Economics Final Exam

1. The production function:

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A.Shows the level of utility at each level of consumption.
B.Shows the quantity produced at each price.
C.Shows the maximum output that can be produced with a given quantity of inputs.

D.Shows the different possible bundles of two goods that can be produced when resources are
fully employed.

2. The total amount of output produced is called:

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A.Total supply
B.Total product

C.Both a and b
D.None of the above

3. Which one of the following statements is true?

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A.If the marginal cost is greater than the average cost the average cost falls.
B.If the marginal cost is greater than the average cost the average cost increases.
C.If the marginal cost is positive total costs are maximized.
D.If the marginal cost is negative total costs increase at a decreasing rate if output increases.

Correct answer
B.If the marginal cost is greater than the average cost the average cost increases.

4. The average variable cost curve:

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A.Is derived from the average fixed costs.
B.Converges with the average cost as output increases.

C.Equals the total costs divided by the output.

D.Equals revenue minus profits.
5. In the _______ run, firms can only adjust the variable factors of production. In the
_______ run, firms are able to change all of the factors of production including capital.
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A.Long; Short

B.Medium; Short
C.Short; Long
D.None of the above

Correct answer
C.Short; Long

6. Total cost increases from £500 to £600 when output increases from 20 to 30 units.
Fixed costs are £200. Which of the following is true?
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A.Marginal cost is £20
B.Average cost falls

C.Variable cost rises by £100

D.Average fixed cost is £100

Correct answer
C.Variable cost rises by £100

7. If marginal product is below average product:

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A.The total product must fall
B.The average product will fall

C.Average variable costs will fall

D.Total revenue will fall

8. If the marginal revenue is less than the marginal cost then to profit maximize a firm
should:
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A.Reduce output

B.Increase output
C.Leave output where it is
D.Increase costs

9. If firms earn normal profits:

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A.They will aim to leave the industry
B.Other firms will join the industry
C.The total revenue equals total costs

D.No profit is made in accounting terms

Correct answer
D.No profit is made in accounting terms

10. In the short term a firm will produce provided the revenue:
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A.Covers fixed costs
B.Covers variable costs

C.Covers total costs

D.Covers sales

11. Which of the following is a key point that you should remember about perfect
competition?
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A.In a perfectly competitive industry, there are many small firms that each produce the same
product.
B.The perfectly competitive firm faces a horizontal demand curve and is too small to affect the
market price.
C.The perfectly competitive firm sells all of the units it produces at the prevailing market price.
D.All of the above.

12. Total revenue equals:

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A.Price plus the quantity
B.Price multiplied by the quantity sold

C.Price divided by the quantity sold

D.Price minus the quantity sold
13. If marginal revenue equals marginal cost:
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A.No profit is being made
B.Total revenue equals total cost
C.Profits are maximized

D.Producing another unit would increase profits

14. The purely competitive firm in Exhibit 21-1 should

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A.Close down
B.Produce 5 units of output
C.Product 10 units of output

D.Produce 12 units of output

Correct answer
D.Produce 12 units of output

15. The firm in Exhibit 21-1

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A.Will close immediately

B.Is earning a short-run economic profit

C.Is earning a short-run economic loss

D.Is operating in the long run
Correct answer
C.Is earning a short-run economic loss

16. The profit maximizing firm in Exhibit 21-1

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A.Has a profit per unit of $5

B.Is incurring a loss per unit of $40

C.Is incurring a loss per unit of $49
D.Is incurring a loss per unit of $108

Correct answer
B.Is incurring a loss per unit of $40

17. This profit-maximizing lumber mill incurs total costs of roughly: (see figure below)
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A.$2200 daily
B.$3300 daily

C.$4200 daily
D.$5200 daily

Correct answer
C.$4200 daily
18. This profit maximizing competitive firm will: (see figure below)
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A.Produce output level q5

B.Minimize total costs by producing output level q3

C.Experience fixed costs equal to 0P3fq4

D.Produce output level q4

Correct answer
D.Produce output level q4

19. If the above firm is a typical pure competitor in this industry, then the firm is: (see
figure below)
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A.Making normal accounting profit

B.Making zero economic profit
C.Breaking even

D.Making supernormal profits

Correct answer
D.Making supernormal profits

20. In the long run in perfect competition:

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A.The price equals the total revenue
B.Firms are allocatively inefficient
C.Firms are productively efficient
D.The price equals total cost

21. In perfect competition:

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A.Short run abnormal profits are competed away by firms leaving the industry
B.Short run abnormal profits are competed away by firms entering the industry

