ECO 251-ND1 PRINCIPLES OF MICROECONOMICS

TEST 2
Due May 3, 2015
Turn in this test and you start with 10 points! It is open book, open notes, open Internet, but do
NOT plagiarize.
Part I. Multiple choice, 3 pts. each. Highlight the best answer to each question.

1. Suppose you are given the following information concerning Penny's Donut Parlor. What is
Penny's total cost of producing 5 donuts?

a. $0.20.
b. $1.00.
c. $1.20.
d. $1.70.
2. Given the information in the table on the production of beach umbrellas, the marginal cost of
producing the third beach umbrella is

a. $3,366.66.
b. $33.33.
c. $50.

d. $25.
3. When a perfectly competitive firm produces eight units of output, it receives total revenue of
$200. The price per unit is
a. $25.
b. greater than $25.
c. less than $25.
d. somewhere between $25 and $30.
4. At Paula's Pizza, the marginal revenue of the last pizza produced is $12. The marginal cost of
the last pizza produced is $10. In order to increase profits, Paula should
a. increase output.
b. decrease output.
c. not change output.
d. offer a different variety of pizza
5. Which of the following most closely describes a perfectly competitive market?
a. large number of buyers, one seller, perfect information, homogenous production
b. large number of buyers and sellers, same product for all firms, free entry and exit from the market
c. differentiated product, many sellers, easy entry into a market
d. differentiated or identical products, many sellers, easy entry, perfect information
6. The first and most important antitrust law passed in the United States was
a. the Sherman Act.
b. the Clayton Act.
c. the Anti-Synergy Act of 1812.
d. the Smith-Hawke Act.

7. Firms in this type of market structure have no influence over the market price.
a. Perfect competition.
b. Monopolistic competition.
c. Oligopoly.
d. Monopoly.
8. A Nash equilibrium occurs when
a. oligopolists cooperate with each other.
b. economic actors who are interacting choose their best strategy given the strategies chosen by
others.
c. the efficient allocation of resources is achieved by setting marginal revenue equal to marginal cost.

d. a monopolist is forced to produce the efficient level of output.

9. Based on the diagram, which of the statements is correct?

a. The firm maximizes profit by producing at the minimum point of its average total cost curve.
b. The firm is incurring an economic loss.
c. The firm is making zero economic profits.
d. This firm is giving 15,000 haircuts at a price of $7
10. Cartel agreements tend to be unstable because
a. cartel agreements tend to lower profits.
b. a firm can increase its profits by cheating on the agreement.
c. agreements become unnecessary as the number of firms in the cartel increases.
d. cutting output and raising prices will benefit each firm in the cartel.
11. Suppose the firm in the diagram operates in a monopolistically competitive market. In the long
run we would expect

a. firms to enter the market, and the demand curve facing the firm to shift to the left.
b. firms to enter the market, and the demand curve facing the firm to shift to the right.
c. firms to exit the market, and the demand curve facing the firm to shift to the left.
d. firms to exit the market and the demand curve facing the firm to shift to the right.
12. Monopolistic competition is characterized by
a. homogeneous output throughout the industry.
b. a small number of sellers in the industry.
c. the ability of firms to influence the price of output.
d. high barriers to entry.
13. Which of the following best illustrates a firm operating in a monopolistically competitive
industry?
a. an automobile producer
b. a wheat farmer
c. an electric utility
d. a firm selling pizzas
14. Fixed costs can be defined as cots that

a. vary inversely with production.

b. vary in proportion to production.
c. are incurred only when production is large enough.
d. are incurred even if nothing is produced.
15. What is the formula for revenue?
a. P X Q
b. FC - VC
c. P - ATC
d. MR MC.
Short answer. Answer nine of the following fully for 5 pts. each.
1. How does accounting profit differ from economic profit?

2. What is the profit maximizing equation, regardless of type of market structure?

3. What are sunk costs?

4. Why do monopolists incur deadweight losses?

5. Given roadside produce stands and Farmers Markets, do you think there is any product whose
market even remotely approaches perfect competition? If so, which one, and why? If not, why?

6. Give one example of a cartel.

7. What is SuperDuper Savers dominant strategy, given the chart below?

SuperDuper Saver

Ultimate Saver
Increase the size of store
and parking lot
Do not increase the size
of store and parking lot/

Increase the size of

store and parking lot
SuperDuper Saver =
$50
Ultimate Saver = $65
SuperDuper Saver =
$250
Ultimate Saver = $35

Do not increase the size

of store and parking lot/
SuperDuper Saver = $25
Ultimate Saver = $275
SuperDuper Saver = $85
Ultimate Saver = $135

8. Give an example of tying.

9.

What is one reason a firm might achieve monopoly status?

10. How can the government act with a monopoly?

11. What are the two externalities in monopolistic competition? Briefly give your opinion on which one
holds the most sway in your local community.