Economics 109. Midterm 2 November 5, On your scantron, please bubble in your name, perm number, and the answers to the following 15 questions.

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1 Economics 109 Midterm 2 November 5, 2004 On your scantron, please bubble in your name, perm number, and the answers to the following 15 questions. 1. Edna s Woodworking Company makes beautiful maple chairs. Edna has a one-year lease on her woodworking shop that requires her to pay her landlord $600 a day regardless of whether she is making any chairs or not. To make chairs, Edna must employ labor and buy materials. The table below lists labor and material cost for different levels of output. Chairs per day Material and labor cost per day 1 $300 2 $400 3 $600 4 $1,000 5 $1,500 The labor cost includes the opportunity cost of Edna s time. With these costs, what is Edna s average total cost if she produces two chairs per day? a. $200 b. $100 c. $500 d. $ With the cost structure described in question 1, what is the marginal cost of the fourth chair Edna produces in a day? a. $400 b. $300 c. $250 d. $200

2 3. Suppose Edna can get a price of $200 for each chair. Further suppose that this price is not affected by the number of chairs Edna sells. With the cost structure described in question 1, how many chairs should Edna produce a day if she wishes to maximize her profits? a. 0 b. 2 c. 3 d Edna can renew her lease at the end of the year for the same rent as she currently pays. What is the lowest price for her chairs that would cause her to renew her lease and stay in business for another year? a. $200 b. $300 c. $400 d. $ MacroTough currently sells its Mini-Me computer game for $100. At that price, it sells 50 games per year. To sell 51 games per year, it would have to lower its price to $99. What is MacroTough s marginal revenue from selling one more computer game per year (51 games instead of 50)? a. $49 b. $99 c. $100 d. $ Monopoly creates a deadweight loss because a monopolist produces an output at which a. price equals marginal revenue. b. marginal revenue exceeds marginal cost c. marginal revenue equals average variable cost. d. price exceeds marginal cost.

3 7. If there is free entry into an industry, free exit from that industry, and the scale of firm production in that industry is small relative to the size of the market, in the long-run we should expect to see the price of the good approach the minimum a. average total cost of firms. b. average variable cost of firms. c. marginal cost of firms. d. average fixed cost of firms. 8. A crucial distinction between the models of perfect competition and monopoly is that a. a monopolist is assumed to maximize profits while a perfect competitor is assumed to minimize costs. b. a monopolist produces where price equals marginal cost while a perfect competitor produces where marginal revenue equals marginal cost. c. a monopolist has fixed costs while a perfect competitor does not. d. the price of a monopolist s output depends on the quantity of that output while the price of a perfect competitor s output is not affect by the quantity of that output. 9. The economic rationale for patents for new drugs is that a. patents protect the purity of drugs. b. patents allow other companies to easily replicate drugs. c. patents prevent drugs from being manufactured in other countries. d. patents reward reward research and development. 10. The economic cost of patents for new drugs is that a. a patent stifles innovation. b. a patent gives the drug s developer a monopoly position, resulting in a price for the drug in excess of its marginal cost. c. a patent prevents the drug from being exported to other countries. d. a patent is costly to enforce.

4 11. The economic rationale for regulating electricity prices is that a. the demand for electricity is very elastic. b. the demand for electricity varies dramatically during the day. c. the generation and distribution of electricity is a natural monopoly. d. the supply of electricity if very inelastic. 12. The critical flaw in California s deregulation of its electric utilities is that a. California utilities were forced to sell their electricity generators. b. the wholesale price was deregulated but the retail price for residential customers remained regulated. c. California utilities had excess capacity to generate electricity. d. the transmission lines continued to be owned by the state. 13. If Germany can produce 100 pairs of shoes per day per worker and 1,000 lines of computer code per day per worker, and Italy can produce 50 pairs of shoes per day per worker and 10 lines of computer code per day per worker, a. Germany has an absolute and comparative advantage in the production of both goods. b. Germany has an absolute advantage in shoes only and a comparative advantage in computer code only. c. Germany has an absolute advantage in both shoes and computer code but only a comparative advantage in shoes. d. Germany has an absolute advantage in both shoes and computer code but only a comparative advantage in computer code. 14. In the year 2000, how large was the value of imports into the United States as a percentage of the country s Gross Domestic Product? a. Less than 5%. b. Between 5% and 25%. c. Between 25% and 50%. d. More than 50%. 15. If there is a general rise in the dollar prices of goods in the United States but no change in the euro prices of goods in Western Europe, we should expect the dollar price of euros to a. fall. b. rise. c. remain unchanged.

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