Mid Term Exam Two

Form B

ECON1001I 1st term 2009-2010

Mid Term Exam Two

Subclass (E or F): ______

Name: ______

University Number: ______

(1) Don’t open this exam until you are told to do so. Read the entire exam before you start. The exam is worth 100 total points.

(2) Follow the instructions at the beginning of each section. Please answer in permanent ink. No pencil please.

(3) There are two parts in this exam covering 6 pages.

(4) GOOD LUCK!

1 This Page is Blank

2 Part I. Answer all question (48 points). Choose the best answer for each question and write it down in the following table. No scores will be given if you only circle your choice in the question but do not write down.

Your answers

1. ______2. ______3. ______4. ______5. ______

6. ______7. ______8. ______9. ______10. ______

11. ______12. ______13. ______14. ______15. ______

16. ______17. ______18. ______19. ______20. ______

21. ______22. ______23. ______24. ______25. ______

1) Which of the following is an accurate definition of producer surplus? a) The difference between the higher price a firm actually received and the lower minimum price the firm would have accepted. b) The difference between the higher price a firm received and the lower price received by its competitor. c) The difference between the higher price a firm received and the lower price received by the previous owner of the business. d) The difference between the highest and lowest prices received by any pair of producers within a special period of time.

2) Perfectly price discriminate is that, a monopoly will charge each buyer the a) market price b) world price c) highest price that he is willing to pay d) lowest price that he is willing to pay e) economic rent

3) In perfect competition, the marginal revenue of an individual firm a) is zero b) is positive but less than the price of the product. c) equals the price of the product. d) exceeds the price of the product.

4) A firm’s shutdown point is the quantity and price at which the firm’s total revenue just equals to a) total cost b) total variable cost c) total fixed cost d) marginal cost

3 5) Public franchises create monopolies by restricting a) demand b) prices c) entry d) profit

6) Market is said to have ______if patent is used to protect the firms from competitors. a) Barriers to entry b) Barriers to exit c) Restricted competitive d) Restricted trade e) none of the above

7) A monopoly firm expands its output and lowers its price. The firm finds that its total revenue falls. Hence, the firm is producing in the a) elastic range of its demand curve. b) inelastic range of its demand curve. c) elastic range of its supply curve. d) inelastic range of its supply curve.

8) To construct the industry supply curve in a perfectly competitive industry, you sum the a) supply curves of the individual firms horizontally. b) supply curves of the individual firms vertically. c) average cost curves of the individual firms horizontally. d) average cost curves of the individual firms vertically.

9) The long run is distinguished from the short run in that, in the long run, a) output prices can vary. b) input prices can vary. c) the quantities of all inputs can vary. d) the firm no longer maximizes its profit.

10) Steve is going to complete an original oil painting which he plans to sell at next weekend’s art show in City Hall. After considering his production costs for brushes, paint, canvas, and the value of his labor time, Steve decided that $1,000 was the lowest price he could accept for his painting. Luckily, he comes across one art lover who is willing to pay him $1,500. Therefore Steve will enjoy a producer surplus equal to a) $1,500 b) $2,000 c) $2,500 d) $500

11) The sole proprietor of the Milwaukee Machine Company receives all accounting profits earned by her firm and a $28,000-a year salary. She has a standing salary offer of $35,000 a year working for a large corporation. If she had invested her capital outside her own company, she estimates that would have returned $22,000 this year. If accounting profits for the year were $50,000, economic profits were: (a) $0. (b) -$7,000. (c) $21,000. (d) $50,000.

4 Answer the next 2 questions on the basis of the following information.

Number of workers total product marginal product 0 0 -- 1 8 8 2 10 3 25 4 30 5 3 6 34

12) Refer to the above data. When two workers are employed: (a) total product is 20. (b) total product is 18. (c) average product is 10. (d) total product cannot be determined from the information given.

13) Refer to the above data. The marginal product of the fourth worker (a) is 5. (b) is 7. (c) is 7.5. (d) cannot be calculated from the information given.

