Principles of Microeconomics
Summer 2009
Exam II
Name:__________________________________
Mark which three sections you wish to be graded for your exam. Each section is worth 33
points. If you fail to mark three sections, sections one, two and three will be graded regardless
of completion. You may look at/complete the entire exam if you wish; I will only grade what is
marked on the cover, unless it is marked incorrectly/unclearly (see previous sentence).
____SECTION ONE
____SECTION TWO
____SECTION THREE
____SECTION FOUR
____SECTION FIVE
____SECTION SIX
SECTION ONE (3 pts. each)
For questions 1-6, refer to Figure R1 which represents a monopolistic market.
1. If this market were allowed to be perfectly competitive, the result would be a price of ___.
a. $2
b. $8
c. $11
d. $14
2. What quantity will the monopolist choose to produce?
a. 0
b. 6
c. 9
d. 12
3. What price will the monopolist choose to charge?
a. $2
b. $8
c. $11
d. $14
1
For those that wish to use them, Demand: P = 20 – Q, Supply: P = 2 + Q, Marginal Revenue: P = 20 – 2Q.
4. The markup as a result of this market being monopolistic will be
a. $3
b. $6
c. $9
d. $12
5. The resource misallocation from the monopolist will be
a. 3 too few
b. 3 too many
c. 6 too few
d. 6 too many
6. The deadweight loss from the monopolist will be
a. $4.50
b. $9.00
c. $18.00
d. None of the above
7. Which market structure(s) would you expect to see advertising that differentiates the firm’s
product from others in the market?
a. Oligopoly and Monopoly
b. Oligopoly and Monopolistic Competiton
c. Oligopoly and Perfect Competition
d. Monopolistic Competition and Monopoly
8. Which of the following best describes the length of the short run?
a. The time in which all inputs are fixed
b. The time in which all inputs are variable
c. The time in which at least one input is fixed
d. The time in which at least one input is variable
9. In which of these markets can a firm earn an above normal rate of return in the long run?
a. Monopoly
b. Perfect Competition
c. Oligopoly
d. Monopolistic Competition
10. How is the method a monopolist maximizes profit differ from the way a perfectly competitive
firm maximizes profit?
a. Monopolists seek to find where TR – TC is greatest
b. Monopolists look to minimize deadweight loss
c. Perfectly competitive firms look for where MR – MC = 0
d. It’s not different; both look to equate MR and MC
11. Which of our country’s historical documents actually suggests to Congress that inventors should
enjoy some limited time of patent protection?
a. Declaration of Independence
b. Articles of Confederation
c. Constitution
d. None of the above
SECTION TWO (3 pts. each)
Scenario T. Suppose that you have taken a job working for NASA. You have accepted a salary from
NASA for $100,000. You incurred a cost of $2,000 in moving to Cape Canaveral. You were forced also to
give up your consulting firm where you were earning an annual salary of $75,000. You now pay dues to
an engineers’ union in the amount of $10,000. You have also purchased a car for $15,000 to get back
and forth to work (depreciating at 10%).
For questions 1-5, refer to Scenario T.
1. You are paying explicit costs in the amount of
a. $12,000
b. $13,500
c. $14,000
d. $15,500
2. You are paying implicit costs in the amount of
a. $75,000
b. $76,500
c. $80,000
d. $81,500
3. Your accounting profit is
a. $86,000
b. $86,500
c. $87,000
d. None of the above
4. Your economic profit is
a. $4,500
b. $6,000
c. $10,500
d. None of the above
5. Your rate of return is
a. Below Normal
b. Normal
c. Above Normal
d. Impossible to tell from the information given
Quantity
0
1
2
3
4
5
Total Cost
$100
$120
$130
$135
$145
$165
6. Refer to the table. What is the average total cost of producing 3?
a. $3
b. $45
c. $135
d. None of the above
7. Refer to the table. What is the marginal cost of producing the 4th unit?
a. $5
b. $10
c. $20
d. None of the above
8. Refer to the table. What is the average variable cost of producing 2?
a. $15
b. $30
c. $130
d. None of the above
9. Refer to the table. What is the fixed cost?
a. $100
b. $120
c. $200
d. There’s no way to tell from the information given
10. Refer to the table. What is the variable cost of producing 5?
a. $13
b. $65
c. $165
d. None of the above
11. The television screen displays a sunny day overlooking green grass in a park. The camera pans
down to see several toddlers enjoying the weather by frolicking in the sandbox and taking turns
on the slide. A man steps in wearing the uniform of “SMITHCO” explaining how his company
helped to clean up the land you are now seeing. SMITHCO is most likely operating in which
market structure?
a. Perfect Competition
b. Monopolistic Competition
c. Oligopoly
d. Monopoly
SECTION THREE (33 pts.)
a. Using the axes below, sketch the general shape of the marginal product curve. Don’t forget to
label the axes. (8 pts.)
b. Indicate where this firm is experiencing teamwork/specialization and where this firm is
experiencing crowding of the fixed input. (4 pts.)
Where MP is increasing, that is teamwork. Where it’s decreasing, that is crowding.
c. Using the axes below, sketch the general shape of the marginal cost curve. Don’t forget to label
the axes. (8 pts.)
d. Using the axes below, sketch the general shape of the total cost curve and variable cost curve.
Don’t forget to label the axes. (13 pts.)
SECTION FOUR (33 pts.)
Suppose that the graph below represents a firm in a perfectly competitive market where the market
equilibrium price is $30.
a. Draw the marginal revenue curve on the graph. (2 pts.)
b. What is the profit maximizing point of production? Write your answer below and label it on
the graph. (4 pts.)
q* = 20
c. Calculate total revenue. (4 pts.)
(Pe)(q*) = $30*20 = $600
d. Calculate total cost. (4 pts.)
(ATC)(q*) = $20*20 = $400
e. Calculate total profit. Also show this on your graph. (6 pts.)
TR – TC = $600 - $400 = $200
f.
Calculate fixed costs. (4 pts.)
(ATC – AVC)(Q) = (18 – 9)(15) = $135
g. Should this firm shut down or continue? How do you know? (4 pts.)
Continue. They are making positive profit.
h. What will the long-run market equilibrium price be in this market? Explain how it will arrive
at this from its current short-run situation. (5 pts.)
The positive profit will draw firms into the market. This will increase supply thus driving
down price. That will lower the profits of all firms until profit = $0 which will occur at a price
of $18.
SECTION FIVE (33 pts.)
List and explain all characteristics of the four types of market structures as if you were teaching the
class. Also give an example of a company you know for each structure explaining why you feel it fits in
that particular structure.
SECTION SIX (33 pts.)
Explain fully how consumers can use the power of their preferences to put unethical producers out of
business assuming a perfectly competitive market structure.