ECON 202-504
Fall 2012
Name:
Midterm Exam 2
UIN:
Instructor: Jinkook Lee
Major:
30 Questions (50 points)
Table 1
Quantity of
Burgers
1
2
3
4
5
6
7
Marginal
Utility
20
14
10
3
1
-5
-10
Quantity of
Pepsi
1
2
3
4
5
6
7
Marginal
Utility
30
10
7
5
1
0
-4
Table 1 lists Jay's marginal utilities for burgers and Pepsi. Jay has $7 to spend on these two
goods. The price of a burger is $2 and the price of a can of Pepsi is $1.
1) Refer to Table 1. What is Jay's optimal consumption bundle?
A) 1 burger and 2 Pepsis
B) 2 burgers and 3 Pepsis
C) 3 burgers and 1 Pepsi
D) 3 burgers and 2 Pepsis
(2 pts.)
2) Suppose Barry is maximizing his utility from consuming used paperback novels and audio
books. The price of a used novel = $4 and the price of an audio book = $8. If the marginal utility
of the last novel was 32 units of utility (utils) what was the marginal utility of the last audio book
purchased?
A) 2 utils
B) 12 utils
C) 16 utils
D) 64 utils
(1.5 pts.)
3) The income effect due to a price decrease will result in an increase in the quantity demanded
for
A) a Giffen good.
B) an inferior good.
C) a public good.
D) a normal good.
(1.5 pts.)
4) Which of the following statements is false?
A) There is an indifference curve associated with any combination of goods selected by a
consumer.
B) A consumer is indifferent among all consumption bundles along a given budget line.
C) All consumption bundles along a given indifference curve are equally desirable.
D) Consumption bundles that lie on higher indifference curves yield higher utility.
(1.5 pts.)
Figure 1
Manuri has $300 to spend on Pilates classes and Yoga classes. The price of a group Pilates class
is $20 and the price of a group Yoga class is $10. Manuri's optimal bundle is given by "A".
5) Refer to Figure 1. Suppose the price of Pilates sessions rise to $30 while income and the
price of Yoga sessions remain unchanged. The substitution effect of this price change is
represented by the movement from
A) A to B.
B) A to C.
C) A to D.
D) D to B.
(1.5 pts.)
6) Gertrude Stork's Chocolate Shoppe normally employs 4 workers. When the Chocolate Shoppe
hired a 5th worker the Shoppe's total output decreased. Therefore,
A) the marginal product of the 5th worker is negative.
B) the total output of Gertrude Stork's Chocolate Shoppe is negative.
C) the average product of the 5th worker is negative.
D) the 5th worker should be hired only if he is willing to accept a wage lower than the wage paid
to the other 4 workers.
(2 pts.)
7) In the short run, why does a production function eventually display diminishing returns to
labor?
A) As the number of workers increases it becomes difficult to monitor them.
B) As a firm hires more workers the skills and the work ethic of the additional workers will
eventually decline.
C) As the number of workers increases eventually the gains from the division of labor and
specialization are used up.
D) The opportunity cost of hiring additional workers must eventually rise.
(2 pts.)
Table 2
Quantity of
Workers
0
1
2
3
4
5
Quantity of
Boxes
0
50
200
240
264
284
Marginal
Product of
Labor
-----
Average
Product of
Labor
-----
8) Refer to Table 2. The table above refers to the relationship between the quantity of workers
employed and the number of cardboard boxes produced per day by Manny's House of Boxes.
The capital used to produce the boxes is fixed. Diminishing returns to labor are first observed in
this example after Manny hires the ________ worker.
A) second
B) third
C) fourth
D) fifth
(1.5 pts.)
9) Which of the following explains why the marginal cost curve has a U shape?
A) Initially, the marginal product of labor falls, then rises.
B) Initially, the average product of labor rises, then falls.
C) Initially, the marginal product of labor rises, then falls.
D) Initially, the average cost of production rises, then falls.
(1.5 pts.)
10) Which of the following statements is true?
A) As output increases, average fixed cost becomes smaller and smaller.
