Question 1

A firm’s cost of production is £12 per unit of output. If P is the price of the output good and Q is the number of units produced, which of the following statements is correct?
- choice a. Point (Q, P) = (2,000, 20) is on the isoprofit curve representing the profit level £20,000.
- choice b. Point (Q, P) = (2,000, 20) is on a lower isoprofit curve than point (Q, P) = (1,200, 24).
- choice c. Points (Q, P) = (2,000, 20) and (4,000, 16) are on the same isoprofit curve. #ans
- choice d. Point (Q, P) = (5,000, 12) is not on any isoprofit curve.

Question 2

Consider a firm whose unit cost (the cost of producing one unit of output) is the same at all output levels. Which of the following statements are correct?
- choice a. Each isoprofit curve depicts the firm’s profit for different outputs for a given price of the output good.
- choice b. Isoprofit curves can be upward-sloping when at high profit levels.
- choice c. Every price-quantity combination lies on an isoprofit curve. #ans
- choice d. Isoprofit curves slope downward when the price is above the unit cost. #ans

Question 3

The table represents market demand Q for a good at different prices P. $~$

	X1	X2	X3	X4	X5	X6	X7	X8	X9	X10	X11
Price	Q	100	200	300	400	500	600	700	800	900	1000
Quantity	P	270	240	210	180	150	120	90	60	30	0

The firm’s unit cost of production is £60. Based on this information, which of the following is correct?
- choice a. At Q = 100, the firm’s profit is £20,000.
- choice b. The profit-maximizing output is Q = 400. #ans
- choice c. The maximum profit that can be attained is £50,000.
- choice d. The firm will make a loss at all outputs of 800 and above.

Question 4.

Which of the following statements is correct?
- choice a. If a firm’s technology exhibits constant returns to scale, doubling the inputs leads to doubling of the output level. #ans
- choice b. If a firm’s technology exhibits decreasing returns to scale, doubling the inputs more than doubles the output level.
- choice c. If a firm’s technology exhibits economies of scale, costs per unit will fall as the firm expands its production. #ans
- choice d. If a firm’s technology exhibits diseconomies of scale, doubling the inputs leads to less than doubling of the output level. #ans

Question 5.

Consider a firm with fixed costs of production. Which of the following statements about its average cost (AC) and marginal cost (MC) is correct?
- choice a. When AC = MC, the AC curve has a zero slope. #ans
- choice b. When AC > MC, the MC curve is downward-sloping.
- choice c. When AC < MC, the AC curve is downward-sloping.
- choice d. The MC curve cannot be horizontal.

Question 6.

Suppose that the unit cost of producing a pound of cereal is $2, irrespective of the level of output. (This means there are no fixed costs, that is, costs that are present for any level of output, including zero.) Which of the following statements is correct?
- choice a. The total cost curve is a horizontal straight line.
- choice b. The average cost curve is downward-sloping.
- choice c. The marginal cost curve is upward-sloping.
- choice d. The average cost and the marginal cost curves coincide. #ans

Question 7

Figure 7.11 depicts the demand curve for Beautiful Cars, together with the marginal cost and isoprofit curves. The quantity-price combination at point E is (Q, P) = (32, 5,440). The average cost of producing 50 cars is the same as the average cost of producing 32. Suppose that the firm keeps the price at P = $5,440 but now produces 50 cars instead of 32. Which of the following is correct?

Figure 7.11. Price to Maximize Profit

- choice a. The firm will now sell all 50 cars at $5,440.
- choice b. The firm’s profit will increase.
- choice c. The firm’s profit remains the same.
- choice d. The firm’s profit is now reduced. #ans

Question 8

Figure 7.11 depicts the demand curve for Beautiful Cars, together with the marginal cost and isoprofit curves. At point E, the quantity-price combination is (Q, P) = (32, 5,440) and the profit is $63,360.

Suppose that the firm chooses instead to produce Q = 32 cars and sets the price at P = $5,400. Which of the following statements is correct?

- choice a. The profit remains the same at $63,360.
- choice b. The profit is reduced to $62,080. #ans
- choice c. The average cost of production is $3,400.
- choice d. The firm is unable to sell all the cars.

Question 9

Figure 7.11 depicts the demand curve for Beautiful Cars, together with the marginal cost and isoprofit curves.

Suppose that the firm decides to switch from P* = $5,440 and Q* = 32 to a higher price, and chooses the profit-maximizing level of output at the new price. Which of the following statements is correct?

- choice a. The quantity of cars produced is reduced. #ans
- choice b. The marginal cost of producing an extra car is higher.
- choice c. The total cost of production is higher.
- choice d. The profit is increased due to the new higher price.

Question 10

This figure shows the marginal cost and marginal revenue curves for Beautiful Cars. Which of the following statements is correct, based on the information shown?

Figure 10. Profit Maximizing Price and Quantity

- choice a. When Q = 40, the marginal cost is greater than the marginal revenue so the firm’s profit must be negative.
- choice b. Revenue is greater when Q = 10 than if Q = 20.
- choice c. The firm would not choose to produce at point E because marginal profit is zero.
- choice d. Profit is greater when Q = 20 than when Q = 10. #ans

PS 8