# ECO201: PRINCIPLES OF MICROECONOMICS. Second Midterm Examination Prof. Bill Even

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2 1) Smith Tees owns a company that manufactures wooden golf tees. The firm currently produces 20,000 tees per day. It cannot produce more tees per day without buying additional equipment of hiring more workers. Based on this information, we know that Smith Tees is: a) Economically efficient b) Technologically efficient c) Both a and b. d) We cannot conclude that Smith Tees is either economically or technologically efficient without more information. 2) China exports steel to the U.S. and the U.S. has recently imposed a tariff on steel imports. This tariff will cause U.S. steel producers surplus to, U.S. steel consumers surplus to, and total (consumer + producer) surplus in the U.S. to. a) Rise; fall; fall b) Rise; fall; rise c) Fall; rise; rise d) None of the above 3) Wanda takes \$5,000 from her savings account that pays 2 percent interest per year and uses the funds to purchase a computer for \$10,000 for her business. At the end of the year the computer is worth \$8,000. Wanda pays an implicit rental rate of a year. a) \$100 b) \$2000 c) \$2100 d) None of the above 4) Heidi quit her job as a chef making \$40,000 per year to start her own restaurant. The first year, Heidi's restaurant earned \$100,000 in revenue. Heidi pays \$50,000 per year in wages to the waitresses and hostess and \$20,000 per year to buy food. What is Heidi's economic profit for the year? a) \$30,000 b) -\$10,000 c) \$50,000 d) \$80,000 2

3 The figure below shows the market for soybeans in China. The demand curve is domestic demand in China (i.e. demand by Chinese consumers) and the supply curve is domestic supply in China (i.e. Chinese producers). 5) If the world price of soybeans is \$3, China will have annual a) exports of 8 million bushels b) imports of 8 million bushels c) imports of 4 million bushels d) none of the above. 6) If the world price of soybeans is \$3 and China bans any imports or exports of soybeans, producers surplus in China would a) Increase by \$2 million b) Increase by \$3 million c) Increase by \$4 million d) None of the above. 7) If the world price of soybeans is \$3 and China bans any imports or exports of soybeans, consumers surplus in China would: a) Increase by \$8 million b) Increase by \$6 million c) Decrease by \$6 million d) None of the above. 3

4 The figure below shows the market for soybeans in China. The demand curve is domestic demand in China (i.e. demand by Chinese consumers) and the supply curve is domestic supply in China (i.e. Chinese producers). 8) If the world price of soybeans is \$3, what is the lowest tariff that would cause China to stop importing any soybeans? a) \$1 b) \$2 c) \$3 d) \$4 9) If the world price of soybeans is \$3 and China imposes a tariff of \$1 per bushel, there would be a deadweight loss of million dollars. a) 1 b) 2 c) 3 d) 4 10) If the world price of soybeans is \$3 and China imposes a tariff of \$1 per bushel, imports of soybeans would drop by million bushels a) 2 b) 4 c) 6 d) 8 11) If the world price of soybeans is \$3 and China imposes a tariff of \$1 per bushel, consumers surplus would and producers surplus would. a) Decrease \$9 million; Increase \$3 million. b) Decrease \$10 million; increase \$2 million. c) Increase \$10 million; decrease \$2 million. 4

5 12) Suppose that the world price of soybeans is \$3 and China imposes a quota that allows no more than 3 million bushels of soybeans to be imported annually. This quota would cause consumers surplus in China to, producers surplus in China to, and total (consumer + producer) surplus to. a) Rise; fall; rise. b) Rise; fall; fall c) Fall; rise; rise. d) None of the above. 13) Suppose that the world price of soybeans is \$3 and China imposes a quota that allows no more than 3 million bushels of soybeans to be imported annually. This quota would cause the price of soybeans in China to: a) Not change. b) Rise to \$4 c) Rise to between \$4 and \$5 d) Rise above \$5. 5

6 14) Which types of firms have unlimited liability? a) Corporations and partnerships. b) Propietorships and partnerships. c) Only corporations. d) Only partnerships. 15)The principal-agent problem is that a) agents and principals don t respond to incentives. b) Agents don t always do what s in the best interest of the principal. c) Principals don t always do what s in the best interest of the agent. d) All of the above. 16) In the United States, account for the largest portion of total sales and account for the share of all firms. a) Corporations; proprietorships b) Proprietorships; partnerships c) Partnerships; corporations d) Proprietorships; corporations Techniques that produce 100 sweaters Technique Labor (hours) Capital (machines) A B C D ) In the above table, the technique that is never economically efficient is a) C b) D c) both C and D. d) It s impossible to tell without more information. 18) Using the data in the above table, if the price of an hour of labor is \$10 and the price of a unit of capital is \$50, then the most economically efficient technique for producing 100 sweaters is a) A. b) B. c) C. d) D. 19) A form of business whose profits are taxed, at the federal level, by only by the personal income tax is a) a corporation. b) a partnership. c) a proprietorship. d) Both b & c. 6

