# MIDTERM I. GROUP A Instructions: December 9, 2010

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2 1. If the marginal profit from increasing output by one unit is negative, then to attain an optimum the firm should A) increase output until marginal profit is maximized. B) reduce output until marginal profit is maximized. C) reduce output until marginal profit equals zero. D) increase output until marginal profit equals zero. 2. A monopolist will operate where A) MR = MC and charge a price corresponding to demand at that level. B) MR = MC and charge a price equal to marginal revenue. C) MC = MR and charge a price corresponding to average cost. D) MR = MC and charge a price equal to marginal cost. 3. The airline industry often engages in Bertrand behavior. This means that firms often prices until profits. A) lower; are maximized B) raise; approach zero C) raise; are maximized D) lower; approach zero 4. A 50 percent tax on the profits of a monopolist will A) cause no change in profit-maximizing price and quantity. B) change price but not quantity. C) raise price and lower quantity. D) be totally shifted to the consumer. 5. Which of the following is a fixed cost to a farmer? A) fertilizer B) seed C) gasoline D) insurance 6. Economists object to monopoly because A) monopolists keep output below efficient levels. B) monopolies are usually polluters. C) monopoly profits go to the rich. D) monopolies overproduce to maximize profits. Version A Page 2

3 7. Suppose Susan owns a business that operates in a market characterized by monopolistic competition. Susan's profit-maximizing price is \$12, her profit-maximizing output is 900 units per week, and her profits are \$1,800 per week. Susan decides that she needs more profits and therefore raises her price to \$15. At the new price of \$15: A) profits will remain at \$1,800. B) marginal revenue will be greater than marginal cost. C) marginal revenue is less than marginal cost. D) profits will increase. 8. Suppose the price elasticity of demand for coffee at the CoffeeWorld equals 1.71 for women and 0.55 for men. A successful price discrimination strategy would lead to: A) higher prices for men and lower prices for women, as long as the CoffeeWorld could prevent women from reselling drinks to men. B) lower prices for men and women. C) lower prices for men and higher prices for women. D) lower prices for men and higher prices for women, as long as the CoffeeWorld could prevent women from reselling drinks to men. 9. A monopolistically competitive industry such as baked goods and a perfectly competitive industry like wheat farming are alike in that: A) there are many firms in each industry. B) barriers to entry in both industries are large. C) firms in both types of industries produce identical products. D) firms in both types of industries produce similar but not identical products. 10. Austin's total fixed cost is \$3,600. Austin employs 20 workers and pays each worker \$60. The average product of labor is 30, the marginal product of the 20th worker is 12. What is the marginal cost of the last unit produced by the last worker Austin hired? A) \$240 B) \$720 C) \$5 D) \$0.20 Version A Page 3

4 Use the following to answer questions 11-12: Figure: Prices, Cost Curves, and Profits 11. (Figure: Prices, Cost Curves, and Profits) In the accompanying figure, if the price is P 1, then the firm earns: A) a loss equal to (ca) x Q 1. B) zero. C) a loss equal to (ba) x Q 1. D) a loss equal to (bc) x Q (Figure: Prices, Cost Curves, and Profits) In the accompanying figure, if the price is P 2, then the maximum profit the firm can earn is: A) (fg) x Q 2. B) (de) x P 2. C) (de) x Q 2. D) (fg) x Q In the perfectly competitive guidebook industry, the market price is \$35. A firm is currently producing 10,000 guidebooks; average total cost is \$38, marginal cost is \$30, and average variable cost is \$30. The firm should: A) shut down, because the firm is losing money. B) raise the price of guidebooks, because the firm is losing money. C) keep output the same, because the firm is producing at minimum average variable cost. D) produce more guidebooks, because the next guidebook produced increases profit by \$5. Version A Page 4

5 14. If there are two gas stations in the town of Smalltown, then the gasoline industry in Smalltown is probably best characterized as: A) monopolistic competitive. B) oligopolistic. C) perfect competitive. D) monopolistic. 15. Heidi quit her job as a chef making \$40,000 per year start her own restaurant. The first year, Heidiʹs restaurant earned \$100,000 in revenue. Heidi pays \$50,000 per year in wages to the waitresses and hostess, \$20,000 per year to buy food, etc. What is Heidiʹs economic profit for the year? A) \$50,000 B) -\$10,000 C) \$30,000 D) \$80, A monopolist's marginal cost curve shifts up, but the firm's demand curve remains the same and the firm does not shut down. Compared to before the increase in marginal costs, the monopolist will its price and its level of production. A) lower; increase B) raise; decrease C) not change; decrease D) raise; increase 17. The total cost (TC) of producing computer software diskettes (Q) is given as: TC = Q. What is the variable cost? A) 5Q B) 5+(200/Q) C) 200 D) Toby operates a small deli downtown. The deli industry is monopolistically competitive. Toby tells you that his and every other deli in town is producing the quantity that minimizes their average total cost. Assuming the delis are maximizing profits, you know: A) the delis have excess capacity. B) the number of delis will soon decrease. C) the number of delis will soon increase. D) the delis's prices equal their average total cost. Version A Page 5

