Dokuz Eylül University
Faculty of Business
Department of Economics
Fall 2011
ECO 1001 PROBLEM SET III
Q1) Richard is consuming X and Y so that MUx/Px = 6 and MUy/Py = 10. To maximize utility,
Richard should
A) continue to consume the same amount of X and Y, as the consumer is already maximizing
utility.
B) consume less of both X and Y.
C) consume more X and less Y.
D) consume less X and more Y.
Q2) The law of diminishing marginal utility
A) refers to the decrease in total satisfaction as more units of a good are consumed.
B) refers to the decrease in additional satisfaction created by consumption of more and more
units of a good.
C) refers to the idea that total utility is negative.
D) All of the above
Q3) A fall in the price of Pepsi that causes a household to shift its purchasing pattern away from
substitutes and toward Pepsi is the
A) income effect of a price change.
B) substitution effect of a price change.
C) complementary effect of a price change.
D) diminishing marginal utility effect of a price change.
Q4) When the consumer’s indifference curve is just tangent to the budget constraint which of the
following conditions is satisfied?
A) MUx = MUy
B) TUx = TUy
C) MUx/Px = MUy/Py
D) TUx/Px = TUy/Py
Q5) If labor is a variable input in production, the law of diminishing marginal returns implies that in
the short run
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A) labor’s marginal product is constant.
B) labor’s marginal product decreases after a certain point.
C) total product is negative.
D) total product is negative after a certain point has been reached.
Q6) If the marginal product of labor is less than the average product of labor, then the
A) marginal product must be increasing.
B) average product must be decreasing.
C) marginal product must be decreasing.
D) Both B and C
Q7) Assume the total product of two workers is 130 and the total product of three workers is 150.
The average product of the third worker is __________, and the marginal product of the third
worker is __________.
A) 40; 10
B) 50; 20
C) 13.33; 6.67
D) 120; 100
Q8) As a firm’s expenditures for capital and labor increase, its isocost line
A) shifts out parallel to the original isocost line.
B) shifts in parallel to the original isocost line.
C) rotates outward on the Y-intercept.
D) rotates outward on the X-intercept.
Q9) The least costly way to produce any given level of output is indicated by
A) the point of intersection between the isoquant corresponding to that level of output and the Yaxis.
B) the point of intersection between the isoquant corresponding to that level of output and the Xaxis.
C) the point of tangency between an isocost line and the isoquant corresponding to that level
of output.
D) the isocost line corresponding to that level of output.
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Refer to the information provided in figure below to answer the questions that follow.
Q10) If the price of capital is $20, then along isocost line AB total cost is
A) $300.
B) $1200.
C) $2400.
D) indeterminate from this information, as the price of labor is not given.
Q11) The firm is currently along isocost CD. If the price of capital is $20, then the price of labor is
A) $4.
B) $20.
C) $80.
D) indeterminate from this information.
Q12) The firm’s isocost line would shift from CD to CE if
A) the price of capital fell.
B) the firm's total expenditure on inputs increased.
C) the price of labor fell.
D) either the price of labor fell or the firm's total expenditure on inputs increased.
Q13) The slope of isocost AB is
A) -1.
B) 0.
C) 1.
D) indeterminate from this information, as the prices of capital and labor are not given.
Q14) As output increases, average fixed costs
A) decrease.
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B) initially decrease and then increase.
C) remain constant.
D) increase.
Refer to the information provided in table below to answer the questions that follow.
Q15) Assuming the price of labor (L) is $5 per unit and the price of capital (K) is $10 per unit, what
production technique should this firm use to produce 2 units of output?
A) Production technique A
B) Production technique B
C) The firm is indifferent between production technique A and production technique B.
D) It is impossible to determine if the firm should select production technique A or B because total
fixed costs are not given.
Q16) If the marginal cost curve is below the average variable cost curve, then
A) average variable costs are increasing.
B) average variable costs are decreasing.
C) marginal cost must be decreasing.
D) average variable costs could either be increasing or decreasing.
