ECO402 Quiz 3 Set 2

Q1. A firm maximizes profit by operating at the level of output where:

1. Marginal revenue equals marginal cost.
2. Average revenue equals average variable cost.
3. Total cost equals marginal cost.
4. Average revenue equals average cost.

Correct answer: Marginal revenue equals marginal cost.

Q2. In a constant-cost industry, price always equals:

1. Minimum LRAC, but not LRMC.
2. LRAC and minimum LRMC.
3. LRMC and minimum LRAC.
4. LRMC and LRAC, but not necessarily minimum LRAC.

Correct answer: LRMC and minimum LRAC.

Q3. Suppose output of two automobile firms, one is producing cars and other is producing trucks, is less than the output of another automobile firm producing both cars and trucks jointly. We can conclude that the production process involves:

1. Increasing returns to scale.
2. Economies of scale.
3. Decreasing returns to scale.
4. Economies of scope.

Correct answer: Economies of scope.

Q4. Which of the following is included in economic depreciation to make it equal to the user cost of capital?

1. Interest Rate - Value of Capital
2. Interest Rate / Value of Capital
3. Interest Rate * Value of Capital
4. Interest Rate + Value of Capital

Correct answer: Interest Rate * Value of Capital

Q5. Cost-output elasticity can be calculated as:

1. AC/MC
2. (AC)(MC)
3. MC/AC.
4. (AC)2(MC)

Correct answer: MC/AC.

Q6. In the long run, if a firm is facing higher average cost than the marginal cost; then certainly per unit total cost will:

1. Be at minimum level
2. Rise
3. Remain constant
4. Fall

Correct answer: Fall

Q7. Suppose Fauji Fertilizer Company Limited spends Rs. 10000 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the vertical axis) to produce 10 bags of Urea. If the wage rate is Rs. 100 per hour and the rental cost of capital is Rs. 200 per hour, then slope of the Isocost line will be:

1. - 1/2
2. -2
3. -1/200
4. -200

Correct answer: - 1/2

Q8. All of the following are characteristics of perfectly competitive markets EXCEPT:

1. Firms are price taker.
2. There are no significant barriers on entry and exit of firms.
3. Firms are not producing homogenous products.
4. There are large numbers of firms.

Correct answer: Firms are not producing homogenous products.

Q9. Assume that a firm's production process is experiencing increasing returns to scale over a broad range of outputs. Long run average costs over this range of output will tend to:

1. Fall to a minimum and then rise.
2. Decline.
3. Remain constant.
4. Increase.

Correct answer: Decline.

Q10. What happens in a perfectly competitive industry when economic profit is greater than zero?

1. Existing firms may get larger.
2. Firms may move along their LRAC curves to new outputs.
3. New firms may enter the industry.
4. All of the given options.

Correct answer: New firms may enter the industry.