If a perfectly competitive firm incurs an economic loss, it should


1.  If a perfectly competitive firm incurs an economic loss, it should

a. shut down immediately.

b. try to raise its price.

c. shut down in the long run.

d. shut down if this loss exceeds fixed cost.


2.  In the long run, a firm is said to be experiencing decreasing returns to scale if a 10 percent increase in inputs results in

a. an increase in output from 100 to 110.

b. a decrease in output from 100 to 90.

c. an increase in output from 100 to 105.

d. a decrease in output from 100 to 85.


3.  If MRP > MLC, it means that a firm should

a. use less labor.

b. use more labor.

c. increase its fixed capacity.

d. decrease its fixed capacity.


4.  Which of the following distinctions helps to explain the difference between relevant and irrelevant cost?

a. accounting cost vs. direct cost

b. historical cost vs. replacement cost

c. sunk cost vs. fixed cost

d. variable cost vs. incremental cost




5.  For a given percentage change in sales, the higher the degree of operating leverage,

a. the higher will be the percentage change in profit.

b. the lower will be the percentage change in profit.

c. the higher will be the absolute change in profit.

d. the lower will be the absolute change in profit.


6.  MC increases because

    a. MC naturally increases as firm nears capacity.

b. labor is paid overtime wages when volume increases.

c. in the short run, MC always increases.

d. the law of diminishing returns takes effect.


7.  Which of the following actions has the best potential for experiencing economies of scope?

a. producing a product that has appeal to a wider segment of the market

b. producing computers and software

c. producing spaghetti and soft drinks

d. producing cars and trucks


 8.  In the short run, finding the optimal amount of variable input involves which relationship?

    a. MP = MC

    b. AP = MP

    c. MP = 0

d. MRP = MFC


9.  If an oligopolistic firm decides to raise its price,

a. other firms will automatically follow.

b. none of the other firms will follow.

c. other firms may follow if it is the price leader.

d. only some of the firms will follow.

 10. Break-even analysis is useful in all the following cases, except:

a. the calculation of alternative cases when time is of the essence.

b. the making of small, quick corrections.

c. in the early stages of a product plan, when few details are available.

d. to prepare a detailed, “bottom-up” plan.


11. The main difference between the price-quantity graph of a perfectly competitive firm and a monopoly is

a. that the competitive firm’s demand curve is horizontal, while that of the monopoly is downward sloping.

b. that a monopoly always earns an economic profit while a competitive company always earns only normal profit.

c. that a monopoly maximizes its profit when marginal revenue is greater than marginal cost.

d. that a monopoly does not incur increasing marginal cost.


12. When a firm increased its output by one unit, its AC rose from $45 to $50. This implies that its MC is

a. $5.

b. between $45 and $50.

c. greater than $50.

d. cannot be determined from the above information.



13. Which of the following cost relationships is not true?

a. AFC = AC – MC

    b. TVC = TC – TFC

c. the change in TVC/the change in Q = MC

d. the change in TC/the change in Q = MC





14. In economic analysis, any amount of profit earned above zero is considered “above normal” because

a. normally firms are supposed to earn zero profit.

b. this would indicate that the firm’s revenue exceeded both its accounting and opportunity cost.

c. this would indicate that the firm was at least earning a profit equal to its opportunity cost.

d. this would indicate that the firm’s revenue exceeded its accounting cost.


15. Which of the following conditions would definitely cause a perfectly competitive company to shut down in the short run?

    a. P < MC

    b. P = MC < AC

c. P < AVC

    d. P = MR


16. The relationship between MC and AC can best be described as follows

a. when AC increases, MC starts to increase.

b. when MC increases, AC starts to increase.

c. when MC decreases, AC decreases.

d. when MC exceeds AC, AC starts to increase.


17. The demand curve which assumes that competitors will follow price decreases but not price increases is called

a. an industry demand curve.

b. an inelastic demand curve.

c. a kinked demand curve.

d. a competitive demand curve.




 18. The existence of a kinked demand curve under oligopoly conditions may result in

a. price flexibility.

b. price rigidity.

c. competitive pricing.

d. none of the above.


19. In economic theory, if an additional worker adds less to the total output than previous workers hired, it is because

a. there may be less that this person can do, given the fixed capacity of the firm.

b. he/she is less skilled than the previously hired workers.

c. everyone is getting in each other’s way.

d. the firm is experiencing diminishing returns to scale.


20. If firms are earning economic profit in a monopolistically competitive market, which of the following is most likely to happen in the long run?

a. some firms will leave the market

b. firms will join together to keep others from entering

c. new firms will enter the market, thereby eliminating the economic profit

d. firms will continue to earn economic profit


21. A monopoly will usually produce

a. where its demand curve is inelastic.

b. where its demand curve is elastic.

c. where its demand curve is either elastic or inelastic.

d. only when its demand curve is perfectly inelastic.




22. Which of the following indicate when Stage I ends and Stage II begins in the short run production?

    a. When AP = 0

    b. When MP = 0

c. When MP = AP

    d. When MP starts to diminish



23. If a company wants to break even at 20,000 units, its variable cost per unit is $3, and its fixed cost per period is $40,000, its selling price per unit will have to be

a. $5.

b. $5.50.

c. $6.

d. $6.50.


24. Which of the following statements best represents a difference between short-run and long-run cost?

    a. Less than one year is considered the short run; more than one year the long run.

b. there are no fixed costs in the long run.

c. in the short run labor must always be considered the variable input and capital the fixed input.

d. all of the above are true.


25. Suppose a firm is currently maximizing its profits (i.e., following the MR=MC rule). Assuming it wants to continue maximizing its profits, if its variable costs decrease, it should

a. lower its price in response to the lower costs.

b. raise its price in order to earn more profits.

c. maintain the same price.

d. not enough information to answer this question.




