FINAL EXAMINATION 2
Intermediate Microeconomics
(ECON 520)
December 16, 2004
Professor D. Weisman
There are two parts to this examination weighted 50 points each. Please write legibly and
think carefully about your answers. You may find that graphical and/or mathematical
analysis will assist you in answering some of these questions.
Part I. Multiple Choice (50 points). Indicate your choice for the best answer to each
question on both the standardized answer sheet provided and the examination so that you
have a record of your answers.
Use the following information to answer the next two questions:
The demand for books is:
The supply of books is:
QD = 60 – 1P
QS = 20
1.
The price elasticity of demand at the market equilibrium is
a.
inelastic.
b.*
elastic.
c.
unitary elastic.
d.
inferior.
e.
none of the above.
2.
What is the supply elasticity at the market equilibrium?
a.*
0
b.
1
c.
10
d.
20
e.
40
3.
A business firm faces a demand curve for its product that is given by Q = 16-P.
The firm implements a small price change that results in a decrease in both
revenues and consumers’ surplus. This implies that the
a.
price was reduced and the initial price was greater than 8
b.
price was increased and the initial price was greater than 5.
c.
price was reduced and the initial price was less than 8.
d.*
price was increased and the initial price was greater than 8.
e.
none of the above.
4.
The price elasticity of demand is equal to -2. A 20 percent reduction in price
would be expected to
a.
increase quantity demanded by 5 percent.
b.
increase quantity demanded by 20 percent.
c.*
increase quantity demanded by 40 percent.
d.
decrease quantity demanded by 40 percent
e.
decrease quantity demanded by 20 percent.
5.
A 2 percent increase in price triggers a 4 percent decrease in the demand for
apartments. Also, when the price is 10, the quantity demanded of apartments is
40. What is the equation of the constant elasticity demand curve for apartments?
a.*
b.
c.
d.
e.
Q = 4000P-2.
Q = 40P-4
Q = 40 – 2P.
Q = 20 – 4P.
none of the above.
6.
Mikey’s utility function given by U = 20 min {C, M}. If C = 10 and M = 12, then
Mikey’s MRSM-C is equal to
a.
20.
b.
10/12.
c.
12/10.
d.*
0.
e.
.
7.
John’s utility function is given by U = 4P + 1B. If John’s equilibrium
consumption bundle consists only of P, it follows that
a.
4PP = PB
b.
PP > 4PB
c.
PP = 4PB
d.
PP < 4PB
e.*
c. or d.
8.
Which of the following is most likely to represent the demand function for
automobiles, where PA and PG are the price of automobiles and gasoline,
respectively, and Q is the quantity of automobiles.
a.*
Q = 100I/[2PA + PG]
b.
Q = I/[2PA].
c.
Q = [I + PG]/ PA.
d.
Q = [2PA + PG]/I.
e.
b. and d.
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John has 2 goods in his consumption bundle, beer and pizza. Suppose that the
price of pizza increases. The substitution effect results in decreased pizza
consumption of 6 units. The income effect results in increased consumption of
pizza by 8 units.
a.
Pizza is a normal good.
b.
Pizza is an inferior good, but not a Giffen good.
c.*
Pizza is a Giffen good.
d.
a. or b.
e.
none of the above is necessarily true.
10.
Carols utility for Beer (B) and Pizza is given by U = 10B•P. Suppose that Carol is
currently exhausting her income on B and P and consuming a combination of B
and P such that MUB/ MUP < PB/PP. Carol can increase her utility by
a.
increasing B and decreasing P in her consumption bundle.
b.*
decreasing B and increasing P in her consumption bundle.
c.
continuing to consume the current amounts of B and P.
d.
decreasing B and decreasing P in her consumption bundle.
e.
none of the above.
11.
Suppose that a firm’s production function is given by Q = 6K0.5L, where K is
capital and L is labor. What is the marginal product of labor when 16 units of
capital are employed?
a.
16.
b.*
24.
c.
1/2.
d.
6.
e.
none of the above.
12.
According to the law of diminishing returns
a.
the total product of an input will eventually be negative.
b.
the total product of an input will eventually decline.
c.
the marginal product of an input will eventually be negative.
d*
the marginal product of an input will eventually decline.
e
none of the above
13.
