TUTORIAL CHAPTER 10,11 &12

The Costs of Production

1. Total revenue equals
a. price x quantity.
b. price/quantity.
c. (price x quantity) - total cost.
d. output - input.

2. Stick Storage manufactures and sells computer flash drives. Last year it sold 2 million
flash drives at a price of $10 each. For last year, the firm's
a. accounting profit was $20 million.
b. economic profit was $20 million.
c. total revenue was $20 million.
d. explicit costs was $20 million.

3. Billy’s Bean Bag Emporium produced 300 bean bag chairs but sold only 275 of the units
it produced. The average cost of production for each unit of output produced was $100.
The price for each of the 275 units sold was $95. Total profit for Billy’s Bean Bag
Emporium would be
a. -$3,875.
b. $26,125.
c. $28,500.
d. $30,000.

4. Gwen has decided to start her own photography studio. To purchase the necessary
equipment, Gwen withdrew $2,000 from her savings account, which was earning 3%
interest, and borrowed an additional $4,000 from the bank at an interest rate of 7%. What
is Gwen's annual opportunity cost of the financial capital that has been invested in the
business?
a. $60
b. $280
c. $340
d. $660

Scenario 13-9
Ellie has been working for an engineering firm and earning an annual salary of $80,000.
She decides to open her own engineering business. Her annual expenses will include
$15,000 for office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for
utilities, and a $35,000 salary for a secretary/bookkeeper. Ellie will cover her start-up
expenses by cashing in a $20,000 certificate of deposit on which she was earning annual
interest of $500.

5. Refer to Scenario 13-9. Ellie's annual implicit costs will equal

a. $55,200.
b. $75,200.
c. $80,500.
 d. $165,700.

6. Refer to Scenario 13-9. Ellie's annual accounting costs will equal

a. $55,200.
b. $75,200.
c. $80,500.
d. $165,700.

7. Refer to Scenario 13-9. Ellie's annual economic costs will equal

a. $55,200.
b. $75,200.
c. $80,500.
d. $135,700.

8. A production function describes

a. how a firm maximizes profits.
b. how a firm turns inputs into output.
c. the minimal cost of producing a given level of output.
d. the relationship between cost and output.

9. When a firm's only variable input is labor, then the slope of the production function
measures the
a. quantity of labor.
b. quantity of output.
c. total cost.
d. marginal product of labor.

10. Riva crafts and sells hard cider as a part-time job. She can bottle and sell four cases in a
week. She is considering hiring her friend Atul to help her. Atul can bottle and sell three
cases per week. What is the maximum total output possible if Riva hires Atul?
a. 3 cases
b. 4 cases
c. 7 cases
d. 11 cases

Table 13-1

Number of Workers Total Output Marginal Product

0 0 --
1 30
2 45
3 60
4 50
5 40
11. Refer to Table 13-1. What is total output when 1 worker is hired?
a. 10
b. 30
c. 45
d. 75

12. Refer to Table 13-1. What is total output when 2 workers are hired?
a. 15
b. 45
c. 75
d. 120

13. Refer to Table 13-1. What is total output when 3 workers are hired?
a. 15
b. 60
c. 105
d. 135

Table 13-6
Wooden Chair Factory
Output
Number of Number of (chairs Marginal
Workers Machines produced Product of Cost of Cost of
per hour) Labor Workers Machines Total Cost
1 2 5
2 2 10
3 2 20
4 2 35
5 2 55
6 2 70
7 2 80

14. Refer to Table 13-6. Each worker at the Wooden Chair Factory costs $12 per hour. The
cost of each machine is
$20 per day regardless of the number of chairs produced. If the factory produces at a rate
of 70 chairs per hour and operates 8 hours per day, what is the factory’s total labor cost
per day?
a. $72
b. $112
c. $576
d. $616

15. Refer to Table 13-6. Each worker at the Wooden Chair Factory costs $12 per hour. The
 cost of each machine is$20 per day regardless of the number of chairs produced. What is
the total daily cost of producing at a rate of 55 chairs per hour if the factory operates 8
hours per day?
a. $480
b. $576
c. $520
d. $616

16. Refer to Table 13-6. Each worker at the Wooden Chair Factory costs $12 per hour. The
cost of each machine is$20 per day regardless of the number of chairs produced. Assume
the number of machines does not change. If the factory produces at a rate of 78 chairs per
hour, what is the total machine cost per day?
a. $20
b. $40
c. $240
d. We are unable to determine total machine costs from the information given.