C.Short run abnormal profits are competed away by the government

D.Short run abnormal profits are competed away by greater advertising

22. In the short run firms in perfect competition will still produce provided:
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A.The price covers average variable cost

B.The price covers variable costs

C.The price covers average fixed cost
D.The price covers fixed costs

23. In the long run equilibrium in perfect competition:

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A.Price = average cost = marginal cost

B.Price = average cost = total cost

C.Price = marginal revenue = total cost
D.Total revenue = total variable cost

24. Refer to the figure below. Which of the following statements is true?
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A.This graph demonstrates that the monopoly could increase profit by increasing output to 4,000
units.
B.Both the monopoly and the competitive industry produce the same amount of output, 2,500
units, but only the monopoly charges a higher price, $4.
C.When firms in the competitive industry maximize profit, the industry produces 2,500 units-
where marginal revenue equals marginal cost.
D.This graph demonstrates that a monopoly would produce less output and charge a higher price
than a competitive industry faced with the same cost conditions.

25. Refer to the figure below and select the best answer choice. Assume that the firm
is producing 600 units. What should the firm do in order to maximize profit?
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A.The firm should increase the level of output until it reaches the minimum average cost.
B.The firm should increase the level of output because at 600 units, marginal revenue is greater
than marginal cost.

C.The firm should maintain output at 600 units, because at this output level, marginal revenue is
greater than marginal cost, marginal cost is minimized, and price is the highest.
D.The firm should increase output because at 600 units price is above marginal cost.

26. Imperfect competition generally leads to:

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A.P=MC
B.Poor quality and high prices
C.High prices, but better quality than under perfect competition

D.All of the above

Correct answer
B.Poor quality and high prices
27. Which of the following is the only difference between monopolistic competition and
perfect competition?
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A.Under perfect competition, firms produce where MC=MR, but under monopolistic competition,
firms produce where AC=MR.
B.Under perfect competition, firms sell a homogeneous product, but under monopolistic
competition, firms sell differentiated products.

C.Under perfect competition, there are fewer firms than under monopolistic competition.
D.None of the above

28. In the long-run, under monopolistic competition, prices are ______ marginal costs,
but economic profits are _______.
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A.Above; Positive
B.Below; Positive
C.Above; Zero

D.Below; Zero

29. Refer to the figure below. When market price equals $20, the profit-maximizing
firm:
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A.Produces 500 units of output and earns economic profit of $4,000.

B.Produces 320 units of output and earns economic profit of $3,200.
C.Produces 320 units of output and earns economic profit of $10.
D.Produces 500 units of output and earns economic profit of $5,000.
30. Refer to the figure below. How much of the total fixed cost is this firm unable to
pay?
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A.$360
B.$540

C.The entire fixed cost. Since the demand curve lies below the ATC curve, the firm does not earn
sufficient revenue to cover any of its fixed cost.
D.$900

SECTION II. TEN (10) TRUE/FALSE QUESTIONS.

6 of 10 points
This section will consist of ten questions, and you will be required to answer all. Each correct answer is worth
1 mark. [10 x 1=10 Marks]

1. All costs are considered to be variable in the long run, but both fixed and variable
costs may exist in the short run.
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True
False

Correct answer
True

2. If economic profits exist in a competitive market new firms will enter to drive down
price or raise costs
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True
False

3. A purely competitive firm producing that output at which P = MC is said to achieve

economic efficiency.
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True

False

4. Under pure competition, price and marginal revenue are identical.

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True
False

Correct answer
True

5. If the firm shuts down in the short run, it will incur losses equal to the fixed costs.
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True

False

6. Firms with some degree of market power include the perfect competitor and the
monopolistic competitor.
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True
False

7. If price is less than ATC, firms will realize economic profits which will lure new firms
into the industry.
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True
False
8. Monopolistically competitive firms will always earn a profit in the long run because
of the existence of high entry barriers.
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True

False

Correct answer
False

9. The short-run supply curve of a firm in a perfectly competitive industry is the portion
of its marginal cost curve that lies above its average variable cost curve.
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True
False

Correct answer
True

10. Any time that price is below the minimum point on the average variable cost curve,
total revenue will be less than total variable cost, and operating profit will be negative.
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True

False

SECTION III. FIVE (5) of TEN (10) SHORT ANSWER QUESTIONS.

