# Principles of Economics II

## Homework #2

PART I:  Multiple Choice – With Explanation: Following your answer choice, please provide an explanation for how you came up with the answer (or why you eliminated the other alternatives.)  The explanation and the choice are worth equal amounts.

NOTE:  Be sure to explicitly indicate your specific choice of multiple choice answer or you will not receive credit for it.

9.  Suppose that a tour bus business incurred implicit costs of \$600,000 and explicit costs of \$7 million in a specific year. If the firm sold 125,000 tours at \$60 per person, its accounting:

A)  profits were \$100,000 and its economic profits were \$500,000.

B)  losses were \$100,000 and its economic losses were \$700,000.

C)  profits were \$500,000 and its economic losses were \$100,000..

D)  profits were zero and its economic losses were \$500,000.

Explanation for why you chose this answer:

10.  Suppose Jim’s Jellies is in a purely competitive market for jelly.  Jim assumes price is given or constant because:

A)  the firm’s demand curve for Jelly is visibly downward sloping.

B)  of product differentiation reinforced by extensive advertising.

C)  each seller supplies a negligible fraction of the total jelly supply.

D)  there are no good substitutes for the jelly the firm produces.

Explanation for why you chose this answer:

11.  Suppose Bill’s Pills is a firm that does not know whether or not their market is competitive, because they did not pay attention in Econ 203, but they still want to maximize profit because they are greedy.  You can tell them that, for profit maximization, the MR = MC rule applies:

A)  to firms in all types of industries.

B)  only when the firm is a “price taker.”

C)  only to non-regulated monopolies.

D)  only to purely competitive firms.

Explanation for why you chose this answer:

12.  Assume the LMNOP Corporation is producing 800 units of output. It is selling this output in a purely competitive market at \$80 per unit. Its total fixed costs are \$4000 and its average variable cost is \$60 at 800 units of output. LMNOP corporation:

A)  should close down in the short run.

B)  is definitely maximizing its profits.

C)  is realizing a loss of \$2000.

D)  is realizing an economic profit of \$2000.

Explanation for why you chose this answer:

13.  Your Gargantuan Gaskets Inc. claims to be a Pure monopoly.  You know that this is true because Gargantuan:

A)  is in a market in which the demand curve to the firm has a negative slope (i.e. slopes downward.)

B)  makes a standardized product being produced by many firms.

C)  is a single firm producing a product for which there are no close substitutes.

D)  is in a market with a large number of firms producing a differentiated product.

Explanation for why you chose this answer:

14. In the event of a minimum wage increase that is set above the equilibrium wage for unskilled laborers, wages for unskilled laborers will __________, and unemployment will _____________.

1. fall; fall
2. fall; rise
3. rise; fall
4. rise; rise