1b03test3fall2006_solutions_for_posting

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Page 1 of 9 McMaster University Department of Economics ECON 1B03 04 and E01 VERSION 1 Midterm Test #3 Tuesday November 21, 2006 Instructor: H Holmes Duration: 45 minutes Total Number of Pages: 8 INSTRUCTIONS : Answer all questions on the scan sheets. USE AN HB PENCIL ONLY. Make sure you carefully fill in the bubbles. YOU MUST FILL IN YOUR STUDENT NUMBER AND THE TEST VERSION NUMBER ON THE SCAN SHEET OR YOUR GRADE WILL NOT BE RECORDED. You may use a non-programmable calculator. Hand in both the scan sheet and this test copy. TOTAL MARKS AVAILABLE : 27 NAME:____________________________________________________ STUDENT #: _______________________________________________
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Page 2 of 9 1. Both Kate and Kyle own furniture factories that produce rocking chairs. In her factory Kate uses a production process that has very low fixed costs and very high variable costs. In his factory Kyle uses a production process that has very high fixed costs and very low variable costs. Currently, each factory is producing 100 rocking chairs at the same total cost. Which of the following statements is correct? If each produces a. less, their costs will be equal. b. more, their costs will be equal. c. more, the costs of Kate's factory will exceed those of Kyle's factory. d. less, the costs of Kate's factory will exceed those of Kyle's factory. 2. If the marginal cost curve is below the average variable cost curve, then a. average variable costs are increasing. b. average variable costs are decreasing. c. marginal cost must be decreasing. d. average variable costs could either be increasing or decreasing. 3. In perfect competition, the marginal revenue curve a. and the demand curve facing the firm are identical. b. is always above the demand curve facing the firm. c. is always below the demand curve facing the firm. d. intersects the demand curve when marginal revenue is minimized. 4. If marginal revenue is greater than marginal cost, the profit-maximizing firm should a. increase output. b. do nothing since it is already maximizing profits.
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