Wilfrid Laurier University

EC120
Midterm 2 Exam-AID
Review Package

Course Coordinator: Andrew Evans

Coordinator E-mail: [email protected]

Tutor: Fisnik Lokku

Tutor: Eric Presacco

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Part A: Answer each question by marking the computer card with the best answer.

1. An economy can produce video games and houses. If worker productivity improves
for video games and remains unchanged for houses then the production possibility
frontier shifts out and the opportunity cost of video games

a) in parallel fashion; rises

b) in parallel fashion; falls
c) in parallel fashion; stays constant
d) and its slope will change falls
e) and its slope will change; rises

2. Andrea is on the way to a concert. She has paid $50 for her ticket. Before entering
the concert hall she is approached by someone who is prepared to pay her $80 for
her ticket. Andrea’s opportunity cost of going to the concert is

a) zero
b) $30
c) $50
d) $80
e) $130

3. Sue runs a sewing store. Revenues are $120,000 per year and raw materials costs
(cloth, thread) are $50,000 per year. Sue owns her own store and thus does not pay
any rent. If she rented out her store she could earn $30,000 per year in rent. In order
to run her business Sue had to give up a $20,000 per year job. Her annual
accounting profits are . Her annual economic profits are .

a) $70,000 $20,000
b) $70,000 $40,000
c) $70,000 $50,000
d) $40,000 $20,000
e) $20,000 $20,000

4. If the marginal product of labour is falling then (pick the best answer)

a) marginal cost must be rising

b) marginal cost must be falling
c) average product must be rising
d) average product must be falling
e) both a) and d) are correct

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5. If widgets are produced with one variable input (labour) and one fixed input
(capital) then if the price of labour increases with no change in labour productivity
then the (pick the best answer)

a) Average total cost curve will shift up.

b) Average variable cost curve will shift down
c) Average fixed cost curve will shift up
d) Marginal cost curve will shift up
e) Both a) and d) are correct

6. If a doubling of all inputs causes output to triple then the production function
exhibits returns to scale which will imply that the

a) increasing long-run average cost curve is upward sloping

b) increasing short-run average total cost curve is U-shaped
c) increasing long-run average cost curve is downward sloping
d) decreasing long-run average cost curve is downward sloping
e) decreasing short-run average total cost curve is U-shaped

7. Which of the following statements about the relationship between marginal product
(MP) and average product (AP) is correct? (Pick the best answer).

a) If MP > AP then AP must be rising

b) If AP > MP then MP must be rising
c) If MP is falling then AP must be falling
d) If AP = MP then MP is maximized
e) Both a) and c) are correct

8. In the short-run an increase in the price of the variable factor with no change in
productivity will (pick the best answer)

a) cause the ATC curve to shift up

b) cause the AFC curve to shift up
c) not cause the MC curve to shift
d) All of the above are correct
e) Both a) and c) are correct

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9. If the production function is given by Q = 0.5K + 0.5L then the production function
exhibits and thus the long-run cost function will exhibit .

a) decreasing returns to scale diseconomies of scale

b) decreasing returns to scale economies of scale
c) increasing returns to scale diseconomies of scale
d) increasing returns to scale economies of scale
e) constant returns to scale constant costs

The following table applies to Questions 10, 11, 12 and 13

L 0 1 2 3 4 5
Q 0 100 250 390 500 600

10. Average variable cost is lowest when output equals

a) 100
b) 250
c) 390
d) 500
e) 600

11. Marginal cost is lowest when output is increased from

a) 0 to 100
b) 100 to 250
c) 250 to 390
d) 390 to 500
e) 500 to 600

12. If fixed costs equal $30, the price of labour is $10 per unit of labour, and raw
materials costs are zero then the average total cost of 500 units of output is

a) $0.08
b) $0.14
c) $10
d) $17.50
e) None of the above

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13. If fixed costs equal $30, the price of labour is $10 per unit of labour, and raw
materials costs are zero then between 0 and 100 units the marginal cost is

a) $0.10
b) $0.25
c) $0.40
d) $10
e) $40

14. The cost data for making toys is as follows. Fixed cost is $30. Cost of raw materials
is $0.15 per toy. The price of labour is $10 per hour and the average product of
labour is 100 toys per hour. The average total cost of producing 200 toys is

a) $0.25
b) $0.30
c) $0.40
d) $0.55
e) None of the above

15. A firm can choose between two plant sizes: A and B. The total cost functions for
each plant size are given below. The firm will switch from A to B if

