Temple College
ECON 2302
NAME:______________
Fall 1998
2nd EXAM
Please read and follow the instructions carefully for each
item on this exam. This take-home exam is an individual
assignment; that is, you may NOT receive assistance from
another person on any of the problems. You MAY use your
textbook, class notes, or any other source to complete the
exam (so long as you are working alone). Each student will
be held to the highest standards of personal honesty and
integrity.
NOTE: In answering all questions, it is better to provide
more explanation rather than less. In deciding how much to
write in response to any item, do NOT assume that the
instructor will “know what you mean.” Your work is due AT
THE BEGINNING OF CLASS on Tuesday, November 24,
1998.
PART I. CONFRONTING SCARCITY; PRODUCTION POSSIBILITIES. Follow
precisely the instructions provided for each question in this section. 7 items. 25
percent.
1. Below is a list of resources. Indicate to the right of each whether the resource is land
(LD), capital (K), labor (L), entrepreneurial ability (EA) or some combination of these
resources (C). Briefly explain (1 or 2 sentences) your choice in each case in the
space provided. (10 points)

fishing grounds in the North Atlantic

uranium deposits in Canada

an irrigation ditch in Nebraska

the work performed by Bill Gates

the oxygen breathed by human beings

an IBM plant in Rochester, Minnesota

the food on the shelf of a grocery store

the work done by a robot in an auto plant

the tasks accomplished in perfecting a new computer for commercial sales

a carpenter building a house
2. Below is a production possibilities table for two commodities: wheat and automobiles.
The table is constructed employing the assumptions of the production possibilities
model. Wheat is measured in units of 100,000 bushels and automobiles in units of
100,000.
COMBINATION
A
B
C
D
E
F
G
H
WHEAT
0
7
13
18
22
25
27
28
AUTOMOBILES
7
6
5
4
3
2
1
0
a. Use the graphing paper provided below, draw a production possibilities curve for the
data in the table. Place wheat on the vertical axis and automobiles on the horizontal
axis. (8 points)
b. Complete the following table to show the opportunity cost per unit of producing the
1st through 7th automobile. (5 points)
AUTOMOBILES
1st
2nd
3rd
4th
5th
6th
7th
COST OF PRODUCTION
3. The graph below is a production possibilities curve. On this graph, draw:
a. a production possibilities curve which indicates greater efficiency in the
production of good A; (2 points)
b. a production possibilities curve which indicates greater efficiency in the
production of good B; (2 points)
c. a production possibilities curve that indicates an increase in the resources
available to this economy. (2 points)
Good A
Good B
4. Below is a list of 12 economic goods. Indicate whether each good is a consumer good
(CON) or a capital good (CAP), or that it depends on who is using it and for what
purposes (DEP). (10 points)

