Midterm 2 Afternoon Exam 11/14/06

Use the following graph of a firm in a perfectly competitive industry with constant costs to answer the next two questions. Assume that the firm is a price taking firm and that the market equilibrium price equals $30 in the short-run.

1. In the short run, how much is the Total Cost for this company at the profit maximizing level of output?

  1. $1800
  2. $1520
  3. $1400
  4. $1050

2. Among the following labels, what is the appropriate label to describe the short run situation described in the above figure?

  1. Shut down
  2. Negative economic profit
  3. Break-even
  4. Positive economic profit

Use the following information to answer the next two questions:

The production of Ipods requires both capital and labor. By capital (K), we mean the building where the production takes place. By labor (L), we mean the number of employees hired at Apple. Assume that Apple, the Ipod manufacturer, has to pay US $ 20,000 per year for maintaining the building in good conditions, regardless of the quantity of Ipods produced (Q). The manufacturer has provided the following information:

Q / L / FIXED COSTS / VARIABLE COST / TOTAL COST
0 / 0 / B
1 / 1
2 / 2 / A / C
3 / 3 / E

3. What is the value of A?

  1. $80,000
  2. $60,000
  3. $0
  4. $20,000

4. When the wage per worker is US$ 65000 a year, the value of B is ______and the value of C is ______.

  1. $20,000; $195,000.
  2. $0; $130,000.
  3. $20,000; $0.
  4. $0; $195,000.

5. Every morning Pablo is concerned about his health and decides where to have breakfast based on the health benefits. As a result he likes Salad House (SH) the most and Burger House (BH) the least, while he is indifferent between BH and Kebab Corner (KC). Which of the following utilities could possibly represent Pablo’s preferences? Assume U stands for the level of utility Pablo gets from consuming one breakfast at the given restaurant. For example, U(SH) is the utility Pablo gets from eating at Salad House.

  1. U(SH) = 10; U(BH) = 18; U(KC) = 12
  2. U(SH) = 10; U(BH) = 8; U(KC) = 2
  3. U(SH) = 10; U(BH) = 2; U(KC) = 2
  4. U(SH) = 10; U(BH) = 18; U(KC) = 18

6. Gus spends his income on gas for his car and food. The government raises the tax on gas, thereby raising the price of gas. But the government also lowers the income tax, thereby increasing Gus’s income. And this rise in income is just enough to place Gus on the same indifference curve as the one he was on before the price of gas rose. How will Gus’s consumption of gas change as a result of this new taxation policy?

  1. Gus’s consumption of gas will decrease.
  2. Gus’s consumption of gas will increase.
  3. Gus’s consumption of gas will be unaffected by these tax changes.
  4. From the given information it is not possible to tell what happens to Gus’s consumption of gas due to this new tax policy.

Use the following information to answer the next question:

The following graph shows Ted’s indifference curves for two goods X and Y. Three possible consumption combinations of the two goods are indicated on the graph as combination 1, combination 2, and combination 3.

7. Which of the following statements best represent Ted’s preference rankings for the three consumption combinations?

  1. Ted strictly prefers combination 1 to both combination 2 and combination 3 and prefers combination 2 to combination 3.
  2. Ted strictly prefers combination 2 to both combination 1 and combination 3 and prefers combination 1 to combination 3.
  3. Ted strictly prefers combination 3 to both combination 1 and combination 2. Ted is indifferent between combination 1 and combination 2.
  4. Ted is indifferent between combination 1 and combination 2. Ted prefers combination 1 to combination 3 and he prefers combination 2 to combination 3.

Use the following graph to answer the next three questions.

8. Suppose a firm has a monopoly in the production of this good. What price will they charge and how many units will they sell?

  1. Price P1 and quantity Q1
  2. Price P2 and quantity Q2
  3. Price P3 and quantity Q1
  4. Price P3 and quantity Q2

9. What is the value of the monopoly mark-up? (in other words, how much more than the perfect competition price does the monopolist charge?)