17. Refer to Table 13-6. Each worker at the Wooden Chair Factory costs $12 per hour. The
cost of each machine is $20 per day regardless of the number of chairs produced. If the
factory produces at a rate of 35 chairs per hour, what is the total labor cost per hour?
a. $40
b. $48
c. $384
d. $424

18. Refer to Table 13-6. Assume the Wooden Chair Factory currently employs 5 workers.
What is the marginal product of labor when the factory adds a 6th worker?
a. 5 chairs per hour
b. 15 chairs per hour
c. 25 chairs per hour
d. 70 chairs per hour

19. Refer to Table 13-6. Assume the Wooden Chair Factory currently employs 2 workers.
What is the marginal product of labor when the factory adds a 3rd worker?
a. 5 chairs per hour
b. 10 chairs per hour
c. 20 chairs per hour
d. 25 chairs per hour

20. Refer to Table 13-6. The Wooden Chair Factory experiences diminishing marginal product
of labor with the addition of which worker?
a. the third worker
b. the fourth worker
c. the fifth worker
d. the sixth worker
 21. A total-cost curve shows the relationship between the
a. quantity of an input used and the total cost of production.
b. quantity of output produced and the total cost of production.
c. total cost of production and profit.
d. total cost of production and total revenue.

22. When a factory is operating in the short run,

a. it cannot alter variable costs.
b. total cost and variable cost are usually the same.
c. average fixed cost rises as output increases.
d. it cannot adjust the quantity of fixed inputs.

23. A firm that produces and sells furniture gets to choose

a. how many workers to hire in both the short run and the long run.
b. the size of its factories in the short run but not in the long run.
c. which short-run average-total-cost curve to use in both the short tun and the
long run.
d. All of the above are correct.

24. When a firm experiences constant returns to scale,

a. long-run average total cost is unchanged, even when output increases.
b. long-run marginal cost is greater than long-run average total cost.
c. long-run marginal cost is less than long-run average total cost.
d. the firm is likely to experience coordination problems.

25. When a firm is experiencing diseconomies of scale, long-run

a. average total cost is minimized.
b. average total cost is greater than long-run marginal cost.
c. average total cost is less than long-run marginal cost.
d. marginal cost is minimized.

Figure 13-9
The figure below depicts average total cost functions for a firm that produces
automobiles.
26. Refer to Figure 13-9. Which of the curves is most likely to characterize the short-run
average total cost curve of the smallest factory?
a. ATCA
b. ATCB
c. ATCC
d. ATCD

27. Refer to Figure 13-9. Which curve represents the long-run average total cost?
a. ATCA
b. ATCB
c. ATCC
d. ATCD

28. Refer to Figure 13-9. At levels of output less than M, the firm experiences
a. economies of scale.
b. diseconomies of scale.
c. constant returns to scale.
d. both diminishing marginal productivity and coordination problems.

29. Refer to Figure 13-9. The firm experiences constant returns to scale at which output levels?
a. output levels less than M
b. output levels between M and N
c. output levels greater than N
d. All of the above are correct as long as the firm is operating in the long run.
30. Refer to Figure 13-9. At output levels greater than N, the firm experiences
a. economies of scale.
 b. constant returns to scale.
c. diseconomies of scale.
d. minimum efficient scale.

Applications and Problems

Scenario 13-22
Suppose that a small hair styling salon had revenues of $150,000 in a given year. The owner spent
$10,000 on utilities, $60,000 on supplies (shampoo, conditioner, hair coloring and other chemicals,
etc.), and $50,000 on equipment (mirrors, chairs, scissors, curling irons, etc.), including
maintenance. The owner could have earned $50,000 working at another salon.

Refer to Scenario 13-22. What is the accounting profit for the hair styling salon?

Refer to Scenario 13-22. What is the economic profit for the hair styling salon?

Topic 11 Firms in Perfectly Competitive Markets

Question 1
To maximize profit, a firm will produce the level of output where MR = MC. If a firm
actually makes a profit depends on the relationship of price to average total cost. What are
the three possible relationships between price and average total cost that determine if a firm
will make a profit, experience a loss, or break even?

Question 2
Werner & Sons is a manufacturer of three-ring binders operating in a perfectly competitive
industry. Table 12-5 shows the firm's cost schedule.

