Econ 315, Stanley

Spring 2015, CSUF

Practice for the Final
FINAL WILL BE COMPREHENSIVE (chapters 1, 2, 3, 5, 6, 7, 8, parts of 9-10,
11 with emphasis on new material).
WHAT YOU WILL NEED FOR THE TEST:
- Scantron Form No. X-101864-ERI or #882
- #2 pencil
- calculator
Scratch paper will be made available.
NOT ALLOWED: formula sheets, books, lecture notes.
MY RECOMMENDATION: take this practice exam seriously.
Which is to say: answer each question without the help of notes or book, use it as a
final check on your preparation, possibly with a clock/watch near you to keep track
of time. AlsoTRY ALL THE FREE MULTIPLE CHOICE QUESTIONS ON THE
BAYE WEBSITE AGAIN.

1.
The price of computers has fallen while the quantity purchased has
remained constant. This implies that the demand for computers has
A.
decreased while the supply of computers has increased.
B.
increased.
C.
decreased while the supply of computers has decreased.
D.
increased while the supply of computers has increased.
E.
become more volatile.
2.
A.
B.
C.
D.
E.

The first derivative of total profit with respect to quantity is

average revenue.
marginal revenue.
marginal profit.
average profit.
total profit.

3.
A firm will have constant profits of $10,000 per year at the end of each
year for the next two years and zero profits thereafter. If the interest rate
is 6%, what is the value of the firm?
A.
$34,650
B.
$40,000
C.
$20,000
D.
$18,333
4.
A.
B.
C.
D.
E.

The price elasticity of market demand primarily depends on the

number of firms in an industry.
cost of producing an industry's output.
availability of substitutes.
substitutability of inputs in producing a product.
supply curves of inputs.

5.
A.
B.
C.
D.
E.

The demand for a consumer product is more elastic the

more broadly defined the product.
longer the time period covered.
higher the average income of consumers.
larger the share of a consumer's income the item represents.
larger the number of firms in the market.

6.
The demand for answering machines is Q = 1,000 - 150P + 25I. Assume that
per capita disposable income I is $200. At a price P of $10, the price
elasticity of demand is (in absolute value)
A.
3.0.
B.
3.33.
C.
1.33.
D.
0.33.
E.
1.0.
7.
A.
B.
C.
D.
E.

As we move down a linear demand curve, demand becomes

more elastic.
less elastic at first and then more elastic.
steeper.
more elastic at first and then less elastic.
less elastic.

8.
"Colombia, Brazil Advance Proposal to Withhold 10 Percent of Export
Output" (Wall Street Journal, September 23, 1991, p. B6). A Colombian delegate
to the International Coffee Organization said that if all its members withheld
10 percent of export output, the international price would rise 20 percent. This
statement implies the elasticity of demand for coffee is approximately
A.
0.00.
B.
5.00.
C.
2.00.
D.
0.20.
E.
0.50.
9.
In Russia, as per capita income rises from $1,980 to $2,020, everything
else remaining constant, annual per capita consumption of vodka falls from 525
to 475 liters; this implies an income elasticity of demand for vodka of
A.
-0.50.
HINT: Use Midpoint Formula
B.
-5.0.
C.
2.0.
D.
5.0.
E.
0.50.
10.
A.
B.
C.
D.

The maximum legal price that can be charged in a market is:

producer surplus
a price floor
the full economic price
a price ceiling

11.
A.
B.
C.
D.
E.

When total product is at its maximum,

average product is greater than marginal product.
average product is maximized.
average product equals marginal product.
marginal product equals 1.
average product equals 1.

12.
A.
B.
C.
D.
E.

Whenever average
marginal product
total product is
total product is
marginal product
total product is

product is declining with increases in input usage,

is less than average product.
declining with increases in input.
increasing with increases in input.
is greater than average product.
at a maximum.

