# ECON 2100 (Summer 2014 Sections 08 & 09) Exam #3A

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1 ECON 21 (Summer 214 Sections 8 & 9) Exam #3A Multiple Choice Questions: (3 points each) 1. I am taking of the exam. A. Version A 2. Average Fixed Costs of Production A. must remain constant as the level of output of the firm is increased. B. are defined as Fixed Costs of Production divided by quantity of output produced. C. are equal to Average Total Costs of Production plus Average Variable Costs of Production. D. More than one (perhaps all) of the above answers are correct. 3. For a firm with market power Marginal Revenue, while for a firm in a perfectly competitive market Marginal Revenue. A. is less than Price; is equal to Price. B. is less than Price; is greater than Price. C. is greater than Price; is equal to Price. D. is equal to Price; is also equal to Price. 4. Consider a perfectly competitive market in the Short Run in which at the prevailing market price of 5.75 per unit of output we observe: 1 firms each producing 1, units of output; 4 firms each producing 2,5 units of output; 5 firms each producing 4, units of output; and 2 firms each producing 5, units of output. It follows that the Short Run market quantity supplied at a price of 5.75 is A. 1, units of output (the amount produced by the firm with the lowest quantity of output). B. 1, units of output (the combined output of the two firms which produce the most output in the market). C. 5, units of output (the sum of the amount produced by each individual firm in the market). D. None of the above answers are correct. 5. Westley Industries (an Australian based pharmaceutical company) produces Iocaine Powder using three inputs, Input A, Input B, and Input C. During the next month they are able to hire any amount of Input A that they wish, but are restricted to using exactly 5 units of Input B and 125 units of Input C. It appears as if Westley Industries is operating in the A. Monopolistic Run. B. Short Run. C. Intermediate Run. D. Long Run. 6. Producer s Surplus can be expressed as A. Revenue minus Fixed Costs of Production. B. Profit plus Fixed Costs of Production. C. Both (A) and (B) are correct. D. Neither (A) nor (B) is correct.

2 7. Webb sells cotton candy in a perfectly competitive market. He hires a business consultant to analyze his company s financial records. The consultant recommends that he increase his production. The consultant must have concluded that at his current level of output Webb s A. Total Revenues are greater than Total Costs. B. Marginal Cost is less than price. C. Marginal Cost is greater than price. D. Marginal Revenue is less than price. 8. is a legal protection which grants the holder the exclusive right to create a particular product or use a particular production technique. A. First Degree Price Discrimination B. A Natural Monopoly C. A Patent D. A Menu Price 9. According to the Inverse Elasticity Pricing Rule, when maximizing profit a firm must be operating in a way such that 1 is equal to p A. MC P. MC B. P MC. P C. P MC. Q P ATC. D. For questions 1 and 11, consider the following scenario. Singular provides cell phone service to customers according to the following three pricing plans. Each consumer has the option of selfselecting the plan which they individually prefer. Plan Name Fixed Charge Per Minute (for minutes Free Minutes Monthly Fee used beyond Free Minutes ) Plan A 4 Unlimited n.a. Plan B Plan C Singular is engaging in A. 11 th Degree Price Discrimination (or Tufnel Pricing ). B. 3 rd Degree Price Discrimination (or Segmented Pricing ). C. 2 nd Degree Price Discrimination (or Menu Pricing ). D. 1 st Degree Price Discrimination (or Perfect Price Discrimination ). 11. Suppose that Kyle wants to talk on his cellphone exactly 8 minutes per month and John wants to talk on his cellphone exactly 1,1 minutes per month. In order to consume these desired levels of service at lowest expenditure, Kyle should choose and John should choose. A. Plan C; Plan B. B. Plan C; Plan A. C. Plan B; Plan B. D. Plan B; Plan A.

