Economics 101
Midterm Exam 3
Spring 2012
Version A Answer Guide
1. Which of the following describes the marginal product of labor?
Additional Output from last unit of labor
e) None of the above
2. Which of the following best describes the objective of the perfect price discriminator?
b) Charge each consumer the price that s/he is willing to pay
3. Which of the following best describes the break-even point of the firm?
c) Quantity at which marginal cost equals average cost
4. Which of the following best describes the difference between the short-run (SR) and the long-run (LR)
for a firm?
e) Labor variable in SR; labor variable in LR; capital fixed in SR; capital variable in LR
5. Which of the following best describes a difference between a competitive firm and a pure monopolist?
c) Competitive firm is price taker, monopolist is price maker
6. Which of the following best describes a market in which there is monopolistic competition?
e) A market in which firms have market power in the short-run, but there is competition in the long-run
For Questions 7 to 13, please consider a competitive industry in which there are 100 IDENTICAL firms.
The cost function for each firm is:
Total
Cost
0
1
2
3
4
5
6
7
10
16
21
30
40
55
75
98
Marginal
Cost
Average
Cost
6
5
9
10
15
20
23
16
10.5
10
10
11
12.5
14
25
20
15
10
5
0
0
1
2
3
Marginal Cost
4
5
6
7
Average Cost
7. What is the marginal cost of the 6th unit produced?
b) $ 20.00
8. How much would ONE firm produce and sell if the equilibrium price in the market were $ 9
Firm finds quantity at which MC=9, then checks to make sure that P>AC. MC equals 9 at quantity of 3, but AC
of 3 is 10.
a) None, the firm would not produce
Consider a situation in which the demand curve in the market shifts to:
Price
50
40
35
32
28
23
20
10
9
Quantity
Demanded
200
300
400
500
600
700
800
900
1000
60
50
40
30
20
10
0
0
100
200
300
400
500
Market Supply
600
700
800
900
1000
Market Demand
9. In the short-run, what is the equilibrium price in this market?
The intersection of the market supply curve and the demand curve occurs at a quantity of 700 and a price of 23.
d) $ 23
10. In the short-run, what are the profits of each firm?
Each firm produces 7 units. The average cost of producing 7 is $14, so the profits are (P-AC) Q = (23-14)7 =
$63
c) $63
11. In the long-run, what is the equilibrium price?
In the long-run, the price is the break-even price. For these firms, the break-even price is $10. Each firm
produces 4 at $10.
b) $ 10
12. In the long-run, how many firms are in the market?
At the long-run price of $10 per unit, 900 units are demanded. Each firm produces 4. So there must be 225
firms.
e) Not Given
13. In the long-run, what are the profits of each firm?
a) $0
14. Which of the following best describes why workers in Chinese firms that supply goods for Walmart
receive wages that are only a small fraction of the cost of the final good?
d) The workers do not have better alternatives than working for Walmart suppliers at low wages
15. Which of the following describes a key element of Walmart’s strategy during the 2000s?
b) Pressuring suppliers to produce their goods in low wage countries such as China
16. Which of the following best describes the main tension in a duopoly?
c) The highest joint profits are made by cooperating, but each firm has an incentive to cheat
For Questions 17 to 19, consider a market with two non-cooperative firms that each must decide whether
to Match Prices or Don’t Match Prices. The exact payoffs to the firms are shown in the table below.
Firm 2
Don’t match prices
Match Prices
Firm 1 = $100 million
Firm 1 = $200 million
Firm 1 Don’t Match
Firm 2 = $100 million
Firm 2 = $300 million
Prices
Match Prices
Firm 1 = $300 million
Firm 2 = $ 250 million
Firm 1 = $ 250 million
Firm 2 = $ 200 million
17. Which firms have a dominant strategy?
a) Firm 1
18. If both firms employ their best strategy (without cooperating) given what each firm thinks the other
will do, what is the likely outcome?