Table 12-5
Average
Quantity Variable Total Marginal Average
Variable
(cases) Cost Cost Cost Total Cost
Cost
0 $0 $76
1 30 106
2 50
3 134
4 140
5 160
6 114
7 150
8 190
9 316

Use the table to answer the following questions.

a. Complete Table 12-5 by filling in the blank cells.
b. Werner is selling in a perfectly competitive market at a price of $40. What is the profit
maximizing or loss-minimizing output?
c. Calculate the firm's profit or loss.
d. Should the firm continue to produce in the short run? Explain.
e. Calculate the profit or loss. Should the firm continue to produce in the short run? Explain
your answer.

Question 3

Use the figure above to answer the following questions.

a. How can you determine that the figure represents a graph of a perfectly competitive firm?
Be specific; indicate which curve gives you the information and how you use this
information to arrive at your conclusion.
b. What is the market price?
c. What is the profit-maximizing output?
d. What is total revenue at the profit-maximizing output?
e. What is the total cost at the profit-maximizing output?
f. What is the profit or loss at the profit-maximizing output?
g. What is the firm's total fixed cost?
h. What is the total variable cost?

Question 4
 The figure above shows the cost curves of a perfectly competitive firm in the coffee market.
Use the graph in Figure 12-19 to answer the following questions. Assume the market price is
$3 per pound.
a. What is the lowest price at which the coffee grower will supply output in the short run?
b. In the diagram draw the firm's demand curve (label this "MR" for marginal revenue).
c. What is the firm's profit-maximizing output?
d. Is the firm earning a profit or a loss? Identify the area in the graph that represents the
firm's profit or loss.

Topic 12 Monopoly

1) If we use a narrow definition of monopoly, then a monopoly is defined as a firm

A) that has been granted special production rights by the government.
B) that can ignore the actions of all other firms because it produces a superior product
compared to its rivals' products.
C) that can ignore the actions of all other firms because it produces a product for which there
are no close substitutes.
D) that has the largest market share in an industry.

2) A monopoly is characterized by all of the following except

A) there are only a few sellers, each selling a unique product.
B) entry barriers are high.
C) there are no close substitutes to the firm's product.
D) the firm has market power.

3) In a natural monopoly, throughout the range of market demand

A) marginal cost is above average total cost and pulls average total cost upward.
B) average total cost is above marginal cost and pulls marginal cost upward.
C) marginal cost is below average total cost and pulls average total cost downward.
D) there are diseconomies of scale.

Figure 15-1
4) Refer to Figure 15-1. Which of the following statements about the firm depicted in the
diagram is true?
A) The fact that this firm is a natural monopoly is shown by the long-run average total cost
curve still falling when it crosses the demand curve.
B) The fact that this firm is a natural monopoly is shown by the continually declining market
demand curve as output rises.
C) The fact that this firm is a natural monopoly is shown by the continually declining
marginal revenue curve as output rises.
D) The fact that this firm is a natural monopoly is shown by the fact that marginal cost lies
below the long-run average total cost where the firm maximizes its profits.

5) A monopolist's profit-maximizing price and output correspond to the point on a graph

A) where average total cost is minimized.
B) where total costs are the smallest relative to price.
C) where marginal revenue equals marginal cost and charging the price on the market
demand curve for that output.
D) where price is as high as possible.

Figure 15-2

Figure 15-2 above shows the demand and cost curves facing a monopolist.

6) Refer to Figure 15-2. To maximize profit, the firm will produce at output level
A) Q1.
B) Q2.
C) Q3.
D) Q4.

7) Refer to Figure 15-2. If the firm's average total cost curve is ATC2, the firm will
A) suffer a loss.
B) break even.
C) make a profit.
D) face competition.

Table 15-1
Price per Unit Quantity Demanded Total Cost of Production
(units) (dollars)
$85 10 $530
80 11 540
75 12 550
70 13 560
65 14 575
60 15 595
55 16 625

A monopoly producer of foreign language translation software faces a demand and cost
structure as given in Table 15-1.
8) Refer to Table 15-1. What is the firm's profit-maximizing output and what is the price
charged to sell this output?
A) P = $85; Q = 10
B) P = $80; Q = 11
C) P = $70; Q = 13
D) P = $65; Q = 14

9) Refer to Table 15-1. When producing the profit-maximizing output, what is the amount of
the firm's profit?
A) $335
B) $350
C) $880
D) $910

Figure 15-4
Figure 15-4 shows the demand and cost curves for a monopolist.

10) Refer to Figure 15-4. What is the profit-maximizing/loss-minimizing output level?