3 For Questions 12 through 15, consider a monopolist facing demand and with costs of production as illustrated below. Further, if this monopolist were restricted to charging a common price for every unit of output sold, Marginal Revenue would be as illustrated below by the curve labeled MR(q) a b MC(q) i c f d g h e j Demand quantity 3, 4,5 MR(q) 12. If this monopolist must charge a common price for every unit of output sold, then they will maximize profit by charging a price of for each unit sold. A. 2.4 B C. 5.4 D Again suppose that this monopolist must charge a common price for every unit of output sold. When the monopolist charges the price and sells the quantity of output which maximize profit, A. the monopolist realizes a Producer s Surplus equal to areas (f)+(g)+(h)+(i). B. Consumers Surplus will be equal to areas (a)+(b). C. Deadweight-Loss will be equal to area (j), due to the monopolist selling more than the efficient quantity of the good. D. More than one (perhaps all) of the above answers is correct. 14. If this monopolist is able to engage in First Degree Price Discrimination (or Perfect Price Discrimination ), then A. Consumers Surplus would be equal to zero. B. she would choose to sell 4,5 units of output. C. Deadweight-Loss would be equal to areas (e)+(h). D. More than one (perhaps all) of the above answers is correct. 15. Comparing the outcome under First Degree Price Discrimination to the outcome which results when the monopolist charges a common price for every unit of output, under First Degree Price Discrimination A. Profit of the monopolist is larger. B. Total Social Surplus is larger. C. Total Consumers Surplus is larger. D. More than one (perhaps all) of the above answers are correct. 5,775 8,25

4 16. In a perfectly competitive market, A. there are significant barriers to entry which prevent new firms from entering the market. B. there are many buyers but relatively few sellers. C. all goods offered for sale are identical to each other. D. More than one (perhaps all) of the above answers is correct. 17. The Efficient Scale of Production refers to A. the level of output at which Marginal Costs of Production are minimized. B. the level of output above which all Fixed Costs can be avoided. C. the level of output at which Average Fixed Costs of production are minimized. D. the level of output at which Average Total Costs of Production are minimized. For questions 18 through 2, consider a firm in a perfectly competitive market with costs of production as illustrated below: MC(q) ATC min AVC min 3. AVC(q) ATC(q) MC min 2.5 quantity 6,25 1, 13,5 18. Fixed Costs of production for this firm are equal to A. zero, since the firm is clearly operating in the Long Run (since an Average Fixed Costs Curve has not been drawn). B. 4. C. 4,. D. 82, If the per unit price of output in this market was 5., then this firm would A. produce exactly 6,25 units of output. B. produce more than 6,25 but less than 1, units of output. C. produce more than 1, but less than 13,5 units of output. D. shutdown and produce zero units of output. 2. This firm will choose to produce a positive quantity of output in the short run even though its maximum profit will be negative if the per unit price of its output is A. greater than 2.5 but less than 3.. B. greater than 3. but less than 6.1. C. greater than 6.1. D. less than 2.5.

5 21. Disneyland Resort in Anaheim, CA offers a season pass to residents of Southern California and Northern Baja California for 284. The regular price for this annual pass is 389. To receive the lower price, a consumer must present a valid I.D. at the time of purchase, showing that they reside in a Southern California town with a ZIP Code in the range of 9 to or a Northern Baja California town with a Postal Code in the range of 21 to This pricing behavior is an example of A. First Degree Price Discrimination (or Perfect Price Discrimination ). B. Second Degree Price Discrimination (or Menu Pricing ). C. Third Degree Price Discrimination (or Segmented Pricing ). D. Fifth Degree Price Discrimination (or Walter Murphy Pricing ) 22. Martin enjoys playing golf. After playing 17 round of golf this year his average score per round is After the next round of golf that he plays, his average score will increase A. if he shoots a score of 72 or higher. B. if he shoots a score of 71 or lower. C. regardless of what score he shoots. D. None of the above answers are correct (since his average score will decrease regardless of what score he shoots in his next round). For questions 23 through 25, consider a firm operating in a perfectly competitive market in the Short Run. Suppose all inputs are fixed other than labor. The table below provides a partial summary of the Short Run Production Function and Costs of this firm. Number of Workers Quantity of Output Marginal Product of Labor Marginal Costs Average Variable Costs 1 2, ,6 3 4, , Average Fixed Costs 23. If this firm were to produce 6, units of output, its Average Variable Costs would be A. 6. B. 27. C. 2. D If this firm were to shutdown and produce zero units of output, its profit would be A. 24, (i.e., minus 24, ) B. 42, (i.e., minus 42, ) C. 66, (i.e., minus 66, ) D Suppose that each unit of output can be sold for 25. In order to maximize profit, this firm should hire workers in the Short Run. A. 5 B. 4 C. 3 D.