Firm 2 knows that firm 1 is going to match prices. Its best response is to not match.
c) Firm 1 = $300 million; Firm 2 = $250 million
19 Is the outcome a Nash Equilibrium?
The lower left is the only box into which both arrows are heading.
a) Yes, it is the only Nash Equilibrium
For Questions 20 to 22, consider a monopolist with the following costs:
Quantity
0
1
2
3
4
5
6
Total
Cost
0
180
240
360
520
700
900
Marginal
Cost
Average
Cost
180
60
120
160
180
200
180
120
120
130
140
150
The monopolist faces the following demand curve:
Quantity
Price
1
2
3
4
5
6
MR
220
210
200
190
180
160
220
200
180
160
140
60
Monopolist Decision
250
Price, Cost
200
150
100
50
0
0
2
4
Quantity
MC
AC
Demand
6
8
MR
20. How much will the monopolist produce and sell?
Monopolist finds quantity at which MR=MC. This occurs at a quantity of 4 with MR=MC=160.
c) 4 units
21. What price would the monopolist charge?
The monopolist charges the price that the fourth consumer is willing to pay, or 190.
e) None of the above
22. What are the profits of the monopolist?
Profits are (P-AC)Q = (190 – 130) 4 = $240
c) $240
For Questions 23 to 25, consider the following information for the production function of a firm that has
fixed costs of $100 and pays a wage equal to $10/hour.
Labor
Output
MP
AP
Cost
MC
10
11
12
13
14
125
132
138
143
147
7
6
5
4
12.5
12
11.5
11
10.5
200
210
220
230
240
AC
1.43
1.67
2.00
2.50
1.60
1.59
1.59
1.61
1.63
23. What is the marginal product of the 14th worker?
MP of 14 worker is 4
e) None of the above
24. What is the average cost per unit produced when 10 workers are hired?
a) $1.60/unit
25. What is the marginal cost (per unit of output) when the 13th worker is hired (compared to 12
workers)?
Marginal cost of 13 worker is (230-220)/(143-138) = 10/5 = $2 per unit
a) $2.00/unnit
26. (35 Points) Firm Supply Curve and Output determination
Please use the back of your Parscore form to answer Question 26
Consider a firm that has the following production function:
Labor (Hours)
1
2
3
4
5
6
7
8
Quantity
10
22
36
48
58
66
70
72
The firm has no fixed costs and faces a wage of $18/hour.
This problem was right out of the lecture notes and is similar to questions 23 to 25. The Average Cost is the
Total Cost divided by Quantity. The Marginal Cost per unit is the change in cost divided by change in quantity.
For example. going from 3 workers to 4 workers, cost increases by 18 and quantity increases by 12. The
marginal cost per unit is 18/12 = 1.5.
Labor
0
1
2
3
4
5
6
7
8
Output
0
10
22
36
48
58
66
70
72
Cost
0
18
36
54
72
90
108
126
144
MC
AC
1.80
1.50
1.29
1.50
1.80
2.25
4.50
9.00
1.80
1.64
1.50
1.50
1.55
1.64
1.80
2.00
a) (10 points) Please graph the cost function for this firm. Label any key points.
The cost function is the relationship between cost and quantity.
Cost Function
160
140
120
Cost
100
80
60
40
20
0
0
20
40
60
80
Quantity
b) (15 points) Please graph the marginal cost and average cost function for this firm (10 points) and
supply curve for this firm (5 points). Label any key points.
The supply curve is the marginal cost curve above the break-even point. For this firm, the break even point
occurs at a quantity of 48. Marginal cost equals average cost equals 1.5.
Firm Supply Curve
Marginal Cost and Average Cost
9.00
9.00
8.00
8.00
7.00
7.00
6.00
Price
Cost
6.00
Break-even point
Q=48, MC=AC=1.5
5.00
4.00
5.00
4.00
3.00
3.00
2.00
2.00
1.00
1.00
0.00
0.00
0
0
20
40
60
80
20
40
60
Quantity
Quantity
Marginal Cost
Marginal Cost
Average Cost
Supply Curve
Average Cost
c) (10 points) Please explain how this firm will decide how much to supply to the market if the price of
output is $4.50 per unit. Show your answer and the profits of the firm on your graph.
The firm finds the quantity at which MR=MC. Marginal revenue for a competitive firm is the price of output,
which is 4.5. The quantity at which MC=4.5 is 70. The firm makes sure that P>=AC (AC=1.8 at 70). Profits
are (P-AC)Q = (4.5 – 1.8) 70 = $189.
80
Firm Supply Curve
9.00
8.00
7.00
Cost
6.00
MR=4.5
5.00
4.00
3.00
2.00
1.00
0.00
0
20
40
60
Quantity
Marginal Cost
Average Cost
Supply Curve
80