A firm is operating in a range of production where there are increasing returns to
labor. The firm’s total product when 8 units of labor is employed is 20. The
marginal product of the 8th unit of labor is 4. The firm’s total product when 6
units of labor is employed is
a.
greater than 16 but less than 18.
b.
less than 10.
c.
less than 12.
d.*
greater than 12 but less than 16.
e.
none of the above.
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14.
The firm’s total cost of producing 10 units of output is 120. At this output level,
the firm’s fixed costs are equal to 40. It follows that the firm’s average variable
costs are equal to
a.
12.
b.
6.
c.*
8.
d.
4.
e.
none of the above.
15.
A firm produces bicycles (B) using wheels (W) and frames (F). Which one of the
following production functions describes the production process for bicycles.
a.
B = 2W + 1F.
b.*
B = min {1/2W, 1F}.
c.
B = min {2W, 1F}.
d.
B = W•F.
e.
none of the above.
16.
The market price is initially equal to 10. A firm operating in a
a competitive market increases its output. The new market price will be
a.
greater than 10.
b.
less than 10.
c.*
equal to 10.
d.
9.
e.
none of the above.
17.
A firm will shut down in the short run when:
1. price is less than average total costs.
2. price is less than average variable costs.
3. total revenues are less than total variable costs.
Which of the following is correct?
a.
1 only.
b.
1 and 2 only.
c.*
2 and 3 only.
d.
1 and 3 only.
e.
1, 2, and 3.
18.
A monopolist with zero marginal costs is currently operating where the price
elasticity is equal to –1. In order to maximize profits, the monopolist should
a.
sell more output.
b.
sell less output.
c.*
sell the same amount of output.
d.
a. or c.
e.
b. or c.
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19.
A monopolist operates in two submarkets. In submarket 1, Ed = -2 and in
submarket 2, Ed = -4. Suppose that C(Q) = 3Q in both markets. The profitmaximizing prices for this monopolist are given by
a.
P1 = 2 and P2 = 2
b.
P1 = 2 and P2 = 3
c.
P1 = 2 and P2 = 5
d.*
P1 = 6 and P2 = 4
e.
None of the above.
20.
Suppose that the Department of Justice (DOJ) vetoes all mergers that are likely to
lead to an increase in price of the product. The market demand function is given
by P(Q) = 24 – Q. Pre-merger, the market is competitive and the cost function is
given by C(Q) = 16Q. Post-merger, the market will be controlled by a monopolist
and C(Q) = xQ. For what values of x will the DOJ approve this merger?
a.*
values of x less than or equal to 8.
b.
values of x less than or equal to 12.
c.
values of x greater than 8.
d.
values of x less than or equal to 16.
e.
The DOJ will not approve this merger for any value of x.
Part II. Problems (50 points). Answer both questions. Each question is worth 25 points.
Show all of your work to receive partial credit. Please write legibly, be precise with your
answers, and remember that economy of presentation is a desirable quality.
1. (25) The competitive firm’s marginal cost function is given by MC(q) = 10 + 2q,
Suppose that the firm’s fixed costs are given by F = 40.
a) (6) What is the market price if the profit-maximizing output for the competitive firm
is 8?
b) (6) What is the producer surplus for this firm at the profit-maximizing level of
output?
c) (6) What are the firm’s profits?
d) (6) Suppose that the firm’s variable costs are given by V(q) = 10q + q2. The firm will
not produce in the market unless the competitive price exceeds a certain level.
What is that level?
2.
The inverse demand function in a market is given by P(Q) = 24 – 2Q. The cost
function is given by C(Q) = 4nQ, where the positive integer n  {1,2,3,….} is the
number of firms participating in this market. Suppose that the competitive
outcome prevails for all n > 1.
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a) (8) Find the profit-maximizing monopoly output and price in this market? What are
the monopolist’s profits?
b) (8) Find the competitive level of output and price in this market when n = 2? What
are total profits in this market?
c) (8) Suppose that there are currently 3 firms participating in this market and 2 of these
firms are considering a possible merger. What is the amount of the gain/loss to
consumers if this merger proceeds?
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