MID-TERM #2: Thursday 25th March
i.
Please be in your seats five minutes before class starts so that we can start on time.
You will have the full class period to complete the test.
ii.
I will provide the test booklet and the Scantron. You need to bring a calculator, a
pencil, a pen and a ruler with you.
iii.
The test is open book. You may bring the required text, your class notes, and your
homeworks with you. Although you will have your material with you, be sure to
prepare for the test – materials are for back-up purposes only. When answering the
questions, be aware that you should manage your time carefully!
iv.
The test will comprise two sections: Section 1 will consist of 20 multiple choice
questions, each worth 2 points. Section 2 will comprise 4 short answer/problem
questions, and will be worth 80 points in total.
REVIEW SESSION #2: Tuesday 23rd March
1. Please visit the book’s website for additional study questions at:
http://myphlip.pearsoncmg.com/cw/mplistres1.cfm?vbookid=152
2. The answers to the multiple choice questions below are highlighted in bold.
3. The answers to the short problems will follow – have a go at doing them first!
Sample Multiple Choice Questions
1.
In order for a taxicab to be operated in New York, it must have a medallion on its
hood. Medallions are expensive, but can be resold, and are therefore an example of:
a.
Variable cost.
b.
Implicit cost.
c.
Opportunity cost.
d.
Fixed cost.
e.
Sunk cost.
2. The difference between the economic and accounting costs of a firm are:
a.
The accountant’s fees.
b.
The corporate taxes on profits.
c.
The opportunity costs of the factors of production that the firm owns.
d.
The sunk costs incurred by the firm.
e.
The explicit costs of the firm.
3. In a short-run production process, marginal cost is rising and average total cost is
falling as output is increased. Thus, marginal cost is:
a.
Above average total cost.
b.
Below average total cost.
c.
Between the average variable and average total cost curves.
d.
Below average fixed cost.
e.
Greater than the sunk costs of production.
4. In 1985, Alice paid $20,000 for an option to purchase ten acres of land. By paying
the $20,000, she bought the right to buy the land for $100,000 in 1992. When she
acquired the option in 1985, the land was worth $120,000. In 1992, it is worth
$110,000. Should Alice exercise the option and pay $100,000 for the land:
a.
Yes.
b.
No.
c.
It depends on what the rate of inflation was between 1985 and 1992.
d.
It depends on what the rate of interest was.
e.
It depends on what she can build on the land.
5. An isocost line reveals the:
a.
Costs of inputs needed to produce along an isoquant.
b.
Costs of inputs needed to produce along an expansion path.
c.
Costs necessary to purchase a plant of minimum efficient scale.
d.
Output combinations that can be produced with a given outlay of funds.
e.
Input combinations that can be purchased with a given outlay of
funds.
6. If the market price for a competitive firm’s output doubles then:
a.
The profit maximizing output will double.
b.
The marginal revenue doubles.
c.
At the new profit maximizing output, price has increased more than
marginal cost.
d.
At the new profit maximizing output, price has risen more than marginal
revenue.
e.
Competitive firms will earn an economic profit in the long-run.
7. If a graph of a perfectly competitive firm shows that the MR=MC point occurs where
MR is above AVC but below ATC:
a.
The firm is still earning positive profit, so long as variable costs are
covered.
b.
The firm is covering explicit, but not implicit, costs.
c.
The firm can cover all of fixed costs but only a portion of variable costs.
d.
The firm is earning negative profit, and will shut down rather than produce
that level of output.
e.
The firm is earning negative profit, but will continue to produce
where MR=MC in the short run.
8. Every firm maximizes profit where:
a.
Average revenue equals average cost.
b.
Average revenue equals average variable cost.
c.
Total costs are minimized.
d.
Marginal revenue equals marginal cost.
e.
Marginal revenue exceeds marginal cost by the greatest amount.
9. Producer surplus in a perfectly competitive industry is:
a.
The difference between profit at the profit-maximizing output and profit at
the profit-minimizing output.
b.
The difference between total revenue and total cost.
c.
The difference between total revenue and variable cost.
d.
The difference between total revenue and fixed cost.
e.
The same thing as total revenue.
10. The long-run supply curve in a constant-cost industry is:
a.
Horizontal and linear.
b.
Upward-sloping and linear.
c.
Downward-sloping and linear.
d.
Vertical and linear.
e.
Linear, but could have any constant slope.
$
$70
$60
$50
S
$40
$30
$20
$10
D
Q (Widgets)
10 20 30 40 50 60 70 80 90 100
11. Using the diagram above, if the market is in equilibrium, then consumer surplus is:
a.
$30.
b.
$70.
c.
$400.
d.
$800.
e.
$1200.
12. Using the diagram above, if the government sets a price ceiling of $20, PS will:
a.
fall by $200.
b.
fall by $300.
c.
remain the same.
d.
rise by $200.
e.
rise by $300.
13. In an unregulated, competitive market, producer surplus exists because some:
a.
Consumers are willing to pay more than the equilibrium price.
b.
Consumers are willing to purchase, but only at prices below equilibrium
price.
c.
Producers are willing to sell at less than the equilibrium price.
d.
Producers are willing to sell at higher than the equilibrium price.
e.
None of the above.