6 19. The market for a perfectly competitive industry is in equilibrium at a price of \$3, and the average cost is \$2.50. In the long run, we would expect an increase in A) each firm's profit. B) each firm's average cost. C) the number of firms. D) each firm's output. 20. Suppose a monopoly is producing at the profit-maximizing level of output. Then at that level of output: A) demand is price unit elastic. B) demand is perfectly price inelastic. C) demand is price elastic. D) demand is price inelastic. 21. In economics, the short run is the time frame in which the quantities of and the long run is the period of time in which. A) all resources are fixed; the quantities of all resources can be varied B) some resources are fixed; the quantities of all resources can be varied C) some resources are variable; the quantities of all resources are fixed D) all resources are variable but technology is fixed; technology is variable 22. In a certain textile firm, labor is the only short term variable input. The manager notices that the marginal product of labor is the same for each unit of labor, which implies that A) the average product of labor is always equal to the marginal product of labor B) as more labor is used, the average product of labor falls C) the average product of labor is always greater that the marginal product of labor D) the average product of labor is always less than the marginal product of labor 23. Gary's Gas and Frank's Fuel are the only two providers of gasoline in Smalltown. Gary summarizes his pricing strategy as: "I'll do to Frank what Frank did to me last time." This is an example of: A) irrational strategy. B) dominant strategy. C) tit-for-tat strategy. D) none of the above. 24. The broccoli market is perfectly competitive. This means that the price of broccoli is than the price would be if the market was monopolistically competitive, and broccoli output is than if it was monopolistically competitive. A) lower; less B) greater; greater C) lower; greater D) greater; less Version A Page 6

7 25. In short-run equilibrium, a perfectly competitive firm A) earns a profit only if the firm has no fixed cost. B) never earns a profit. C) may earn a profit or a loss. D) always earns a profit. 26. At the profit-maximizing level of output, what is true of the total revenue (TR) and total cost (TC) curves? A) They must intersect, with TC cutting TR from below. B) They must have the same slope. C) They must be tangent to each other. D) They must intersect, with TC cutting TR from above. Use the following to answer question 27: Figure: Monopolistic Competition V 27. (Figure: Monopolistic Competition V) The accompanying figure illustrates a firm in the ; in the, the demand and marginal revenue curves will shift. A) long run; short run; right B) short run; long run; right C) long run; short run; left D) short run; long run; left 28. The owners of gas stations in Bigtown are trying to set up a cartel that will raise the price of gasoline. Which of the following will increase the chances that the cartel will fail due to the cheating by the owners? A) There are only a few gas stations in Bigtown. B) The firms are currently producing as much as they can. C) The stations vary in terms of the services that they provide. D) All Bigtown gas stations face the same costs. Version A Page 7

8 Use the following to answer questions 29-30: Figure: Payoff Matrix for Gehrig and Gabriel 29. (Figure: Payoff Matrix for Gehrig and Gabriel) The accompanying figure shows the payoff matrix for two producers, Gehrig and Gabriel, who sell handmade Davy Crockett figurines in San Antonio. Both Gehrig and Gabriel have two strategies available to them: to produce 5,000 figurines each month or to produce 7,000 figurines each month. If both follow a tit-for-tat strategy equilibrium will be reached when: A) they each produce 7,000 figurines. B) Gehrig produces 7,000 figurines and Gabriel produces 5,000 figurines. C) Gehrig produces 5,000 figurines and Gabriel produces 7,000 figurines. D) they each produce 5,000 figurines. 30. (Figure: Payoff Matrix for Gehrig and Gabriel) The accompanying figure shows the payoff matrix for two producers, Gehrig and Gabriel, who sell handmade Davy Crockett figurines in San Antonio. Both Gehrig and Gabriel have two strategies available to them: to produce 5,000 figurines each month or to produce 7,000 figurines each month. For Gehrig and Gabriel, the dominant strategy is to: A) collude and increase production to more than 14,000 figurines. B) produce 5,000 figurines. C) produce 7,000 figurines. D) produce between 5,000 and 7,000 figurines. Version A Page 8

9 Answer Key 1. C 2. A 3. D 4. A 5. D 6. A 7. B 8. A 9. A 10. C 11. D 12. C 13. D 14. B 15. B 16. B 17. A 18. C 19. C 20. C 21. B 22. A 23. C 24. C 25. C 26. B 27. D 28. C 29. D 30. C Version A Page 9

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