ECO 1104 Lecture : Nov 21 2013.docx

1. When economists speak of "marginal," they mean
a. Opportunity.
b. Scarcity.
c. Incremental.
d. Unimportant.

2. Managers undertake an investment only if
a. Marginal benefits of the investment are greater than zero.
b. Marginal costs of the investment are greater than marginal benefits of the investment.
c. Marginal benefits are greater than marginal costs.
d. Investment decisions do not depend on marginal analysis.

3. A firm produces 500 units per week. It hires 20 full-time workers (40 hours/week) at an hourly wage of $15. Raw materials are ordered weekly, and they cost $10 for every unit produced. The weekly cost of the rent payment for the factory is $2,250. How do the overall costs break down?
a. Total variable cost is $17,000; total fixed cost is $2,250; total cost is $19,250.
b. Total variable cost is $12,000; total fixed cost is $7,250; total cost is $19,250.
c. Total variable cost is $5,000; total fixed cost is $14,250; total cost is $19,250.
d. Total variable cost is $5,000; total fixed cost is $2,250; total cost is $7,250.

4. Total costs increase from $1,500 to $1,800 when a firm increases output from 40 to 50 units. Which of the following is true if marginal cost is constant?
a. FC = $100
b. FC = $200
c. FC = $300
d. FC = $400

5. A manager of a clothing firm is deciding whether to add another factory in addition to one already in production. The manager would compare
a. The total benefits gained from the two factories to the total costs of running the two factories.
b. The incremental benefit expected from the second factory to the total costs of running the two factories.
c. The incremental benefit expected from the second factory to the cost of the second factory.
d. The total benefits gained from the two factories to the incremental costs of running the two factories.

6. A firm is thinking of hiring an additional worker to their organization who they believe can increase total productivity by 100 units a week. The cost of hiring him or her is $1,500 per week. If the price of each unit is $12,
a. The MR of hiring the worker is $1,500.
b. The MC of hiring the worker is $1,200.
c. The firm should not hire the worker since MB < MC.
d. All the above

7. A retailer has to pay $9 per hour to hire 13 workers. If the retailer only needs to hire 12 workers, a wage rate of $7 per hour is sufficient.
What is the marginal cost of the 13th worker?
a. $117
b. $9
c. $33
d. $84

8. If a firm's average cost is rising, then
a. Marginal cost is less than average cost.
b. Marginal cost is rising.
c. Marginal cost is greater than average cost.
d. The firm is making an economic profit.

9. After the first week of his MBA Managerial Economics class, one of your pharmaceutical sales representatives accuses you of committing the sunk-cost fallacy by refusing to allow him to reduce price to make what he considers to be a really tough sale. Which of the following suggests the sales representative may be right?
a. Most of the costs of drug development are sunk, not fixed.
b. Sales representatives are paid a sales commission on revenue, so they don't care about the costs of drug development.
c. Sales representatives don't worry that a low price today may make it more difficult for the company's other sales representatives to charge higher prices to their customers, tomorrow.
d. Sales representatives think only about one thing, sales.

10. A company is producing 15,000 units. At this output level, marginal revenue is $22, and the marginal cost is $18. The firm sells each unit for $48 and average total cost is $40.
What can we conclude from this information?
a. The company is making a loss.
b. The company needs to cut production.
c. The company needs to increase production.
d. Not enough information is provided.

A competitive firm’s short-run demand for labor will rise when the price of its product rises.

As the wage rate rises, the marginal revenue product of labor increases.

A competitive firm’s demand for labor always slopes down in the short-run, but may slope upwards or downwards in the long run.

When labor an capital are complements in production, a higher wage will cause a firm to use more capital in the long run.

If labor is a regressive factor, then a firm’s long-run demand for labor may or may not be downward sloping.

The short-run demand curve for labor for a firm in any type of market for its output coincides with

An increase in the price of labor will, in the short run, cause a competitive firm’s

Which of the following would cause the firm’s short-run demand curve for labor to shift to the right?