7 20) If two companies want to merge and the Department of Justice is questioning the merger, the chance of approval will be lower if the geographic definition of the market is and if the products included in the market definition are. a) widened; widened b) widened; narrowed c) narrowed; widened d) narrowed ; narrowed. 21) Suppose there are 6 firms in the airline industry with market shares of 40, 30, 10, 10, 5 and 5. Based on this information, the Herfindahl-Hirschman index in the airline industry: a) 90 b) 900 c) 2700 d) 2750 The table below shows total product for a flower shop with different numbers of workers. 22) Based on the information in the above table, diminishing marginal returns begins with the a) First worker b) Second worker c) Third worker d) Fourth worker 23) Which of the following statements is true? If a firm is producing at a point where it is experiencing diminishing marginal returns, a) Marginal cost will definitely increase if production is increased. b) Average total cost will definitely increase if production is increased. c) Average variable cost will definitely increase if production is increased. d) All of the above. 7

8 24) As a firm increases production, we know that a) AFC will always fall b) AVC will fall only if MC is below AVC currently. c) ATC will fall only if MC is below ATC currently. d) All of the above To answer the next 2 questions, suppose that a firm is producing 100 units of output and its marginal cost is \$40, its average total cost is \$50, and its average variable cost is \$30. 25) If the firm increases its production from 100 to 101 units of output, average fixed cost will, average variable cost will, and average total cost will. a) Fall; rise; rise b) Fall; fall; rise c) Fall; rise; fall. d) None of the above. 26) What will be the firm s total cost of producing 101 units? a) \$5030 b) \$5040 c) \$5050 d) None of the above 27) Based on the above figure, which of the following ranges of output exhibit increasing marginal returns over the entire range? a) up to 10 gallons b) between 10 and 40 c) between 40 and 50 d) both b and c 8

9 28) In perfect competition, the product of a single firm a) has many perfect substitutes produced by other firms. b) has many perfect complements produced by other firms. c) is sold under many differing brand names. d) is sold to different customers at different prices. 29) Because the demand for a perfectly competitive firm's product is perfectly elastic, marginal revenue is equal to a) one. b) zero. c) the price of the product. d) negative one. Labor (workers) Output (units per day) Total variable cost (dollars) Total cost (dollars) ) Based on the above table for a firm s costs, if output increases from 3 to 8 units, the marginal cost per unit of output is: a) Less than \$4 b) \$4 c) \$5 d) More than \$5 31) Perfect competition arises if the efficient scale of a single producer is relative to the demand for the good or service. a) maximum; small b) minimum; small c) maximum; large d) minimum; large 9

10 32) Based on the cost curves for Dustin s copy shop, we can conclude that the minimum efficient scale for production is copies per day. a) 2,000 b) 4,000 c) 6,000 d) 8,000 33) Dustin's copy shop can use four alternative plants. The figure above shows the average total cost curves for Plant 1 (ATC1), Plant 2 (ATC2), Plant 3 (ATC3), and Plant 4 (ATC4). Dustin's Plant 3 will be economically efficient if the firm produces copies per day. a) 2,000 b) 4,000 c) 8,000 d) None of the above 10

11 To answer the next 4 questions, consider the diagram below for a firm in a perfectly competitive market. 34) If the price of the firm s product is 10 and the firm maximizes profit, a) It will produce 15 units of output. b) It will have economic profits of \$80 c) It will have an ATC of 6 d) None of the above 35) If the price of the product is \$10, in the long run, we should expect to see: a) New firms enter the industry and prices fall. b) Existing firms reduce production levels. c) Economic profits fall d) All of the above. 36) If the price of the product is \$10 and this is an increasing cost industry, in the long run, the typical firm will produce an output where a) ATC for the typical firm will be \$6. b) ATC for the typical firm will be below \$6 c) ATC for the typical firm will be above \$6 37) If the price of the product is \$10 and this is a constant cost industry, in the long run, a) The typical firm will produce 15 units of output. b) Economic profits for the typical firm will be zero. c) ATC for the typical firm will be \$6. d) All of the above. 11

