<p> Midterm 2 Morning Exam 11/14/06</p><p>Use the following graph to answer the next three questions. </p><p>1. What quantity does a profit-maximizing monopolist produce? a. Q1 b. Q2 c. Q3 d. Q4</p><p>2. What is the value of the monopoly mark-up relative to the price of the good if this market was characterized as a perfectly competitive market? (in other words, how much more than the perfect competition price does the monopolist charge for each unit consumed?) a. P3-P1 b. P2-P1 c. P3-P2 d. P4-P2</p><p>3. What is the deadweight loss due to this monopoly? a. (P3-P1)(Q3-Q1)/2 b. (P3-P2)(Q3-Q1)/2 c. (P3-P1)(Q4-Q1)/2 d. (P2-P1)(Q4-Q1)/2</p><p>4. Suppose Masa’s income is $100, the price of good Y is $5 and the price of good X is $12.5. Which of the following equations represents Masa’s budget line? (Assume that good X is on the horizontal axis.) a. 4x + 5y = 100 b. 5x + 2y = 40 c. 5x + 2y = 100 d. 4x + 5y = 40</p><p>5. Say that when a firm doubles all of its inputs, it triples the amount of output it produces. Then this firm a. Is experiencing increasing returns to scale. b. Is experiencing diminishing returns to scale. c. Is experiencing constant returns to scale. d. Is experiencing diseconomies of scale.</p><p>6. The market for a medicine is perfectly competitive. Suppose the ATC curve is minimized at $10. Marginal cost for the firm is given by the equation MC=(1/2)*Q. Market demand for this medicine is perfectly inelastic at 100. How many firms will be in this market in the long run? a. 1 firm b. 5 firms c. 10 firms d. 20 firms</p><p>2 7. The substitution effect resulting from a change in the price of good X is equal to the ______that can be attributed exclusively to the resulting change in relative prices. a. change in the quantity of substitute good Y demanded. b. change in the demand curve for good X. c. change in the quantity of good X demanded. d. change in the price of substitute good Y.</p><p>8. Suppose Sonny loves ham sandwiches as long as they are made with exactly one slice of ham and two slices of bread. Suppose that the price of one slice of ham is $2 and the price of a slice of bread is $1. If Sonny has exactly $20 to spend on bread and ham, how much money should he spend on bread to maximize his consumption of sandwiches? a. $5 b. $10 c. $20 d. $15</p><p>9. Which of the following statements is true? a. The short run is the period of time over which only two resources are variable. b. The long run is the period of time over which only one resource is fixed. c. The long run profit is always greater than the short run profit. d. The short run is the period of time over which at least one resource is held fixed.</p><p>10. Which of the follow is NOT a limitation of the CPI as a measure of inflation? a. The CPI uses an unchanging market basket of goods. b. The CPI is calculated on a 100-point scale. c. The CPI does not account for changes in product quality. d. The CPI ignores the recent growth of discount stores.</p><p>3 11. If the company produces no output, it must pay a. no costs. b. a small amount of variable cost. c. its fixed cost. d. its owners a normal profit.</p><p>Use the following graph to answer the next question.</p><p>12. Fill in the blanks, using the above figure: If a consumer consumes at point A, his marginal rate of substitution is ______than the price ratio. Hence the consumer can get a higher utility by ______the consumption of Good B and by ______the consumption of good A. a. larger; decreasing; increasing b. larger; increasing; decreasing c. smaller; decreasing; increasing d. smaller; increasing; decreasing</p><p>4 Use the following information to answer the next two questions:</p><p>The production of Ipods requires both capital and labor. By capital (K), we mean the building where the production takes place. By labor (L), we mean the number of employees hired at Apple. Assume that Apple, the Ipod manufacturer, has to pay US $15,000 per year for maintaining the building in good condition, regardless of the quantity of Ipods produced (Q). The manufacturer has provided the following information:</p><p>Q L FIXED COSTS VARIABLE TOTAL COST COST 0 0 B 1 2 2 8 A C 3 15</p><p>13. What is the value of A? a. $65000 b. $15000 c. $0 d. $45000</p><p>14. When the wage per worker is US$ 65000 a year, the value of B and C are respectively: a. $15 000; $195000. b. $0; $520,000. c. $0; $65000. d. $0; $195000.