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ECON 247
Practice Final Examination

This practice final examination follows the format of the actual final examination in this course.
It will give you an indication of the level of difficulty of the questions on the final examination
and of the types of questions you can expect.

Part I: Multiple-Choice Questions (30 marks total)

1. When a firm is making a profit-maximizing production decision, which of the following

principles of economics is likely to be most important to the firm’s decision?

a. The cost of something is what you give up to get it.

b. A country’s standard of living depends on its ability to produce goods and
services.
c. Prices rise when the government prints too much money.
d. Governments can sometimes improve market outcomes.

2. What is the marginal product of an input in the production process?

a. the increase in total revenue obtained from an additional unit of that input
b. the increase in profit obtained from an additional unit of that input
c. the increase in total profit obtained from an additional unit of that input
d. the increase in quantity of output obtained from an additional unit of that input

3. Variable cost divided by quantity produced equals

a. average total cost.

b. marginal cost.
c. fixed cost.
d. average variable cost.

4. If marginal cost is rising,

a. average variable cost must be falling.

b. average fixed cost must be rising.
c. marginal product must be falling.
d. marginal product must be rising.

5. The efficient scale of a firm Is the quantity of output that

a. maximizes marginal product.

b. maximizes total revenue.
c. minimizes average total cost.
d. minimizes average variable cost.

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6. A profit-maximizing firm in a competitive market produces small rubber balls. When the
market price for small rubber balls falls below the minimum of its average total cost but
still lies above the minimum of average variable cost, what happens to the firm?

a. It will experience losses, but it will continue to produce rubber balls.

b. It will shut down.
c. It will be earning both economic and accounting profits.
d. It will be earning only accounting profits.

7. At the profit-maximizing level of output, which equation is correct?

a. Marginal revenue = average total cost

b. Marginal revenue = average variable cost
c. Marginal revenue = marginal cost
d. Average revenue = average total cost

8. Which of the following expressions is correct for a competitive firm?

a. Profit = total revenue – total variable cost

b. Marginal revenue = change in total revenue ÷ change in quantity of output
c. Average revenue = total revenue ÷ marginal revenue
d. Total revenue = marginal revenue + average revenue

9. When some resources used in production are available only in limited quantities, what is
the likely shape of the long-run supply curve in a competitive market?

a. downward sloping
b. upward sloping
c. horizontal
d. vertical

10. As a general rule, when accountants calculate profit, they account for explicit costs. What
do they usually ignore?

a. certain outlays of money by the firm

b. implicit costs
c. operating costs
d. fixed costs

11. What do we know about a monopoly’s marginal cost?

a. It will be less than its average fixed cost.

b. It will be less than the price per unit of its product.
c. It will exceed its marginal revenue.
d. It will equal its average total cost.

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12. When a single firm can supply a product to an entire market at a smaller cost than could
two or more firms, what is the industry called?

a. a resource industry
b. an exclusive industry
c. a government monopoly
d. a natural monopoly

13. In a competitive market, a firm’s supply curve dictates the amount it will supply. How
does a monopoly market compare?

a. The same statement applies.

b. The supply curve conceptually makes sense but, in practice, is never used.
c. The supply curve will have limited predictive capacity.
d. The supply curve does not exist.

14. What may antitrust laws do?

a. enhance the ability of firms to capture profits from a concentration of market

power
b. enhance the ability of firms to reduce economic losses
c. restrict the ability of firms to operate at the socially efficient level of production
d. restrict the ability of firms to merge

15. The process of buying a good in one market at a low cost and selling the good in another
market for a higher cost in order to profit from the price difference is called

a. sabotage.
b. conspiracy.
c. arbitrage.
d. collusion.

16. What will happen if firms in a monopolistically competitive market are earning positive
profits?

a. Firms will likely be subject to regulation.

b. Barriers to entry will be strengthened.
c. Some firms must exit the market.
d. New firms will enter the market.

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17. Which of the following situations is least likely to apply to a monopolistically

competitive firm?

a. Profit is positive in the short run.

b. Total cost exceeds total revenue in the short run.
c. Profit is positive in the long run.
d. Total revenue equals total cost in the long run.

18. When a market is monopolistically competitive, what is the typical firm in the market
likely to experience in the short run and in the long run?

a. positive profit in both the short run and the long run
b. positive or negative profit in the short run and a zero profit in the long run
c. zero profit in the short run and a positive or negative profit in the long run
d. zero profit in both the short run and the long run

19. What was discovered in the case study about Canada Goose, the Canadian maker of
outdoor apparel?

a. Advertising is psychological rather than informational.

b. Advertising helps differentiate a product from that of the competition.
c. Advertising impedes competition.
d. Advertising is more effective when social media is used.

