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1 ECON Fall 2008 Xiaoyong Cao Final Exam Form A Instructions: The exam consists of 2 parts. Part I has 35 multiple choice problems. You need to fill the answers in the table given in Part II of the exam. The second part of the exam is a short answer questions You MUST answer all questions in 75 minutes. No notebooks or books are allowed. Check carefully before you turn in your exams. If you have a question regarding the exam, please stand up and I will assist you I enjoy teaching this class. Good luck and have a nice Holiday!!

2 Principles of Microeconomics Exam 3 (Test Form A) Part I: Multiple Choice Problems Identify the letter of the choice that best completes the statement or answers the question. 1. The profit-maximization problem for a monopolist differs from that of a competitive firm in which of the following ways? a. A competitive firm maximizes profit at the point where marginal revenue equals marginal cost; a monopolist maximizes profit at the point where marginal revenue exceeds marginal cost. b. A competitive firm maximizes profit at the point where average revenue equals marginal cost; a monopolist maximizes profit at the point where average revenue exceeds marginal cost. c. For a competitive firm, marginal revenue at the profit-maximizing level of output is equal to marginal revenue at all other levels of output; for a monopolist, marginal revenue at the profit-maximizing level of output is smaller than it is for larger levels of output. d. For a profit-maximizing competitive firm, thinking at the margin is much more important than it is for a profit-maximizing monopolist. 2. The Tragedy of the Commons can be corrected by a. conducting a cost-benefit analysis. b. assigning property rights to individuals. c. providing government subsidies for the resource. d. making certain everyone in the economy has access to the resource. 3. Diminishing marginal product suggests that the marginal a. cost of an extra worker is unchanged. b. cost of an extra worker is less than the previous worker's marginal cost. c. product of an extra worker is less than the previous worker's marginal product. d. product of an extra worker is greater than the previous worker's marginal product. Scenario 13-5 A certain firm produces and sells staplers. Last year, it produced 7,000 staplers and sold each stapler for $6. In producing the 7,000 staplers, it incurred variable costs of $28,000 and a total cost of $45, Refer to Scenario In producing the 7,000 staplers, the firm's average fixed cost was a. $1.00 b. $1.32 c. $2.21 d. $ Refer to Scenario In producing the 7,000 staplers, the firm's average total cost was a. $5.00 b. $5.42 c. $6.21 d. $6.43 Table 13-8 Quantity of Fixed Variable Cost Total Average Fixed Average Variable Cost Average Total Marginal

3 gigaplots Cost Cost Cost Cost Cost 1 $13 $38 2 $28 3 $70 4 $64 5 $110 6 $108 7 $133 8 $ Refer to Table What is the total cost of producing 7 gigaplots at Jimmy's Gigaplot factory? a. $140 b. $150 c. $153 d. $ Refer to Table What is the average total cost of producing 2 gigaplots at Jimmy's Gigaplot factory? a. $14.00 b. $18.50 c. $22.50 d. $26.50 Table 14-2 The following table presents cost and revenue information for Soper s Port Vineyard. COSTS REVENUES Total Marginal Quantity Total Cost Cost Demanded Price Revenue Quantity Produced Marginal Revenue 8. Refer to Table Consumers are willing to pay $120 per unit of port wine. What is Soper's Port Vineyard's economic profit at their profit maximizing point? a. $78 b. $243 c. $278 d. $ When existing firms in a competitive market are profitable, an incentive exists for a. new firms to seek government subsidies that would allow them to enter the market. b. new firms to enter the market, even without government subsidies. c. existing firms to raise prices. d. existing firms to increase production. 10. In the long-run equilibrium of a competitive market, the number of firms in the market adjusts until the market demand is satisfied at a price equal to a. average fixed cost for the marginal firm.

