Dr. Barry Haworth
University of Louisville
Department of Economics
Economics 201


Practice Midterm #2


1) When marginal costs (MC) are less than average costs (AC):
a. AC is increasing
b. MC is increasing
c. AC is decreasing
d. MC is constant

2) When marginal costs are increasing:
a. marginal product of labor is decreasing
b. marginal product of labor is increasing
c. marginal product of labor is at a maximum
d. marginal product of labor is constant

3) If the price is below the break even point (and all fixed costs are sunk):
a. the firm will shut down
b. the firm will produce and earn a loss
c. the firm will produce and earn zero economic profit
d. the firm will produce and earn positive profits

4) The best definition of bounded rationality is:
a. when it is rational to increase output until reaching a certain point
b. when a person makes rational economic decisions on the basis of limited information
c. when a person makes rational economic decisions in order to increase profits
d. when it is rational to erect boundaries in order to become more efficient

5) If a firm increases its scale of operation, and the long run AC decreases, then:
a. diseconomies of scale are present
b. economies of scale are present
c. there are decreasing returns to scale
d. the firm is producing at minimum efficient scale

6) When profits are zero:
a. firms are producing where AC is at a minimum
b. firms are producing where AC and MC intersect
c. firms are producing at the break-even point
d. all of the above

7) Minimum efficient scale always occurs when:
a. Long Run MC is at a minimum
b. Long Run AC is at a minimum
c. Short Run MC is at a minimum
d. Short Run AC is at a minimum

The following function for Total product corresponds with that of a single firm and will be used for questions 8 and 9.

(Q = total product or output, L = labor, K = capital)

K is fixed at 10 units and L varies between 1 and 100 units.
8) Calculate the average product of labor when L = 10
a. 20
b. 0.5
c. 2
d. none of the above

9) Calculate the marginal product of labor when L increases from 10 to 11:
a. 0.98
b. 1.02
c. 1.91
d. 0.52

Questions 10-12 all relate to the following equations:

TC = $80 [if q = 0]
TC = 100 + 20q2 [if q > 0]
MC = 40q [if q > 0]

(where TC = total costs, MC = marginal cost, and q = output)

10) What is the value of average costs, when q = 10?
a. 0.005
b. 80
c. 210
d. 400
e. 2100

11) What is the value of average fixed costs, when q = 10?
a. 10
b. 50
c. 100
d. 110
e. 1100

12) What is the value of average variable costs, when q = 10?
a. 8
b. 40
c. 200
d. 2000

13) Which of the following equations is always true:
a. Average Fixed Costs = Total Costs - Variable Costs (i.e. AFC = TC -VC)
b. Fixed Costs = Total Revenue - Total Cost (i.e. -FC = TR - TC)
c. Variable Costs = Total Costs + Fixed Cost (i.e. VC = TC + FC)
d. Average Costs = Average Fixed Costs + Average Variable Costs (i.e. AC = AFC + AVC)

14) A perfectly competitive firm's demand curve __________:
a. is negatively sloped
b. is a horizontal line
c. is positively sloped
d. is less steep than its marginal revenue curve
e. both a and b

15) Which of the following will allow a perfectly competitive firm to maximize its profits:
a. set price where price equals marginal cost
b. set output where price equals marginal cost
c. set output where marginal cost equals average cost
d. set price where marginal cost equals average cost

16) If a firm doubles in size but needs less than twice as many workers, then:
a. the firm will experience decreasing returns to scale
b. the firm will experience increasing long run unit costs
c. the firm will experience increasing returns to scale
d. the firm will experience constant long run unit costs

Questions 17-19 relate to the following equations:
In a given perfectly competitive market, each firm has the following costs:

TC = $25 [if q = 0]
TC = 100 + 2q +q2 [if q > 0]
MC = 2 + 2q [if q > 0]

17) If the market price is $28, what are each firm's profits?
a. not enough information provided (above) to answer
b. $0 (breaking even)
c. $69
d. $339
e. -$3471 (loss of $3471)

18) What are the sunk costs of this firm?
a. $0
b. $2
c. $25
d. $75
e. $100

19) What are the recoverable fixed costs of this firm?
a. $0
b. $2
c. $25
d. $75
e. $100

20) Which of the following is true about Long Run Average Cost?
a. LRAC decreases as output (scale) increases
b. LRAC increases as output (scale) increases
c. LRAC remains constant as output (scale) increases
d. All of the above

21) Which is the best example of diminishing marginal returns:
a. as output increases, the marginal cost gets smaller
b. as a firm hires more labor, marginal product gets smaller
c. as a firm hires more labor, output gets lower
d. as output increases, the firm hires less labor

22) Which of the following statements is true:
a. marginal cost reaches a minimum point before average cost
b. marginal product reaches a minimum point before average product
c. a firm should never produce when marginal product is decreasing
d. a firm should always produce when marginal cost is increasing

23) When in long run equilibrium, a profit maximizing perfectly competitive firm will produce where:
a. P > AC
b. P = AVC
c. P = AC
d. P < AC
e. both b and d

24) Which of the following is not characteristic of a true perfectly competitive market:
a. each firm produces a small amount of total industry output
b. each firm is unable to change the market price by changing their output
c. perfect availability of information
d. each firm's product is slightly different (heterogeneous)
e. there are no barriers to entry or exit from the industry