Ag Econ 1041
Third Exam, 130 points
November 18, 2010
Name ______________________________
11 a.m. Section
True/False – one point each
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A price ceiling is a maximum legal price.
A housing shortage results when a tax is imposed on housing.
Marginal cost is calculated as the change in total costs divided by the change in
output.
In order for a firm to choose to produce any output, it must be the case that total
revenues are greater than or equal to variable costs.
Market equilibrium is considered efficient because no more trades remains that
benefit some without harming others.
Lumber mills that were shutdown are now producing due to increased foreign
demand.
When a monopoly sells additional units, marginal revenues are constant.
Economies of scale can cause oligopolistic market structures.
The long run is a period of time over which the demand for a product can
increase or decrease.
Entry of firms into a market typically occurs if there are not large economies of
scale in production.
In the long run typical firms in a monopolistically competitive market structure
produce an output level where price = marginal cost.
Clothing stores are an example of an oligopolistic industry.
A minimum price (price floor) will cause an inefficient outcome.
As a consumer consumes more of a good, marginal utility increases.
A firm’s short run marginal cost increases as it produces more and more output
because of diseconomies of scale.
A firm’s short run average total cost curve is shaped like a “W.’
Choosing an alternative with the lowest opportunity cost is equivalent to
choosing the alternative where marginal utility is greatest per dollar.
A firm’s production possibilities curve shows maximum combinations of goods
that can be produced given the resources and technology of that firm.
A change in supply is illustrated by a new supply curve.
The law of diminishing marginal utility is consistent with the consumer
behavior that produces a negatively sloped demand curve.
A price cut will increase the revenue a firm receives if the demand for its
product is elastic.
A decision to increase advertising by Verizon will lower costs in an effort to get
even greater increases in revenue.
When price rises for a good the demand curve shifts left.
Income elasticity is a measure that indicates the shift in a demand curve caused
by a change in income.
Raising prices during a recession can make sense if demand is inelastic.
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Multiple choice – two points each
__C___ 26. The fundamental goal of a firm is
a) Different for each firm
b) To make a quality product
c) To maximize profit
d) To gain market share
e) Decrease its employment of workers in order to cut its costs
__B___ 27. ________________ cost is defined as a cost of production that does not entail a
direct money payment.
a) An explicit
b) An implicit
c) A total
d) A fixed
e) A marginal
__C___ 28. The long run is a time period in which
a) Some of the firms’ resources are fixed
b) All of the firm’s resources are fixed
c) All of the firm’s resources are variable
d) The firm cannot increase its output
e) All costs become explicit costs
__C___ 29. If a firm shuts down, it
a) Earns zero economic profit
b) Incurs an economic loss equal to its total variable cost
c) Incurs an economic loss equal to its total fixed cost
d) Earns a normal profit
e) Might earn an economic profit, a normal profit, or incur an economic loss
__A___ 30. A perfectly competitive firm is a price taker because
a) Many other firms produce the same product
b) Only one firm produces the product
c) Many firms produce a slightly differentiated product
d) A few firms compete
e) It faces a variable demand curve
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The following questions are valued at five points each
31. Diagram the market for hiking boots as income increases. Show or identify the consumer
surplus and producer surplus.
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D1
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Q0 Q1
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32. New home prices have been falling as the supply decreases. Draw this situation and be
complete. Provide a reason for any shift you show on the graph.
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33. Draw the typical situation for a monopoly except that this monopoly is charging too high of
a price to maximize profit thought it is still breaking even. Be complete.
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MR
The following questions are valued at ten points each
34. a) What are the characteristics of monopolistic completion?
1. many sellers
2. differentiated product
3. non-price competition
4. no economic profit
5. little price control
b) How do these characteristics change as the market structure moves toward monopoly?
1. fewer seller
2. no change
3. same or more
4. potential for profit
5. more price control
35. a) Decisions of producers are designed to ___make or maximize profit__________________
b) A firm attempting to maximize profits in the short run should attempt to sell the quantity
where ___MR = MC__________________________________________.
c) ____Profit______________________________ attracts additional resources.
d) Firms attempt to differentiate their products from others to provide additional utility to
buyers in an effort to __increase demand or profit_______________________________.
e) If firms set prices or output levels they are called a ____cartel_____________________.
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36. Diagram the situation where a monopoly or oligopoly is making economic profit. Be sure to
show price and quantity sold and the profit earned.
$/q
P
MC
ATC
Profit
D
0
q
MR
q
37. Diagram the situation where rent controls (price ceiling) are put in place. Show the final
consumer and producer surplus as well as identifying the market outcomes.
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DWL
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Pc
PS
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38. The federal government decides to increase the excise tax on gasoline by $0.20 to decrease
gasoline consumption. Diagram this change. Show the amount of revenue collected by the
government as well as who, in general, was the source of the revenue. Be sure to show the
change in market outcomes as well.
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P1
P0 Govt Rev
Buyers
Sellers
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39. Livestock prices would fall if the number of livestock increased. Show this result moving
from the firm situation to the overall market on a diagram. Provide one reason the
individual producer might increase supply.
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MC
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S1
MC
ATC
ATC
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D = MR
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40. Diagram the short run situation for a firm in monopolistic competition that is operating at a
loss. What is likely to change to bring this firm into a long run equilibrium situation?
__firms leave industry_________________________________
$/q
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MC
ATC
AVC
Loss
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q
MR
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41. Diagram a typical situation of an unregulated oligopoly. Show the profit, variable cost and
total cost of the firm. FC + VC = TC
MC
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ATC
AVC
Profit
FC
VC
D
q
q
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