13.
If labor produces output according to Q = 8L1/2, labor costs $10, and
output sells for $100, the optimal level of L (to maximize profit) is
A.
8.
B.
16.
C.
1,600.
D.
2.
E.
10.

14.
If output is produced according to Q = 4l + 6k, (l is the quantity of L
and k is the quantity of K) the price of K is $12, and the price of L is $6,
then the cost minimizing combination of K and L capable of producing 60 units of
output is
A.
l = 5 and k = 6.66.
B.
l = 7.5 and k = 5.
C.
l = 6 and k = 6.
D.
l = 0 and k = 10.
E.
l = 15 and k = 0.
15.
If labor is on the vertical axis and capital is on the horizontal axis,
the slope of an isocost line is given by
A.
-PL /PK.
B.
-PK /PL.
C.
-PK PL.
D.
-MPL /MPK.
E.
-MPK /MPL.
16.
An example of implicit costs is the
A.
bad-debt liabilities arising out of excessive sales on credit.
B.
prices paid for purchased inputs.
C.
opportunity cost of owner-supplied capital and labor that is not
recognized by accountants.
D.
the firms uses for money that could be borrowed.

17.

A student in a managerial economics class calculated the four-firm

concentration ratio and HHI for industries A and B. What is the proper
conclusion she can draw from the following findings?

A. Industry B is a monopoly.
B. The market power of firms in industry A is greater than that in industry B.
C. C4 is higher for industry A while the HHI is higher for industry B. This
inconsistency must be due to a calculation error.
D. Neither industry is perfectly competitive.
18.
A.
B.
C.
D.

Which is a means of avoid opportunism?

spot exchange
fixed wages
pension plans
contracts

19.
A. It
B. It
C. It
D. It

The main advantage of a piece rate compensation plan is:

gives workers an incentive to produce a large quantity of output
gives workers an incentive to produce output of high quality
requires monitoring
always makes workers better-off

20.
A.
B.
C.
D.
E.

In
at
at
at
so
so

a competitive market the equilibrium price is determined

the intersection of the firm's demand and market supply curves.
the intersection of the market demand and market supply curves.
the intersection of the firm's demand and marginal cost curves.
as to cover the costs of the potential firms.
as to cover the costs of the firms currently in the industry.

21.
A representative firm with short-run total cost given by TC = 50 + 2q +
2q2 operates in a competitive industry where the short-run market demand and
supply curves are given by QD = 1,410 - 40P and QS = -390 + 20P. Its short-run
profit maximizing level of output is
A.
0 units.
B.
1 unit.
C.
2 units.
D.
5 units.
E.
7 units.
22. Consider the same setup as in question 21.
operating in the industry in the short run?
A. 3
B. 7
C. 30
D. 130
E. none of the above

What is the number of firms

23.
Henry's Hosiery has exclusive rights to sell Yves Chevrier lingerie in the
United States. The demand for Yves underwear faced by Henry is given by
Q = 250 - 0.5P. Henry's costs are given by TC = 50Q + 5.5Q2. Its maximum
monopoly profits are
A.
$6,750.
B.
$7,050.
C.
$7,500.
D.
$7,750.
E.
$8,750.
24.
P =
a)
b)
c)
d)

You are the manager of a monopoly that faces a demand curve described by
230 - 20Q. Your costs are C = 5 + 30Q. The profit-maximizing price is
150
90
130
110

25. Suppose that initially the long run equilibrium price is $50 in a perfectly
competitive market. Firms are making zero economic profits. Then the market
demand shrinks permanently and some firms leave the industry and the industry
returns back to a long run equilibrium. What will be the new equilibrium price,
assuming cost conditions in the industry remain constant?
a) $50
b) $45
c) Lower than $50 but exact value cannot be known without more information.
d) Larger than $45 but exact value cannot be known without more information.