an automobile

a tractor

a taxicab

a house

a factory building

an office building

an ironing board

a refrigerator

a telephone

a quart of a soft drink

a cash register

a srewdriver
4. Briefly answer each of the following:
a. When is society economically efficient? (2 points)
b. What assumptions are made by the production possibilities model? (4 points)
c. What is the law of increasing opportunity cost? Why do costs increase? (2 points)
d. What determines the optimal product mix for society’s production possibilities? (2
points)
e. How can unemployment in the labor force be illustrated with the production
possibilities curve? (2 points)
f.
What will be the effect of increasing resource supplies on production possibilities? (2
points)
g. Describe how technological advances will affect a society’s production possibilities
curve. (2 points)
h. Explain the tradeoff between goods for the present and goods for the future. (2
points)
i.
What qualification does international trade make for the interpretation of production
possibilities? (2 points)
j.
Describe the effects of going to war on a society’s production possibilities curve. (2
points)
5. Below are the productions possibilities schedules for two countries: the United States
and Chile.
USA
COPPER
0
1
2
WHEAT
8
4
0
CHILE
COPPER
0
1
2
WHEAT
4
2
0
a. Draw each country’s production possibilities curve on the graphing paper provided.
(8 points)
b. What does the slope of each country’s curve tell you about the cost ratios in each
country? What is the cost in the US? What is the cost ratio in Chile? (4 points)
c. Suppose that these two countries do NOT currently engage in international trade or
specialization, and suppose that each country produces the combination given by the
mid-points of their production possibilities curves. What would be the total output of
copper for the two countries? What would be the total output of wheat? (4 points)
d. If these two countries were to specialize and trade wheat for copper, which product
would the US specialize in the production of? Why? Which would Chile specialize
in? Why? (4 points)
e. If specialization and trade occur, what will the terms of trade be? (4 points)
6. In a paragraph, explain:
a. the theory or principle of comparative advantage; (2 points)
b. what is meant by and what determines the terms of trade; (2 points)
c. the gains from trade. (2 points)
PART II. PRODUCTION AND COSTS. Follow precisely the instructions provided
for each question in this section. 6 items. 25 percent.
1. On the graphing paper provided, sketch a total product curve and a marginal product
curve indicating the relationship between a firm’s increasing use of a factor of
production and the firm’s output. Be sure to indicate which graph shows total
product and which shows marginal product. Also, be sure to label the axes on each
graph. (8 points)
2. The following table shows the total production of a firm as the quantity of labor
employed increases. The quantities employed of all other factors are held constant.
UNITS OF LABOR
0
1
2
3
4
5
6
7
8
TOTAL PRODUCTION
0
80
200
330
400
450
480
490
480
MARGINAL PRODUCT
**
a. Compute the marginal products of the first through the eighth and then enter them in
the table. (7 points)
b. Increasing marginal returns (IMR) to labor occur over what range of output?
Decreasing marginal returns (DMR) to labor occur over what range of output? (6
points)
c. Draw the total product and marginal product curves for this firm. Identify on your
graphs the regions of IMR and DMR to labor. (8 points)
3. On the first graph below, sketch the way that total cost changes as the output a firm
produces increases in the short run. (4 points)
4. On the second graph, sketch the way that marginal cost, average total cost, and
average variable cost change as the output a firm produces increases in the short
run. (8 points)
5. Assume that a firm has a plant of fixed size and that it can vary its output only by
varying the amount of labor it employs. The table below shows the relationships
between the amount of labor employed, the output of the firm, the marginal product
of labor, and the average product of labor.
Quantity of
Labor employed
0
1
2
3
4
5
6
7
8
9
10
Total
Output
0
5
11
18
24
29
33
36
38
39
39
Marginal Product
of Labor
**
5
6
7
6
5
4
3
2
1
0
Average Product
of Labor
**
5
5.5
6
6
5.8
5.5
5.14
4.75
4.33
3.9
Total
Cost
Marginal Average Variable
Cost
Cost
$
**
$
**
$
a. Assume that each unit of labor costs the firm $10. Compute the total cost of labor for
each quantity of labor that the firm might employ and enter these figures into the
table. (7 points)
b. Now determine the marginal cost of the firm’s product as the firm increases its
output. Enter these figures into the table. (7 points)
c. When the marginal product of labor increases, what happens to the marginal cost of
the firm’s product? (3 points)
d. When the marginal product of labor decreases, what happens to the marginal cost of
