Midterm 2, Spring 2012 - University of Portland

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Ecn. 121, Section D
Spring 2012
Todd Easton
Honors Pledge
As a student of the Dr. Robert B. Pamplin Jr. School of Business Administration, or of another
school at the University of Portland, I strive to uphold academic integrity and promote ethical
behavior. In doing so, I pledge on my own honor that I have not given, received, or used any
unauthorized materials or assistance on this examination.
Your signature: _____________________
Midterm Exam #2
Please print your name in the space in the upper-left-hand corner, so that you receive credit for your work.
Please also sign, and uphold, the honors pledge.
Part I--Multiple Choice Questions
Answer the questions below on the answer sheet provided, using a #2 pencil. Each question is worth 3 points;
for a total of 60 points. Take a maximum of 30 minutes.
1) According to US antitrust law, which of the following is always illegal?
a) merging with competing firms
b) using monopoly power in one market to gain advantage in another
c) colluding with competing firms to set price
d) taking into account interdependence when pricing products
2) Think about a firm facing a downward-sloping demand curve. For such a firm, marginal revenue is less than
price. Here is the reason for this: when the firm cuts the price of its product and sells more output
a) demand is elastic.
b) demand is inelastic.
c) the firm loses revenue on sales to existing customers.
d) the firm gains revenue selling to new customers.
Use the diagram to the right to answer the next
two questions. This diagram depicts a
monopoly’s situation.
3) The profit-maximizing output level is
a) OA.
b) OB.
c) OC.
d) OD.
4) The profit-maximizing price is
a) OE.
b) OF.
c) OG.
d) OK.
5) Which of the following is an example of an economic event whose cost is mostly private, as opposed to
external? To ask the same thing another way, which of the following is not an example of an external cost?
a) A steel mill’s pollution corrodes limestone buildings downtown.
b) An additional driver commuting to work slows down others on the highway.
c) A bakery goes out of business and consumers of baked goods pay higher prices as a result.
d) Carbon dioxide emitted by a power plant contributes to global warming.
6) Please answer the following question for a perfectly competitive firm in the short run. As long as price is
sufficient to cover _____, a firm is better off by operating rather than by shutting down.
a) marginal cost
b) average variable cost
c) marginal revenue
Please use the information below to answer the next two questions. As you do so, assume the market for tax
return preparation is perfectly competitive.
7) Aplia Suppose the market price of a tax return is $100. If the wage for a tax accountant is $350 per day, how
many returns should Ides of April produce?
a) 11 returns per day
b) 15 returns per day
c) 18 returns per day
d) 20 returns per day
e) 21 returns per day
8) Aplia Now suppose that as tax day approaches, the price of a tax return increases to $200 and tax accountants'
wages rise to $500 per day. At this wage and price level, Ides of April maximizes profit by producing how
many tax returns?
a) 11 returns per day
b) 15 returns per day
c) 18 returns per day
d) 20 returns per day
e) 21 returns per day
9) Suppose a firm faces a downward-sloping demand curve. It would be most correct to conclude the firm’s
industry is characterized by
a) oligopoly.
b) monopolistic competition.
c) perfect competition.
d) imperfect competition.
10) The level of carbon dioxide in the atmosphere is measured in parts per million. Some scientists studying
global warming estimate the relationship between future levels of carbon dioxide and future temperature levels
for the earth. Because the models they use only approximate the forces affecting climate, the models estimate
future temperatures with substantial uncertainty. Pick the word pair that best completes this description of what
these scientists have found:
Higher levels of carbon dioxide will be associated with _____ future temperatures and _____ uncertainty
about future temperature levels.
a) lower; less
b) lower; more
c) higher; less
d) higher; more
11) Think about two market failures: one due to monopoly power and one due to external benefits. What do
they have in common?
a) They both must occur in imperfectly competitive markets.
b) They both must occur with differentiated products.
c) They both result in output being too low.
d) They both result in price exceeding marginal cost.