4 b. the maximum of marginal cost of the marginal firm. c. the minimum of average total cost of the marginal firm. d. the minimum of average variable cost of the marginal firm. 11. In the long-run equilibrium of a market with free entry and exit, if all firms have the same cost structure, then a. marginal cost exceeds average total cost. b. the price of the good exceeds average total cost. c. average total cost exceeds the price of the good. d. firms are operating at their efficient scale. Figure 15-2 The figure below illustrates the cost and revenue structure for a monopoly firm. 12. Refer to Figure Profit will be maximized by charging a price equal to a. P 0. b. P 1. c. P 2. d. P In order to sell more of its product, a monopolist must a. sell to the government. b. sell in international markets. c. lower its price. d. use its market power to force up the price of complementary products. 14. A monopolist's average revenue is always a. equal to marginal revenue. b. greater than the price of its product. c. equal to the price of its product. d. less than the price of its product. 15. Marginal revenue can become negative for a. both competitive and monopoly firms. b. competitive firms, but not for monopoly firms. c. monopoly firms, but not for competitive firms. d. neither competitive nor monopoly firms. 16. For a monopoly firm, the shape and position of the demand curve play a role in determining (i) the profit-maximizing price. (ii) the shape and position of the marginal cost curve. (iii) the shape and position of the marginal revenue curve. a. (i) and (ii)

5 b. (ii) and (iii) c. (i) and (iii) d. (i), (ii), and (iii) Table 15-4 Consider the following demand and cost information for a monopoly. Quantity Price Total Cost 0 $30 $3 1 $25 $7 2 $20 $12 3 $15 $18 4 $10 $ Refer to Table The marginal cost of the fourth unit is a. $7. b. $12. c. $25. d. $ "Monopolists do not worry about efficient production and minimizing costs since they can just pass along any increase in costs to their consumers." This statement is a. false; price increases will mean fewer sales, and lower costs will mean higher profits (or smaller losses). b. true; this is the primary reason why economists believe that monopolies result in economic inefficiency. c. false; the monopolist is a price taker. d. true; consumers in a monopoly market have no substitutes to turn to when the monopolist raises prices. Table 15-5 Dreher's Designer Shirt Company, a monopolist, has the following cost and revenue information. Assume that Dreher s is able to engage in perfect price discrimination. COSTS REVENUES Total Cost Marginal Quantity Price Total ($) Cost Demanded ($) Revenue Quantity Produced 19. Refer to Table What are Dreher's Designer Shirt Company's fixed costs? a. $100 b. $150 c. $354 Marginal Revenue

6 d. $ When a good is excludable, a. one person's use of the good diminishes another person's ability to use it. b. people can be prevented from using the good. c. no more than one person can use the good at the same time. d. everyone will be excluded from using the good. 21. An example of a common resource would be a. cable TV service. b. a tornado siren. c. clothing. d. the environment. 22. Explicit costs a. require an outlay of money by the firm. b. include all of the firm's opportunity costs. c. include income that is forgone by the firm's owners. d. Both b and c are correct. 23. The efficient scale of the firm is the quantity of output that a. maximizes marginal product. b. maximizes profit. c. minimizes average total cost. d. minimizes average variable cost. 24. In the short-run, a firm's supply curve is equal to a. the marginal cost curve above its average variable cost curve. b. the marginal cost curve above its average total cost curve. c. the average variable cost curve above its marginal cost curve. d. the average total cost curve above its marginal cost curve. 25. Sizable economic profits can persist over time under monopoly if the monopolist a. produces that output where average total cost is at a maximum. b. is protected by barriers to entry. c. operates as a price taker rather than a price maker. d. realizes revenues that exceed variable costs. Table Consider the following table of long-run total cost for four different firms Quantity Firm 1 $210 $340 $490 $660 $850 $1,060 $1,290 Firm 2 $180 $350 $510 $660 $800 $930 $1,050 Firm 3 $120 $250 $390 $540 $700 $870 $1,050 Firm 4 $150 $300 $450 $600 $750 $900 $1, Refer to Table Which firm has diseconomies of scale over the entire range of output? a. Firm 1 b. Firm 2 c. Firm 3 d. Firm 4

7 27. Susan quit her job as a teacher, which paid her $36,000 per year, in order to start her own catering business. She spent $12,000 of her savings, which had been earning 10 percent interest per year, on equipment for her business. She also borrowed $12,000 from her bank at 10 percent interest, which she also spent on equipment. For the past several months she has spent $1,000 per month on ingredients and other variable costs. Also for the past several months she has taken in $3,500 in monthly revenue. a. In the short run, Susan should shut down her business and in the long run she should exit the industry. b. In the short run, Susan should continue to operate her business, but in the long run she should exit the industry. c. In the short run, Susan should continue to operate her business, but in the long run she will probably face competition from newly entering firms. d. In the short run, Susan should continue to operate her business, and she is also in long-run equilibrium. Figure 15-7 The figure below depicts the demand, marginal revenue, and marginal cost curves of a profitmaximizing monopolist. 28. Refer to Figure If the monopoly firm is NOT allowed to price discriminate, then the deadweight loss amounts to a. $50. b. $100. c. $500. d. $1, When marginal cost is rising, average variable cost a. must be rising. b. must be falling. c. must be constant. d. could be rising or falling. 30. When government receipts exceed total government spending during a fiscal year, the difference is a. a budget surplus. b. a budget deficit. c. the national debt. d. automatically refunded.