(14) A firm has total fixed costs of $8,000 a year. The average variable cost is $5.00 for 2,000 units of output. At this level of output, its average total costs are: (a) $4. (b) $5. (c) $7. (d) $9.

(15) Which of the following is not a barrier to entry? (a) patents (b) licensing (c) profit maximisation (d) ownership of essential resources

16) The first time Michel tasted coffee, he thought it was bitter and bad-tasting. The second time Michel had coffee he thought that it was barely tolerable. Eventually, Michel started to enjoy coffee, and within a few months he was drinking several cups a day. This suggests that, for Michel, a) coffee is an inferior good. b) coffee is a luxury good. c) diminishing marginal utility does not apply to coffee consumption. d) economic models cannot be applied to habit-forming substances. e) his demand for coffee has increased.

5 17) Which of the following about a monopolist is not necessarily true? (a) It causes inefficiency. (b) It charges too high compared to the perfectly competitive market. (c) It earns a positive economic profit. (d) It has no supply curve.

18) A profit-maximizing monopolist with a positive constant marginal cost is producing at a point in the market demand curve where the price elasticity of demand is ε. ε may be (a) -.05. (b) -1. (c) -2. (d) either (a) or (c).

19) If you know that when a firm produces 10 units of output, total costs are $1,030 and average fixed costs are $10, then total fixed costs are: (a) $5. (b) $100. (c) $1,020. (d) $930.

20) If marginal cost exceeds average total cost, then: (a) average total cost must be increasing. (b) average variable cost must be increasing. (c) average fixed cost must be increasing. (d) both (a) and (b)..

21) Suppose the most you would be willing to pay for the first two cups of coffee are $10 and $9, respectively, but you buy two cups of coffee at Starbucks for $5 each. The economic surplus of buying the two cups of coffee is: a) $19. b) $10. c) $9. d) $5. e) Not enough information

22) If a monopolist is operating at an output level where marginal revenue is positive, the firm: (a) has maximized total revenues. (b) could raise revenues by raising prices. (c) can always increase profits by lowering its price. (d) is operating on the elastic portion of its demand curve.

23) A monopolist can sell 20 units of a product per day at a unit price of $10. To sell another unit it must reduce price to $9. The marginal revenue of the 21st unit is: (a) -$11. (b) -$10. (c) $21. (d) $189. 6 The following question is based on the figure below which shows the effect of a minimum wage law.

24) If there were no minimum wage and then the government instituted a wage of $7, in this market a) employment would rise by 40. b) employment would fall by 40. c) unemployment would increase by 40. d) there would be a surplus of 20.

7 Part II. Answer both questions (50 points).

1) Suppose the weekly demand for a certain good, in thousands of units, is given by the equation P = 8 – Q and the weekly supply of the good is given by the equation P = 2 + Q, where P is the price in dollars.

a) Calculate the total weekly economic surplus generated at the market equilibrium. (8 points) b) Suppose a per-unit tax of $2, to be collected from sellers, is imposed in this market. Calculate the direct loss in economic surplus experienced by participants in this market as a result of the tax. (14 points)

9 2) The Franklin swimming pool has a fixed number of identical customers. Each customer's monthly demand curve for visiting the pool is P = 20 - Q (i.e., MR=20-2Q), where P is the price for each visit and Q the number of visits in a month. Suppose that the marginal cost of serving each visit is $2.

(a) Suppose the pool is a uniform-pricing monopolist. Calculate the optimal price it will charge. Calculate the monthly visits per customer, the consumer surplus and the producer surplus. (15 points)

10 (b) Suppose the pool now requires users to register as members. Each member pays a monthly membership T and a fee p for each visit of his/her visit. What is the (T,p) that maximizes the pool’s profits? (15 points)

End of Exam

11 12 Peter's inverse demand function for beer is p = 100 - Q/2, while Kim's inverse demand function for beer is p = 40 - Q/4. Peter and Kim are the only buyers in the market. The inverse market supply function is p = 20. (a) Depict the two individual demands and the market demand in a diagram and depict also the market supply in a diagram. (10 points)

(b) What are Peter's and Kim's equilibrium quantity demanded? What is the equilibrium price? (10 points)