ECON 2100 (Summer 2012 Sections 07 and 08) Exam #3A

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1 ECON 21 (Summer 212 Sections 7 and 8) Exam #3A Multiple Choice Questions: (3 points each) 1. I am taking of the exam. A. Version A 2. Excess Capacity refers to the A. quantity of output at which Average Total Costs of production are imized. B. maximum possible amount of output that a firm can produce in the short run. C. amount by which the output of a firm is less than the efficient scale of output. 3. At the most basic level, profit is defined as A. Per Unit Price multiplied by Quantity Sold. B. Total Revenues plus Total Costs. C. Total Revenues us Total Costs. D. Total Revenues us Variable Costs. 4. is a market structure in which there is one single seller of a unique good (with no close substitutes ) and in which there are barriers to entry which prevent rival firms from entering the market A. Monopoly B. Monopolistic Competition C. Perfect Competition D. Duopoly 5. Visually, the demand curve facing a firm operating in a perfectly competitive market is A. a horizontal line, since such a firm does not have any market power. B. a vertical line, since whatever price such a firm sets, quantity demanded will always be exactly equal to the capacity of the firm. C. positively sloped, since the Law of Demand will be violated in such a market. 6. In the Short Run, a firm operating in a monopolistically competitive market A. maximizes profit by producing the level of output which imizes Average Total Costs of production. B. faces a downward sloping demand curve for its output. C. would never want to shut-down (since it can always earn a positive profit in the Short Run). 7. For a firm with market power Marginal Revenue, while for a firm in a perfectly competitive market Marginal Revenue. A. is less than Price; is equal to Price. B. is less than Price; is greater than Price. C. is equal to Price; is less than Price. D. is equal to Price; is also equal to Price.

2 8. It is typically assumed that a perfectly competitive market is characterized by Free Entry/Exit, an assumption which means that A. since there are many buyers and many sellers in such markets, nobody would notice if one particular seller chose to exit the industry. B. in the short run all firms in the industry can easily exit and avoid all of their fixed costs of production. C. in the long run, new firms can enter and existing firms can exit the industry with relative ease and without incurring any substantial costs of doing so. 9. Consider a firm in a perfectly competitive market with: output price of $5.5 per unit; AVC $3.85; and ATC $5.4. In the short run, this firm should A. shut down, since their maximum profit is negative. B. produce a positive quantity, even though their maximum profit is negative. C. produce a positive quantity, since they can earn a positive profit. D. None of the above answers are correct (since additional information is needed to detere if this firm should shut-down and if this firm can earn a positive profit). For questions 1 through 12, consider a market for which in 1998, 25, and 212 market shares and squared values of market shares were as reported in the two tables below. Year Share of Share of 2 nd Share of 3 rd Share of 4 th Share of 5 th Share of 6 th Year Share of Share of 2 nd Share of 3 rd Share of 4 th Share of 5 th Share of 6 th , ,225 1, The value of the Herfindahl-Hirschman Index (HHI) in this market in 25 was A. 3,51. B. 2,678. C. 2,626. D The value of the Four Firm Concentration Ratio (C4) A. decreased between 1998 and 25, and then decreased further between 25 and 212. B. decreased between 1998 and 25, but then increased between 25 and 212. C. increased between 1998 and 25, but then decreased between 25 and 212. D. increased between 1998 and 25, and then increased further between 25 and This industry was least competitive (i.e., most concentrated or closest to monopoly ) in according to C4 and in according to HHI. A. 1998; B. 25; C. 212; 25. D. 1998; 212.

3 13. refers to the general business practice of selling different units of the same good to different consumers at different prices. A. Natural Monopoly. B. Economies of Scale. C. The Inverse Elasticity Pricing Rule. D. Price Discriation. For questions 14 through 17, consider a firm in a perfectly competitive market with Short Run costs of production as illustrated below: $ MC(q) ATC(q) AVC(q) 12.5 ATC AVC 5.9 MC ,7 2,975 4, If this firm were to produce zero units of output, then A. it would earn zero profit. B. it would earn a profit of $( 1,15). C. it would earn a profit of $( 47,8). D. it would earn a profit of $( 82,65). 4,7 quantity 5,8 15. If the per unit price of output in this market were $14.25, then this firm would A. earn revenue of $66,975. B. incur Variable Costs of Production equal to $42,3. C. realize a Producer s Surplus of $24, This firm will produce a positive quantity of output in the Short Run but earn a negative profit if and only if the per unit price of output is A. less than $3.95. B. greater than $3.95 but less than $5.9. C. greater than $5.9 but less than $11.. D. greater than $11. but less than $ This firm would choose to produce more than 4,7 units of output if and only if price is A. greater than $ B. greater than $11. but less than $ C. exactly equal to $11.. D. below $5.9.