TCA = 2,000,000 + 8Q
TCB = 14,000,000 + 2Q

a) Q > 6,000,000
b) Q > 4,000,000
c) Q > 3,000,000
d) Q < 3,000,000
e) Q > 2,000,000

16. The average revenue curve for a perfectly competitive firm is , the firm’s
marginal revenue curve and is the same as the .

a) downward sloping; is the same as; market demand curve

b) downward sloping; lies above; market demand curve
c) horizontal; is the same as; market demand curve
d) horizontal; lies above; firm’s demand curve
e) horizontal; is the same as; firm’s demand curve

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17. In the short-run, a decrease in the price of the fixed factor with no change in labour
productivity for all current and potential future firms in a perfectly competitive
industry will cause (pick the best answer)

a) output per firm to decrease

b) industry price to fall
c) firms to enter the industry
d) all of the above
e) None of the above

The table given below applies to questions 18, 19 and 20 and refers to a cost table faced
by every firm in a perfectly competitive industry.

Quantity 0 1 2 3 4 5 6 7
Total cost 50 70 80 100 130 170 220 280

18. If the market price is $25 then the firm should produce units in order to
maximize profits in the short-run.

a) 0 (i.e. the firm shuts down)

b) 3
c) 4
d) 5
e) 7

19. The firm will shutdown in the short-run if the price falls below

a) $10
b) $15
c) $20
d) $32.50
e) $33.33

20. The long-run equilibrium price in this industry equals

a) $15
b) $20
c) $32.50
d) $33.33
e) $40

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21. Suppose that in a perfectly competitive industry the short-run equilibrium P = $24.
Firm A is producing the output level at which ATC = $24, MC = $28 and AVC =
$16. In order to maximize profits Firm A should

a) shut down
b) increase output
c) reduce output but not shut down
d) not change output and make zero profit
e) not change output and make losses less than the fixed costs

22. Suppose that P < LRAC at the level of output chosen by all profit maximizing firms
in a perfectly competitive industry in short-run equilibrium. In adjusting to the
long-run equilibrium the price will and output per firm will

a) stay constant fall

b) rise fall
c) rise rise
d) fall rise
e) rise stay constant

23. The long-run impact of a permanent decrease in demand in a perfectly competitive

industry is that the price (P) will and output per firm (q) will .

[Note: The long-run impact is determined by comparing the long-run equilibrium

values of P and q before and after the increase in demand].

a) fall fall
b) fall stay constant
c) stay constant fall
d) stay constant stay constant
e) fall rise

24. Which of the following can act as an entry barrier

I. Brand proliferation
II. Economies of scale

a) Both I and II
b) Neither I nor II
c) I only
d) II only

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25. A firm can choose between two plant sizes: A and B. The total cost functions for
each plant size are given below. The firm will switch from A to B if

TCA = 2,000,000 + 8Q
TCB = 14,000,000 + 2Q

a) Q > 6,000,000
b) Q > 4,000,000
c) Q > 3,000,000
d) Q < 3,000,000
e) Q > 2,000,000

26. The average revenue curve for a perfectly competitive firm is , the firm’s
marginal revenue curve and is the same as the .

a) downward sloping; is the same as; market demand curve

b) downward sloping; lies above; market demand curve
c) horizontal; is the same as; market demand curve
d) horizontal; lies above; firm’s demand curve
e) horizontal; is the same as; firm’s demand curve

27. In the short-run, a decrease in the price of the fixed factor with no change in labour
productivity for all current and potential future firms in a perfectly competitive
industry will cause (pick the best answer)

a) output per firm to decrease

b) industry price to fall
c) firms to enter the industry
d) all of the above
e) None of the above

28. Suppose that in a perfectly competitive industry the short-run equilibrium P = $24.
Firm A is producing the output level at which ATC = $24, MC = $28 and AVC =
$16. In order to maximize profits Firm A should

a) shut down
b) increase output
c) reduce output but not shut down
d) not change output and make zero profit
e) not change output and make losses less than the fixed costs

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29. Suppose that P < LRAC at the level of output chosen by all profit maximizing firms
in a perfectly competitive industry in short-run equilibrium. In adjusting to the
long-run equilibrium the price will and output per firm will

a) stay constant fall

b) rise fall
c) rise rise
d) fall rise
e) rise stay constant

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The diagram below applies to Question 31 and 32 and it shows the private marginal cost
curve (MCP), which is also the supply curve (S), the private marginal benefit curve
(MBP), which is also the demand curve (D), and the external marginal cost curve (MCE).

