economics midterm

economics midterm - ECONOMICS 211 SECOND MIDTERM...

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Unformatted text preview: ECONOMICS 211 SECOND MIDTERM EXAMINATION O ‘5 FALL 2006 \ C (2 hours, 100 points) Circle the name of your instructor: Soligo { ‘ Nal Clarke Gonzalez—Cog Jiang Mutitatcheron NAME:-_.m_ PLEDGE: Or: mt; Hanna“ "2' {kt/1w aw VPL Cit NJ 1 gay M An WILLA. »; . a . l. on é {gym _ _. “I . .|_ PART 1: MULTIPLE CHOICE: Circle the correct answer (2 points each; 22 points in total) 1. Which of the following is part of a firm’s explicit costs? I. wages _r II. electricity costs III. interest on a bank loan 41/ IV. interest forgone on funds used to buy capital equipment A) I and II. B) III and IV. To) I, II and 111. v D) I, III and IV. 2. Indifference curves are @wed in toward the origin if there is diminishing margina rate of substitution. Estraight lines if the goods are perfect complements. ENight angles if the goods are perfect substitutesr “3).,always bowed out and away from the origin. \ 0 2:0 Techniques that produce 100 sweaters 4. 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 $20, then the most economically efficient technique for producing 100 sweaters is A) A B) B C) C 155‘]; Mangoes (pounds per month) 5. In the above figure, Reggie’s budget line rotates outward fro BL] to BL2. He initially consumes at point A. If his new consumption bu implies that his demand curve for kiwi fruit A) has shifted. B) is a vertical line. @ slopes downward. / D) is a horizontal line. e is at point C, this 6. ~“> 8. 19¢”) Ll "w \492; Suppose the price of a soda is $2 each, the price of a hot dog is $3 each and the budget is $20. If the marginal utility of the fourth soda is 100 and the marginal utility of the fourth hot dog is 150, to maximize utility, a person will buy 75:?“ 4 sodas and 4 hot dogs. 53;) C) D) more hotdogs than 4 and fewer sodas than 4 because hot dogs provide more utility. 7 buy more sodas than 4 to increase their utility. fewer sodas than 4 and more hot dogs than 4. A winemaker used to rent a machine to press grapes, at a rent of $6,000/year. Five years ago, he bought the machine for $50,000 making the entire purchase payment at that time. In calculating his economic profits for the current year, the cost of the machine -.A) zero because he makes no payments on the machine during the current year. ‘3). zero if he discovers that the machine cannot be sold or rented out. $6,000 because that is what he would have paid if he contin 0 rent the machine. \B)k positive since it has depreciated. If the monopolists operated in the inelastic range of his demand curve, A) he would be operating where his Average Revenue (AR) is negative 83> his MR would be negative. his MR would be negative although his total receipts would be at a maximum. D) he could raise his total receipts by lowering his price. / 9. If firms are profit maximizers, we should not expect to find a competitive firm expanding its scale if it faces kyincreasmg returns to scale. g} decreasrng returns to scale. E) constant returns to scale. D) pecuniary returns to co 10. For a certain firm, total cost is $20 at 10 units of output and $21 at 11 units of output. In that range of output, marginal cost is (KN 9w " ~i"i:"{:_, i, 2;) r nay-Z 11; } v < A) greater than average total cost. B) equal to average total cost. 5/ @ less than average total cost. D) insufficient information given for an answer. 11. So far as it affects consumer welfare, monopoly is potentially objectionable because _ /' A) a monopolist makes short—run economic profits. \Bg\a monopolist produces where P 2 MR > MC. {:a.\ _ . . . - {Chat the monopolist's profit maxrmizm g output, the gain to consumer of further production is greater than the cost of the additional resources us d up. bfi‘r‘production could be rearranged so as to make one person better off Without making anyone worse off. l PART II: SHORT ANSWER QUESTIONS (23 points in total) J 1. (8 points total) The graph below shows a typical family’s indifference curves for beef and potatoes. Weekly income is $50. A pound of beef sells for $2 and a 20 lb. bag of potatoes sells for 50 cents. lbs. of /‘3 beef \ 100 “y . t 20 lb. bags \ fiaw¢ of potatoes fizfiéfi “Fig”: i— t» c g’ét, >/ / a. (2 points) Label the budget line as B1 21 d equilibrium point B, Wt is the . . . .7 g; a, ‘ marglnal rate of substitution at E. Z .2 (110$ w b. A very harsh winter causes the price 0 potatoes to rise to $1.25 for a 20 lb. bag. Label the new budget line ‘ 2 d show, on the potato axis, the: i. (2 points) Substitution effect ii. (2 points) Income effect iii. (2 points) On the basis of your results, are potatoes: (Choose the correct answer) 1. Normal goods? / 2. Inferior goods but not Giffen goods? 