A) 600 units
B) 800 units
C) 940 units
D) 1,160 units

11) Refer to Figure 15-4. What is the amount of the monopoly's profit?
A) $2,700
B) $4,200
C) $10,400
D) $12,600

12) Refer to Figure 15-4. What is likely to happen to this monopoly in the long run?
A) New firms will enter the market to eliminate its profits.
B) It will expand its output to take advantage of economies of scale so as to further increase
its profit.
C) As long as there are entry barriers, this firm will continue to enjoy economic profits.
D) It will be regulated by the government because of its excess profits.

Table 15-3
Total Marginal Marginal
Price Quantity Revenue Revenue Total Cost Cost
$17 3 $51 ----- $56 -----
16 4 64 $13 63 $7
15 5 75 11 71 8
14 6 84 9 80 9
13 7 91 7 90 10
12 8 96 5 101 11

Assume Table 15-3 gives the monthly demand and costs for subscriptions to basic cable for
Comcast, a cable television monopoly in Philadelphia.

13) Refer to Table 15-3. If Comcast wants to maximize its profits, what price (P) should it
charge and how many cable subscriptions per month (Q) should it sell?
A) P = $12; Q = 8
B) P = $14; Q = 6
C) P = $16; Q = 4
D) P = $15: Q = 5

14) Refer to Table 15-3. If Comcast maximizes its profits how much profit will it earn?
A) $84
B) $40
C) $4
D) Comcast will break even.

Figure 15-9
Figure 15-9 shows the demand and cost curves for a monopolist.

15) Refer to Figure 15-9. What is the economically efficient output level?
A) 600 units
B) 800 units
C) 940 units
D) 1160 units

16) Why does a monopoly cause a deadweight loss?

A) because it does not produce some output for which marginal benefit exceeds marginal
cost
B) because it appropriates a portion of consumer surplus for itself
C) because it increases producer surplus at the expense of consumer surplus
D) because it does not produce some output for which demand exceeds supply

17) Market power refers to

A) the ability of consumers to dictate what products should be produced.
B) the ability of a firm to advertise its product and succeed in selling more output.
C) the ability of a firm to sell at a lower price than rival sellers.
D) the ability of a firm to charge a price higher than the marginal cost of production.

18) A market economy benefits from market power

A) if the majority of the population are entrepreneurs.
B) if firms with market power do research and development with the profits earned.
C) if market power gets so bad the government creates public enterprises.
D) under no circumstances.

Figure 15-12
Figure 15-12 shows the cost and demand curves for a monopolist.

19) Refer to Figure 15-12. Assume the firm maximizes its profits. What is the amount of
consumer surplus?
A) $21
B) $124
C) $186
D) $332

Applications and Problems

Refer to Figure 15-7. Use the figure above to answer the following questions.
a. What is the profit-maximizing quantity and what price will the monopolist charge?
b. What is the total revenue at the profit-maximizing output level?
c. What is the total cost at the profit-maximizing output level?
d. What is the profit?
e. What is the profit per unit (average profit) at the profit-maximizing output level?
f. If this industry was organized as a perfectly competitive industry, what would be the
profit-maximizing price and quantity?

Topic 12 Monopoly

1) If we use a narrow definition of monopoly, then a monopoly is defined as a firm

A) that has been granted special production rights by the government.
B) that can ignore the actions of all other firms because it produces a superior product
compared to its rivals' products.
C) that can ignore the actions of all other firms because it produces a product for which there
are no close substitutes.
D) that has the largest market share in an industry.

2) A monopoly is characterized by all of the following except

A) there are only a few sellers, each selling a unique product.
B) entry barriers are high.
C) there are no close substitutes to the firm's product.
D) the firm has market power.

3) In a natural monopoly, throughout the range of market demand

A) marginal cost is above average total cost and pulls average total cost upward.
B) average total cost is above marginal cost and pulls marginal cost upward.
C) marginal cost is below average total cost and pulls average total cost downward.
D) there are diseconomies of scale.

Figure 15-1
4) Refer to Figure 15-1. Which of the following statements about the firm depicted in the
diagram is true?
A) The fact that this firm is a natural monopoly is shown by the long-run average total cost
curve still falling when it crosses the demand curve.
B) The fact that this firm is a natural monopoly is shown by the continually declining market
demand curve as output rises.
C) The fact that this firm is a natural monopoly is shown by the continually declining
marginal revenue curve as output rises.
D) The fact that this firm is a natural monopoly is shown by the fact that marginal cost lies
below the long-run average total cost where the firm maximizes its profits.

5) A monopolist's profit-maximizing price and output correspond to the point on a graph

A) where average total cost is minimized.
B) where total costs are the smallest relative to price.
C) where marginal revenue equals marginal cost and charging the price on the market
demand curve for that output.
D) where price is as high as possible.