8 31. When a competitive firm triples the amount of output it sells, a. its total revenue triples. b. its average revenue triples. c. its marginal revenue triples. d. its profit must increase. 32. If the market demand of potatoes is -0.3 in a perfectly competitive market, then the individual farmer s elasticity of demand is a. will also be b. depends on how large a crop the farmer producers. c. will range between -0.3 and d. will be infinite. Figure 13-6 The curves below reflect information about the cost structure of a firm. 33. Refer to Figure Curve A is U-shaped because of a. diminishing marginal product. b. increasing marginal product. c. the fact that increasing marginal product follows decreasing marginal product. d. the fact that decreasing marginal product follows increasing marginal product. 34. A firm will shut down in the short run if the total revenue that it would get from producing and selling its output is less than its a. opportunity costs. b. fixed costs. c. variable costs. d. total costs. 35. Which of the following expressions is correct? a. accounting profit = economic profit + implicit costs b. accounting profit = total revenue - implicit costs c. economic profit = accounting profit + explicit costs d. economic profit = total revenue - implicit costs

9 Principle of Microeconomics Exam 3 Part II (TEST FORM A) Xiaoyong Cao/Fall 2008 Name UIN Multiple Choice Answer Sheet 1B 2B 3C 4D 5D 6D 7D 8C 9B 10C 11D 12D 13C 14C 15C 16C 17A 18A 19A 20B 21D 22A 23C 24A 25B 26C 27B 28D 29D 30A 31A 32D 33C 34C 35A Answer the following question: (30 points) 1. In a perfect competitive market, a typical ice-cream producer has a fixed cost 16 dollars and the following average variable cost: (16 points) Quantity Average variable cost Average total cost 1 $ (I talked this problem in class) a) Calculate the average total cost and fill in the above table and find out the efficient production scale. The efficient production scale is 4 and LR equilibrium price is the minimized ATC=8 b) In a graph, draw the marginal cost, average total cost, average fixed cost and average variable cost curves for a typical firm. Label your graph clearly. These curves are typical cost curves for a firm. I need to see: 1) MC, AVC are increasing 2) ATC is U-shaped 3) MC and ATC intersects at the minimized ATC. 4) AFC is decreasing.

10 3. Some 5. A c) Now suppose the market demand is given by Q=100-5p, where p is the market price of ice-cream and Q is the quantity demanded. Then in the long run, how many firms will be in the ice-cream market? Explain your answer carefully. LR price is 8, so the total demand is Q=100-5*8=60. Then the number of firms is 60/4=15 since each firm will produce at the efficient production scale 4. d) Now suppose that there is a permanent positive shock on the demand side, how would you predict the price of ice-cream and the number of firms in the short run and in the long run? Why? Use graphs to support your conclusions if necessary. Positive shock will make the price go up in the short run and existing firms will earn positive profit. With free entry, new sellers will enter the market, increasing the supply, driving down the price to the LR equilibrium price. In the equilibrium, the price will be 8 again and the number of firms increases. 2. Give two reasons why the long-run industry supply curve may slope upward. Use an example to demonstrate your reasons. (5 points) resource used in production may be available only in limited quantities and firms may have different cost structures. The example provided in the text for the first reason is the market for farm products. As more people become farmers, the price of land is bid up since its supply is limited. As the price of farm land is bid up, the costs of all farmers in the market rise. The example used to support the second reason is the market for painters. Anyone can enter the market for painting services, but not everyone has the same costs because some painters work faster than others. 4. Let's assume that a monopolist decides to maximize revenue, rather than profit. How does this operating objective change the size of the deadweight loss? If you are a "benevolent" manager of a monopoly firm and are interested in reducing the deadweight loss of monopoly, should you maximize profits or maximize revenue? Carefully explain your answer. (5 points) revenue maximizer operates where MR = 0. This solution moves the monopolist closer to the socially optimal competitive outcome, and reduces deadweight loss. Revenue maximization is potentially a more "socially" optimal objective for monopoly markets than profit maximization.

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