B) Average fixed cost does not change as output increases.
C) The marginal cost curve intersects the average fixed cost curve at its minimum point.
D) When marginal cost is greater than average fixed cost, average fixed cost increases.
(1.5 pts.)
Table 3
Quantity
(sets)
100
200
300
400
500
Long Run
Average Cost
$40
35
30
30
35
Elegant Settings manufactures stainless steel cutlery. Table 3 shows the company's cost data.
11) Refer to Table 3. Elegant Settings experiences
A) economies of scale up to an output level of 400.
B) diminishing returns up to an output level of 400.
C) increasing returns beyond an output level of 400.
D) economies of scale at an output of 300 or less and diseconomies of scale at an output level
above 400.
(1.5 pts.)
Table 4
Apples
(pounds)
0
100
150
200
250
300
350
400
Market Price
per Pound
$3
Total
Revenue
(TR)
$0
Average
Revenue
(AR)
-----
Marginal
Revenue
(MR)
-----
Table 4 lists the various pounds (lbs.) of apples that Margie Stattler can sell. Assume that Margie
operates in a perfectly competitive market.
12) Refer to Table 4. What is Margie's total revenue if she sells 250 pounds of apples?
A) $250
B) $500
C) $750
D) There is not enough information in the table to determine Margie's total revenue.
(1.5 pts.)
13) If a perfectly competitive apple farm's marginal revenue exceeds the marginal cost of the last
bushel of apples sold, what should the farm do to maximize its profit?
A) determine what the total revenue and total cost of production are
B) increase output
C) decrease output
D) lower its price to sell more
(1.5 pts.)
Figure 2
14) Refer to Figure 2. If the firm is charging a price of $12 per unit
A) it breaks even.
B) it is making a profit.
C) it is selling 700 units.
D) it is not selling any output.
(1.5 pts.)
Figure 3
Figure 3 illustrates the cost curves of a perfectly competitive firm.
15) Refer to Figure 3. If the market price is P1
A) The firm will experience a loss and raise its price to P2. The firm will then break even.
B) The firm will break even by producing a quantity of Q2.
C) The firm will experience a loss since price is less than ATC.
D) The firm may make a profit if it can increase the demand for its product.
(1.5 pts.)
16) Refer to Figure 3. If the market price is P2 the firm
A) will break even and produce a quantity of Q2.
B) will make a profit and produce a quantity of Q2.
C) will make a profit and produce a quantity of Q1.
D) will make a profit and produce a quantity of Q3.
(1.5 pts.)
17) Ben's Peanut Shoppe suffers a short-run loss. Ben will not choose to shut down if
A) his Shoppe's total revenue exceeds his fixed cost.
B) his Shoppe's total revenue exceeds his variable cost.
C) his Shoppe's total revenue exceeds his implicit costs.
D) his Shoppe's total revenue exceeds his capital costs.
(2 pts.)
Figure 4
18) Refer to Figure 4. The firm's short-run supply curve is its
A) marginal cost curve.
B) marginal cost curve from b and above.
C) marginal cost curve from c and above.
D) marginal cost curve from d and above.
(2 pts.)
19) Refer to Figure 4. At the profit-maximizing output level, the firm earns
A) zero economic profit.
B) a profit of $600.
C) a profit of $1,200.
D) a profit of $2,700.
(1.5 pts.)
Figure 5
20) Refer to Figure 5. Which panel best represents the perfectly competitive organic produce
market in which some firms are experiencing short-run losses, and consumers are displaying an
increased preference for organic produce?
A) Panel A
B) Panel B
C) Panel C
D) Panel D
(2 pts.)
21) Refer to Figure 5. Which panel best represents the perfectly competitive organic produce
market in which firms are breaking even, economically, organic produce is considered a normal
good, and the average income level of consumers is rising?
A) Panel A
B) Panel B
C) Panel C
D) Panel D
(2 pts.)
Figure 6
The graphs in Figure 6 represent the perfectly competitive market demand and supply curves for
the apple industry and demand and cost curves for a typical firm in the industry.