14. Import tariffs generally result in:
a.
higher domestic prices.
b.
less consumer surplus.
c.
more producer surplus for domestic producers.
d.
a deadweight loss.
e.
all of these.
15. When the government imposes a specific tax per unit on a product, changes in
consumer surplus are _______________ and changes in producer surplus are
_______________:
a.
negative; negative
b.
negative; positive
c.
positive; positive
d.
positive; negative
e.
all of the above
16. When the demand curve is downward sloping, marginal revenue is:
a.
Equal to price.
b.
Equal to average revenue.
c.
Less than price.
d.
More than price.
e.
Equal to marginal cost.
17. Using the diagram above, how much profit will the monopolist earn if s/he produces
at output level, Q1:
a.
0CDQ1.
b.
0BEQ1.
c.
0AFQ1.
d.
ACDF.
e.
BCDE.
18. Using the diagram above, if the monopolist produces at the output level where
P=MC, which of the following statements is true:
a.
The monopolist is maximizing profit.
b.
The monopolist is not maximizing profit and should decrease output.
c.
The monopolist is not maximizing profit and should increase output.
d.
The monopolist is earning a positive profit.
e.
The monopolist should produce where ATC crosses the demand curve.
19. The marginal revenue of socks is given as MR = 2500 - 5Q. The marginal cost of
socks is given as MC = 5Q. How many socks will be produced to maximize profit:
a.
800.
b.
50.
c.
500.
d.
250.
e.
None of the above.
20. The firms in a market have decided not to compete with one another and have
agreed to limit output and raise price:
a. This practice is known as collusion and is illegal in the United States.
b. This practice is known as concentrating and is legal in the United States and
Canada.
c. This is an effective barrier to entry, and is legal in the United States.
d. In this way, firms can better take advantage of economies of scale.
e. In this way, firms can better take advantage of product differentiation.
Sample Short Answer/Problem Questions:
Question 1: Costs of Production
1a) A fast-food restaurant currently pays $5 per hour for servers and $50 per hour for
rental machinery. The restaurant uses seven hours of server time per unit of machinery
time. Determine whether the restaurant is minimizing its cost of production when the
ratio of the marginal product of capital to the marginal product of labor is 12. If not, what
adjustments are called for to improve the efficiency in resource use?
1b) Complete the following table. Explain the pattern observed when looking at average
total costs, and marginal costs.
Q
0
1
2
3
4
5
6
TFC
TVC
TC
MC
AFC
AVC
ATC
50
10
75
50
50
225
300
1c) In the European Union, more than 400 firms produce shoes but only 1 produces
aircraft. What might be one of the main explanations for the difference in the number of
firms in the two industries?
Question 2: Perfect Competition
2a) Conigan Box Company produces cardboard boxes that are sold in bundles
containing a thousand boxes. The market is perfectly competitive, with boxes currently
selling for $100 per thousand. Conigan’s total and marginal cost curves, where Q is
measured in number of bundles per year, are:
TC = 3,000,000 + 0.001Q2
MC = 0.002Q
i.
ii.
Calculate Conigan’s profit maximizing quantity. Is the firm earning a profit?
Analyze Conigan’s position in terms of the shutdown condition. Should
Conigan operate or shut down in the short-run? And in the long-run?
2b) Complete the following table for a price taking competitive firm, where the market
price is $40. Determine the profit maximizing level of output.
Q
0
1
2
3
4
5
6
FC
25
TC
AC
MC
TR
AR
MR
35
30
45
185
57
120
Question 3: Analysis of Perfect Competition
Use the diagram above to answer the following questions:
i.
What is the equilibrium p* and q* in the camera market depicted above?
ii.
Suppose the government places a tax on camera manufacturers of $20 per
camera. Show the effect of the tax in the diagram above. What price will
buyers pay, and what price will sellers receive? How many cameras will be
sold?
iii.
Why does the imposition of a tax lead to a deadweight loss? Calculate the
deadweight loss associated with the $20 tax.
3b) The utilities commission in a city is currently examining pay telephone service in the
city. The commission has been asked to evaluate a proposal by a city council member
to place a $0.10 price ceiling on local pay phone service. The staff economist at the
utilities commission estimates the demand and supply curves for pay telephone service
as follows, where P = price of a pay telephone call, and Q = number of pay telephone
calls per month:
QD = 1600 - 2400P
QS = 200 + 3200P
i.
ii.
Determine the equilibrium price and quantity without the price ceiling.
Determine the quantity that will be available if the price ceiling is imposed.
Question 4: Monopoly
4a) Draw two diagrams – the first to represent an individual firm in a perfectly
competitive market in long-run equilibrium, and the second to represent a monopolist.
Explain why monopoly leads to a deadweight loss.
4b) The profit-maximizing price charged for goods produced is $16. The intersection of
the marginal revenue and marginal cost curves occurs where output is 10 units.
Assume constant marginal and average cost at $8. Draw a diagram to depict the above.
What profit does the monopolist earn? Calculate the deadweight loss (assuming the
perfectly competitive firm would produce 20 units).
4c) Define a natural monopoly, explaining what the size of the market has to do with
whether an industry is a natural monopoly. Suppose that a natural monopolist were
required by law to charge its average cost. Draw a diagram, label the price charged,
and the deadweight loss to society relative to marginal cost pricing.