6 26. Visually, the demand curve facing a firm operating in a perfectly competitive market is A. positively sloped, since the Law of Demand will be violated in such a market. B. negatively sloped, since the firm must decrease price in order to increase quantity sold. C. a vertical line, since whatever price such a firm sets, quantity demanded will always be exactly equal to the capacity of the firm. D. a horizontal line, since such a firm does not have any market power. 27. If a firm is currently operating at a point where costs of production exhibit Economies of Scale, then as the firm increases its level of output A. Average Total Costs of Production must increase. B. Average Total Costs of Production must decrease. C. Fixed Costs of Production must increase. D. Fixed Costs of Production must decrease. For questions 28 and 29, consider a firm which sells a good in two different markets: Market Segment A and Market Segment B. The two graphs below illustrate demand and marginal revenue in each market (when the firm is able to set a different price in each market). The firm has constant Marginal Costs of 1 per unit, plus Fixed Costs of 1,25. If the firm is restricted to charging the same price in each market, profit is maximized by charging a price of Market Segment A Market Segment B , 2,75 3,2 Demand A Q 4,6 Marg. Rev. A ,25 3,25 Demand B Marg. Rev. B Q 28. If this firm were able to engage in 3 rd Degree Price Discrimination (instead of engaging in standard monopoly pricing, treating the two segments as one single market), then it would choose to sell units in Market Segment A and units in Market Segment B. A. 4,6;. B. 3,2; 3,25. C. 2,75; 2,25. D. 2,; 3, If this firm were able to engage in 3 rd Degree Price Discrimination (instead of engaging in standard monopoly pricing, treating the two segments as one single market), then A. consumers in Segment B would be better off. B. consumers in Segment A would be better off. C. Neither (A) nor (B) is correct (i.e., consumers in neither segment would be better off). D. Both (A) and (B) are correct (i.e., consumers in both segments would be better off).

7 3. The short run supply curve of a firm operating in a perfectly competitive market is the portion of the Marginal Cost Curve which lies A. below the Average Total Cost Curve. B. above the Average Total Cost Curve. C. above the Average Fixed Cost Curve. D. above the Average Variable Cost Curve. For questions 31 and 32, consider a firm operating in a perfectly competitive market in the short run. Last month this firm had: Revenue of 24,; Explicit Costs of 18,; and Implicit Costs of 4,. 31. Last month this firm earned an Economic Profit of and an Accounting Profit of. A. 2,; 6,. B. 6,; 2,. C. 2,; 24,. D. 24,; 2,. 32. In the Long Run this firm should and should expect other firms to want to. A. exit the market; enter the market. B. exit the market; exit the market. C. remain in the market; enter the market. D. remain in the market; exit the market. For question 33, consider the costs functions illustrated below: MC(q) ATC(q) AVC(q) quantity 33. What appears to be wrong with these cost curves? A. The Marginal Cost Curve is J-shaped (instead of always increasing). B. The initial value of Marginal Costs is equal to the initial value of Average Variable Costs (instead of being strictly less than the initial value of Average Variable Costs). C. The Average Total Cost Curve is above the Average Variable Cost Curve. D. The Marginal Curve does not intersect the Average Variable Cost Curve at its minimum and does not intersect the Average Total Cost Curve at its minimum.

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