11 of 0 points
This section contains ten (10) sets of questions. Each question is worth three (3) marks. Choose any five (5).
[5 x 3 = 15 Marks]

1. Define the term “economies of scale” and name two ways in which they are usually
achieved. [3 Marks]
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Economies of scale are cost advantages reaped by companies when production becomes
efficient. Companies can achieve economies of scale by increasing production and lowering
costs. This happens because costs are spread over a larger number of goods. Costs can be both
fixed and variable.
Individual feedback
ii) Technology

2. Define barriers to entry and list four types. [3 Marks]

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Barriers to entry are the obstacles or hindrances that make it difficult for new companies to enter
a given market. These may include technology challenges, government regulations, patents,
start-up costs, or education and licensing requirements.

3. Describe the major features of the monopoly market structure and cite two (2)
examples of firms in Belize that could be considered as monopolies. [3 Marks]

4. Draw a fully labelled diagram of a monopoly firm making a profit. [3 Marks]

5. Draw a fully labelled diagram of a perfectly competitive firm breaking even. [3

Marks]

6. What are the characteristics of a perfectly competitive market? [3 Marks]

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A perfectly competitive market has the following characteristics: There are many buyers and
sellers in the market. Each company makes a similar product. Buyers and sellers have access to
perfect information about price.
Individual feedback
Price-takers

7. What is market failure? [3 Marks]

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Market failure is the economic situation defined by an inefficient distribution of goods and
services in the free market. In market failure, the individual incentives for rational behavior do not
lead to rational outcomes for the group.

8. Market power means that firms must make four decisions instead of three. List the
four decisions. [3 Marks]

9. What does it mean when a firm in perfect competition is earning positive economic
profit? [3 Marks]
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If economic profit is positive, there is incentive for firms to enter the market. If profit is negative,
there is incentive for firms to exit the market. If profit is zero, there is no incentive to enter or exit.
For a competitive market, economic profit can be positive in the short run.
Individual feedback
Did not answer the question.

10. State the long-term profit condition of a firm in monopolistic competition and
illustrate with a graph. [3 Marks]

SECTION IV. THREE (3) of SIX (6) PROBLEM SOLVING QUESTIONS.

0 of 0 points
This section contains six (6) problem solving questions. You are required to do three (3). Each correct part is
as valued on the exam. [3 x 15 = 45 Marks]Show all relevant calculations.

1. Shamisha and her brother Devin have a belt business together. To start the
business they need to invest in a pushcart. The Price of the pushcart is $50,000.00.
Suppose they decide to sell 5,000 belts for the year for $22.00 each. Assume that the
belts cost $5.00 from the supplier. Also, the cart must be handled by a clerk who works
for an annual wage of $18,000.00. The market interest rate available is 20%.
a)Calculate the total cost. [5 Marks] b)Calculate total revenue [5 Marks] c) Will this
business make a profit or a loss?[5 Marks]

2. Assume that the price of bicycles in a perfectly competitive market is $100 and the
typical firm is subject to the following costs: a) Complete the table.[10 Marks] b) What
is the profit-maximizing output of this firm and why? [2 Marks] c) Calculate the total
profit/loss of this firm at the level of output in (b) above. [1 Mark] d) Can this profit/loss
situation in (c) above remain in the long run? Explain fully.[2 Marks]
3. The table below shows the costs and revenue data for a perfectly competitive firm.
a)Complete the table.[7 Marks] b)What is the output where the firm’s profits will be at a
maximum? Explain why. [3 Marks] c)Calculate the total profit or loss of this firm at the
profit-maximizing level. [2 Marks] d)Can this profit/loss situation in (c) above remain in
the long run? Explain fully. [3 Marks]

4. The following graph shows a monopoly firm operating in the short run. a) What is
the price the monopolist is charging for its product?[3 Marks] b)What is the profit
maximizing quantity or output?[3 Marks] c)What is the average cost of producing the
profit maximizing out?[3 Marks] d)Calculate the total profit or loss of this monopoly
firm. [3 Marks] e)How much of the total fixed cost is the monopoly able to pay at the
output in (b) above? [3 Marks]

5. The figure below describes a firm in a monopolistically competitive industry: a)What

price will the firm set? [2 Marks] b)What total economic profit/loss will this firm
receive? [3 Marks] c)Given that entry and exit are relatively easy, is this a long-run
equilibrium situation? Explain. [5 Marks] d)State the shutdown rule for a firm or
business. Explain why this firm should shut-down or continue operating. [5 Marks]

6. The following table shows the demand, revenue and cost schedule for a monopoly
firm: a) Complete the table [6 Marks] b) Plot the TC, ATC, MR & MC curves in a graph
[6 Marks] c) From off the graph, calculate the total profit or loss of the firm and
underline the profit/loss box [3 Marks]