Economics 172 Name:____________________________

Fall 2007 Quiz 5

1. A special license is required to operate a taxi in many cities. The number of licenses is restricted by the government. More drivers want licenses than are issued. This describes a non-perfectly competitive market primarily because

A) taxi services are very different.

B) firms cannot freely enter and exit the market. The lack of entry makes this a non-perfectly competitive market.

C) transaction costs are high.

D) the government generates revenue from the licenses.

2. A firm should always shut down if its average revenue is

A) declining.

B) more than its average fixed costs.

C) less than its total costs. In the short run, the firm can still produce.

D) less than its avoidable costs. If price is below avoidable costs, shut down immediately.

3. The figure to the right shows the cost curves for a competitive firm. If the profit-maximizing level of output is 40 price is equal to

A) $0.

B) $15.

C) $11.

D) $10

E) $8

86

At Q=40, MC = 40 and if the firm is profit maximizing, price must be =MC=15.

4. What is the total economic profit ($) at an output level of 40? ($15-$11)x40=$160

5. In the long run, profits will equal zero in a competitive market because of

20 30

A) constant returns to scale.

B) identical products being produced by all firms.

C) the marginal rate of technical substitution.

D) free entry and exit. Due to entry, profits will be competed away.