Answer Key to Study Questions for Test #3

Here is the key to the sample problems. Let me know if you think I made a mistake. I usually do.

1-D, 2-A, 3-C, 4-D, 5-A, 6-C,
7-B, 8-A, 9-B, 10-E, 11-B, 12-A
13-B, 14-C, 15-C, 16-E, 17-B, 18-C, 19-B,
20-B, 21-C, 22-A, 23-A, 24-B, 25-C, 26-A,
27-C, 28-A, 29-C, 30-A, 31-A,
32-D, 33-B, 34-B, 35-B, 36-B, 37-D,
38-A, 39-A, 40-B, 41-A,
42-B, 43-B, 44-D, 45-A, 46-D,
47-B, 48-B, 49-B, 50-A, 51-A, 52-A, 53-B,
54-A, 55-C, 56-D*, 57-B, 58-A, 59-C, 60-B,
61-D, 62-A, 63-C, 64-B,
65-D, 66-C, 67-B, 68-C,
69-C, 70-C.

*56 originally reported as A. (Thanks Scott.)

Some comments:

Yes, I realize 29 and 30 are the same as 25 and 26. I copied and pasted problem from old exams. That happens. Hopefully you had consistent responses. ;-)

Item 49: Sorry about the terminology. Since the cost of something is its "opportunity cost", it would be appropriate to say that explicit costs + implicit costs = the full opportunity cost and let that equal TC. I will try to stick to the "explicit" and "implicit" terminology for the test.

Item 46: If the MC = 11 and MR = 9 (which was given in the problem), then the firm is producing too much. So it should cut back production to where MC = 9. Advertising won't improve their position, and they have no power to increase price.

The diagram on page 12 is used for problems 66-68, not 43-45.

*terminology alert* in that diagram on p. 12, note how the price P2 is at the minimum of the AVC. At this price the firm produces Q2. It is producing at a LOSS, but it does cover ALL of its VC but NONE of the FC. This, price-quantity combination (at the minAVC) is called the "shutdown point". If the price falls below P2, losses would be greater than FC, so the firm is going to shut down. When the price is anywhere between P2 and P3, it will be producing at a loss but it is better than shutting down. Prices between P2 and P3 lead the profit maximization solution to a "loss minimization".