Midterm # 2
Econ 2610: Principles of Microeconomics, Spring 2010
Yogesh Uppal
Date: April 1, 2010
Questions (1)-(20) are multiple choice questions and worth 2 point each. Please select the right
answer. If you any questions, quietly raise your hands. Good luck and I am sure you guys will
do great.
1) Suppose John follows the rational spending rule to allocate his budget between food and
cloths. He is maximizing his utility and spends half of his income on cloths. What must be true if
he buys one more unit of cloths instead given the same income?
A) His marginal utility from food must be greater than from cloths.
B) His marginal utility from cloths must be greater than from food.
C) His total utility will increase.
D) None of the above
Answer: A
2) If Ann’s marginal utility per dollar from buying one more pair of shoes is 20 units. Whereas
the same from buying one more dress is 10 units. Then Ann should
A) buy more of shoes.
B) buy more of dresses.
C) buy more of both.
D) None of the above
Answer: A
3) The equilibrium price and quantity for doughnuts is $1 and 500 units per day. Suppose the
government sets a price ceiling of 50 cents. This results in a:
A) shortage for doughnuts.
B) surplus of doughnuts.
C) will not have any effect.
D) Need more information.
Answer: A
4) In a competitive market, supply measures
A) the average cost of production.
B) the marginal cost of production.
C) the total cost of production.
D) the variable cost of production.
Answer: B
5) In the market for coffee, the cost of last cup produced is $2 and the benefit from the last unit is
$1. What can be said about economic efficiency?
A) Economic efficiency has not been reached, more needs to be produced.
B) It has been reached.
C) Economic efficiency has not been reached, less needs to be produced.
D) Need more information to reach a conclusion.
Answer: C
6) The government levies sales tax on two goods A and B, which have an elasticity of demand of
0.75 and 1.25, respectively. In which of the goods, the tax will create lower deadweight loss?
A) Good A
B) Good B
C) Both A and B have equal dead weight loss.
D) Need more information to answer the question
Answer: A
7) An example of a long run adjustment is:
A) GM laying off some workers to bring down its costs.
B) the local bakery orders more flour.
C) A Xeroxing company buying another Xerox machine.
D) your local Walmart hires two more associates.
Answer:
8) If average total cost is $50 and average variable cost is $35 when output is 20 units, then the
firm's fixed cost at that level of output is:
A) $45
B) $300
C) $150
D) $85
Answer: B
Figure 1
9) Refer to figure 1. The point at which curve A intersects curve B, the firm produces 20
units. The cost reading from curve D is 10 and from curve C is 20 at that level of output.
What is the average total cost at 20 units of output?
A) 15
B) 20
C) 25
D) 30
Answer: D
10) Refer to figure 1. How much does this firm spend on variable inputs?
A) 200
B) 300
C) 400
D) 600
Answer: C
11) Refer to figure 1. How much does this firm spend on fixed inputs?
A) 200
B) 300
C) 400
D) 600
Answer: A
12) Refer to figure 1. If the firm charges a price of $30, how much should the marginal
cost of production be at the profit maximizing level of output?
A) 10
B) 20
C) 30
D) 40
Answer: C
13) Refer to figure 1. If the firm charges a price of $30, how much profit does it earn?
A) 200
B) 300
C) 400
D) 600
Answer: 0 (credit was given as the right answer was not listed)
14) Refer to figure 1. What should the firm do?
A) Firm is not making a loss and continues to produce.
B) Firm is making a loss and continues to produce.
C) Firm is making a loss and should shut down.
D) None of the above
Answer: A
15) Refer to figure 1. What can you say about the market efficiency?
A) The market is efficient because the firm is in the long run equilibrium.
B) The market is NOT efficient because the firm is over-producing.
C) The market is NOT efficient because the firm is under-producing.
D) None of the above
Answer: A
The figure below shows the market for granola. The market is initially in equilibrium at a price of
P1 and a quantity of Q1. Now suppose producers decide to cut output to Q2 in order to raise the
price to P2.
