects the average total cost curve at its minimum.
B. the average fixed costs are constant as output rises.
C. the difference between them (average fixed cost) declines.
D. output is rising more rapidly than inputs are being increased.
27. Monopoly and pure competition
A. are alike in that entry is easy in both.
B. are alike in that entry is blocked in both.
C. differ in terms of the number of firms in the industry.
D. differ in that monopoly is associated with a standardized product and perfect competition associated
with differentiated products.
28. With respect to entry and exit, monopolistic competition is
A. characterized by free entry and blocked exit.
B. like pure competition in that entry and exit are free.
C. characterized by easy (though not free) entry and exit.
D. like pure monopoly in that entry is blocked.
29. An oligopoly is characterized by
A. free entry and blocked exit.
B. few number of firms and blocked entry.
C. firms that sell homogeneous product but differentiated.
D. firms selling identical products but differentiated.
30. Suppose that the market for computers is dominated by a single firm, like IBM, that is able to exert influence
over prices and output. This situation violates the perfect competition assumption of
A. many buyers and sellers. C. ease of entry and exit.
B. identical or homogeneous goods. D. no differentiation.
31. City hotels and restaurants are illustrative of
A. pure competition. C. oligopoly.
B. monopolistic competition. D. monopoly.
32. This characteristic of oligopoly implies that there is interdependence among firms that leads to conflicting
motives, that leads them to act and react on the price movements of one another.
A. lack of uniformity C. no unique patter of pricing behavior
B. competition D. interdependence
33. The actions of a firm in a purely competitive industry have no effect on market price; therefore, the demand
curve faced by the firm is
A. unknown. C. a horizontal line at the level of the market price.
 B. a downward-sloping curve. D. a firm’s total revenue curve.
34. A competitor maximizes profit by producing the output that
A. equates price and average variable cost. C. equates MR and MC.
B. equates TR and TC. D. maximizes the difference between MR and MC.
35. A firm will shut down in the short-run whenever
A. price is less than ATC. C. price is less than AVC.
B. price is less than AFC. D. MR is equal to MC.
36. The slope of total curves/functions (e.g., TP, TC, TR) is
A. their marginal values. C. their average values.
B. the shape of the curve/function. D. none of the above
37. Which of the following statements is correct?
A. In order to maximize profits in the short run, a purely competitive firm should produce at the level
where marginal cost is equal to price.
B. A purely competitive firm will produce in the short run, so long as total receipts are sufficient to cover
its total fixed costs.
C. A purely competitive firm will always close down in the short run, whenever price is less than average total
cost.
D. In the long-run, firms incur costs that are fixed and variable.
38. When the firm generates sales that is enough to cover its costs the firm is experiencing
A. zero profit. C. break-even.
B. losses. D. both A and C above
39. In the long run, average total cost exhibits a pattern just like the short run average total cost because of this
reason.
A. Increasing and decreasing returns are associated with more outputs produced.
B. Economies and diseconomies of scale are experienced as a firm gets bigger in size.
C. Law of diminishing returns starts to set in.
D. None of the above explains the shape of a long run average total cost curve
40. If it is possible for a perfectly competitive firm to do better financially by producing rather than shutting down,
then it should produce the amount of output at which:
A. MR < MC
B. MR = MC
C. MR > MC
D. none of the above
41. Economies of scale means that
A. as output increases, the cost of producing that output decreases.
B. as output increases, the cost per unit of output decreases.
C. as output increases, the cost per unit of output increases.
D. production is efficient because it is cheaper to produce as firm expands.
42. In the short-run, the basic relationship between an individual firm’s supply curve under perfect competition and
the market supply curve under perfect competition is
A. the individual firm’s supply curve is horizontal, but the market supply curve is upward sloping
B. the individual firm’s supply curve is vertical, but the market supply curve is upward sloping
C. the market supply curve is the summation of all the individual’s firms’ supply curves
D. the market supply curve is equal to the average of all the individual firm’s supply curves
43. Suppose that a monopolist can segregate his buyers into two different groups to which he can charge two
different prices. In order to maximize profit, the monopolist should charge a higher price to the group that has:
A. the higher elasticity of demand.
B. the lower elasticity of demand.
C. richer members.
D. none of the above
44. The socially optimal price (P = MC) is socially optimal because
A. it reduces the monopolist’s profit.
B. it yields a normal profit.
C. it minimizes ATC.
D. it achieves allocative efficiency.
45. The main problem with imposing the socially optimal price (P = MC) on a monopoly is that the socially
optimal price:
A. may be so low that the regulated monopoly can’t break even.
B. may cause the regulated monopoly to engage in price discrimination.
C. may be higher than the monopoly price
D. none of the above
II. PROBLEMS/ESSAY

NOTE: Provide solution/s as required. But no need to show solutions in completing the tables.

1. Assume the following unit-cost data are for a purely competitive producer.

Output AFC ($) AVC ($) ATC ($) MC ($)

0 - - - -
1 60.00 45.00 105.00 45.00
2 30.00 42.50 72.50 40.00
3 20.00 40.00 60.00 35.00
4 15.00 37.50 52.50 30.00
5 12.00 37.00 49.00 35.00
6 10.00 37.50 47.50 40.00
7 8.57 38.57 47.14 45.00
8 7.50 40.63 48.13 55.00
9 6.67 43.33 50.00 65.00
10 6.00 46.50 52.50 75.00

A. At a product price of $56, will this firm produce in the short run? (1 point) Why or why not? (2
points) If it does, what will be the profit-maximizing or loss-minimizing output? (1 points) What economic
profit (or loss) will the firm realize per unit of output? (2 points)
B. Answer the same questions in letter A assuming that product price is $41.
At a product price of $41, will this firm produce in the short run? (1 point) Why or why not? (2 points) If it
does, what will be the profit-maximizing or loss-minimizing output? (1 point) What economic profit (or loss)
will the firm realize per unit of output?(2 points)
C. Answer the same questions in letter A assuming that product price is $32.
At a product price of $41, will this firm produce in the short run? (1 point) Why or why not? (2 points) If it
does, what will be the profit-maximizing or loss-minimizing output? (1 points) What economic profit (or loss)
will the firm realize per unit of output? (2 points)
D. When is the firm going to shut down? (2 points)
E. In the table below, complete the short-run supply schedule for the firm and indicate the profit or
loss incurred at each output.

Quantity Profit (+) or Quantity

Price Supplied, loss (–) Supplied,
Single Firm 1500 Firms
$26
32
38
41
46
56
66
(Table 4 points until profit or loss column)
1. Sketch the relevant supply curve for the firm. (4 points)
2. Now assume there are 1500 identical firm in this competitive industry; that is, there are 1500 firms, each
of which has the same cost data as shown in the first table. Calculate the industry supply schedule. (2
points)
3. Suppose the market demand data for the product are as follows:
Total Quantity
Price
Demanded
$26 17,000
32 15,000
38 13,500
41 12,000
46 10,500
56 9,500
66 8,00

What will equilibrium price be? (1 point) What will equilibrium output be for the industry? (1 point) For
each firm? (1 point) What will profit or loss be per unit? (1 point) Per firm? (1 point) Will this industry
expand or contract in the long run? (1 point)
2. Explain what might cause a government to allow monopoly, except in cases on public utilities, given the adverse
effect of such market to the consumers and the public in general. (9 points)