</p><p>15. Alonso likes a scoop of mudslide ice cream (MS) more than a ham sandwich (HS) but prefers chocolate chip cookies (CCC) to both MS and HS. Which of the following utilities could possibly represent Alonso’s preferences? Assume U stands for the level of utility Alonso gets from consuming the three foods. For example, U(MS) is the utility Alonso gets from eating a scoop of mudslide ice cream. a. U (MS) = 10; U (HS) = 12; U (CCC) = 18 b. U (MS) = 15; U (HS) = 12; U (CCC) = 18</p><p>5 c. U (MS) = 10; U (HS) = 2; U (CCC) = 8 d. U (MS) = 10; U (HS) = 12; U (CCC) = 8 Use the following graph to answer the next two questions. </p><p>The graph below shows the cost curves for coffee beans for a representative firm in the coffee bean market. Assume the market for coffee beans is perfectly competitive and is a constant cost industry.</p><p>16. Coffee beans currently are being sold at price P*. Which of the following statements is true? a. Firms will enter the market because the price is above average variable cost. b. Firms will not produce because they would make a loss if they produced any level of output. c. Firms will produce in the short run, but in the long run some firms will leave the market. d. It is impossible to tell what will happen to the price because it is between average variable cost and average total cost.</p><p>17. What will the price of coffee equal in the long run? a. P1 b. P2 c. P* d. It is impossible to tell with the information given.</p><p>6 18. Masa consumes two goods X and Y. The price of X is $4 and price of Y is $5. Masa’s income is $100. What is the absolute value of Masa’s MRS between X and Y at her optimal consumption bundle? (Assume good Y is plotted on the vertical axis.) a. 20 b. 25 c. 4/5 d. 5/4</p><p>Use the following graph to answer the next two questions. </p><p>Assume the market is perfectly competitive and the price is currently $20. </p><p>19. Given the above graph, this firm’s economic profits equal a. $300 b. $180 c. $150 d. $90</p><p>20. Among the following labels, what is the appropriate label to describe the situation described in the above figure? a. Shut down. b. Negative economic profit. c. Break-even. d. Positive economic profit.</p><p>7 Use the following information to answer the next two questions.</p><p>A firm has a monopoly over the production of computer software. The marginal cost of a unit of software is $10 and there are no fixed costs. The marginal revenue is given by MR = 20 - Q. The demand function is given by P= -(1/2)*Qd + 20. </p><p>21. What is the profit-maximizing price for a monopolist? a. $10 b. $15 c. $20 d. $25</p><p>22. Calculate the value of this monopolist’s profits when he produces that level of output where profit is maximized. The monopolist’s maximum profit equals a. $50 b. $100 c. $150 d. $200</p><p>23. The market for pens is perfectly competitive. Suppose the price of pens is above the long run price. Which of the following statements are true? a. Firms make zero profit in the short run. b. Firms will enter the market in the long run. c. Firms will leave the market in the long run. d. Firms will make negative profits because consumers will not purchase pens at a price above the long run price.</p><p>8 Use the information in the table to answer the next two questions.</p><p>Nominal Price of Year CPI Real Price of Cheese Cheese 2005 100 $6.00 2006 150 $12.00</p><p>24. What is the inflation rate between 2005 and 2006? a. 50% b. 100% c. 150% d. 250%</p><p>25. What is the real price of cheese in 2006 using 2005 dollars? a. $4.00 b. $6.00 c. $8.00 d. $12.00</p><p>26. Which of the following firms is the best example of a natural monopoly? a. Firm A, which holds a government patent on a specific type of light bulb. b. Firm B, which competes with many other firms to sell wheat. c. Firm C, the only provider of cable and internet services in a rural town. d. Firm D, which owns every known diamond mine in the world.</p><p>9 Use the following information to answer the next two questions.