Test Paper: Principles of Microeconomics

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SESI 2011/2012

1. Which of the following is the best example of a variable cost? A. Monthly payments for hired labour.
B. Property tax payments.
C. Monthly rent payments for a warehouse.
D. Pension payments to retired workers.

2.Malik wants to start his own business. The business he wants to start will require that he purchase a factory that costs $400 000. Malik currently has $500 000 in the bank earning 3 percent interest per year. If Malik purchases the factory with his own money, what is the annual implicit opportunity cost of purchasing the factory?

B.$3 000
C.$12 000
D.$15 000

3.When a firm is operating at an efficient scale,
A.average variable cost is minimized.
B.average fixed cost is minimized.
C.average total cost is minimized.
D.marginal cost is minimized.

4.Suppose that a firm’s total cost is given by the equation TC = 100 + 15Q – 5Q2 + 2Q3, where Q represents total output. If Q = 10, then average variable cost is
D.$1 650.

5.Consider the following statements when answering this question: I.Suppose a semiconductor chip factory uses a technology where the average product of labour is constant for all employment levels. This technology obeys the law of diminishing returns. II.Suppose a semiconductor chip factory uses a technology where the marginal product of labour rises, then is constant and finally falls as employment increases. The technology obeys the law of diminishing returns. A. I is true and II is false.

B. I is false and II is true.
C. Both I and II are true.
D. Both I and II are false.

6.Suppose the marginal product of labour is 12 and the marginal product of capital is 3. If the wage rate is $9 and the price of capital is $3, then in order to minimize costs the firm should
A.use more capital and less labour.
B.use more labour and less capital.
C.use four times more capital than labour.
D.none of the above.

7.Which of the following production functions exhibits constant returns to scale? A.Q = K0.75L0.35
B.Q = 3K2 + L
C.Q = min[K, 0.2L]
D.Q = K0.4L0.4

8.In a competitive market, no single producer can influence the market price because A. many other sellers are offering a product that is essentially identical. B. consumers have more influence over the market price than producers do. C. government intervention prevents firms from influencing price. D.producers agree not to change the price.

9.In a competitive market with identical firms,
A.an increase in demand in the short run will result in a new price above the minimum of average total cost allowing firms to earn a positive economic profit in the long run. B.firm cannot earn positive economic profit in either the short run or long run. C.firms can earn positive economic profit in the long run if the long-run market supply curve is upward sloping. D. free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run.

10.Wong’s Garage operates in a perfectly competitive market. At the point where marginal cost equals marginal revenue, ATC = $20, AVC = $15, and the price per unit is $10. In this situation,
A.Wong’s Garage is earning a positive economic profit.
B.Wong’s Garage should shut down immediately.
C.Wong’s is losing money in the short run, but would continue to operate.
D.the market price will rise in the short run to increase profits.

11.In a constant cost competitive industry if price rises above its long-run equilibrium level, which of the following will not occur as the industry adjusts to a...
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