12 38) Suppose that if electric car production increases world wide, Tesla would be able to purchase component parts to produce its cars at a lower price. This would mean that Tesla a) has economies of scale b) has diseconomies of scale c) is in an increasing cost industry d) is in a decreasing cost industry. 39) The owners will shut down a perfectly competitive firm if the price of its good falls below its minimum a) average marginal cost. b) wage rate. c) average total cost. d) average variable cost. 40) If the price of the product is \$10 and this is a decreasing cost industry, in the long run, the price will settle a) Below \$6 b) At \$6 c) Between \$6 and \$10 d) At \$10 12

13 41) Suppose that the golf tee industry is perfectly competitive and in a long run equilibrium with a price of \$4 per bag of 50 tees. If the golf tee industry is a constant cost industry and there is a permanent decrease in the demand for grape, in the long run, this decrease in demand will the price of grapes and economic profits. a) Decrease; decrease b) Decrease; not affect. c) Not change; not affect d) Not change; decrease. 42) Suppose that the golf tee industry is perfectly competitive and in a long run equilibrium with a price of \$4 per bag of 50 tees. If the golf tee industry is a decreasing cost industry and there is a permanent decrease in the demand for grape, in the long run, this decrease in demand will the price of grapes and economic profits. a) Decrease; decrease b) Decrease; not affect. c) Not change; not affect d) Increase; not affect. 43) Suppose that the golf tee industry is perfectly competitive and in a long run equilibrium with a price of \$4 per bag of 50 tees. Based on this information, we know that the typical golf tee firm is producing an output level where a) ATC is \$4 b) AVC is below \$4 and not at its minimum possible value c) MC is \$4 d) All of the above. 44) Suppose that the golf tee industry is perfectly competitive and in a long run equilibrium with a price of \$4 per bag of 50 tees. The golf tee industry is a constant cost industry and there is a permanent decrease in the demand for grapes. In the short run, this decrease in demand will the price of grapes and economic profits. a) Decrease; decrease b) Decrease; not affect. c) Not change; not change d) Not change; decrease. 13

14 45) Suppose that a firm produces nails in a perfectly competitive market and the price is \$1 per pound. Assume that the firm is in a long run equilibrium and its ATC is currently \$1 per pound. If the Trump administration imposes steel tariffs which drives up steel prices which increases the firm s MC and ATC to \$1.30 per pound, in the short run, a) The price of nails would increase by \$.30 per pound and nail producers would still have zero economic profits. b) The price of nails would rise by less than \$.30 per pound and nail producers would have negative economic profits. c) The price of nails would rise by less than \$.30 per pound, but economic profits would still be zero. d) The price of nails would not change and economic profits would turn negative. 46) Suppose that a firm produces nails in a perfectly competitive market and the price is \$1 per pound. Assume that the firm is in a long run equilibrium and its ATC is currently \$1 per pound. If the Trump administration imposes steel tariffs which drives up steel prices which increases the firm s MC and ATC to \$1.30 per pound, in the long run (assuming a constant cost industry), a) The price of nails would increase by \$.30 per pound and nail producers would still have zero economic profits. b) The price of nails would rise by less than \$.30 per pound and nail producers would have negative economic profits. c) The price of nails would rise by less than \$.30 per pound, but economic profits would still be zero. d) The price of nails would not change and economic profits would be zero. To answer the next two questions, use the following information. Until 2002, the U.S. government enforced a peanut quota system that allocated the rights to grow a limited number of peanuts across farmers. If a person owned 10,000 "quota pounds" they had the right to grow and sell up to 10,000 pounds of peanuts. Any excess peanuts had to be destroyed. A person could sell their quota pounds to anyone. 47) In 2000, a farmer could "rent" a quota pound for approximately \$.12 per year. One would expect that the rental price for this license would decrease if a) the demand for peanuts increased or the cost of inputs used to produce peanuts increased b) the demand for peanuts increased or the cost of inputs used to produce peanuts decreased c) the demand for peanuts decreased or the cost of inputs used to produce peanuts increased d) none of the above 48) In 2002, the quota program was eliminated and anyone was allowed to grow peanuts. In the long run, elimination of the program should cause: a) the price of peanuts to fall as new peanut growers enter the market. b) the profits of peanut growers to be unaffected c) consumers surplus to grow among peanut consumers. d) all of the above. 14