Intermediate Microeconomics; Multiple Choice Questions

Task: Answer all assignment questions

Part A – Multiple Choice Questions (20 marks)
1.If A in the production function Y = A • F(K,L) rises, then:

2.output rises for any level of K and L.
the marginal product of labor rises.
the marginal product of capital rises.
all of the above.

Explicit costs would include:
a. rent.
b. the interest loss of the business owner on money withdrawn from his/her saving account and
invested in the business.
c. the loss of rent on a building the business owner owns and uses in his/her business.
d. the opportunity costs of the business owner’s time.
e. the use of tools owned by the business owner and dedicated to the business.

3.A young chef is considering opening his own sushi bar. To do so, he would have to quit his current
job, which pays $20 000 a year, and take over a store building that he owns and currently rents to
his brother for $6000 a year. His expenses at the sushi bar would be $50 000, for food and $2000
for gas and electricity. What are his implicit costs?

4.An economist left her $100 000-a-year teaching position to work full-time in her own consulting
business. In the first year, she had total revenue of $200 000 and business expenses of $100 000.
She made a/an:

5.$26 000
$66 000
$78 000
$52 000
$72 000

economic profit.
economic loss.
implicit profit.
accounting loss but not an economic loss.
zero economic profit.

In the long run, total fixed cost:

does not exist.
is constant.

During the course of a week, McDonalds has enough time to hire or lay-off workers, but it does not
have enough time to expand its kitchen or add an additional seating area. In this situation,

The law of diminishing returns applies to which of the following segments of the marginal product
of labour curve?

The entire curve.
The downward-sloping segment only.
The upward-sloping segment only.
The point where labour input is zero.

Under perfect competition, no matter how much output is produced, the total revenue curve is a:

has no fixed costs.
is in the short run.
suffers an economic loss.
earns a large profit.

positively sloped line.
negatively sloped line.
horizontal straight line.
U-shaped curve.
hill-shaped curve.

One of the characteristics of perfect competition is that

some firms can influence price.
firms depend on each other in setting the output.
firms produce a differentiated product.
consumers do not distinguish between the sellers

10. The body charged with increasing or maintaining competition in the Australian economy is:

the ACCC.
the Treasury.
the Reserve Bank of Australia
the Australian Prudential Regulation Authority
the Productivity Commission.

11. If a competitive firm suffers loss, it should:

always shut down.
shut down if its losses are greater than total fixed costs.
shut down if its total fixed costs are greater than losses.
raise its price.
immediately change its fixed inputs.

12. The monopolist’s demand curve is:

below the marginal revenue curve.
identical to the marginal revenue curve.
a downward-sloping market demand curve.
a horizontal line at the market price
a U-shaped curve.

13. Economies of scale means that competition is unsustainable because:

competition results in lower quantity and lower price.
as firms become larger, the inefficiency grows.
one large scale firm can produce at lower cost than several firms
it is easier to control one firm than many firms

14. Electricity and water are usually supplied to households by one supplier because:

government can collect more taxes from a monopoly firm.
the single supplier can provide electricity and water at lower cost than two or more firms.
long-run average total cost increases over the entire range of output.
it is a monopoly protected by the ownership of vital resources.

15. At a price of $5, 24 units of a good would be sold. At a price of $10, 25 units of output would be
sold. The marginal revenue of the 25th unit of output is:


16. A monopolist that lowers its price and increases output, even at the expense of short-run profits, is
engaging in:

predatory pricing.
price discrimination.
predatory discrimination
multi-purpose pricing.
a flexible pricing strategy

17. The monopolistic competition market structure helps explain:

why a monopoly market structure is superior to other market structures.
why firms do not advertise.
why firms try to win customers through advertising.
why firms cannot raise prices without losing all of their customers.

18. Which of the following statements best describes the price, output and profit conditions of
monopolistic competition?
a. Price will equal marginal cost at the profit-maximising level of output; and profits will be
positive in the long run.
b. Price will always equal average variable cost in the short run and either profits or losses may
result in the long run why firms try to win customers through advertising.
c. Marginal revenue will equal marginal cost in the short run, profit-maximising level of output;
and in the long run, economic profit will be zero.
d. Marginal revenue will equal average total cost in the short run; and long-run economic profits
will be zero.
19. Costume jewellery is produced in a monopolistically competitive market. One producer finds that
MR = MC = $3 when output is 700 necklaces. An economist studying this information can conclude

the producer is charging a price of $3.
economic profit is $2100.
the producer charges a price greater than $3
new firms will want to enter.
this producer should produce more than 700 necklaces

20. The short-run equilibrium for a monopolistically competitive firm is at P = $28.47, ATC = $22.13 and
MC = MR = $17.47. Which of the following is true?