If increased capital usage reduces the firm’s short-run demand for labor, then

When is the law of demand violated for labor? That is, with regards to the law of labor demand, when does an increase in the wage not lead to a reduction in the quantity of labor demanded?

If the wage rate rises, then the firm’s long-run marginal costs change, which in turn affects the firm’s output level and its employment of labor. This phenomenon is known as

When will the scale effect of a wage increase cause a reduction in the quantity of labor demanded?

Consider the usual case where a higher wage rate increases a firms’ marginal costs. In this case, the industry’s demand curve for labor

To maximize profits, a monopolist will hire the quantity of labor at which marginal revenue product of labor

A firm’s revenue minus its factor payments equals

As the amount of labor used in production increases, total product

A profit-maximizing price taker will produce at a level where

If the wage rate is $10 per hour and one worker can produce 2 units of output per hour, then the marginal cost of production is

A firm’s long-run demand for labor is more wage-elastic than its short-run demand for labor.

A monopsonist’s short-run demand curve for labor coincides with its marginal revenue product of labor curve.

Workers will receive higher wages when an employer faces an upward-sloping supply curve for labor.

The profit an owner receives is equivalent to the rent received for her entrepreneurial services.

When high levels of labor are employed, total production tends to increase at a decreasing rate.

The substitution effect on labor always decreases the quantity of labor demanded when the wage rate increases.

A firm’s marginal revenue product of labor equals the marginal product of labor multiplied by the per-unit cost of labor.

Tastes and preferences are relevant to individual choices for consumption but not relevant to choices for supplying labor.

A higher wage will always cause a worker to increase the quantity of labor supplied.

The substitution and income effects of a wage increase both cause consumption to rise.

A worker’s labor supply may either rise or fall when nonlabor income increases, depending on whether the substitution effect or the income effect dominates.

When an increase in marginal productivity increases workers’ nonlabor income, the effect on the quantity of labor supplied is ambiguous/uncertain.

A technological improvement that is permanent is more likely to raise employment than one that is temporary.

Other factors being constant, firms that provide on-the-job training to workers will tend to pay higher wages.

If there is discrimination, employers engage in it a cost.

Human capital tends to increase over the course of a person’s life.

In the indifference curve budget line model of labor supply,

In the indifference curve budget line model of labor supply, the slope of the indifference curve is used to measure

If a worker has chosen a quantity of labor where the marginal value of leisure exceeds the wage rate, she would be better off by

When there is an increase in the wage rate there will be

When the wage rate rises, the substitution effect leads a worker to

Consider the indifference curve budget line model of labor supply, and assume consumption and leisure are both normal goods. A higher wage rate would result in

When the wage rate rises, a worker chooses to replace some leisure hours with work hours, even if he would remain equally well off. This phenomenon is known as

Which of the following will shift a worker’s labor supply curve to the left?

Which of the following would cause a rightward shift in the labor demand curve?

When some jobs are inherently more risky or unpleasant than other jobs, different workers will be paid different wages because of

Discrimination is difficult to measure empirically because

Intertemporal substitution dictates that

A decrease in the wage rate causes the budget line to

An increase in the marginal productivity of labor will tend to

A downward shift in a worker’s budget line is a result of

One deficiency of the labor-leisure indifference curve analysis is that because indifference curves are always tangent to the worker’s budget line, the model cannot explain why some people choose not to work.

4. Decisions made “at the margin” entail a choice based upon_____________ of a decision.

a. the additional benefits
b. the total costs
c. comparing the total benefits and costs
d. comparing the additional benefits and costs
5. 100 units of Good X are available but individuals desire 500units. ______________ will determine who attains Good X, and whodoes not.

a. A rationing device
b. Opportunity Cost
c. Utility
d. Natural Selection


6. Individuals will continue consuming so long as:

a. The price of a good continues to decrease
b. The marginal costs of consuming are outweighed by the marginalbenefits
c. The individual seeks additional utility
d. The individual is willing and able

8. If the cross-price elasticity of two goods is positive, thenthose two goods are
a. substitutes.
b. complements.
c. normal goods.
d. inferior goods.