22) Refer to Figure 6. Which of the following statements is true?
A) The current market price is $3 but the firm will be able to increase the price in the future.
B) The current market price is $3 but the price will fall in the long-run as a result of a decrease in
demand.
C) The current market price is $3 but the price will fall in the long-run as new firms enter the
market.
D) The current market price is $3 but the price will increase in the future as the market demand
increases.
(2 pts.)
23) A perfectly competitive industry achieves allocative efficiency in the long run. What does
allocative efficiency mean?
A) Each firm produces up to the point where the price of the good equals the marginal cost of
producing the last unit.
B) Each firm produces up to the point where all scale economies are exhausted.
C) Production occurs at the lowest average total cost.
D) Firms use an input combination that minimizes cost and maximizes output.
(1.5 pts.)
Figure 7
24) Refer to Figure 7. The marginal revenue from one additional unit sold is the sum of the gain
in revenue from selling the additional unit and the loss in revenue from having to charge a lower
price to sell the additional unit. Based on the diagram in the figure,
A) X represents the gain (price effect) and Y the loss (output effect).
B) X + Z represents the loss (output effect) and Y the gain (price effect).
C) Y represents the gain (output effect) and X the loss (price effect).
D) X represents the loss (price effect) and Y + Z the gain (output effect).
(2 pts.)
25) For the monopolistically competitive firm,
A) Price (P) = Marginal Revenue (MR) = Average Revenue (AR).
B) P = MR > AR.
C) P = AR > MR.
D) P > MR = AR.
(1.5 pts.)
26) Every firm that has the ability to affect the price of the good or service it sells will
A) have a perfectly elastic demand curve.
B) have a marginal revenue curve that lies below its demand curve.
C) earn a short-run profit but break even in the long run.
D) shut down in the short run.
(1.5 pts.)
Table 5
Quantity
Price
Total Cost
1
$18
$14
2
16
20
3
14
26
4
12
32
5
10
38
6
8
44
Table 5 shows the demand and cost data facing a monopolistically competitive producer of
canvas bags.
27) Refer to Table 5. At the profit-maximizing or loss-minimizing output level
A) the firm makes a profit of $12.
B) the firm incurs a loss equal to its fixed cost.
C) the firm makes a profit of $16.
D) the firm incurs a loss of $14.
(1.5 pts.)
28) Which of the following would not occur as a result of a monopolistically competitive firm
suffering a short-run economic loss?
A) The firm could exit the industry in the long run.
B) If the firm does not exit the industry in the long run its demand curve will shift to the left.
C) If the firm does not exit the industry in the long run its demand curve will shift to the right.
D) If the firm remains in the industry in the long run it will break even.
(2 pts.)
29) If firms in a monopolistically competitive market are earning economic profits, which of the
following scenarios best reflects the change a representative firm experiences as the market
adjusts to its long-run equilibrium?
A) Demand decreases and becomes less elastic.
B) Demand decreases and becomes more elastic.
C) Demand increases and becomes less elastic.
D) Demand increases and becomes more elastic.
(1.5 pts.)
30) Long-run equilibrium in a monopolistically competitive market is similar to long-run
equilibrium in a perfectly competitive market in that in both markets, firms
A) produce at the minimum point of their average total cost curves.
B) produce where price equals marginal cost.
C) break even.
D) produce where price equals marginal revenue.
(1.5 pts.)
 Extra Credit (3 points)
Tom receives an allowance of $20 (per week). He spends all his allowance on pizza and Coke.
Initially, the price of pizza is $2 (per slice), and the price of Coke is $2 (per can). For Tom, pizza
is inferior good and demand curve for pizza is upward sloping. Coke is normal good.
Now, suppose that the price of pizza falls to $1 (per slice).
 Draw his initial, hypothetical, and new budget constraints. (1pt.)
 Derive his initial and new optimal consumption bundles of pizza and Coke by using
indifference curves. (1pt.)
 Specify income effect and substitution effect. (1pt.)