Principles of Microeconomics
Exam III
Fall 2008
Name:____________________________________
You may choose one of the following options. You are welcome to look over the entire exam
before selecting the option; this is probably a good idea. Your exam will be graded based on
the option that you mark. If you fail to mark one of the options, mark more than one option, or
your mark is unclear, then sections MC-I, MC-II, and MC-III will be graded. The options are
listed below with weights.
_____ MC-I, MC-II, MC-III (33, 33, 33)
_____ MC-I, MC-II, SA-I (33, 33, 33)
_____ MC-I, MC-II, E-I (33, 33, 33)
_____ MC-I, SA-I, SA-II (33, 33, 33)
_____ MC-I, SA-I, E-I (33, 33, 33)
_____ MC-I, E-I, E-II (33, 33, 33)
_____ SA-I, SA-II, SA-III (33, 33, 33)
_____ SA-I, SA-II, E-I (33, 33, 33)
_____ SA-I, E-I, E-II (33, 33, 33)
_____ E-I, E-II, E-III (33, 33, 33)
You may do one additional section for up to 10 bonus points. Write your choice below.
________________________________________
SECTION MC-I (33 points)
1. Which of the following market structures allow firms to make an above normal rate of return in
the long run?
a. Perfect Competition
b. Monopolistic Competition
c. Oligopoly
d. Monopoly
2. Which of the following market structures contains firms that engage in public relations
advertising?
a. Perfect Competition
b. Monopolistic Competition
c. Oligopoly
d. Monopoly
3. Which of the following market structures are we most likely to find firms engaging in collusive
behavior?
a. Perfect Competition
b. Monopolistic Competition
c. Oligopoly
d. Monopoly
4.
Which of the following market structures have no barriers to entry or exit?
a. Perfect Competition
b. Monopolistic Competition
c. Oligopoly
d. Monopoly
Scenario E. You have spent the past year working on a home-based business. You have one friend
who is an economist and another who is an accountant and they have volunteered to analyze your
first year. You provide them with the following information: Your supplies cost $10,000. You paid
out $40,000 in wages. You rented a building that cost you $10,000. You quit your previous job
where you were earning $75,000 per year. You had to pay $5,000 in taxes and $7,000 in utilities.
You sold 1000 pairs of shoes for a price of $75 each.
5. Refer to Scenario E. What is your total revenue?
a. $72,000
b. $75,000
c. $147,000
d. None of the above
6. Refer to Scenario E. What were your explicit costs?
a. $72,000
b. $75,000
c. $147,000
d. None of the above
7. Refer to Scenario E. What were your implicit costs?
a. $72,000
b. $75,000
c. $147,000
d. None of the above
8. Refer to Scenario E. What was your accounting profit?
a. $-72,000
b. $0
c. $3,000
d. None of the above
9. Refer to Scenario E. What was your economic profit?
a. $-72,000
b. $0
c. $3,000
d. None of the above
10. Refer to Scenario E. Your rate of return would be classified as ______ normal.
a. “Below”
b. “Above”
c. It’s normal; no word is missing.
d. There isn’t enough information available to answer this question
11. Refer to Scenario E. If you are operating in a perfectly competitive market, what will your
economist say about your long-run profit possibilities?
a. “They should remain positive.”
b. “You’re going to be losing money at some point.”
c. “Eventually you will only be able to break-even.”
d. “I’m sorry, I can’t help you.”
Section MC-II (33 points)
Scenario Q. In the 2012 election for President of the United States, candidates Sarah Palin and President
Barack Obama are trying to decide whether or not to “go negative”, which includes launching negative
attacks against his/her opponent. If both “go negative”, they both would win 269 electoral votes which
would result in a tie (meaning each has a chance to win). If one goes negative while the other doesn’t,
the one who goes negative will win 300 electoral votes while the other will receive 238 (meaning the
one who goes negative wins). If neither go negative, each would only win 69 leaving the remaining 270
to go to the third party candidate (in which Obama and Palin would both lose).
1. Refer to Scenario Q. What is Barack Obama’s dominant strategy?
a. Go negative
b. Don’t go negative
c. He has no dominant strategy
d. There isn’t enough information to answer the question
2. Refer to Scenario Q. What is Sarah Palin’s dominant strategy?
a. Go negative
b. Don’t go negative
c. She has no dominant strategy
d. There isn’t enough information to answer the question
3. Refer to Scenario Q. What is the most likely outcome?
a. Each earns 269 electoral votes
b. Obama gets 300, Palin gets 238
c. Obama gets 238, Palin gets 300
d. Each earns 69 electoral votes
4. Refer to Scenario Q. If this is a Prisoners’ Dilemma, what would have to be true?
a. The most likely outcome occurs
b. The most likely outcome is the best overall outcome
c. The most likely outcome is not the best overall outcome
d. None of the above
Table F
Quantity
0
10
20
30
40
Total Cost
$100
$140
$190
$250
$320
5. Refer to Table F. What is the fixed cost?
a. $0
b. $100
c. $200
d. None of the above
6. Refer to Table F. What is the average variable cost of producing 30?
a. $0
b. $7
c. $210
d. $310
7. Refer to Table F. If the market equilibrium price is $6, how many will this firm produce to
maximize profit if this is a firm in a perfectly competitive market?
a. 10
b. 20
c. 30
d. 40
8. Refer to Table F. What is the marginal cost of producing the 40th unit of output?
a. $4
b. $5
c. $6
d. $7
9. Refer to Table F. What is the variable cost of producing 20 units?
a. $90
b. $100
c. $190
d. None of the above
10. Refer to Table F. Based on the information in the above table, which of the following would
best describe the shape of this firm’s marginal product curve?
a. Always increasing
b. Always decreasing
c. Decreasing then increasing (a U-shape)
d. Increasing then decreasing (an inverse U-shape)
11. Refer to Table F. Based on the information in the above table, which of the following would
best describe the curvature of this firm’s total product curve?
a. Always steepening
b. Always flattening
c. Steepening at first then flattening
d. Flattening at first then steepening
SECTION MC-III (33 pts.)
