Intro Micro Exam 2, Winter 2009NAME:______
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You may not attach additional paper to this exam. You may use the back page for additional space. If something is unclear, please do not hesitate to ask for clarification.
1. You have discovered that the cross-price elasticity of demand for beer with respect to the price of wine is Ebeer, wine = 1.5. Interpret this value for someone completely unfamiliar with the concept. (6 points)
2. You have discovered that the income elasticity for flour is EI = - .5. Interpret this value for someone completely unfamiliar with the concept. (6 points)
3. A firm employs labor and other inputsto produce goods in the short run. Explain the law of diminishing marginal returns to labor. Please use two diagramsto illustrate the relationship between total product and marginal product of labor. In both graphs show the quantity of labor that corresponds tothe point of diminishing returns.(12 points)
4. What is the difference between marginal, and total utility of the consumption of some good (like chocolate)? Can marginal utility from the consumption of chocolate be negative? Briefly explain with an example. (11 points)
5. Indicate how each of the following would shift the (1) marginal cost curve, (2) average variable cost curve, (3) average fixed cost curve, and (4) average total cost curve of a manufacturing firm. In each case specify the direction of the shift and briefly comment on your rationale. (6 points each)
a. Adecrease in shipping costs.
b. An increase in the monthly fee for a billboard on the side of a highway that advertises your company.
6. Homer consumes only two goods, beer and doughnuts. The price of a beer is $2 and the price of a doughnut is $1. He has currently spent all of his income. The marginal utility of his next beer is 8 and the marginal utility of his next doughnut is 2. Has Homer done a good job of maximizing his utility? Should he adjust his consumption of beer and doughnuts? Thoroughly explain your responses. (8 points)
7. A small coffee shop sells cups of coffee at a perfectly competitive price of $1 per cup. The owner of the business has asked for your economic advice and he has given you access to the following information.
- The business has daily fixed costs of $100.
- At a price of $1, the output where P=MR=MC is at 200 cups.
- At the output of 200 cups, the business incurs total variable costs of $225.
Given this information, what is your advice to the owner of the coffee shop? Show any necessary computations to make your point. (8 points)
8a. A firm has the following cost information. Begin by filling in the missing data. (8 points)
Q / TC / TVC / TFC / ATC / MC / AVC1 / 75 / 20 / 95 / 75 / 75
2 / 20 / 87 / 80 / 77.50
3 / 260 / 240 / 20 / 86.67 / 85
4 / 350 / 330 / 20 / 82.50
5 / 445 / 20 / 89 / 95
b. Is this firm operating in the short run or the long run? Explain how you know. (5 points)
8. A perfectly competitive firm has the table of costs below. If the market price is $110, how many units of output should the firm produce to maximize profit? Calculate the profit or loss. (6 points)
Output / TFC / TVC0 / $300 / $0
1 / $300 / 150
2 / $300 / 200
3 / $300 / 260
4 / $300 / 340
5 / $300 / 450
6 / $300 / 590
7 / $300 / 770
9.a. The U.S. market for soybeans is perfectly competitive with thousands of price-taking buyers and sellers. Graphically depict both the U.S. soybean market and one typical farmer who is producing at the profit maximizing quantity when the market price is above his average total cost curve. Label everything. (10 points)
b. Explain how this soybean market will adjust in the long run. No graphs are necessary. What will happen in the market and what will happen for the typical farmer? (8 points)
Dr. Eric R. DodgeMarch 5, 2009