Figure 2
16) Refer to Figure 2. What is the area that represents consumer surplus at the price P1?
A) A
B) A+B
C) A+B+C
D) A+B+C+D
Answer: C
17) Refer to Figure 2. What is the area that represents producer surplus at the price P1?
A) D+E
B) D+B
C) D+B+G
D) D+E+G+H
Answer: A
18) Refer to Figure 2. What is the state of the market at a price of P2?
A) surplus
B) shortage
C) equilibrium
D) none of the above
Answer: A
19) Suppose the elasticity of demand for good X is 0.5. The government imposes a sales tax of a
dollar. Who bears greater burden of this tax?
A) consumer
B) producer
C) burden is the same for consumer and producers
D) none of the above
Answer: B
20) You are given the following long run information about a perfectly competitive firm,
which produces wheat: ATC = $15, P =$10 and Q = 100. What should the firm do?
A) This firm should continue to produce.
B) This firm should shut down.
C) The firm is indifferent between staying open and shutting down.
D) need more information to answer the question.
Answer: B
SHORT ANSWERS. Write your answers in the space given below each question.
21) (20 points) Ann likes coffee and doughnuts and has only $5 to spend. The price of a
cup of coffee is $2 and the price of a doughnut is $1. The following table provides
information about her total utilities from both coffee and doughnuts.
MUcoffee MUcoffee MUdoughnut MUdoughnut MUdoughnut
Total
Quantity
Total
Quantity
Utility
of
Utility from
of coffee
from coffee doughnut doughnuts
1
2
3
4
5
6
16
36
60
80
96
108
1
2
3
4
5
6
10
15
17
14
9
2
per dollar
16
20
24
20
16
12
8
10
12
10
8
6
Per dollar
10
5
2
-3
-5
-7
10
5
2
-3
-5
-7
a. Complete the above table.
b. Suppose Ann purchases 1 coffee and 3 doughnuts. What should she do to
increase her utility?
ANS: She should buy more coffee because marginal utility per dollar from 1 coffee
(8) is greater than marginal utility per dollar from 3 doughnuts (2).
c. Write down the conditions for Ann’s utility maximization.
1) The consumer spends all her income
2) Marginal utility per dollar is the same for all goods.
d. How much of each good should she consume to maximize her utility?
ANS: 2 coffee and 1 doughnuts because both conditions in (c) are satisfied.
e. Suppose price of a doughnut drops to 50 cents. How much of each good should she
consume?
ANS: 2 coffee and 2 doughnuts
Per dollar
When the
price is 50
cents
20
10
4
-6
-10
-14
22) (20 points) Consider the following information for a perfectly competitive firm,
which has a fixed cost of $10. The market price is $25. Find the following on the
table: Total cost, marginal cost, average total cost and average variable cost.
Q
0
1
2
3
4
5
6
7
8
Variable
Cost
$0
15
25
40
60
85
115
150
190
TC
ATC
AVC
MC
10
25
35
50
70
95
125
160
200
25
17.5
16.67
17.5
19
20.83
22.85
25
15
12.5
13.33
15
17
19.01
21.4
22.75
15
10
15
20
25
30
35
40
a. What is profit maximizing level of output the firm should produce?
ANS: For a perfectly competitive firm, profit maximizing condition is P = MC.
That happens when Q =5.
b. How much profit does the firm make at the profit maximizing level of output?
ANS: Profit = (P-ATC)*Q = (25 – 19)*5 = 30
c. What happens to the output and profits if the price falls to $15.
ANS: At P = 15, the firm will produce 3 units. Profit = (15- 16.67)*3 = -5
d. What is the shutdown point for this firm?
ANS: The shut down point is where AVC is minimum. That happens at Q = 2 where
AVC is 12.5.
e. At what price will the firm reach its long run equilibrium?
ANS: The firm reaches its long run equilibrium at a price equal to minimum value of
ATC. That happens at Q=3 where ATC is minimum at 16.67. SO, when the price is
16.67 the firm is in long run equilibrium.