1 Name Recitation Section Number Student ID Number Econ 1101-Lecture 2 Midterm 2 Fall 1998 Form A
2 Section 1: Multiple Choice (3 points each) For the following twenty-two questions, find the best answer and fill in the corresponding circle on your answer sheet. 1. Public goods are goods that are a. rival and excludable. b. not rival but are excludable. c. rival but not excludable. d. neither rival nor excludable. 2. A person who receives the benefit of a good but avoids paying for it is a(n) a. externality. b. free-rider. c. thief. d. bystander. 3. Suppose the demand for sandals is more elastic than the demand for running shoes. Assume the supply of both sandals and running shoes is equally inelastic. Comparing similar taxes on sandals and running shoes a. the tax on sandals has a larger deadweight loss. b. the tax on sandals has a smaller deadweight loss. c. the tax on sandals has a smaller burden for consumers, only if the buyers pay the tax. d. the tax on running shoes has a smaller burden for consumers, only if the sellers pay the tax. 4. A tax on a good a. raises the price buyers pay and lowers the price sellers receive. b. raises the price buyers pay and raises the price sellers receive. c. lowers the price buyers pay and lowers the price sellers receive. d. lowers the price buyers pay and raises the price sellers receive. 5. The loss in total surplus resulting from a tax is called a. the Federal deficit. b. the Federal surplus. c. the deadweight loss. d. one of the Ten Principles of Economics. 6. Countries usually impose restrictions on foreign trade to a. protect foreign producers. b. protect foreign consumers. c. protect domestic producers. d. protect domestic consumers.
3 7. In the long run all costs are a. fixed. b. variable. c. sunk. d. None of the above. 8. Consider a good that a country exports. Compared with no trade (closed economy), free trade results in in consumer surplus that in producer surplus. a. a reduction; is greater than the increase b. a reduction; is less than the increase c. an increase; is greater than the increase d. an increase; is greater than the decrease 9. If Brazil has a comparative advantage in producing rubber and free trade in rubber is allowed, a. Brazil will become an importer of rubber. b. Brazil will become an exporter of rubber. c. Brazil will not trade rubber. d. it is impossible to determine whether Brazil will become an importer or an exporter of rubber without additional information about rubber prices. 10. Suppose that a steel factory emits a certain amount of air pollution and that this pollution is a negative externality. The social cost of producing the steel includes a. the private costs of the steel producers and the price consumers pay for the steel. b. the private costs of the steel producers and the costs to the bystanders affected by the pollution. c. the costs to the bystanders affected by the pollution only. d. the price consumers pay for the steel and the costs to the bystanders affected by the pollution. 11. In a market that is affected by a positive production externality, the efficient level of output is the free market level of output and the efficient price is the free market price. a. less than, greater than b. greater than, less than c. greater than, greater than d. less than, less than 12. The amount of money that a firm receives from the sale of its output is called a. total revenue. b. total gross profit. c. total net profit. d. net revenue.
4 13. Susumu and Toshi are officemates. Susumu enjoys having a messy office. Toshi enjoys a clean office. If Susumu values a messy office more than Toshi values a clean office, the efficient outcome a. is to have a messy office. b. will only happen if Susumu is given the property rights to having a messy office. c. will only happen if Toshi is given the property rights to a clean office. d. is to have a clean office. 14. The local government of Bigsville wants to have a public concert. The cost of the concert is $ The concert will be financed by collecting a $1.00 tax from each of the 201 residents of Bigsville. One hundred residents of Bigsville value the concert at $0.50 each. Another one hundred residents value it at $2.00 each. One resident values the concert at $0.75. If majority rules voting is used to decide, will Bigsville have a public concert? a. Yes. b. No. c. It would be inefficient to have the concert. d. There is not enough information to determine this. 15. When economic profits are equal to zero a. accounting profits are positive. b. the firm is doing as well as its next best alternative. c. average total cost is equal to price. d. all of the above are true. 16. When no output is produced, Diskmatic s total costs are $200. Which of the following statements must be true? a. Diskmatic s marginal cost when no output is produced is $200. b. Diskmatic s variable cost when ten units of output are produced is $200. c. Diskmatic s fixed cost when ten units of output are produced is $200. d. Diskmatic s marginal revenue is $ To maximize profit a perfectly competitive firm will choose to produce the amount of output such that a. price equals marginal revenue. b. marginal revenue equals marginal cost. c. price is less than average variable cost. d. average total cost is less than average variable cost. 18. Firms in a perfectly competitive market are said to be a. market takers. b. market determiners. c. price takers. d. price determiners.
5 19. Production functions get flatter as the amount of input increases. Why? a. Workers become more productive as they learn a new job. b. Fixed costs decrease as output increases. c. This statement is false. Production functions get steeper as the amount of input increases. d. There is diminishing marginal product. 20. In the long run we expect perfectly competitive firms to a. produce the quantity that minimizes average total costs. b. produce at the efficient scale. c. both a and b. d. none of the above. 21. In the short run, at what level of output will average variable cost equal average total cost? a. when marginal cost equals average variable cost. b. there is not a level of output where this occurs, as long as fixed costs are positive. c. when marginal cost equals average total cost. d. this holds true for all levels of output in which average variable cost is falling. 22. Recall the guest lecture by Pascal Gauthier. Suppose that when Canada enters a free trade agreement with Chile there is trade creation with Chile and trade diversion with France in the market for wine. Which of the following statements must be true? a. The price of wine from Chile plus the tariff is lower than the price of wine from France plus the tariff. b. The free market price of wine in France is higher than the free market price of wine in Chile. c. The free market price of wine in Chile is lower than the price of wine in France plus the tariff. d. There is not enough information to determine the relative prices of wine in Chile and France.
6 Name Recitation section number Student id number Section 2: Definitions (3 points each) Give the definition of the following three terms in the space provided. Pigovian tax rivalness efficient scale
7 Name Recitation section number Student id number Section 3: Short Answer Answer all parts of the following questions in the space provided. price,costs bottles of sunscreen (6 pts) a) Draw a short run cost diagram for a perfectly competitive firm that sells sunscreen. You must include three curves: marginal cost, average total cost, and average variable cost. (4 pts) b) In the summer, demand for sunscreen is high. This firm earns positive profits in the summer. Label a price in the summer as P 1 that is consistent with this fact. Find the quantity the firm would produce at P 1. Label this as Q 1. (5 pts) c) Label the amount of profits when the price is P 1 on your diagram. Are profits positive or negative? (4 pts) d) How much is marginal revenue for the second bottle of sunscreen sold in the summer? Justify your answer. (2 pts) e) This firm shuts-down in the winter when demand for sunscreen is low. Label a price in the summer as P 2 that is consistent with this fact. (4 pts) f) What would cause this firm to exit the industry?