Principles of Microeconomics

Crash Course and Chapter-by-Chapter Critique

By Irma Dircks

608 pages. Charts, graphs, indexes, bibliography
ISBN: 978-3-00-023932-8
Price: $39.80 (Paperback)
Also available as e-book for $15
Publisher: Ancilla Tutorials
Publication date: July 16, 2008

Test Questions with Answers

Chapter 11. Supply Theory II.
Firm Behaviour

Chapter 11 ― Question 1
If marginal revenue exceeds marginal cost, a competitive firm should

  1. shut down temporarily
  2. expand output
  3. reduce output
  4. lower the price of its product
    *B. Profits are maximised when MR = MC.

Chapter 11 ― Question 2
Which of the following is true

  1. economic profit minus accounting profit equals explicit costs
  2. economic profit is below accounting profit
  3. economic profit is higher than accounting profit
  4. accounting profit is economic profit minus opportunity costs
    *B. Answer C is nonsense. Economic profit is lower than accounting profit. Answers A and D are traps.
    Remember that accounting profit is revenue minus explicit cost; economic profit is revenue minus all opportunity cost or minus implicit and explicit costs, which is the same.

Chapter 11 ― Question 3
If total fixed costs are $2,000 and total variable costs are $3,000 for 4 units, what is the average total cost of an output level of 4 units?

  1. 5,000
  2. 1,250
  3. 750
  4. 500
    *B. 5000/4.

Chapter 11 ― Question 4
If total revenues cover explicit costs, but not implicit costs

  1. there are accounting and economic profits
  2. there are accounting profits only
  3. there are losses
  4. there are neither economic nor accounting profits
    *D. Accounting profits are profits that exceed - rather than cover - explicit costs.

Chapter 11 ― Question 5
A firm has total revenues of $1m. Its total expenses are $700,000. The firm's owner earned a salary of $100,000 in his previous job.
1) What is the firm's economic profit?
2) What is its accounting profit?
*1) Economic profit = $200,000.
*2) Accounting profit = $300,000.
Remember that economic profits are profits above explicit and implicit costs.

Chapter 11 ― Question 6
Equilibrium in an industry of perfect competitors means

  1. there are no accounting profits
  2. all firms make economic profits
  3. there are no economic profits to attract new entrants
  4. None of the above.
    *C. Equilibrium means nobody leaves, nobody enters. A and B are nonsense.

Chapter 11 ― Question 7
The long-run average total cost of producing 20 units is $22 and the long-run average total cost of producing 25 units is $21.  This is due to

  1. economies of scale
  2. diminishing marginal utility
  3. constant returns to scale
  4. increasing returns
    *A. Answer B is nonsense. Marginal utility is applied to demand theory, not to cost theory. Answer D is wrong because in the long run new investment is made which initially causes increasing returns to scale.

Chapter 11 ― Question 8
A firm employs 20 units of labour and pays $20 for each. It employs 20 units of capital and pays  $60 for each. The marginal product of capital is twice that of labour. The firm should

  1. double labour
  2. substitute capital for labour
  3. increase labour
  4. double capital
    *C. There are no figures for the marginal products of labour and capital. But you are told that MP of capital is twice that of labour. So you can invent a formula:
MP of labour MP of capital 10 20  Or: 40 80
Price of labour Price of capital 20 60 20 60

The least-cost rule stipulates that the two fractions should be in the same ratio. The factor whose fraction has the higher value should be increased. This is labour.

Chapter 11 ― Question 9
A firm moves from one point on an isoquant curve to another on the same isoquant curve. Which of the following will not happen

  1. a change in the mix of the inputs
  2. a change in the quantity of output
  3. a change in the costs of production
    *B. B will not happen because isoquant means "the same quantity". A movement along the isoquant curve is by definition a change in the mix of inputs and can hence be a change in the costs of production.

Chapter 11 ― Question 10
What magnitudes are indicated on the x-axis and the y-axis of the following curves:

  1. the PPF
  2. the production function
  3. the isoquant curve
    *1) two goods on the axes
    *2) number of workers on the x-axis, output on the y-axis
    *3) two factors on the axes

Chapter 11 ― Question 11
Distinguish the following terms

  1. marginal product
  2. marginal product revenue
  3. marginal revenue
  4. marginal cost
    *1) Marginal product = increase in output created by one additional worker or machine
    *2) Marginal product revenue = marginal product x price received for it
    *3) Marginal revenue = Increase in company revenues created by selling one additional unit of the firm's product
    *4) Marginal cost = Cost of producing one additional units

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