# ECO201: PRINCIPLES OF MICROECONOMICS. Second MIDTERM EXAMINATION

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2 To answer the next 3 questions, consider the market for copper described below. 1) Suppose that the world price of copper is \$40 and there is free trade in copper market. If the U.S. government imposes a \$5 tariff on every pound of copper, U.S. copper buyers would be made worse off by daily and U.S. copper sellers would be made better off by daily. a. \$25,000; \$10,000 b. \$27,500; \$12,500 c. \$25,000; \$12,500 2) Suppose that the world price of copper is \$40 and there is free trade in copper market. If the U.S. government imposes a \$5 tariff on every pound of copper, U.S. imports of copper would decrease by daily and the government would collect in tax revenue daily. a. 1,000; \$5,000 b. 2,000; \$10,000 c. 1,000; \$10,000 3) Suppose that the world price of copper is \$40 and there is free trade in copper market. If the U.S. government imposes a \$5 tariff on every pound of copper, the daily deadweight loss from the tariff would be: a. \$2,500 b. \$5,000 c. \$7,500 2

3 To answer the next 3 questions, consider the market for copper described below. 4) Suppose that initially the U.S. is not allowed to import or export copper. If trade is now permitted and the world price of copper is \$55, the U.S. would a. import 1,000 pounds of copper daily b. import 2,000 pounds of copper daily c. export 1,000 tons of copper daily d. none of the above 5) Suppose that initially, the world price of copper is \$55 and the U.S. did not allow trade. If trade is allowed, U.S. copper producers would be a. better off by \$22,500 daily b. better off by \$17,500 daily c. worse off by \$17,500 daily 6) Suppose that initially, the world price of copper is \$55 and the U.S. did not allow trade. If trade is allowed, U.S. copper buyers would be a. better off by \$17,500 daily b. better off by \$20,000 daily c. worse off by \$17,500 daily 3

4 7) Suppose that the world price of copper is \$40 and there is free trade in copper market. If the U.S. government imposes a quota on copper imports allowing no more than 2,000 pounds to be imported, the price of copper would a. remain at \$40 b. rise to \$45 c. rise to \$50 d. rise to \$60 8) Suppose that the world price of copper is \$40 and there is free trade in copper market. If the U.S. government imposes a quota on copper imports allowing no more than 2,000 pounds to be imported, the companies with the rights to import the copper would a. not make a profit b. would make a profit of \$10,000 per day c. would make a profit of \$20,000 per day 9) Suppose that the world price of copper is \$40 and there is free trade in copper market. If the U.S. government imposes a quota on copper imports allowing no more than 2,000 pounds to be imported, a. U.S. producers would be better off by \$12,500 per day. b. U.S. consumers would be better off by \$12,500 per day c. U.S. consumers would be worse off by \$12,500 per day d. none of the above 4

5 10) Suppose that the U.S. exports corn to the rest of the world. Which of the following would cause U.S. corn exports to rise? a. bad weather outside of the U.S. causing corn production to drop elsewhere. b. good weather in the U.S. leading to larger corn crops in the U.S. c. an increase in the world price of corn d. all of the above 11) Which types of firms have limited liability? A) proprietorships B) corporations and partnerships C) partnerships and proprietorships D) corporations 12) Heidi quit her job as a chef making \$80,000 per year to start her own restaurant. The first year, Heidi's restaurant earned \$600,000 in revenue. Heidi pays \$325,000 per year in wages to the waitresses and hostess and \$120,000 per year to buy food. She owns the building but could rent it out to another restaurant owner for \$36,000 per year. a. \$39,000 b. \$75,000 c. \$3,000 d. none of the above 13) Mary borrows \$500,000 for a new combine on her farm. Her interest rate is 5%. The value of the combine is expected to fall to \$450,000 by the end of the year. Mary pays an implicit rental rate of a year for her combine in the first year. A) \$25,000 B) \$ \$50,000 C) \$75,000 D) none of the above Techniques that produce 100 sweaters Technique Labor (hours) Capital (machines) A B C D ) In the above table, the technique that is definitely NOT technologically efficient a. A b. B c. C d. D 15) 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 \$30, then the most economically efficient technique for producing 100 sweaters is a) A b) B. C) C. D) D. 5

6 16) Suppose there are 15 firms in the regional local restaurant industry with the following market shares: 5 with 10 percent each; 10 with 5 percent each. If two of the small firms with 5 percent market shares merged, the Herfindahl-Hirschman Index would and the 4 firm concentration ratio would. a. increase; not change b. not change; not change c. increase; increase 17) Which of the following is an ADVANTAGE of a proprietorshiop relative to a corporation? A. the manner in which its profits are taxed. B. its access to financial capital. C. its unlimited liabilility. D. all of the above 18) If two companies want to merge and the Department of Justice is questioning the merger, the chance of approval will be greater if A) the geographic definition of the market is widened. B) the products included in the market definition are increased. C) the ability that firms can monitor each other's prices is reduced. D) all of the above 19) Suppose there are 15 firms in the regional local restaurant industry with the following market shares: 5 with 10 percent each; 10 with 5 percent each. The Herfindahl-Hirschman Index in this industry is A) 40 B) 400 C) 750 D) none of the above. 6