Per-unit profit is $11.
Additional firms will be attracted into the industry.
The firm could raise price and increase profits.
The firm could lower price and increase profits.
Average cost must be rising

Part B – Written Answer Questions (80 marks)

Suppose life expectancy in years (L) is a function of two inputs, health expenditures (H) and
nutrition expenditures (N) in hundreds of dollars per year. The production function is
L = cH0.8N0.2.

Beginning with a health input of $400 per year (H = 4) and a nutrition input of $4900 per
year (N = 49), show that the marginal product of health expenditures and the marginal
product of nutrition expenditures are both decreasing.


Does this production function exhibit increasing, decreasing, or constant returns to scale?


Suppose that in a country suffering from famine, N is fixed at 2 and that c = 20. Plot the
production function for life expectancy as a function of health expenditures, with L on the
vertical axis and H on the horizontal axis.


Now suppose another nation provides food aid to the country suffering from famine so
that N increases to 4. Plot the new production function.
[15 Marks]


Suppose the process of producing lightweight parkas by Uluru’s Parkas is described by the
q = 10K0.8(L − 40)0.2
where q is the number of parkas produced, K the number of computerized stitching-machine
hours, and L the number of person-hours of labor. In addition to capital and labor, $10 worth of
raw materials is used in the production of each parka.
a. By minimizing cost subject to the production function, derive the cost-minimizing demands
for K and L as a function of output (q), wage rates (w), and rental rates on machines (r). Use
these results to derive the total cost function: that is, costs as a function of q, r, w, and the
constant $10 per unit materials cost.
b. This process requires skilled workers, who earn $32 per hour. The rental rate on the
machines used in the process is $64 per hour. At these factor prices, what are total costs
as a function of q? Does this technology exhibit decreasing, constant, or increasing returns
to scale?
c. Uluru’s Parkas plans to produce 2000 parkas per week. At the factor prices given above,
how many workers should the firm hire (at 40 hours per week) and how many machines
should it rent (at 40 machine-hours per week)? What are the marginal and average costs at
this level of production?
[25 Marks]

Doug’s Doorstops, Inc. (DD) is a monopolist in the doorstop industry. Its cost is
C = 100 – 5Q + Q2, and demand is P = 55 – 2Q.
a. What price should DD set to maximize profit? What output does the firm produce? How
much profit and consumer surplus does DD generate?
b. What would output be if DD acted like a perfect competitor and set MC = P? What profit
and consumer surplus would then be generated?
c. What is the deadweight loss from monopoly power in part a?
d. Suppose the government, concerned about the high price of doorstops, sets a maximum
price at $27. How does this affect price, quantity, consumer surplus, and DD’s profit?
What is the resulting deadweight loss?
e. Now suppose the government sets the maximum price at $23. How does this decision
affect price, quantity, consumer surplus, DD’s profit, and deadweight loss?
[20 Marks]

Northern Airlines (NA) flies only one route: Darwin-Adelaide. The demand for each flight is
Q = 500 – P. NA’s cost of running each flight is $30,000 plus $100 per passenger.
a. What is the profit-maximizing price that NA will charge? How many people will be on each
flight? What is NA’s profit for each flight?
b. NA learns that the fixed costs per flight are in fact $41,000 instead of $30,000. Will the
airline stay in business for long? Illustrate your answer using a graph of the demand curve
that NA faces, NA’s average cost curve when fixed costs are $30,000, and NA’s average cost
curve when fixed costs are $41,000.
c. Wait! NA finds out that two different types of people fly to Adelaide. Type A consists of
business people with a demand of QA = 260 – 0.4P. Type B consists of students whose total
demand is QB = 240 – 0.6P. Because the students are easy to spot, NA decides to charge
them different prices. Graph each of these demand curves and their horizontal sum. What
price does NA charge the students? What price does it charge other customers? How many
of each type are on each flight?
d. What would NA’s profit be for each flight? Would the airline stay in business? Calculate the
consumer surplus of each consumer group. What is the total consumer surplus?
e. Before NA started price discriminating, how much consumer surplus was the Type A
demand getting from air travel to Adelaide? Type B? Why did total consumer surplus
decline with price discrimination, even though total quantity sold remained unchanged?
[20 Marks]

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