26. The learning curve indicates that

a. economies of scale is taking effect.

b. repetition of various production tasks cause unit costs to decrease.

c. workers must learn new skills in order to improve.

d. it takes time to learn a new skill.


27. Which of the following characteristics is most important in differentiating between perfect competition and all other types of markets?

a. whether or not the product is standardized

b. whether or not there is complete market information about price

c. whether or not firms are price takers

d. all of the above are equally important.


The following information is to be used in answering the questions below.

Company A sells its product for $4 per unit, has variable costs per unit of $2.50, and its fixed cost is $50,000 per period.

Company B sells a product similar to A’s for $3.80 per unit, has variable costs per unit of $1.80, and its fixed cost is $80,000 per period.


28. If production reaches 70,000 units per period, then

a. A’s profit will be higher than B’s.

b. B’s profit will be higher than A’s.

c. both will earn the same profit.

d. cannot tell which will make the higher profit.


29. Porter’s “Five Forces” Model is based on

a. the laws of supply and demand.

b. the law of diminishing returns.

c. the Structure-Conduct-Performance model.

d. the key factors affecting demand.

 30. Which of the following relationships is correct?

    a. When marginal product starts to decrease, marginal cost starts to decrease.

    b. When marginal cost starts to increase, average cost starts to increase.

    c. When marginal cost starts to increase, average variable cost starts to increase.

d. When marginal product starts to decrease, marginal cost starts to increase.



31. Average fixed cost is

a. AC minus AVC.

    b. TC divided by Q.

    c. AVC minus MC.

    d. TC minus TVC.


32. The four-firm concentration ratio

a. indicates the total profitability among the top four firms in an industry.

b. is an indicator of the degree of monopolistic competition.

c. indicates the presence and intensity of an oligopoly market.

d. is used by the government as a basis for anti-trust cases.


33. When a firm increased its output by one unit, its AC decreased. This implies that

a. MC < AC.

    b. MC = AC.

    c. MC < AFC.

    d. The law of diminishing returns has not yet taken effect.




34. The following is not one of the strengths of the Cobb-Douglas production function:

a. both marginal product and returns to scale can be estimated from it.

b. it can be converted into a linear function for ease of calculation.

c. it shows a production function passing through increasing returns to constant returns and then to decreasing returns.

d. the sum of the exponents indicates whether returns to scale are increasing, constant or decreasing.



35. At the break-even point, degree of operating leverage

a. is at its highest point.

b. is at its lowest point.

c. cannot be defined.

d. none of the above.



36. When a company is faced by a kinked demand curve, the marginal revenue curve

a. will be upward sloping.

b. will be horizontal.

c. will always be zero at the quantity produced.

d. will be discontinuous.


37. Which of the following is not true about the law of diminishing returns?

    a. It is a short run phenomenon.

    b. It refers to diminishing marginal product.

    c. It will have an impact on the firm’s marginal cost.

d. It divides Stage I and II of the production process.

    e. All of the above are true.



38. Which of the following is a reason for economies of scale?

a. fixed costs are spread out as volume increases.

b. the law of diminishing returns does not take effect.

c. input productivity increases as a result of greater specialization.

d. there is greater savings in transportation costs.

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39. An increase in fixed cost will

a. decrease the break-even quantity point.

b. increase the break-even quantity point.

c. will be offset by an increase in price.

d. will have no effect on the analysis.


40. In order to find the quantity which must be produced when a certain amount of profit is required per period, the basic break-even formula must be adjusted by

a. adding the required profit to the variable cost.

b. deducting the required profit from revenue.

c. adding the required profit to fixed cost.

d. none of the above.


41. Which of the following cost functions indicates that the law of diminishing returns takes effect as soon as production begins?

a. 1000 + 2.5Q + .05Q2

    b. 1000 + 2.5Q

    c. 1000 + 2.5Q – 1.2Q2 + .03Q3

    d. Not enough information to determine this




42. The law of diminishing returns begins first to affect a firm’s short-run cost structure when

a. average variable cost begins to increase.

b. marginal cost begins to increase.

c. average cost begins to increase.

d. average fixed cost begins to decrease.


43. The main factor that explains the difference between accounting cost and economic cost is

a. opportunity cost.

b. fixed cost.

c. variable cost.

d. all of the above help to explain the difference.


44. Economies of scale is indicated by

a. declining long run AVC.

b. declining long run AFC.

c. declining long run AC.

d. declining long run TC.


45. When a firm’s MC curve shifts to the right, it implies that

a. new firms are entering the market.

b. labor productivity is decreasing.

c. labor productivity is increasing.

d. the firm’s overhead costs are decreasing.


46. When a firm experiences increasing returns to scale

a. its AFC will decrease.

b. its AFC will increase.

c. its AC will increase.

d. its AC will decrease.

 47. If a firm’s rent increases, it will affect its cost structure in the following way:

    a. AVC will increase.

    b. MC will increase.

c. TFC will increase.

d. all of the above will increase.


48. Assuming the existence of economies of scale, if a firm finds that it can reduce its unit cost by decreasing its scale of production, it means that

a. it has too much production capacity relative to its demand.

b. it should try to produce less.

c. the law of diminishing returns has not taken effect.

d. it has too much fixed overhead relative to its variable cost.


49. Which of the following relationships implies that a firm’s short run cost function is linear?

    a. MC = AC

b. MC = AVC

    c. AC = AFC + AVC

    d. MC > AC



50. Which of the following cost functions will exhibit both decreasing and increasing marginal costs?

a. a cubic cost function

b. a quadratic cost function

c. a linear cost function

d. all of the above

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