Assume that the Law of Diminishing Marginal Product applies at the current output level of a competitive firm

Multiple choice. Choose best answer.
1) Diseconomies of scale occur when
a. long-run average total costs rise as output increases.
b. long-run average total costs fall as output increases.
c. average fixed costs are falling.
d. average fixed costs are constant.
2. Calculate the monopolist’s profit under the following conditions. The intersection of the marginal
revenue and marginal cost curves occurs where output is 10 units. At an output of 10 units, the
monopoly price is $20 per unit, the marginal cost is $12 per unit, and the average variable cost is $4
per unit, and average fixed cost is $8 per unit.
a. $120
b. $100
c. $80
d. $60
3. Marginal revenue is equal to price for a competitive firm because
a. Total revenue increases by less than the price of the good when an additional unit is sold
b. Firms need to lower price to increase the quantity sold
c. Firms can increase price and still increase the quantity sold
d. Total revenues increases by more than the price of the good when an additional unit is sold
e. Individual firms do not affect the market price of the good when they increase the quantity they
produce.
4. Which of the following statements is false?
a. In the long run, there are no fixed costs.
b. Marginal cost is independent of fixed costs.
c. Economies of scale is a short-run concept.
d. Diminishing marginal product explains increasing marginal cost.5. Refer to the above graph. The firm is making a __________ of ___________
a. profit; $88
b. loss; $88
c. profit; $8
d. loss; $8
e. profit; $16
6. A firm’s output is 80 units, its MC is $44, its ATC is $43, and its AFC is $10. AVC is
a. Increasing
b. Decreasing
c. Constant
d. Not enough information

7. Table 1 presents the cost schedule for Lauren’s cookies. If Lauren produces 4 figs, Lauren’s fixed costs
are
a. $0.
b. $100.
c. $190.
d. $50.
8. Table 1 presents the cost schedule for Lauren’s Cookies. If Lauren produces five figs, Lauren’s
marginal costs are
a. $40.
b. $50.
c. $150.
d. $650.
e. None of the above.
9. The marginal cost curve intersects the
a. ATC, AVC, and AFC curves at their minimum points
b. ATC and AFC at their minimum points
c. AVC and AFC at their minimum points
d. ATC and AVC at their minimum points
10. Assume that a competitive constant-cost industry is in long-run equilibrium when market demand
suddenly increases. Which of the following statements is correct?
a. Existing firms will start suffering losses in the short run
b. Existing firms will stop producing in the short run if AVC exceeds AR at the profit maximizing output
level
c. Some firms will exit the industry in the long run
d. Market supply will shift to the right in the long run

Table 2
Price per unit Output
$8
600

$7
$6
$5
$4
$3
$2
$1

800
1000
1200
1400
1600
1800
2000

11. Suppose that Sam L. is a monopolist in the donut market, which has the demand shown in Table2.
When Sam L. increases output from 800 to 1000 units, what happens to Sam L.’s revenues?
a. Revenues increase by $200
b. Revenues increase by $400
c. Revenues decrease by $200
d. Revenues increase by $1000
e. Revenues do not change
12. A firm is deciding whether to produce or shut down in the short run. Its total costs are $20,000 of
which $5,000 are the total fixed costs of production. The firm should produce in the short run as long
as its total revenues are at least
a. $0
b. $15,000.
c. $10,000.
d. $5,000.
13. Which of the following is true for a profit maximizing firm in a competitive market in the long run but
not true for a monopolist?
a. MC=MR
b. MC=P
c. AR=P
d. Only one firm exists
14. Refer to Table 2. Sam L. remains a monopolist in the donut market. Suppose Sam L.’s marginal cost of
producing each donut is constant and equal to $2. Sam L. will maximize his profits by charging a price
of
a. $20
b. $4
c. $5
d. $6
e. None of the above
15. In the short run, when price is below average total cost, a firm in a competitive market will
a. Shut down and incur the loss of both variable and fixed costs
b. Continue to operate as long as average revenue exceeds marginal cost
c. Continue to operate as long as average revenue exceeds average variable cost
d. Always exit the industry
16. Assume that the Law of Diminishing Marginal Product applies at the current output level of a
competitive firm. The price is $20 and, at the current output level, marginal cost is $22 and average
total cost is $21. To maximize profits the firm should:
a. produce the current output level
b. produce more
c. produce less
d. any of the above is possible, without further information.
17. A competitive firm might choose to set its price above the market price, because
a. this would result in higher average revenue.
b. this would result in higher profits.
c. this would result in lower total costs.
d. None of the above is correct.
18. The practice of selling the same goods to different customers at different prices, but with the same

marginal cost, is known as
a. price discrimination.
b. monopoly pricing.
c. arbitrage.
d. price segregation.
19. A firm’s average variable cost is $80, its total fixed cost is $6,000, and its output is 600 units. Its
average total cost must be:
a. less than $80.
b. $80
c. $90
d. more than $90.
20. Which is a true statement?
a. Diseconomies of scale and diminishing marginal products are two ways of stating the same thing.
b. Economies of scale is a short-run concept, and diminishing marginal product is a long-run concept.
c. Constant returns to scale is a short-run concept, and diminishing marginal product is a long-run
concept.
d. None of the above.
Long Problems – SHOWWORK OR YOUWILL LOSE POINTS!!
21. The market for gilders is initially competitive and the market demand is: P 231 0.9QD . The
combined marginal costs of the firms in the gilder industry are:MC 11 0.2Q.
a. Graph the market demand and MC curves, and indicate the MR curve for the firms in the gilder
industry below. How much is produced in the industry and what is the price of gilders?

b. What are consumer surplus and producer surplus in the market
c. What is the DWL, if any, for this market?
d) Now suppose that one company buys out all of the firms in the gilder market, but has the same
combined MC. Draw the monopolist’s MR on your original graph above. How much does the
monopolist produce and what price do they charge?
e. What are CS and PS with the monopoly?
f. What is the DWL, if any, with the monopoly?