Econ 98-Chiu
Mock Exam 1
Name & SID:
Spring 2005
Date:
You have 30 minutes to answer the following questions. Please show all your work and circle
your final answers. NO CALCULATORS.
Your goal is NOT to finish this quiz. Your goal is to maximize your total number of points.
1. What is market equilibrium price and quantity of sodas? [ 1 point ]
P
S
4
2
D
1
4
Q
2. The price of water decreases. Assume water and sodas are substitutes. Show what happens in
the market for sodas (graph above). How does this affect the equilibrium price and quantity
for sodas? [5 points]
3. Name all the main assumptions for perfect competition. [ 4 points ]
4. Define “price-taker”. [ 1 point ]
5. How do perfectly competitive firms make output decisions? In other words, how do perfectly
competitive firms know how much to produce? An equation would be acceptable. [ 4 points ]
Page 1 of 4
Econ 98-Chiu
Mock Exam 1
Spring 2005
Name & SID:
Date:
6. Assume that the market for corn is perfectly competitive. Also assume that the market price
(P1) for corn is $1/ton. The individual firm is making positive profits, assuming no entry or
exit, at this price. What is the firm’s marginal revenue curve? What is the firm’s demand
curve? Sketch and label both the firm’s marginal revenue curve (MR) and firm’s demand
curve (d). Shade in the area for firm’s profit. [20 points]
Firm
Market
7. Will the price of corn stay at $1/ton? Will the price of corn increase or decrease when there is
free entry and exit? Will the equilibrium market quantity of corn increase or decrease? Do
individual firms produce more or less when there is free entry and exit? Sketch the free
entry and exit effects in the market and in the individual firm. [20 points]
Firm
Market
Page 2 of 4
Econ 98-Chiu
Mock Exam 1
Name & SID:
Spring 2005
Date:
8. William argues that perfectly competitive firms do not produce where MC=MR because he
believes that perfectly competitive firm’s always produce where P=MC. Do you think he is
correct? Why or why not? [1 point]
9. What is Marginal Cost? [1 point]
10. What is Marginal Utility? [1 point]
11. What is opportunity cost? [1 point]
12. What is sunk cost? [1 point]
13. What is total cost? [1 point]
14. What is variable cost? [1 point]
15. What is fixed cost? [1 point]
16. What is average total cost? [1 point]
17. What is the difference between the firm supply curve and the market supply curve? No
graphs are necessary. [20 points]
Page 3 of 4
Econ 98-Chiu
Mock Exam 1
Name & SID:
Spring 2005
Date:
18. Graph and explain. Assume perfect competition. Assume initially no entry or exit. The
market price for CD players is $70. The firm produces q1. The average cost of producing q1
is $100. What is the price of CD players when there is free entry and exit? [10 points]
19. Graph and explain. Draw a typical market supply and demand graph for oranges. Assume a
downward demand curve and an upward supply curve. Label the market equilibrium: P*, Q*.
Producers are willing to sell 50 oranges at $100, but consumers are willing to buy 50 oranges
at $70. Label 50 oranges as Q1. Is Q1 below or above Q*? What is the final price of oranges?
[10 points]
20. You’re done.
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