20. Ignoring oligopoly and focusing on the other three types of market structure, in which of
those market structures does a profit-maximizing firm experience a zero economic profit?

a. perfect competition only

b. perfect competition and monopolistic competition
c. perfect competition and monopoly
d. monopolistic competition and monopoly

21. Which of the following characterizations typically applies to monopolistically

competitive firms?

a. many firms selling products that are similar but not identical
b. many firms selling identical products
c. a few firms selling products that are similar but not identical
d. a few firms selling highly differentiated products

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22. In an oligopoly market,

a. as the number of firms decreases, the market approaches a cartel equilibrium.

b. as the number of firms decreases, the market approaches a competitive market
equilibrium.
c. as the number of firms increases, the market approaches a competitive market
equilibrium.
d. as the number of firms increases, the market approaches a monopoly market
equilibrium.

23. What is the profit-maximizing price for monopoly firms?

a. a price that exceeds marginal cost

b. a price that exceeds fixed costs
c. a price that exceeds average revenue
d. a price that equals marginal revenue

24. Why is the prisoner’s dilemma an important game to study?

a. Most games present zero-sum alternatives.

b. It identifies the fundamental difficulty in maintaining cooperative agreements.
c. Strategic decisions that prisoners face are identical to those faced by firms
engaged in competitive agreements.
d. It shows how easy it is to maintain a cartel.

25. On what grounds is the practice of tying illegal?

a. It allows firms to expand their market power.

b. It allows firms to form collusive arrangements.
c. It prevents firms from forming collusive agreements.
d. It creates monopolies.

26. Why are labour markets different from most other markets?

a. Labour demand is represented by a vertical line on a supply-demand diagram.

b. Labour demand is represented by an upward-sloping line on a supply-demand
diagram.
c. Labour demand is derived.
d. Labour demand is differentiated.

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27. When we focus on the firm as a supplier of a good or a service, we assume that the firm
is a profit maximizer. When we focus on the firm as a demander of labour, what do we
assume the firm’s objective to be?

a. to minimize wages
b. to minimize variable costs
c. to maximize the number of workers hired
d. to maximize profit

28. The value of the marginal product of labour is equal to

a. the change in marginal cost caused by the addition of the last worker.
b. the change in total cost caused by the addition of the last worker.
c. the change in total revenue caused by the addition of the last worker.
d. the change in total profit caused by the addition of the last worker.

29. What does a firm’s labour-demand curve represent?

a. the quantity of labour supplied at the market wage

b. the marginal product of labour
c. the quantity of labour supplied based on the product demand
d. the number of workers that the firm is willing to hire at any given wage

30. Which of the following is most closely linked to a household member’s decision on how
much labour to supply?

a. the supply of factors of production other than labour

b. technological change
c. the trade-off between leisure and work
d. immigration trends

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Part II: Short-Answer Questions (30 marks total)

Answer any three of the following four questions. If you answer more than three questions, only
the first three will be marked. (10 marks each)

31. Suppose that a firm faces fixed costs of $40, and its variable costs are as shown in the
table below.

Outpu Profit
Price FC VC TC AVC ATC MC AFC TR MR
t
0 $25 $40 $0 $40 ---- ---- ---- ---- $ 0 ---- $-40

1 24 40 30

2 23 40 50

3 22 40 58

4 21 40 64

5 20 40 70

6 19 40 80

7 18 40 94

8 17 40 114

9 16 40 144

a. Calculate the total revenue (TR) and total cost (TC) if the (2 marks)
i. price is $24 and quantity is 1.
ii. price is $21 and quantity is 4.

b. Calculate the marginal revenue (MR) and marginal cost (MC) if the (2 marks)
i. price is $19 and quantity is 6.
ii. price is $18 and quantity is 7.

c. Calculate the average variable cost (AVC) if the (2 marks)

i. price is $20 and quantity is 5.
ii. price is $22 and quantity is 3.

d. Calculate the profits or losses if the (2 marks)

i. price is $18 and quantity is 7.
ii. price is $17 and quantity is 8.

e. Is this a competitive firm? How can you tell? (2 marks)

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32. a. List and describe the characteristics of a perfectly competitive market. (4 marks)

b. Explain how a firm in a competitive market identifies the profit-maximizing level

of production. When should the firm raise production, and when should the firm
lower production? (3 marks)

c. Why, in a perfectly competitive market, is the long-run supply curve more elastic
than the short-run supply curve? (3 marks)

33. Define the following terms and explain their importance to the study of economics.
(10 marks)
a. monopsony
b. diminishing marginal product of labour
c. price discrimination
d. Nash equilibrium
e. externality

34. a. Farmer McDonald gives banjo lessons for $20 an hour. One day he spends 10
hours planting $100 worth of seeds on his farm. What opportunity cost has he
incurred? What cost would his accountant measure? If the seeds will yield $200
worth of crops, does McDonald earn accounting profit? Does he earn an
economic profit? (6 marks)

b. What are opportunity costs? How do explicit and implicit costs relate to
opportunity costs? (4 marks)

ECON247v10 Practice Final Examination March 10, 2017