Econ 101 Sample Question Chapter 10 1) What is a firms fundamental goal and what happens if the firm that

doesnt pursue this goal? 2) Why do accountants and economists calculate a firms cost and profit in different ways? 3) Why is normal profit an opportunity cost? 4) What are the constraints that a firm faces? How does each constraint limit the firms profit? 5) Is a firm technologically efficient if it uses the latest technology? Why or why not? 6) Is a firm economically inefficient if it can cut its costs by producing less? Why or why not? 7) Explain the key distinction between technological efficiency and economic efficiency. 8) Explain the distinction between a command system and an incentive system. 9) What is the principal-agent problem? What are three ways in which firms try to cope with it? 10) What are the three types of firms? Explain the major advantages and disadvantages of each. 11) What are the four market types? Explain the distinguishing characteristics of each. 12) What are the two measures of concentration? Explain how each measure is calculated. 13) Market shares of chocolate makers are in the table below.
Firm Mayfair, Inc Bond, Inc Magic, Inc All Natural, Inc others Market share (percent) 15 25 20 15 25

a. b.

Calculate the four-firm Concentration ratio What is the structure of the chocolate industry?

14) Kuku runs a kebab restaurant in Belik. With no skills and no job experience, Kuku has no alternative employment. Other Kebab restaurant owners that Kuku knows earn $20,000 a year. Kuku pays the airport $3,000 a year for the space he uses, and his total revenue from selling Kebab is $40,000 a year. He spent $2,000 on Oven, Knives, and pots and paid for these items using his credit card. The interest on his credit card balance is 10 percent a year. At the end of the year, Kuku was offered $1000 for his business and all its equipment. Calculate Kukus opportunity cost of production and his economic profit.

15) Alternative ways of Printing 100 textbooks are:

Metho d A B C D

Labor (hours ) 1 5 20 50

Capital (machine s) 10 8 4 1

a) Which methods are technologically efficient? b) Which method is economically efficient if the hourly wage rate and implicit rental rate of capital are

(i) Wage rate $1, rental rate $100? (ii) Wage rate $5, rental rate $50? (iii) Wage rate $50, rental rate $5?

Chapter 11

1) Define the following concept: i) ii) iii) iv) v) vi) vii) Total Cost Average cost Marginal cost Variable cost Average variable cost Fixed cost Average fixed cost

2) What is the law of diminishing returns? Why does marginal product eventually diminish? 3) Explain the relationship between marginal product and average product. 4) How does marginal cost change as output increases (a) initially and (b) eventually? 5) What does the law of diminishing returns imply for the shape of the marginal cost curve? 6) What does a firms production function show and how is it related to a total product curve? 7) What does a firms long-run average cost curve show? How is it related to the firms short-run average cost curves? 8) What are economies of scale and diseconomies of scale? How do they arise? What do they imply for the shape of the long-run average cost curve? 9) What is a firms minimum efficient scale?

10) Bills Bakery has a fire and Bill loses some of his cost data. The bits of paper that he recovers after the fire provide the information in the table (all the cost numbers are dollars). Bill asks you to come to his rescue and provide the missing data in the five spaces identified as A, B, C, D, and E.
TP 10 20 30 40 50 AFC 120 A 40 30 24 AVC 100 B 90 C 108 ATC 220 150 90 130 130 D E 132 MC 80

11) Pro Painters hires students at $250 a week to paint houses. It leases equipment at $500 a week. The table sets out its total product schedule. a. What is total cost, average total cost, and marginal cost if Pro Painters paints 12 houses a week?
Output (houses painted per week) 2 5 9 12 14 15

Labor (students ) 1 2 3 4 5 6

b. At what output is average total cost a minimum?

c. Explain why the gap between total cost and total variable cost is the same at all outputs.

12) ProPainters hire students at $250 a week to paint houses. It leases equipment at $500 a week. Suppose that ProPainters doubles the number of students it hires and doubles the amount of equipment that it leases. ProPainters experiences diseconomies of scale. a. Explain how the ATC curve with one unit of equipment differs from that when ProPainters uses double the amount of equipment. b. Explain what might be the source of the diseconomies of scale that ProPainters experience. 13) The table shows the production function of Bonnies Balloon Rides. Bonnies pays $500 a day for each balloon it rents and $25 a day for each balloon operator it hires a. Graph the ATC curve for Plant 1, Plant 2, Plant 3 and Plant 4 b. On Bonnies LRAC curve, what is the average cost of producing 18 rides and 15 rides a day? c. Explain how Labor Output Bonnies uses its (workers (rides per day) per day) long-run average Plant 1 Plant 2 Plant 3 Plant 4 cost curve to 10 4 10 13 15 20 10 15 18 20 decide how many 30 13 18 22 24 balloons to rent.
40 50 Balloons 15 16 1 20 21 2 24 25 3 26 27 4

Chapter 12

1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11)

Why is a firm in perfect competition a price taker? In perfect competition, what is the relationship between the demand for the firms output and the market demand? In perfect competition, why is a firms marginal revenue curve also the demand curve for the firms output? What decisions must a firm make to maximize profit? Why does a firm in perfect competition produce the quantity at which marginal cost equals price? What is the lowest price at which a firm produces an output? Explain why. What is the relationship between a firms supply curve, its marginal cost curve, and its average variable cost curve? How do we derive the short-run market supply curve in perfect competition? In perfect competition, when market demand increases, explain how the price of the good and the output and profit of each firm changes in the short run. In perfect competition, when market demand decreases, explain how the price of the good and the output and profit of each firm changes in the short run. Pats Pizza Kitchen is a price taker. Its costs are in the table. a. Calculate Pats profit-maximizing output and economic profit if the market price is (i) (ii) (iii) $14 a pizza. $12 a pizza. $10 a pizza.

b. What is Pats shutdown point and what is Pats economic profit if it shuts down temporarily? c. Derive Pats supply curve. d. At what price will firms with costs identical to Pats exit the pizza market in the long run? e. At what price will firms with costs identical to Pats enter the pizza market in the long run? 12) The market is perfectly competitive and there are 1,000 firms that produce paper. The first table sets out the market demand schedule for paper. Each producer of paper has the costs in the second table when it uses its least-cost plant.
Price (dollars per box) 3.65 5.20 6.80 8.40 10.00 11.60 13.20 Quantity demanded (thousands of boxes per week) 500 450 400 350 300 250 200

a. What is the market price of paper? b. What is the markets output? c. What is the output produced by each firm? d. What is the economic profit made or economic loss incurred by each firm? e. What is the breakeven Point? f. What is the shut down point? g. Do firms have an incentive to enter or exit the market in the long run? h. What is the number of firms in the long run? i. j.

What is the market price in the long run? What is the equilibrium quantity of paper produced in the long run?

13)

Quick Copy is one of the many copy shops near the campus. Figure 12.5 shows Quick Copys cost curves. If the market price of copying a page is 10 cents, calculate Quick Copys
a. Marginal revenue. b. Profit-maximizing output. c. Economic profit.