7 Output (ounces of gold per day) Average Variable Cost per day (dollars) Total Fixed Cost per day (dollars) ) The above table gives some of the costs of the Ace Gold Company. What is the average total cost of producing 4 ounces of gold daily? a. \$125 b. \$425 c. \$725 d. \$ ) The above table gives some of the costs of the Ace Gold Company. What is the marginal cost of the 4 th ounce of gold? a. \$200 b. \$400 c. \$800 d. \$1200 To answer the next 2 questions, use the following information about Amco whose price for its product is \$50, its marginal cost is \$40, its average variable cost is \$45, its average total cost is \$55, and its output is 100 units. 22) Amco must have total fixed costs of a. \$100 b. \$1,000 c. \$2,000 d. \$5,000 23) If Amco increases production to 101 units, its ATC will, its AVC will, and its AFC will. A. fall; fall; fall B. fall; rise; fall C. rise; rise; fall. D. none of the above. 24) If Amco increases production from 100 to 101 units, its profits will: a. increase \$10 b. increase \$5 c. decrease \$5 d. decrease \$10 7

8 25) Based on class discussion, the minimum efficient scale for a firm has been rising over time in which industry? a. farming b. commercial printing c. steel industry 26) Many economists have argued that technological change (like online banking) has given large banks a cost advantage over small banks. One might interpret this to mean that the new technology has a. increased minimum efficient scale in banking b. will gradually lead to a banking industry that is less competitive c. has increased the range of output over which there are economics of scale in banking d. all of the above. 27) If a firm is faced with increasing marginal returns, its marginal product of labor must as it hires more workers and its marginal cost of output must as it increases production. a. rise; rise B. rise; fall C. fall; fall D. fall; rise. 28) 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 2 will be economically efficient if the firm produces A) 2,000 copies per day. B) 4,000 copies per day. C) 6,000 copies per day. D) none of the above 8

9 29) A competitive market emerges when 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 The graph below represents the cost curves for Bimbo s copy shop who sells copies in a competitive market. 30) In the above figure, if the price is 8 cents per page, how many units should Bimbo produce to maximize profits in the short run? a) 0 b) 40 c) 60 d) none of the above 31) In the above figure, Bimbo should shut down and produce no output in the short run if and only if the price is a) below \$2 b) below \$4 c) below \$6 d) below \$8 32) In the above figure, if the price is 8 cents per page, Bimbo s profits per page (not total profits) would be a. negative b. positive but less than 2 cents c. 2 cents d. more than 2 cents 9

10 The graph below represents the cost curves for Bimbo s copy shop who sells copies in a competitive market. 33) In the above figure, if the price is 8 cents per page and Bimbo s is in an increasing cost industry, in the long run we would expect A) firms would enter and the price would eventually settle at 6 cents B) firms would not enter or exit and the price would stay at 8 cents C) firms would enter and price would eventually settle between 6 and 8 cents D) none of the above 34) In the above figure, if the price is 8 cents per page and Bimbo s is in a constant cost industry, in the long run we would expect A) firms would enter and the price would eventually settle at 6 cents B) firms would not enter or exit and the price would stay at 8 cents C) firms would enter and the price would eventually settle at 4 cents D) none of the above 10

11 To answer the next 6 questions, suppose that the copper industry is perfectly competitive and at a long run equilibrium. The price of copper is \$5 per pound. 35) If there is an increase in demand for copper, in the long run, we should expect a. the typical firm will produce more copper. b. the typical firm will realize positive economic profits c. the typical firm will produce more than the amount that minimizes average total cost. d. none of the above 36) If there is an increase in demand for copper, in the short run, we should expect a. the typical firm will produce more copper. b. the typical firm will realize positive economic profits c. the typical firm will produce more than the amount that minimizes average total cost. d. all of the above. 37) If the copper industry is a constant cost industry and the government adds a \$1 tax per pound of copper, in the long run, the total price of copper paid by consumers (including the tax) will and the profits of the typical avocado farmer will. a. rise by less than \$1; fall b. rise by \$1; not change c. rise by less than \$1; not change d. rise by \$1; fall 38) If the copper industry is a constant cost industry and the government adds a \$1 tax per pound of copper, in the short run, the total price of copper paid by consumers (including the tax) will and the profits of the typical avocado farmer will. a. rise by less than \$1; fall b. rise by \$1; not change c. rise by less than \$1; not change d. rise by \$1; fall 39) If the copper industry is an increasing cost industry and the government adds a \$1 tax per pound of copper, in the long run, the total price of copper paid by consumers (including the tax) will and the profits of the typical avocado farmer will. a. rise by less than \$1; fall b. rise by \$1; not change c. rise by less than \$1; not change d. rise by \$1; fall 40) If the copper industry is a constant cost industry and the government adds a \$1 tax per pound of copper, compared to the short run, the tax revenue generated by the tax will a. be greater in the long run b. be the same in the long run c. be less in the long run 11

12 41) In Ohio, there are a limited number of liquor licenses for any given city based on its population. The price that people are willing to pay for a liquor license in Oxford would be increased if the number of people who want to goes to bars or the cost of operating a bar. a. increases; increases b. increases; decreases c. decreases; decreases d. decreases; increases. 42) According to the assigned reading and our discussion in class, a. the entry of Uber into the taxicab market has reduced the price of taxicab medallions b. the taxicab medallion system causes the typical cab to be driven fewer miles per day c. a taxicab operating in a market with a medallion system will have higher profits than those operating in cities without a medallion d. all of the above 43) Which of the following is most likely to cause an industry to have external economies (i.e. be a decreasing cost industry)? a. economies of scale in the production of component parts for their product. b. diseconomies of scale in the production of component parts for their product. c. increased demand for inputs driving up the cost of component parts for their product. d. economies of scale in the production of their product. 44) Suppose that an industrial robot is invented that is capable of replacing 20 workers in a typical warehouse and that the robot s annual cost is less than the cost of the 20 workers. If warehouses are in a competitive industry, in the long run, a. any firm that doesn t switch to robotics will have negative economic profits b. firms that buy the robots will pass the cost savings on to their customers in the form of lower prices c. firms that buy the robots will not have positive economic profits d. all of the above 45) Fill in your unique id and form number correctly on your scantron to get credit for a correct answer. 12