Figure 15-2

Figure 15-2 above shows the demand and cost curves facing a monopolist.

6) Refer to Figure 15-2. To maximize profit, the firm will produce at output level
A) Q1.
B) Q2.
C) Q3.
D) Q4.
7) Refer to Figure 15-2. If the firm's average total cost curve is ATC2, the firm will
A) suffer a loss.
B) break even.
C) make a profit.
D) face competition.

Table 15-1
Price per Unit Quantity Demanded Total Cost of Production
(units) (dollars)
$85 10 $530
80 11 540
75 12 550
70 13 560
65 14 575
60 15 595
55 16 625

A monopoly producer of foreign language translation software faces a demand and cost
structure as given in Table 15-1.
8) Refer to Table 15-1. What is the firm's profit-maximizing output and what is the price
charged to sell this output?
A) P = $85; Q = 10
B) P = $80; Q = 11
C) P = $70; Q = 13
D) P = $65; Q = 14

9) Refer to Table 15-1. When producing the profit-maximizing output, what is the amount of
the firm's profit?
A) $335
B) $350
C) $880
D) $910

Figure 15-4
Figure 15-4 shows the demand and cost curves for a monopolist.

10) Refer to Figure 15-4. What is the profit-maximizing/loss-minimizing output level?

A) 600 units
B) 800 units
C) 940 units
D) 1,160 units

11) Refer to Figure 15-4. What is the amount of the monopoly's profit?
A) $2,700
B) $4,200
C) $10,400
D) $12,600

12) Refer to Figure 15-4. What is likely to happen to this monopoly in the long run?
A) New firms will enter the market to eliminate its profits.
B) It will expand its output to take advantage of economies of scale so as to further increase
its profit.
C) As long as there are entry barriers, this firm will continue to enjoy economic profits.
D) It will be regulated by the government because of its excess profits.

Table 15-3
Total Marginal Marginal
Price Quantity Revenue Revenue Total Cost Cost
$17 3 $51 ----- $56 -----
16 4 64 $13 63 $7
15 5 75 11 71 8
14 6 84 9 80 9
13 7 91 7 90 10
12 8 96 5 101 11

Assume Table 15-3 gives the monthly demand and costs for subscriptions to basic cable for
Comcast, a cable television monopoly in Philadelphia.

13) Refer to Table 15-3. If Comcast wants to maximize its profits, what price (P) should it
charge and how many cable subscriptions per month (Q) should it sell?
A) P = $12; Q = 8
B) P = $14; Q = 6
C) P = $16; Q = 4
D) P = $15: Q = 5

14) Refer to Table 15-3. If Comcast maximizes its profits how much profit will it earn?
A) $84
B) $40
C) $4
D) Comcast will break even.

Figure 15-9
Figure 15-9 shows the demand and cost curves for a monopolist.

15) Refer to Figure 15-9. What is the economically efficient output level?
A) 600 units
B) 800 units
C) 940 units
D) 1160 units

16) Why does a monopoly cause a deadweight loss?

A) because it does not produce some output for which marginal benefit exceeds marginal
cost
B) because it appropriates a portion of consumer surplus for itself
C) because it increases producer surplus at the expense of consumer surplus
D) because it does not produce some output for which demand exceeds supply

17) Market power refers to

A) the ability of consumers to dictate what products should be produced.
B) the ability of a firm to advertise its product and succeed in selling more output.
C) the ability of a firm to sell at a lower price than rival sellers.
D) the ability of a firm to charge a price higher than the marginal cost of production.

18) A market economy benefits from market power

A) if the majority of the population are entrepreneurs.
B) if firms with market power do research and development with the profits earned.
C) if market power gets so bad the government creates public enterprises.
D) under no circumstances.

Figure 15-12
Figure 15-12 shows the cost and demand curves for a monopolist.

19) Refer to Figure 15-12. Assume the firm maximizes its profits. What is the amount of
consumer surplus?
A) $21
B) $124
C) $186
D) $332

Applications and Problems

Refer to Figure 15-7. Use the figure above to answer the following questions.
a. What is the profit-maximizing quantity and what price will the monopolist charge?
b. What is the total revenue at the profit-maximizing output level?
c. What is the total cost at the profit-maximizing output level?
d. What is the profit?
e. What is the profit per unit (average profit) at the profit-maximizing output level?
f. If this industry was organized as a perfectly competitive industry, what would be the
profit-maximizing price and quantity?