1. Refer to Figure R. If this is a monopoly, what quantity will the firm produce?
a. 6
b. 8
c. 11
d. There’s no way to tell
2. Refer to Figure R. If this is a monopoly, what price will this firm charge?
a. $7
b. $10
c. $12
d. $14
3. Refer to Figure R. What would the competitive price be?
a. $7
b. $10
c. $12
d. $14
4. Refer to Figure R. If this is a monopoly, what will be this firm’s markup?
a. $2
b. $3
c. $5
d. $7
5. Refer to Figure R. If this is a monopoly, what will be the resource misallocation?
a. 2 too many
b. 2 too few
c. 3 too many
d. 3 too few
6. Refer to Figure R. If this is a monopoly, what will be the deadweight loss?
a. $4
b. $5
c. $10
d. None of the above
7. Which of the following would lead to the formation of a natural monopoly?
a. High fixed costs
b. High variable costs
c. High fixed costs relative to variable costs
d. All of the above are possible
8. If we were looking at a marginal product curve, we could identify teamwork and specialization
by identifying what portion the MP curve?
a. Increasing
b. Decreasing
c. Horizontal
d. Any of the above are possible
9. In which of the following pairs would we see firms in both market structures engage in
advertising that attempts to differentiate their product from others?
a. Monopoly and Oligopoly
b. Oligopoly and Monopolistic Competition
c. Monopoly and Perfect Competition
d. Oligopoly and Perfect Competition
10. What is the length of time that defines the short-run?
a. One day
b. One month
c. One year
d. None of the above
11. Which of our country’s documents actually suggests that patent protection be implemented?
a. Articles of Confederation
b. Declaration of Independence
c. Constitution of the United States
d. None of the above mentions it
SECTION SA-I (33 points)
Suppose the graph below represents a perfectly competitive firm where the market equilibrium price is
$15.
a. Draw and label the marginal revenue curve for this firm.
b. What quantity represents the profit maximizing point of production?
c. Calculate total revenue for this firm.
d. Calculate total cost for this firm.
e. Calculate total profit for this firm. Also show this on your graph.
f.
Calculate fixed costs for this firm.
g. Should this firm shut down or continue to produce? How do you know?
h. How will this market reach its long run result? What will the long run equilibrium price be in this
market?
SECTION SA-II (33 points)
a. Given the total product curve above, sketch the shape of the corresponding marginal product
curve. Make sure you properly label the axes.
b. Indicate where this firm is benefiting from teamwork/specialization on the graph.
c. Indicate where this firm is experiencing crowding of the fixed input on the graph.
d. On the graph below, sketch a general shape of the marginal cost curve for this firm. Make sure
you correctly label the axes.
e. On the graph below, sketch a general shape of both the total cost and variable cost curves for
this firm. Make sure you label the axes correctly. Also indicate why the two are not exactly
identical.
SECTION SA-III (33 points)
Explicit Cost of $0
Wages of $10,000
Utilities in the amount of $4,000
Took out loan of $100,000 and
paid 5% interest
Taxes were $5,000
Quit job earning $50,000
Rent of $40,000
Supplies came to $60,000
Explicit Cost Amount
$0
Implicit Cost Amount
a. Fill out the table above putting the amount of any explicit cost in the “Explicit Cost Amount”
column or the “Implicit Cost Amount” if it is an implicit cost. The top row is an example. If I had
an explicit cost of $0, I would put $0 in the “Explicit Cost Amount” column and nothing in the
“Implicit Cost Amount” column.
b. Calculate your accounting profit if you sold 100,000 units at $2 each.
c. Calculate your economic profit if you sold 100,000 units at $2 each.
d. Calculate your rate of return if you sold 100,000 units at $2 each.
e. How would your answers to b, c, and d change if I changed “Rent of $40,000” to “Kicked out
tenants who were paying $40,000”? Recalculate your answers.
SECTION E-I (33 points)
The presence of a monopoly is a “double-edged sword”; it comes with advantages and
disadvantages. Discuss all advantages and disadvantages of monopolies citing examples for each.
SECTION E-II (33 points)
Assume for a moment that the market for hybrid automobiles (those that use both gasoline and
electricity for power) is perfectly competitive. Explain fully the reason for their emergence in the
past few years. Though a graph is not required, it may be helpful.
SECTION E-III (33 points)
Suppose that Microsoft and Apple have the same three possible strategies available. These
strategies are increase advertising, keep advertising the same, or cut advertising. Construct a payoff
matrix such that the dominant strategy for Apple is to increase advertising and the dominant
strategy for Microsoft is to keep advertising the same. Fabricate your own numbers to meet this
requirement. After you have completed this, find the most likely outcome, best overall outcome,
and identify any/all Nash Equilibria.