26. A market where there are only a few sellers competing with each other is
known as
A.
monopolistically competitive.
B.
oligopolistic.
C.
monopolistic.
D.
cartelized.
27. When economies of scale are large, firms can reduce their average total cost
a) by selling off their subsidiaries
b) by merging into an even larger firm
c) by eliminating the bureaucratic costs
d) by hiring professional managers
28. Suppose the firms cost function is given by C(Q)= 100 + Q + 2*Q2 + 3*Q3 .
At an output of Q=2, what are the marginal and average total costs,
respectively?
a) $45, $67
b) $17, $67
c) $14, $17
d) $45, $17
29. In the problem above, at Q=2, what can you deduce about trends in the firms
average costs?
a) the firm is at the lowest point on its average cost curve (bottom of U)
b) the firm is producing in the range of increasing unit costs
c) the firm is producing in the range of decreasing unit costs
d) cannot tell
30. Which of the following is NOT true regarding a firm in a monopolisticallycompetitive industry in the LONG-RUN?
a) the firm earns no economic profits
b) the firm produces a larger quantity than in the short-run
c) the firm produces a smaller quantity than in the short-run
d) the firm is providing the goods at the cheapest price to society
(P=MC=minimum ATC)

Consider the following payoff matrix:

FIRM A

Low Price
High Price

FIRM B
Low Price
(10,9)
(-10,7)

High Price
(15,8)
(11,11)

31. Which of the following is true?

a) a dominant strategy for Firm A is high price
b) there does not exist a dominant strategy for Firm A
c) a dominant strategy for Firm B is low price
d) none of the above
32. What are the Nash equilibrium strategies for Firms A and B in a a-shot game?
a) (low price, low price)
b) (high price, high price)
c) (low price, high price)
d) (high price, low price)
33. By definition, price discrimination occurs when:
a) a seller raises prices when demand surges
b) a seller charges different buyers the same price
c) a seller charges different prices based on different costs of service
d) a seller charges different prices for the same good or service
34. Suppose a firm sells in three different markets. In market A, management
thinks that demand elasticity is -1.1. In market B, management thinks
elasticity is -3.5. In market C, management thinks elasticity is -8. In which
market will a profit-maximizing firm set the highest price?
a) market A
b) market B
c) market C
d) one cannot say for sure
35. What should a firm charge for a package of 3 t-shirts if a typical
consumers inverse demand function is P=10-Q??
a) $7
b) $21
c) $21.50
d) $25.50

WORKED PROBLEMS

1.The following table contains information for a price-taking competitive firm. Complete the table
and determine the profit maximizing output when price (=MR) is $10.
Output
0
1
2
3
4
5
6

Total Cost
10

Marginal Cost

Fixed Cost

Average Cost

5
10
50
18
20
150

2. You own a hot dog stand at a university where there are few other food options for
students. You notice that when you charge $2.00 you sell 100 hotdogs. When you raise the
price to $3.00 you only sell 80 hotdogs. 2 questions:
a. What type of demand elasticity conditions are present? (Hint: you do not have to compute
the precise own price elasticity of demand.)
b. Should you raise or lower your hotdog price to achieve your highest total revenue?

3. SupposeyouarethemanagerofAlphaEnterprisesafirmthatholdsapatentthatmakesitthe
exclusivemanufacturerofbubblememorychips.Basedontheestimatesprovidedbyaconsultant,you
knowthattherelevantdemandandcostfunctionsforbubblememorychipsare

.
a.Whatisthefirm'sinversedemandfunction?
b.Whatisthefirm'smarginalrevenuewhenproducing4unitsofoutput?
c.Whatarethelevelsofoutputandpricewhenyouaremaximizingprofits?SHOWINGRAPH
4. You have just been hired as a manager for a new health spa in Reitrement Village. The owner has
commissioned a market study that estimates the average customers monthly demand curve for
visiting the health spa to be:
Qd = 50 0.25P
The cost of operating is C(Q) = 3Q, where Q= number of visits
The owner has been charging a $20 per-month membership fee and a $5 per visit fee. Part of your
salary is 10% of monthly profits. Suggest a pricing strategy that will increase your salary.