31. In the diagram above the efficient output level is

a) 10
b) 30
c) 40
d) 50
e) 70

32. If the market illustrated in the diagram above is competitive and the government
imposes a tax equal to $10 per unit then total surplus will

a) rise
b) fall
c) stay constant
d) rise, fall or stay constant

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Part B (16 marks) Answer each question in the space provided.

B1. (8 marks). A perfectly competitive industry is in long-run equilibrium. Diagrams for

a typical firm in the industry (Firm A) and the market are given below. Assume that
minimum LRAC equals the minimum average cost of the SRATC curve illustrated in the
Firm A diagram.

a. (3 marks). Suppose that the demand curve shifts right. Illustrate the demand shift in the
market diagram and indicate the new short-run equilibrium
(i) price (labelled P1) on both the market and firm diagram (½ mark)
(ii) industry output (labelled Q1) on the market diagram (½ mark)
(iii) output of Firm A (labelled q1) on the firm A diagram (1 mark).
(iv) profits or losses of firm A on the firm A diagram. Use horizontal line shading to
indicate positive profits and vertical line shading to indicate negative profits
. (1 mark).

b. (3 marks). Illustrate what will happen to the industry in the long-run by indicating
(i) which curve(s) in the Market diagram will shift (1 mark)
(ii) the LR equilibrium price (labelled P2) in both diagrams. (½ mark).
(iii) the LR equilibrium industry output (labelled Q2) in the Market diagram (½ mark).
(iv) the LR output of firm A (labelled q2) in the Firm A diagram (1 mark)

c. (2 marks). Explain your answer to part b. In particular explain why curve(s) have
shifted and how this relates to profits and entry or exit.

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Solutions to Practice Midterm

Part A answers

1.d
2.d
3.a
4.a
5.e
6.c
7.a
8.a
9.e
10.c
11.b
12.b
13.a
14.c
15.e
16.e
17.e
18.b
19.b
20.c
21.c
22.c
23.d
24.a
25.e
26.e
27.e
28.c
29.c
30.b
31.a

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Part B (16 marks) Answer each question in the space provided.

B1. (8 marks). A perfectly competitive industry is in long-run equilibrium. Diagrams for

a typical firm in the industry (Firm A) and the market are given below. Assume that
minimum LRAC equals the minimum average cost of the SRATC curve illustrated in the
Firm A diagram.

a. (3 marks). Suppose that the demand curve shifts right. Illustrate the demand shift in the
market diagram and indicate the new short-run equilibrium
(i) price (labelled P1) on both the market and firm diagram (½ mark)
(ii) industry output (labelled Q1) on the market diagram (½ mark)
(iii) output of Firm A (labelled q1) on the firm A diagram (1 mark).
(iv) profits or losses of firm A on the firm A diagram. Use horizontal line shading to
indicate positive profits and vertical line shading to indicate negative profits
. (1 mark).

b. (3 marks). Illustrate what will happen to the industry in the long-run by indicating
(i) which curve(s) in the Market diagram will shift (1 mark)
(ii) the LR equilibrium price (labelled P2) in both diagrams. (½ mark).
(iii) the LR equilibrium industry output (labelled Q2) in the Market diagram (½ mark).
(iv) the LR output of firm A (labelled q2) in the Firm A diagram (1 mark)

c. (2 marks). In the space below explain your answer to part b. In particular explain why
curve(s) have shifted and how this relates to profits and entry or exit.
Positive profits attract entry. (½ mark)
Entry causes the market supply curve to shift right. (½ mark)
Entry continues until profits are zero. (½ mark)
Profits are zero when P = min ATC. (½ mark)

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