the firm’s product? (3 points)
e. If labor is the firm’s only variable factor, the total labor cost and the total variable cost
are equal (the same thing). Find the average variable cost of the firm’s product and
enter these figures into the table. (7 points)
f.
When the average product of labor increases, what happens to the average variable
cost of the firm’s product? (3 points)
g. When the average product of labor decreases, what happens to the average variable
cost of the firm’s product? (3 points)
h. What explains the behavior you observed in your answers to (c), (d), (f), and (g)? (5
points)
6. Briefly answer each of the following:
a. What type of adjustments can a firm make in the long run that it cannot make in the
short run? How long is the short run? (5 points)
b. State precisely the law of diminishing marginal returns. Exactly what is it that
diminishes? Why does it diminish? (5 points)
c. Distinguish between a fixed cost and a variable cost. (5 points)
d. What is the precise relationship between marginal cost and minimum average
variable cost, and between marginal cost and minimum average total cost? Why are
these relationships necessarily true? (5 points)
e. What is meant by economies of scale? What are some the factors that explain its
existence? (5 points)
f.
What is meant by diseconomies of scale? What causes diseconomies of scale? (5
points)
g. How do economies/diseconomies of scale influence the size of firms in an industry
and the number of firms in an industry? (5 points)
PART III. PERFECTLY COMPETITIVE MARKETS. Follow precisely the
instructions provided for each question in this section. 6 items. 25 percent.
1. The following table shows short-run marginal costs for a perfectly competitive firm.
Use these data to draw the firm’s marginal cost curve below. (5 points)
OUTPUT
100,000
200,000
300,000
400,000
500,000
MARGINAL COST
$ 5
10
20
40
70
2. Suppose the firm’s shut-down price is $10. Draw the firm’s short-run supply curve
below. (5 points)
3. Suppose there 100 identical firms like the firm discussed in items #1 and #2. Draw
the short-run industry supply curve below. (5 points)
4. Suppose the wage for workers in a factory that makes Christmas wreaths is $5 per
hour. Complete the following table. (10 points)
Wreaths
per hour
3
4
5
6
Number
of workers
15
18
23
33
Additional
Workers
**
Additional
Labor Cost
**
Additional
Marginal
Material Cost Cost
**
**
$20
20
20
5. Now use the data to draw the firm’s short-run supply curve for wreaths. (7 points)
6. You’ve been hired by an unprofitable firm to determine whether it should shut down
its operation. The firm currently uses 70 workers to produce 300 units of output per
day. The daily wage per worker is $100. The price of a unit of the firm’s output is
$30. The cost of other variable inputs is $500 per day. Although you do not know
the firm’s fixed cost, you know that it is high enough that the firm’s total cost exceed
its total revenue. Should this firm continue to operate at a loss? Explain. (10 points)
PART IV. MONOPOLIES AND PRICE DISCRIMINATION. Follow precisely the
instructions provided for each question in this section. 5 items. 25 percent.
1. The National Park Service grants a single firm the right to sell food and other goods
in Yosemite National Park. Discuss the tradeoffs associated with this policy. (5
points)
2. Consider the Slappers, a minor league hockey team that plays in an arena with
8,000 seats. The only cost associated with staging a hockey game is a fixed cost of
$6,000; the team incurs this regardless of how many people attend the games. The
demand curve for hockey tickets has a slope of $1/1,000 – that is, each $1 increase
in price decreases the number of tickets sold by 1,000. Here are some examples of
price and quantity demanded:
Price
Quantity demanded
$4
8,000
$5
7,000
$6
6,000
$7
5,000
The owner’s objective is to maximize the profit per hockey game (total revenue
minus fixed cost).
a. What is the appropriate (profit-maximizing) price? (5 points)
b. If the owner picks the price that you indicated in (a), how many seats in the arena will
be empty per game? Is it rational to leave some seats empty? Explain. (5 points)
3. Critically appraise the following statement from a member of the local city council: (5
points)
“Several of the merchants in our city offer discounts to our senior citizens. These
discounts obviously decrease the merchants’ profits, so the City Council should
decrease the merchants’ taxes to offset their losses on senior citizen discounts.”
4. An advertisement for an early-bird sale at a fabric store notes that people who buy
fabric between 6 and 7am receive a 40% discount, while people who buy between 7
and 8am receive a 20% discount. What is the rationale for such a scheme? (5
points)
5. Why are student discounts common for services like admission to museums, night
clubs, and other entertainment, but uncommon for consumer goods like hardware,
appliances, and automobiles? (5 points)