  1. P3-P1
  2. P2-P1
  3. P3-P2
  4. P4-P2

10. Suppose that this firm no longer has a monopoly and the market becomes perfectly competitive. What will happen to price and quantity as it becomes a competitive market?

  1. Quantity sold will increase and price will increase.
  2. Quantity sold will increase and price will decrease.
  3. Quantity sold will decrease and price will increase.
  4. Quantity sold will decrease and price will decrease.

11. Which of the following statements is true?

  1. Average costs first fall and then, as diminishing returns sets in, total costs rise as the firm expands its output.
  2. The AVC curve always passes through the minimum point of the MC curve.
  3. The AVC curve is always above the ATC curve.
  4. The AFC is always constant.

12. Which of the following is NOT a property of indifference curves?

  1. Indifference curves for an individual do not intersect.
  2. For indifference curves that are bowed towards the origin, an indifference curve further from the origin represents a higher level of utility.
  3. Downward sloping indifference curves have a negative marginal rate of substitution.
  4. Indifference curves of two individuals consuming the same combination of goods (for instance, two books and three hotdogs) cannot intersect.

13. Suppose that when a firm triples all of its inputs, it doubles the amount of output it produces. Then this firm

  1. Is experiencing increasing returns to scale.
  2. Is experiencing decreasing returns to scale.
  3. Is experiencing constant returns to scale.
  4. Is experiencing economies of scale.

Use the following information to answer the next two questions.

A natural monopolist is regulated by the government and must provide its product at marginal cost to consumers.

14. What quantity of output will the natural monopolist provide to consumers in the short run? The regulated monopolist will provide

  1. The same quantity as an unregulated natural monopolist.
  2. The same quantity as a profit-maximizing monopolist.
  3. The same quantity as would be produced if this industry instead of being a monopoly was a perfectly competitive industry.
  4. A quantity that exceeds the amount that would be provided if this industry instead of being a monopoly was a perfectly competitive industry.

15. In the long run, what will the natural monopolist choose to do if the natural monopolist is regulated to provide its product at marginal cost to consumers? The regulated natural monopolist will

  1. Stay in business and provide its product at marginal cost to consumers.
  2. Break into several smaller firms.
  3. Invest in more capital to increase production capacity.
  4. Exit the industry.

16. When a firm exits a perfectly competitive industry,

  1. the individual demand curve facing each remaining firm shifts up.
  2. short-run industry equilibrium is re-established at a new point along the original short-run industry supply curve
  3. the short-run supply curve shifts to the right.
  4. this indicates that the firm was not covering its fixed costs in the long run.

17. The market for apples is perfectly competitive. In the long run, each firm in the market is producing 100 apples and selling them for $4 each. What is the marginal cost of the 100th unit for each firm?

  1. $4
  2. $20
  3. $25
  4. $100

18. Both John and Mike own shoe factories that produce sport shoes. In his factory John uses a production process that has low fixed costs and high variable costs. In his factory Mike uses a production process with high fixed costs and low variable costs. Currently, each factory produces 10,000 shoes per month at the same total cost. Which of the following statements is correct (assuming typical cost curves)?

  1. If each produces 10 fewer shoes, their costs will be equal.
  2. If each produces 10 fewer shoes, Mike’s costs will exceed John’s.
  3. If each produces 10 more shoes, their costs will be equal.
  4. If each produces 10 more shoes, Mike’s costs will exceed John’s.

19. Consider a perfectly competitive market. Assume all firms in the industry have the same cost and production functions. Right now, the quantity produced by one firm is higher than the minimum-cost output. What will happen in the long-run?

  1. New firms will enter the market.
  2. Some firmswill exit the market.
  3. Each firm will increase its price for the product.
  4. Each firm will increase its level of production for the product.

20. The budget line for Mike who consumes X and Y is given by Y = 10 – 2X. Assume that X is on the horizontal axis and Y is on the vertical axis and the price of X is $4 per unit and the price of Y is $2 per unit. How much is Mike’s income?

