Ecn. 121
Spring 2007
Todd Easton
Midterm Exam #2
Please write your name in the upper right hand corner of this exam, so it can be returned to you later. Turn in this
copy with your answers. Please also put your name on the back of each sheet of you essay answers, as I would
like to grade the essays "blind."
Part I--Multiple Choice Questions
Answer the questions below on the answer sheet provided, using a #2 pencil. You should take a maximum of 35
minutes for this section. Each question is worth 3 points; the entire section is worth 36 points.
1) Economies of scale are sometimes a barrier to entry because
a) it is expensive to advertise enough to gain visibility in the market.
b) one must have the right technology to produce some products competitively.
c) it can cost a lot to build a plant large enough to achieve low production costs.
d) government may decide that the public is best off if those economies are protected by law.
2) Taxes on externality-producing activities are meant to
a) eliminate externalities.
b) dramatically reduce output.
c) force decision makers to consider the full costs of their actions.
d) raise money, so that the government can compensate victims of the externality.
3) Which of the following market structures will have only normal profit in the long run?
a) monopoly
b) monopolistic competition
c) duopoly
d) oligopoly
4) DE Suppose the market for coffee is in equilibrium at a price of $5 per pound. This means
a) all producers who want to sell coffee are pleased.
b) all producers who require less than $5 to produce coffee are not producing.
c) all consumers who want to buy coffee are satisfied.
d) all consumers who value a pound of coffee at less than $5 are not buying.
e) some consumers who wish to buy at $5 cannot find someone to buy from.
5) DE Balanced, across the board income growth characterizes the period of the
a) entire 20th century.
b) mid 1940's to the early 1970's.
c) 1960's to 1990's.
d) 1980's.
e) 1990's.
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Use the data in the table to the right to answer
questions 6) to 8). The data describe the
demand for the Uretown Yokels, an ice
hockey team that’s the only live sports
entertainment in Uretown. Below the table,
there is a blank graph. If it is helpful, feel free
to use it to graph data from the table.
6) When the Yokels decrease price from $12 to $10 to attract 300 spectators, total revenue increases, indicating
that demand is _________ and that marginal revenue is _________.
a) elastic, positive
b) elastic, negative
c) inelastic, positive
d) inelastic, negative
7) If the Yokels cut price from $12 to $10 per ticket, each new customer will ______ and each regular customer
will _______.
a) increase total revenue by $10, increase total revenue by $2
b) increase total revenue by $10, decrease total revenue by $2
c) decrease total revenue by $10, increase total revenue by $2
d) decrease total revenue by $10, decrease total revenue by $2
8) When the Yokels decrease price from $10 to $8, the marginal revenue per ticket is
a) $6
b) $2
c) -$2
d) -$6
e) None of the above is correct.
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9) Producing up to the point where price equals marginal cost yields the socially efficient level of output if
there are
a) external costs, but not external benefits.
b) external benefits, but not external costs.
c) neither external benefits nor external costs.
d) both external benefits and external costs.
10) An essential characteristic of a perfectly competitive firm is that
a) it produces a differentiated product.
b) it is a price taker.
c) it faces a perfectly inelastic demand curve.
d) the demand curve for the market in which it operates is perfectly elastic.
11) DE Products have network economies if they
a) can be used by more than one person at a time.
b) are cheaper to produce as more people buy them.
c) are more useful as more people own them.
d) make your other possessions more valuable.
e) have many complements.
12) You are deciding whether to open your own fruit stand in your hometown this summer or just hang around
your parents’ house. The returns to your decision depend on whether someone else also opens a fruit stand. The
payoff matrix for your decision shows your earnings and those of the “someone else.” That matrix is given below:
You
Produce
Don’t produce
You: $0
Produce
-$100 each
Someone else: $1000
Someone else
You: $1000
Don’t produce
$0 each
Someone else: $0
Where are the equilibriums for this game?
a) Lower-right
b) Upper-left and lower-right
c) Upper-right
d) Lower-left
e) Upper-right and lower-left
Part II-- Short Answer and Essay Questions
Write concise answers to each question on lined paper. Please use complete sentences and write your answer to
each question on a separate sheet of paper, using only the front side. You should take a maximum of 40 minutes
for the whole section. The entire section is worth 34 points.
1) [10 points] Think about the discussion of industry structure in class and in our textbook. Explain one difference
and one similarity between “perfect competition” and “monopolistic competition.”
2) [5 points] Say whether the following statement is true or false. After that, briefly explain the truth, or error, in it.
"A crucial difference between a monopolistic competitor and an oligopolist is that an oligopolist cannot be
certain of their demand curve."
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Please detach this sheet from the exam. Answer the questions below on this sheet in the space provided. Turn it in
with your first answer to the first question in Part II.
3) [19 points] The graph below gives the demand, marginal revenue, marginal cost, average variable cost, and
average total cost for a computer manufacturer producing a unique personal computer. The cost and revenue
numbers are in dollars per computer.
Costs & Revenues Per Unit, Banana Computer
7000
Cost or revenue per unit
6000
5000
Demand
MR
4000
MC
3000
AVC
ATC
2000
1000
0
0
1000
2000
3000
4000
5000
Quantity per month
a) Please neatly indicate the profit maximizing output (label it Q1) and the profit-maximizing price (label it
P1) on the diagram. Please also indicate the firm’s average total cost at the profit maximizing output (label
it ATC1).
b) What, approximately, is the firm’s average total cost at the profit maximizing output? Explain the
meaning of the average total cost number
c) Is this firm making below-normal, normal, or above-normal profits? Please explain how you know.
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Good Answers!
Part I
1c 2c 3b 4d 5b 6a
7b 8b 9c 10b 11c 12e
Part II
1) [10 points] Think about the discussion of industry structure in class and in our textbook. Explain one difference
and one similarity between “perfect competition” and “monopolistic competition.”
One difference between perfect competition and monopolistic competition would be the sort of product being sold.
In a perfectly competitive market, the product is standardized. Customers do not care which producer they buy from.
In a monopolistically competitive market, the product is differentiated. Customers care which producer they buy
from, because some producers’ products suit them better than other producers’ products.1
One similarity between the two kinds of competition is the number of firms competing. In both cases the number is
large. The result is that in both cases there is an absence of interdependence.2
2) [5 points] Say whether the following statement is true or false. After that, briefly explain the truth, or error, in it.
"A crucial difference between a monopolistic competitor and an oligopolist is that an oligopolist cannot be
certain of their demand curve."
This statement is mostly true. A monopolistic competitor is one of many firms producing similar, but distinct,
products. Such a firm may not be certain of the demand curve for their product, but they can be more certain
than an oligopolist. An oligopolist is one of only a small number of firms producing. As a result, if a competitor
cuts its product’s price, the price reduction is likely to reduce the oligopolist’s demand. This is an example of the
uncertainty oligopolists live with: their demand changes with changes in their competitors’ behavior.
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Actually, this is the only difference between perfect competition and monopolistic competition.
One other similarity would be just as relevant to mention here: low entry barriers. In both cases it’s relatively
easy for new firms to get established. The result is that we expect economic profits to be zero in the long run.
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