4 For Questions 18 through 21, consider a monopolist facing demand and with costs of production as illustrated below. Further, if this monopolist were restricted to charging a common price for every unit of output sold, Marginal Revenue would be as illustrated below by the curve labeled MR(q) $ 4.9 a b MC(q) i c f d g h e j Demand quantity 1,5 2,24 MR(q) 18. If this monopolist must charge a common price for every unit of output sold, then they will maximize profit by charging a price of for each unit sold. A. $1.5 B. $2.2 C. $3.4 D. $ Again suppose that this monopolist must charge a common price for every unit of output sold. When the monopolist charges the price and sells the quantity of output which maximize profit, A. Consumers Surplus will be equal to areas (a)+(b)+(c)+(d)+(e). B. Deadweight-Loss will be equal to area (j), due to the monopolist selling more than the efficient quantity of the good. C. the monopolist realizes a Producer s Surplus equal to areas (c)+(d)+(f)+(g)+(i). 2. If this monopolist is able to engage in First Degree Price Discriation (or Perfect Price Discriation ), then A. she would choose to sell 2,24 units of output. B. Deadweight-Loss would be equal to areas (e)+(h). C. Producers Surplus would be equal to areas (f)+(g)+(h)+(i). 21. Comparing the outcome under First Degree Price Discriation to the outcome which results when the monopolist charges a common price for every unit of output, under First Degree Price Discriation A. Total Consumers Surplus is smaller. B. Profit of the monopolist is smaller. C. Total Social Surplus is smaller. D. More than one (perhaps all) of the above answers are correct. 2,89 4,125

5 22. The DeBeers company was mentioned in lecture as an example of a firm that A. was able to maintain its monopoly because it had exclusive ownership of an input that was essential to the production process. B. has historically operated in an industry that is a natural monopoly. C. engages in First Degree Price Discriation (or Perfect Price Discriation ). D. operates in a perfectly competitive market (and therefore has marginal revenue equal to price for every unit sold). 23. Emma sells sandals near the beach. Last month she earned Total Revenue of $6,4. Her Total Costs of Production were $7,5, while her Variable Costs of Production were $5,25. From these figures, it follows that she A. would likely want to exit the industry in the Long Run. B. would have been better off shutting down during the past month. C. realized a positive Profit but negative Producer s Surplus during the past month. D. None of the above answers is correct. 24. Disneyland Resort in Anaheim, CA offers a season pass to residents of Southern California and Northern Baja California for $184. The regular price for this annual pass is $289. To receive the lower price, a consumer must present a valid I.D. at the time of purchase, showing that they reside in a Southern California town with a ZIP Code in the range of 9 to or a Northern Baja California town with a Postal Code in the range of 21 to This pricing behavior is an example of A. Fifth Degree Price Discriation (or Walter Murphy Pricing ) B. Third Degree Price Discriation (or Segmented Pricing ). C. Second Degree Price Discriation (or Menu Pricing ). D. First Degree Price Discriation (or Perfect Price Discriation ). 25. is a legal protection which grants the holder the exclusive right to create a particular product or use a particular production technique. A. The Inverse Elasticity Pricing Rule B. A Patent C. Segmented Pricing D. A Natural Monopoly , IEPR Incorporated is the only seller of widgets. They face demand of D( p), for 2 p which the value of price elasticity of demand is equal to 2 at every point along the demand curve. They have production costs of C ( q) 4q 5,, from which it follows that marginal costs are equal to $4 for each unit produced. When maximizing profit this firm will A. be able to earn a positive profit of $8,. B. charge $4 for each unit of output sold. C. choose to sell 2, units of output. 27. refers to a market structure in which competing firms sell differentiated products and there are no substantial barriers to entry. A. Perfect Competition B. Monopolistic Competition C. Monopoly D. Oligopoly

6 28. Consider a perfectly competitive market in the Short Run in which at the prevailing market price of $11.5 per unit of output we observe: 2 firms each producing 2, units of output; 5 firms each producing 3, units of output; 5 firms each producing 6, units of output; and 25 firms each producing 1, units of output. It follows that the Short Run market quantity supplied at a price of $8.95 is A. 2, units of output (the amount produced by the firm with the lowest level of output). B. approximately 3,384.6 units of output (the average amount of output produced across all firms in the market). C. 1, units of output (the amount produced by the firm with the greatest level of output). D. 1,1, units of output (the sum of the amount produced by each individual firm in the market). 29. For a firm operating in a perfectly competitive market, Marginal Revenue A. is always equal to zero for every unit of output sold. B. is greater than Average Revenue at every level of output. C. does not change as the firm alters its quantity of output. For questions 3 and 31, consider a firm operating in a monopolistically competitive market with costs of production and facing demand as illustrated below. $ MC(q) 8 ATC(q) Demand quantity 4, 5, 7,2 MR(q) 8,4 3. In order to maximize profit, this firm should charge a price of for each unit sold. A. $8 B. $6 C. $48 D. $ In the Long Run this firm should A. completely exit the industry, since their maximum Short Run profit is negative. B. expect demand for their product to decrease. C. expect to be able to earn a positive profit indefinitely.

7 32. In general, a monopolist will A. produce/sell the level of output which equates Marginal Revenue to Marginal Costs. B. produce/sell every unit of output for which Marginal Revenue is positive. C. produce/sell the level of output which makes Average Total Costs as small as possible. 33. Eli sells turnips in a small, rural town in North Dakota. Since he is the only turnip seller in town, he has some market power. He is currently charging $2. for each bag of turnips, a price at which he sells 4 bags per month. If he were to increase his quantity sold to 5 bags per month A. his Total Revenue would be less than $1,. B. his profit would be larger. C. he would be able to avoid all Fixed Costs of production.

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