  1. $20
  2. $5
  3. $40
  4. $10

21. The following graph shows Joe’s preferences for bread and butter. Given his income and the initial prices he optimally chooses to consume at point A. Suppose the price of bread rises and the price of butter decreases in such a way that Joe’s new budget constraint still passes through A. Then, the quantity consumed of butter

  1. will increase.
  2. will decrease.
  3. will stay the same.
  4. may increase, decrease of remain the same.

22. The greatest loss a firm can earn in the short run (or the greatest negative profit) is equal to

  1. Total fixed costs.
  2. Total variable costs.
  3. The interest rate times the value of capital invested.
  4. The difference between the price and the average total cost at the profit minimizing quantity.

Use the following information for the next three questions.

A monopolist faces a demand curve given by P = 100 – 2Q. The monopolist has constant marginal cost of $20 per unit produced, and the monopolist’s marginal revenue is given by MR = 100 – 4Q.

23. What is the profit-maximizing price for the monopolist?

  1. $20
  2. $40
  3. $60
  4. $80

24. How much profit will the monopolist make?

  1. $1200
  2. $800
  3. $600
  4. $400

25. What is the deadweight loss due to this monopoly?

  1. $200
  2. $400
  3. $600
  4. $800

26. A jewelry manufacturer has the capacity to produce 15,000 gold-plated wedding bands per month. At present it is selling 10,000 bands at $20 each. A national discount chain approaches the company and offers to purchase an additional 5000 bands at $9 each. The company’s average total cost at 10,000 bands is $12. At 15,000 bands the company’s average total cost will be $10. Should they take the offer?

  1. No, $9 does not cover costs.
  2. No, $9 does not earn a sufficient profit.
  3. Yes, the deal causes profits to rise.
  4. The firm should shut down.

27. Suppose that the CPI in Japan was 200 in 2005 and that the inflation rate from 2005 to 2006 was 15%. The CPI in Japan in 2006 is therefore

  1. 170
  2. 200
  3. 215
  4. 230

28. The market for soccer balls is perfectly competitive. Market demand is given by P = 50- (1/2)*Q. All firms have the same marginal cost function, which is MC = 2Q + 2. If the price in this market is currently $10 then how many firms will be producing in this market?

  1. 10 firms
  2. 20 firms
  3. 80 firms
  4. 8 firms

Use the information in the table to answer the next two questions.

Year / CPI / Real Wage / Nominal Wage
2005 / 200 / $10,000.00
2006 / 400 / $40,000.00

29. What is the real wage in 2006 using 2005 dollars?

  1. $10,000
  2. $20,000
  3. $30,000
  4. $40,000

30. If we change the base year for the CPI to 2005, what will the CPI be in 2006?

  1. 100
  2. 200
  3. 300
  4. 400

31. The maximum amount of total product that any particular collection of inputs is capable of producing during a particular time period is described by

  1. the marginal product.
  2. the average cost.
  3. the producer surplus.
  4. the production function.

Use the following graph to answer the next question.

32. Fill in the blanks, using the above figure.

If a consumer consumes at point A, his marginal rate of substitution is ______than the price ratio. Hence the consumer can get a higher utility by ______the consumption of Good B and by ______the consumption of good A.

  1. Larger; decreasing; increasing
  2. Larger; increasing; decreasing
  3. Smaller; decreasing; increasing
  4. Smaller; increasing; decreasing

33. A natural monopolist has an average total cost of $5 per unit produced when maximizing profits. If the government breaks the monopolist into three separate equal-sized firms, then the average total cost for each firm will be

  1. greater than $15.
  2. greater than $5.
  3. equal to $5.
  4. less than $5.

Version 1

1c, 2b, 3d, 4b, 5c, 6a, 7d, 8c, 9c, 10b, 11a, 12d, 13b, 14c, 15d, 16a, 17a, 18b, 19a, 20a, 21c, 22a, 23c, 24b, 25b, 26c, 27d, 28b, 29b, 30b, 31d, 32c, 33b

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