11. The basic reason most supply curves are upward sloping isthat:

a. More firms are in the market, therefore more goods areproduced.
b. Because more quantity is being demanded, suppliers raise theprice.
c. Producers face higher opportunity costs when producing higherlevels of quantity, so they must receive a higher price.
d. Producers seek to maximize total revenue.


18. When the price of bubble gum is $0.60, the quantity demanded is500 packs per day. When the price falls to $0.50, the quantitydemanded increases to 900. The demand for gum would beconsidered:

a. inelastic.
b. elastic.
c. unit elastic.
d. perfectly inelastic.



20. Inefficient Production implies which of the following:

a. it is impossible to produce more of one good without producingless of another
b. there are too few resources
c. there are too many resources
d. it is possible to produce more of one good without producingless of another

21. Workers at a bicycle assembly plant currently make minimumwage. If the federal government increases the minimum wage by $1.00an hour it is likely that the

a. demand for bicycle assembly workers will increase.
b. supply of bicycles will shift to the right.
c. supply of bicycles will shift to the left.
d. firm must increase output to maintain profit levels.


24. Suppose at a price of $5 and at a price of $9, John purchases40 units of good X. Given this information, we know that John’sdemand for good X is
a. perfectly elastic at all prices.
b. inelastic at all prices.
c. unit elastic between the prices of $5 and $9.
d. perfectly elastic between the prices of $5 and $9.
e. perfectly inelastic between the prices of $5 and $9.


25. If the price of good A decreases by 10 percent and the quantitydemanded of good B decreases by 10 percent, this is evidence that Aand B are
a. substitute goods.
b. complement goods.
c. inferior goods.
d. normal goods.
e. not related.


6. For an individual to achieve consumer equilibrium when consumingtwo goods, A and B, the individual must satisfy the followingcondition:

a. TUA = TUB
b. TUA/PA = TUB/PB
c. MUA = MUB
d. MUA/PA = MUB/PB
e. MUA/PB = MUB/PA

7. Which of the following statements is correct regarding a firm'sdecision making?
a. The decision to shut down and the decision to exit are bothshort-run decisions.
b. The decision to shut down and the decision to exit are bothlong-run decisions.
c. The decision to shut down is a short-run decision, whereas thedecision to exit is a long-run decision.
d. The decision to exit is a short-run decision, whereas thedecision to shut down is a long-run decision.

Table 1

Output Total Cost
0 $20
1 $30
2 $41
3 $51
4 $65
5 $75
6 $84
7 $105

13. Refer to Table 1. The marginal cost of producing the fifth unitof output is
a. $55.00
b. $15.00
c. $9.00
d. $10.00

21. A perfectly competitive firm can produce its current level ofoutput at an average total cost of $10 and a marginal cost of $8.If the market price of the product is currently $8, what should thefirm do?

a. The firm should definitely shut down since average total costexceeds price.
b. The firm should shut down if average variable cost is $8 orgreater, but the firm should continue to produce the current levelof output if average variable cost is less than $8.
c. The firm should increase production in order to increaseprofit.
d. The firm should continue to produce, but it should decreaseproduction in order to increase profit.
24. In the long run all costs are variable. Thus, aprofit-maximizing firm may exit:

a. When Price < Average Total Cost
b. When Price > Average Total Cost
c. When Average Revenue > Average Fixed Cost
d. When Average Revenue > Marginal Cost

25. Marginal cost tells us the
a. value of all resources used in a production process.
b. marginal increment to profitability when price isconstant.
c. amount by which total cost rises when output is increased by oneunit.
d. amount by which output rises when labor is increased by oneunit.

26. For a perfectly competitive firm:
a. marginal revenue is equal to price.
b. price is equal to marginal cost at the output level thatmaximizes profit.
c. selling an additional unit of the good it produces increasestotal revenue by the price of the good.
d. a and b
e. a, b, and c