1 ECON MIDTERM FALL 2006 OCT 3, 2011
QUESTION 1 (5/5)
The MRT is the marginal rate of transformation. It depicts the opportunity cost as you
produce one good in favor of another (opportunity cost) on the PPF (production
possibility frontier). If it is bowed outward, then the law of increasing opportunity cost
applies.
QUESTION 2 (8/8)
1.
2.
3.
4.
Many small firms
Free entry/exit
Homogenous product
Same Cost/technology
QUESTION 3 (5/5)
The short run in perfect competition means SI, which means that there is no entry and
exit. Therefore, in terms of costs, when cost rises, firms will sell less at a greater price.
When cost falls, firms will sell more at a lower price. The level of capital is fixed as all
firms have the same access to costs and technology.
QUESTION 4: (5/10)
QUESTION 5: (0/8)
***CHANGE IN PROFIT: area under MR- area under MC
QUESTION 6 (5/5)
No it does not. The demand curve for heroine is virtually inelastic, meaning that the curve
should be a nearly vertical slope. When this occurs, there will be demand no matter the
price as addicts will buy at any price.
QUESTION 7 (9/9)
a) Market price is the same
b) Output of each firm is the same
c) Number of firms in the market increases
QUESTION 8 (6/6)
No it does not. MC needs to intersect AC at the minimum point. MC in this graph
intersects AC to the left of the minimum which is incorrect.
QUESTION 9 (12/12)
Controls on the price of beef to grocery stores will create a shortage in the production of
beef, as beef producers will sell less quantity beef of at a lower price. This will cause
market prices to increase as there is a shortage of beef and a greater consumer loss.
QUESTION 10 (5/5), (5/5)
QUESTION 11
In SII, the Thai restaurant will return to zero economic profit as if he is making positive
economic profit, more firms will enter until the price returns to the socially optimum
level at equilibrium.
QUESTION 12 (6/6)
Yes it is possible for a monopolist to be producing at the upward sloping part of the
demand curve. The monopolist produces where MC=MR so if demand is high enough,
the monopolist could produce at growing AC.
QUESTION 13 (0/6)
Yes it is possible for a monopolistically competitive firm to be producing in the upper
sloping part of the AC in stage 1 perfect competition equilibrium. This is because if the
price for production increases and there is no entry or exit, firms will be forced to
produce at higher costs. In stage one it is possible to have negative profits.
No. A monopolistically competitive firm always faces downwardsloping demand (because the product is differentiated). In a stage
II equilibrium, there is free entry, which shifts the demand curve to
the left until the AC curve is tangent to the demand curve (and
profit=0). If the AC curve is tangent to the demand curve, and the
demand curve is downward sloping, then the AC curve must be
downward sloping, not upward sloping. Therefore, a
monopolistically competitive firm never produces in the upwardsloping portion of its AC curve in stage II equilibrium.
Total: 81/100