Ag Econ 1041
Third Exam, 130 points
November 18, 2010
Name ___________KEY_______________
8 a.m. Section
Multiple choice – two points each
__A___ 1. Mutual interdependence is characteristic of
a) Oligopoly
b) Monopoly
c) Pure competition
d) Monopolistic competition
e) None of the above
__A___ 2. If some firms leave a monopolistically competitive industry, the demand curves of
the remaining firms will
a) Shift to the right
b) Become more elastic
c) Shift to the left
d) Be unaffected
__B___ 3. Economic or above normal profits are least likely to be present in the long run
equilibrium situations for
a) Oligopolies and perfectly competitive firms
b) Monopolistically competitive and perfectly competitive firms
c) Monopolies and oligopolies
d) Oligopoly and monopolistically competitive firms
__B___ 4. Which of the following statements is correct?
a) If an individual’s marginal utility from a product diminishes rapidly, this
implies that her demand for this product is elastic
b) If an individual’s marginal utility for a product diminishes rapidly this implies
that her demand for the product is inelastic
c) There is no relationship between the rapidity of decline in marginal utility and
the elasticity of demand
d) If marginal utility is diminishing, total utility must also be diminishing
__B___ 5. The average total cost curve usually turns upward at some output level because
a) All factors of production are increasing
b) The law of diminishing returns is in operation
c) All factors of production are fixed
d) The law of diminishing marginal utility is in operation
e) None of the above
1
True/False – one point each
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F
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30.
A monopolistically competitive firm expects price to exceed marginal cost in
its long run equilibrium position.
When analyzing a market we want to use demand and supply.
Costs that do not change once they are incurred are called implicit costs.
Industries where economies of scale exist tend to be dominated by a few large
firms relative to market size.
If a monopolist is charging $11 for each unit of output, one can infer that
marginal revenue is greater than $12.
If a firm’s demand curve does not exceed AVC, it should shut down
immediately.
An increase in the price of cookies reduces the demand for cookies.
Economies of scale can be a barrier to entry into an oligopolistic industry.
Normal profit is equal to the opportunity cost of the owner(s).
Price discrimination is charging different consumers different prices.
Fixed costs should determine short run decisions.
Ceteris paribus means a theory is commonly accepted but has not been
thoroughly tested.
A shift in demand or supply is measured as a movement along the vertical
axis.
Opportunity cost is the purchase price of a good or service.
A firm always wants to produce or sell the output that earns it the highest
possible revenue.
A firm’s short run marginal cost curve rises because of diminishing return to
input use.
An increase in fixed cost will cause a firm to increase price to remain at its
most profitable combination of price and quantity produced in the short run.
If MC, the additional cost of the next unit produced, is greater than AVC, then
AVC is increasing with additional output.
Within a limited time period, the marginal utility of consuming more peanut
butter cookies will decline.
New production technology use tends to reduce costs for a firm.
The law of diminishing returns applies only to small and medium sized firms.
The shutdown condition of a firm is where total revenue is less than the fixed
factors of production.
Proprietorships are owned by shareholders.
The supply curve changes with an excise tax because the government pays the
tax.
A corporation benefits from the limited liability of owners.
2
Short answers – five points each
31. If the supply of steel decreases, what happens to the demand for steel, ceteris paribus?
Nothing or Qd ↓
32. What creates a comparative advantage?
Lower opportunity costs
33. Use a graph to show what happens in a market when supply shifts faster, due to technology
improvements, than demand changes as utility increases for a product.
S
P
S1
P0
P1
D
Q0
Q1
D1
Q
34. What is the difference between the short run and the long run?
Existence of fixed costs
35. The major processor of alligator hides can produce either boots or purses. If the demand for
alligator boots increases, what happens to the supply of
a) Boots __nothing______________
b) Purses __decreases_____________
36. If tea and coffee are substitutes, the cross-elasticity of coffee with respect to the price of tea
will be __positive________ and an increase in the price of tea will _increase_________ the
demand for coffee.
3
37. Diagram why food and clothing prices are likely to be higher next year.
P
S1
S
P1
P0
D
0
Q1
Q0
Q
38. What are diminishing returns? Why do diminishing returns cause marginal costs to rise?
Reduced output per input. Costs per unit of output rises
39. What is the crucial characteristic that distinguishes oligopoly from monopolistic
competition?
Mutual interdependence
Matching – one point each
I
Q
E
M
A
K
G
N
D
B
T
S
R
P
H
F
L
J
O
C
40.
41.
42.
43.
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60.
Demand
Supply
Utility
Average variable cost
Decision rule
Oligopolist
Inelastic
Consumer surplus
Marginal
Market structure
Opportunity cost
Economies of scale
Diminishing returns
Equilibrium
Monopoly
Deadweight loss
Strategic behavior
Substitute
Profit maximization output
Profit
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
S
T
MUa/Pa = MUb/Pb = …
Business environment
AR > AC
Effect of a small change
Value or benefit
Loss of not being at societal optimum
Not very responsive
Single firm in a market
Marginal benefit
Potential replacement
One of a few competitors
Oligopolists attempt to gain an advantage
Variable cost per output
Net benefit to consumers
Marginal revenue = marginal cost
No tendency to change
Schedule of prices and quantities
Increasing marginal costs
Cost advantage to size
Next best alternative
4
Ten point questions
61. Fill in the blank
a) Reference is often made to increasing costs which reflects increasing marginal costs.
The cause of increasing marginal costs is __diminishing returns_________________
b) Importing countries benefit from ___lower___________ ____prices_____________.
c) Choosing the good that provides the greatest MU/P is the same as choosing the good
with the lowest _opportunity cost______________________________.
d) Inputs not directly related to output and the costs associated with those inputs are
__fixed_____________________ in the short run.
e) When firms set prices or quantities to sell for multiple firms it is called a
___cartel_____________________________.
62. Diagram the short run situation for a firm in monopolistic competition that is making a
profit. What is likely to change to bring this firm into a long run equilibrium
situation? __new entrants (firms)___________________________________
$/q
MC
ATC
P0
Profit
D
q
q0
MR
5
63. Diagram a typical situation for an unregulated monopoly. Show the total revenue, profit and
total cost of the firm. TR = profit + TC
$/Q
MC
P
ATC
PROFIT
ATC
TC
D
Q0
Q
MR
6