QUESTIONS FOR CHAPTER 5

I. Multiple choices:

1. Xavier opens up a lemonade stand for two hours. He spends $10 for ingredients and
sells $60 worth of lemonade. In the same two hours, he could have mowed his neighbor’s
lawn for $40. Xavier has an accounting profit of _____ and an economic profit of ____.
a. $50, $10
b. $90, $50
c. $10, $50
d. $50, $90
2. Diminishing marginal product explains why, as a firm’s output increases, a. the
production function and total-cost curve both
get steeper.
b. the production function and total-cost curve both
get flatter.
c. the production function gets steeper, while the
total-cost curve gets flatter.
d. the production function gets flatter, while the
total-cost curve gets steeper.
3. A firm is producing 1,000 units at a total cost of $5,000. If it were to increase
production to 1,001 units, its total cost would rise to $5,008. What does this information
tell you about the firm?
a. Marginal cost is $5, and average variable cost is $8.
b. Marginal cost is $8, and average variable cost is $5.
c. Marginal cost is $5, and average total cost is $8.
d. Marginal cost is $8, and average total cost is $5.
4. A firm is producing 20 units with an average total cost of $25 and a marginal cost of
$15. If it were to increase production to 21 units, which of the following must occur?
a. Marginal cost would decrease.
b. Marginal cost would increase.
c. Average total cost would decrease.
d. Average total cost would increase.
5. The government imposes a $1,000 per year license fee on all pizza restaurants. As a
result, which cost curves shift?
a. average total cost and marginal cost
b. average total cost and average fixed cost
c. average variable cost and marginal cost
d. average variable cost and average fixed cost
6. If a higher level of production allows workers to specialize in particular tasks, a firm
will likely exhibit ________ of scale and ________ average total cost.
a. economies, falling
b. economies, rising
c. diseconomies, falling
d. diseconomies, rising
7. A perfectly competitive firm
a. chooses its price to maximize profits.
b. sets its price to undercut other firms selling similar
products.
c. takes its price as given by market conditions.
d. picks the price that yields the largest market share.
8. A competitive firm maximizes profit by choosing the quantity at which
a. average total cost is at its minimum.
b. marginal cost equals the price.
c. average total cost equals the price.
d. marginal cost equals average total cost.
9. A competitive firm’s short-run supply curve is its ________ cost curve above its
________ cost curve.
a. average total, marginal
b. average variable, marginal
c. marginal, average total
d. marginal, average variable
10. If a profit-maximizing, competitive firm is producing a quantity at which marginal
cost is between average variable cost and average total cost, it will
a. keep producing in the short run but exit the market in the long run.
b. shut down in the short run but return to production in the long run.
c. shut down in the short run and exit the market in the long run.
d. keep producing both in the short run and in the long run.
11. In the long-run equilibrium of a competitive market with identical firms, what are the
relationships among price P, marginal cost MC, and average total cost ATC ?
a. P > MC and P> ATC.
b. P> MC and P = ATC.
c. P = MC and P > ATC.
d. P = MC and P = ATC.
12. Pretzel stands in New York City are a perfectly competitive industry in long-run
equilibrium. One day, the city starts imposing a $100 per month tax on each stand. How
does this policy affect the number of pretzels consumed in the short run and the long run?
a. down in the short run, no change in the long run
b. up in the short run, no change in the long run
c. no change in the short run, down in the long run
d. no change in the short run, up in the long run
13. A firm is a natural monopoly if it exhibits the following as its output increases:
a. decreasing marginal revenue.
b. increasing marginal cost.
c. decreasing average revenue.
d. decreasing average total cost.
14. For a profit-maximizing monopoly that charges the same price to all consumers, what
is the relationship between price P, marginal revenue MR, and marginal cost MC?
a. P = MR and MR = MC.
b. P > MR and MR = MC.
c. P = MR and MR > MC
d. P > MR and MR > MC.
15. If a monopoly’s fixed costs increase, its price will _____ and its profit will _____.
a. increase, decrease
b. decrease, increase
c. increase, stay the same
d. stay the same, decrease
16. Compared to the social optimum, a monopoly firm chooses
a. a quantity that is too low and a price that is too high.
b. a quantity that is too high and a price that is too low.
c. a quantity and a price that are both too high.
d. a quantity and a price that are both too low.
17. The deadweight loss from monopoly arises because a. the monopoly firm makes
higher profits than a competitive firm would.
b. some potential consumers who forgo buying the good value it more than its marginal
cost.
c. consumers who buy the good have to pay more than marginal cost, reducing their
consumer surplus.
d. the monopoly firm chooses a quantity that fails to equate price and average revenue.
18. When a monopolist switches from charging a single price to practicing perfect price
discrimination, it reduces
a. the quantity produced.
b. the firm’s profit.
c. consumer surplus.
d. total surplus.

II. Applications:
1. Bob’s lawn-mowing service is a profit-maximizing, competitive firm. Bob mows
lawns for $27 each. His total cost each day is $280, of which $30 is a fixed cost.
He mows 10 lawns a day. What can you say about Bob’s short-run decision
regarding shutdown and his long-run decision regarding exit?
2. Suppose the book-printing industry is competitive and begins in a long-run
equilibrium.
a) Draw a diagram showing the average total cost, marginal cost, marginal revenue,
and supply curve of the typical firm in the industry.
b) Hi-Tech Printing Company invents a new process that sharply reduces the cost of
printing books. What happens to Hi-Tech’s profits and to the price of books in the
short run when Hi-Tech’s patent prevents other firms from using the new
technology?
c) What happens in the long run when the patent expires and other firms are free to
use the technology?