Q17) The short-run average total cost curve eventually begins to increase at an increasing rate
because of
A) economies of scale.
B) the constraint that the firm cannot change production technologies.
C) diminishing returns phenomena.
D) increasing returns to scale.
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Refer to the information provided in table below to answer the following questions.
Q18) Assume that fruit baskets are sold in a perfectly competitive market. The market price of a
fruit basket is $22. To maximize profits, Exotic Fruit should sell __________ fruit basket(s).
A) three
B) four
C) five
D) six
Q19) A firm in a perfectly competitive industry is producing 50 units, its profit-maximizing
quantity. Industry price is $2, total fixed costs are $25, and total variable costs are $40. The firm's
economic profit is
A) $15.
B) $30.
C) $35.
D) $60.
Refer to the information provided in figure below to answer the questions that follow.
Q20) For this farmer to maximize profits he should produce __________ bushels of wheat.
A) 6
B) 9
C) 12
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D) 16
Q21) If this farmer is maximizing profits, his total costs will be
A) $11.
B) $66.
C) $90.
D) $132.
Q22) If this farmer is maximizing his profits, his TVC is
A) $24.
B) $42.
C) $108.
D) $255.
Q23) This farmer’s fixed costs are
A) $0.
B) $24.
C) $45.
D) indeterminate unless we know the level of output the firm is producing.
Q24) If this farmer is maximizing profits, his total revenue will be
A) $90.
B) $135.
C) $180.
D) $240.
Q25) If this farmer is maximizing profits, his profit will be
A) -$24.
B) $45.
C) $48.
D) $72.
Q26) If this farmer is maximizing profit, his operating profit (or loss) is
A) -$24.
B) $48.
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C) $72.
D) $156.
Q27) This farmer would earn a zero operating profit if price was
A) $7.
B) $9.
C) $10.
D) $11.
Q28) This farmer would earn a zero economic profit if price was
A) $7.
B) $9.
C) $10.
D) $11.
Q29) This farmer’s shutdown point is at a price of
A) $0.
B) $4.
C) $7.
D) $10.
Q30) In long run equilibrium for a perfectly competitive industry, firms earn _________ economic
profits and produce ___________.
A) zero; efficiently
B) zero; inefficiently
C) positive; efficiently
D) positive; inefficiently
Q31) When an increase in the scale of production leads to higher average costs, the industry
exhibits
A) diminishing returns.
B) increasing returns to scale.
C) decreasing returns to scale.
D) constant returns to scale.
Q32) A monopoly is an industry with
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A) a single firm in which the entry of new firms is blocked.
B) a small number of firms each large enough to impact the market price of its output..
C) many firms each able to differentiate their product.
D) many firms each too small to impact the market price of its output.
Q33) An important distinction between perfect competition and monopoly is that in
A) perfect competition, there is no distinction between the firm and the industry.
B) perfect competition, the firm is the industry.
C) monopoly, the market demand curve faces the firm.
D) monopoly, the firm produces less than the total quantity supplied.
Q34) A monopolist sets both price and quantity, and the amount of output that it supplies depends
A) only on the marginal cost curve.
B) only on the demand curve.
C) on both its marginal cost curve and the demand curve that it faces.
D) on both its average cost curve and the demand curve that it faces.
Q35) For a monopolist, if total revenue increases as output decreases, then marginal revenue is
A) equal to price.
B) zero.
C) positive.
D) negative.
Refer to the information provided in figure below to answer the question that follows.
Q36) The profit-maximizing level of output for the Memory Company is __________ high school
yearbooks.
A) 0
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B) 200
C) 300
D) 350
Q37) The profit-maximizing price for the Memory Company’s high school yearbook is
A) $0.
B) $9.
C) $16.
D) $20.
Q38) The profit-maximizing level of profit for the Memory Company is
A) -$1,800.
B) -$1,200.
C) -$800.
D) $0.
Q39) The Memory Company’s operating profit is
A) -$800.
B) -$1,000.
C) $800.
D) $1,000.
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