</p><p>A natural monopolist is regulated by the government and must provide its product at average total cost to consumers.</p><p>27. What quantity of output will the natural monopolist provide to consumers in the short run? The regulated natural monopolist will provide a. The same quantity as an unregulated natural monopolist. b. The same quantity as a profit-maximizing monopolist. c. The same quantity as the quantity this industry would produce if it were a perfectly competitive industry. d. A smaller quantity than this industry would produce if it were a perfectly competitive industry and a greater quantity than if this natural monopolist was an unregulated natural monopolist.</p><p>28. In the long run, what will the regulated natural monopolist choose to do if the regulators set price equal to average total cost? The natural monopolist will a. Stay in business and provide its product at average total cost to consumers. b. Break into several smaller firms. c. Lower its price to increase profits. d. Shut down and not produce this product.</p><p>29. Which of the following statements is true about a profit-maximizing monopolist? a. The monopolist produces an amount such that marginal revenue is zero. b. The monopolist produces an amount such that price equals marginal cost. c. The monopolist charges a price that equates marginal cost and quantity demanded. d. The monopolist charges a price that exceeds marginal cost.</p><p>10 Use the following information to answer the next two questions.</p><p>Suppose that the market for Pepper Jack Cheese is perfectly competitive. The market demand for this product is described by the equation P = 40,020 – Q. Furthermore, suppose that there are many competitive firms producing in this market and the costs for a representative firm can be described by this equation for TC, TC = 25 + Q2 + 10Q, and this equation for MC, MC = 2Q + 10. In the long run there are 40,000 units of Pepper Jack Cheese being produced in the market. </p><p>30. How many units of Pepper Jack Cheese will each individual firm produce to maximize its profits in the long run? a. 5 b. 10 c. 20 d. 40</p><p>31. Now, suppose that the demand for Pepper Jack Cheese increases due to a shift in consumer preferences. Which of the following best describes the situation in this market after the shift in demand? a. In the short run each firm will increase its production to accommodate the higher demand and gradually over time more firms will enter this industry attracted by the positive profits. b. In the short run the number of firms will not change and each firm will produce the same amount as before. c. In the short run the number of firms will stay the same and each firm will produce less, while in the long run more firms will exit due to negative profits and firms will decrease their production. d. In the short run more firms will enter, while in the long run they will exit: in the long run the market and firms will produce the same amount and charge the same price as they did initially before the change in demand.</p><p>11 Use the following graph to answer the next question. </p><p>32 The difference in Consumer surplus between having a Monopoly or many perfectly competitive firms operate in the market above could be represented by the area: a. BEFC b. BEGD c. CFGD d. AGD </p><p>33. Both Ike and Tina own furniture factories that produce rocking chairs. In her factory Tina uses a production process that has low fixed costs and high variable costs. In his factory Ike uses a production process with high fixed costs and low variable costs. Currently, each factory produces 100 rocking chairs at the same total cost. Which of the following statements is correct (assuming typical cost curves)? a. If each produces 10 fewer chairs, their costs will be equal. b. If each produces 10 fewer chairs, Tina’s costs will exceed Ike’s. c. If each produces 10 more chairs, their costs will be equal. d. If each produces 10 more chairs, Tina’s costs will exceed Ike’s.</p><p>Version 1 1a, 2c, 3a, 4b, 5a, 6b, 7c, 8b, 9d, 10b, 11c, 12b, 13b, 14b, 15b, 16c, 17a, 18c, 19c, 20d, 21b, 22a, 23b, 24a, 25c, 26c, 27d, 28a, 29d, 30a, 31a, 32b, 33d</p><p>12</p>
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