12) I am about to take a drive. Which of these is the best measure of the marginal cost per mile for the drive,
provided I already own a car?
a) the average cost per mile driven during the year for gasoline
b) the average cost per mile driven during the year for gasoline and insurance
c) the average cost per mile driven during the year for gasoline, insurance, and depreciation
13) Suppose a firm develops an effective way to engage in price discrimination. That discrimination will result
in them
a) minimizing marginal costs.
b) increasing the elasticity of consumer demand.
c) increasing the average price obtained for a given quantity supplied.
d) creating effective hurdles.
Use the table below to answer the next question. It shows the demand for Danielle’s music lessons.
14)Aplia What price/quantity combination should Danielle choose in order to maximize her profit? Assume that
the opportunity cost of her time is $20 per hour and that her time is her only cost.
a) She should set a price of $32 and give 7 lessons per week.
b) She should set a price of $36 and give 6 lessons per week.
c) She should set a price of $40 and give 5 lessons per week.
d) She should set a price of $44 and give 4 lessons per week.
15) One of the main similarities between competitive and monopolistically competitive firms is
a) price equaling marginal cost when a firm maximizes profits.
b) the tendency of a firm to realize only normal profits in the long run.
c) the market, not the firm, setting the product’s price.
16) Guava Computers produces a unique product. In the production of this product, their fixed costs are
$20,000 per day. Their marginal cost is constant at $ 15 per unit. What is Guava's average total cost when it is
producing 2,000 units per day?
d) $30,000
e) $50,000
Please use the graphs in the box below to answer the next question.
17)Aplia Suppose the current price in this market is $40 per chair. Assuming $40 is above the minimum average
variable cost, how many firms are operating in this market?
Note: The graph on the left shows the situation of a one firm. Assume all firms in the chair industry have
costs like this one and the industry is perfectly competitive. The diagram on the right shows the market
demand for chairs.
b) 30
c) 100
d) 120
e) 150
18) Externalities
a) raise the firm's cost curves.
b) cause the firm to move along its cost curves (that is, cause it to produce more or less).
c) exist because of collusion.
d) None of the above is true.
19) Think about a two-player game like the ones we studied in class. In such a game, a Nash equilibrium
a) always makes both players better off.
b) always results in neither player wishing to unilaterally change their strategy.
c) always results from both players adopting their dominant strategy.
20) The price of a good in a competitive market may be a poor measure of the marginal social cost of
producing it if
a) price exceeds average total cost.
b) production results in significant negative externalities.
c) there are no close substitutes available.
d) All of the above are true.
Part II-- Short Answer and Essay Questions
Write concise answers to each question in the space provided. Please use complete sentences when . You
should take a maximum of 30 minutes for the whole section. The entire section is worth 30 points. Take a
maximum of 25 minutes.
1) Aplia [6 pts.] Please use the facts in the paragraph and table below to answer the following two questions.
Please show your work in the boxes below.
a) If the 50% reduction in SO2 emissions ordered by
the EPA occurs at the lowest possible cost, then the
cost of reducing the pollution is _________ dollars.
b) Now assume that the EPA does not know the cost
of reducing pollution at each firm and simply orders
each firm to reduce pollution emissions from each
generating unit by 50%. The total cost of pollution
reduction is _________ dollars.
2) [18 pts.] Suppose you are a monopolist and that you face the following demand and costs in the short run:
Price Quantity sold
Total costs
($ per unit)
per day per day (in $)
a) Use the space to the right of the table above to display your marginal revenue and marginal cost for each
level of output from 1 to 5 units per day. Show your work for an output of 2 units per day.
b) Using the marginal revenue and marginal cost numbers, explain the effect on profit of expanding output
from one unit per day to two units per day.
c) Give the profit maximizing rule for a monopolist.
d) Apply the profit maximizing rule. Give the price and output that would maximize your profits.
3) [6 pts.] Briefly explain why economists think entry barriers are important.
Good Answers!
Part I
Part II