Exam 2 - Economics 102 — Professor Amuedo-Dorantes Fall...

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Unformatted text preview: Economics 102 — Professor Amuedo-Dorantes Fall 2007 Name: Red ID: § C cum ed .' Second Midterm Exam - Type A l.- (20 points) John has been in the habit of mowing Willa’s lawn each week for $20. John’s opportunity cost is $15 and Willa would be willing to pay $25 to have her lawn mowed. (a) (5 points) What is the maximum tax the government can impose on lawn mowing without discouraging John and Willa from continuing their mutually beneficial arrangement? (b) (10 points) Show graphically the effect of imposing such a tax. Then, use a table to show the impact of the tax on: ° (P, Q) 0 Consumer surplus, 0 Producer surplus, and 0 Total market surplus before and after the tax is imposed. Is there a deadweight loss? What is it? (c) (5 points) Would the loss of total surplus that results from the tax larger when they impose the maximum tax possible or when they impose a smaller tax? Explain your answer graphically. {a} E) mam Jo w coffin“; ,F‘pvw Willa M Toby‘s coat. o A (C) Bigger W‘WA (wrx. a, lager J05] Le- (greed-m mew m ox. lafiua (WCRW 0+ {50me GL‘KW‘B I Liam DWL. hymn) 1 Economics 102 — Professor Amuedo-Dorantes Fall 2007 Continue your answer on this page: Economics 102 - Professor Amuedo-Dorantes Fall 2007 2.- (30 points) The U.S. and the European Union frequently engage in trade. One of the items Europe imports from the U.S. is com. (a) (b) (c) (15 points) Using supply-and-demand analysis, demonstrate graphically (using two‘ separate graphs) that both the U.S. and Europe benefit from trading with each other relative to living in autarky. Then, construct two tables similar to the ones we have used in class to show all surplus changes for the U.S. and for the European Union as a result of engaging in international trade. 0 Who gains and who loses from that trade in the U.S.? 0 Who gains and who loses from that trade in Europe? (10 points) Now suppose that the European Union, in an attempt to protect corn farmers, imposes a quota on the quantity of com that can enter the European Union from the U.S. Show graphically the equilibrium in free trade (without any trade restriction) and the equilibrium with the quota. Then compare: ‘ 0 prices, 0 imports, 0 consumer surplus, o producer surplus, and 0 license holders’ revenues from the quotas under fi‘ee-u‘ade and under trade with a quota. Construct a table similar to the ones we have used in class to show all surplus changes from free trade to trade with a quota. (5 points) Show that it is not beneficial to engage in trade with tariffs by indicating the overall loss 1 from trading with a quota in your graph from part (b). Economics 102 — Professor Amuedo-Dorantes Fall 2007 Continue your answer on this pgge: Economics 102 — Professor Amuedo—Dorantes Fall 2007 3.- (20 points) Adrian’s Premium Chocolates produces boxes of chocolates for its mail order catalogue business. She rents a small room for $150 a week in the downtown business district that serves as a factory. Her other cost is labor. She can hire workers for $275 a week. There are no imolicit costs. Boxes of Marginal Total Cost Chocolates Product I “— \ 0 Average Total Cost 630 mm — r c 890 (a) (5 points) Fill in the columns for the boxes of chocolates and marginal product. 0 What pattern do you see for the latter? I‘l drops as we. add mam (AW "lo Tend-nu. mn— o How might you explain it? Dcewsutfi NJlNII‘AS ox- aiming/meg MP 1.1:“ ca-d— p33me (b) (5 points) Fill in the columns for total cost and average total cost. less - thUls - 0 What pattern do you see for the latter? A M . yad'lem . b How might you explain it? -Di‘m.’m' slams AFC a+ ~Fu‘u‘l’ W— (‘Acwatslaa INC. +1“... up; _ (c) (5 points) Now fill in the column for marginal cost. V o What pattern do you see? Co widow»; r i. 9 Mg How might you explain it? Diminishing r‘eJmm; or HP. A; yo; gfir 195g $0M “le Vault/deg A. (d) (5 points) Graph the ATC and MC functions, labeling the axis pronerly. Explain their relationship. mom “5+ 0% 0 Where do both functions cross? 1' a ,E g, , 7}? fl 4 _ r { OVW"+' _'5 W o What is that point called and why? : ‘“ " " W" ‘1" f'“ L / ”"‘ 'L I" W ape/«Jule, . a '4 v 192 M, 4+. . . lca I ()7! cm; what: L’k S ETC madvs ie.- 4110, "EEC; Earl' Scale". Economics 102 — Professor Amuedo-Dorantes A Fall 2007 A 4.- (20 points) The following table presents cost and revenue information for John’s Vineyard. If he charges P=$80: :- n =- A Hal-mm n a. m m (a) (10 points) Fill up all the columns in,thevtable. Ga) (10 points) Answer the following questions. Make sure to explain your answers to all these questions for full credit. go ls John’s Vineyard a competitive firm? How can you tell? leifi- {$5 I 7): AK : MR. o How much should John produce to maximize profit? Why? ‘Hfi SkOJ induct—5 Cut: 6 , Whine: M12 2 MC or P: HO. 44—"rl’hai- amid; “HAL (1W amt, cm as. Yrod’uc.‘ m. W\orL what: 0* W’ch pmoULa/"w: HQ) HO Mm; H 2 4 Ho. 0 Would that be a short-run or a long-run equilibrium? How can you tell? W .Lo ac 5K ggiejbdum KM 0dr M WIRE flzTQ—TC .—_ 4530495 = Us Jag-o. Economics 102 — Professor Amuedo-Dorantes Fall 2007 5.- (10 points) Joe’s Garage operates in a perfectly competitive market. At the point where MC equals MR, ATC=$20, AVC=$15, and the P=$10. 0 Should he shut down immediately or should he continue to operate in the short-run? Write down the shut-down rule and explain how you arrive to your answer for full credit. S‘Ku—FdowA rule : i P < MC 51m: 19 :3“: < MC zafits ) 41w Mm-mn. 0 Will he be able to stay in the market in the long-run? Write down the exit-rule and explain how you arn‘ve to your answer for full credit. 54% we: 51; P< fl éx‘ML: 7:.$\0 < Arr: =$ZOI~QAL boo/«40L M emf» +0“ wax-loit— (JFK mgg leak/{215%, ...
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This note was uploaded on 04/23/2008 for the course ECON 102 taught by Professor Clague during the Fall '08 term at San Diego State.

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Exam 2 - Economics 102 — Professor Amuedo-Dorantes Fall...

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