3. Inferior 2. (7 points total) A firm which minimizes total cost produces 2,000 rolls of insulation per day using 7 units of capital and 5 laborers. The wage rate is $28.00 per day, the marginal product of labor is 4 and the marginal product of capital is l. j 4/ CAPITAL 5 J H N LABOR “if? it“; a. (1 point) The price of a unit of capital is $ ll'Z pQéy. b. (2 point) The total cost is $ ClZLl per day. 2% 13 ‘i 7(013 Over time the price of capital rises and the price of labor falls. Assume t 1rm continues to produce 2,000 units and adjusts in response to the price changes. 0. (1 point) Will the firm use more or less labor? m" 223% d. (1 point) Will the firm use more or less capital? li‘fifi ’ e. (1 point) Does MN, GH or 1] represents the new isocost line? f. (1 point) At the new equilibrium input combination has the margin rate of substitution of labor for capital fallen, risen dr remained—imehanged? light, , g. (1 point) At the new equilibrium on the isoquant what can be sai spent on each input? my}: last? éeiiw 33m em "about the last dollar H": fez/’3‘” (stare rag Wm flaunt mmmd QIYJth. 3. (8 points total) L1 (dashed), L2, and L3 are lines given in the graph below. L1 and L2 are straight lines and they are also parallel to each other. L2 is the total revenue curve and L3 gives the total cost curve. “l; $TR,TC $400 ' $300 $250 $200 $150 $100 $50 Fill in the blanks below. a. (1 point) The total fixed cost is b~ (1 point) Price/unit is ‘3 Z c. (2 points) The maximum profit is (a £39 at the output level of ‘33,) d. (1 point) The marginal cost at the profit maximizing IW'fS , Z . , , e. (2 points) Zero economic profit quantities are l O O and Z 52;}; . i f. (1 point) The average variable cost at/the output level of 50 is 3 2 tic at VL'ST’C— {(21,} '1 "x VC3500 HILL; _ W. 7 “$5; "<7 LPART III: LONG PROBLEMS (55 points in total) 1. (16 points total) You are asked to predict the behavior of an industry given the following specifications which approximate real conditions: the industry is \b perfectly competitive; there are 100 firms which have identical cost curves and, to / begin with, the industry is in short-run and long-run equilibrium. Figure 1 gives L9 industry's demand curve and short—run supply curve. The grid in Figure 2 is \ ‘ reserved for firm level analysis questions below. Units Week (a) In Figure 2 above: i) (2 points) Draw in that portion of the firm's marginal cost curve for which you have information. ii) (1 point) Draw in the firm's demand curve. / iii) (1 point) Each firm in the industry produces (2 unit eek /” (b) Each firm has typical "U" shaped average cost and avewble cost curves. Recalling that the industry is i long—run equilibrium, i) (2 points) minimu verage total cost is $ and occ at the firm's output of in units/ eek. / ii) (1 point) minimum avera variable cost is $ 2 and occurs at the firm's output of L) unit eek. (c) (2 points) Briefly explain why the supply curve of the indu y/begins at the price $2 and output 400 and that below $2 the industry supplie othing. 1» {g ‘0: Cash when MC: avg, WM (Rum \ {\cwf"a Wu 3mm Wk fig 2th \m is 7 gown ~ ‘3"; kW (jag/(fr chm 9331's.}: (d) There is a permanent fall in industry demand so that at each price 3 less units/week are demanded. / i) (2 points) In the short run the industry will supplyggg units at a price of 35 ii) (2 points) At this price, a firm in the industry is making either a profit @I is breaking even. (Circle the best alternative.) / iii) (3 points) Assume that the industry has cons t costs in the long—runfité the long—run equilibrium price is 39 L”) m and the industry suppliestO units. The total number of firms in the industry is now Sb 2. (10 points total) The kite industry is perfectly competitive and consists of many identical firms. Each firm’s long~run average and marginal costs of production are given by 'e % AC=Q+lg—O, MC=2Q where Q is the number of kites produced. Currently the market demand is given by Q = 8,000 — 50p Where P is the price. Assuming that this industry is int calculate the following: ’lOng—run equilibrium, tea.» . 2Q: Q +75” 21. ( 2 points) the numer of kites each rm produces ! DO \ \0 i Q: a , 2 e2 3 “M Q: to b. ( 2 points) the market priCC “MI : “Z (x “QC/L (3 74132 c. ( 2 points) the profits of each firm flmaamw (9/ d. ( 2 points) the number of kites sold in the market Q: Show Sofia}; ‘1» K7000 e. ( 2 points) the number of firms in the industry 10 3. (23 points) Rick Weiner is a computer jock at a respected university in the southwest. He invents a new computer program. Big Byte is a software distributor. The figure below shows the market demand curve for the new program. The equations for these curves are a/ 4% J , \ ‘\ P=60—é—Q Q w M)» 3,7570%} . Ma r- , 3400' \X"Coc>“7<},. {ttkc/ r): 1 MR=6O‘—Q lb: (90» ““ Q t, 4 if it)sz ' 3Q “30‘: “wt Q n.3, $ ~~60: s Q 1 “79(1) Q L” Ocqefi NC, No. of copies sold per year 300 lsoo NC. 480 100 \bb 200 l 400 240 mdwms Big Byte's costs of reproducing and distributing the software are constant at $10 per copy. (There are no fixed costs of reproduction and distribution). Big Byte offers Rick (I) a lump sum Royalty of $3,500 per year or (II) a royalty of $10 for each copy sold. a. (14 points) Complete the following table:’ ll Q: Zootaswio) - 35w Option/ OpfiM , E O ’ i) Number of Copies Sold by Big Byte CD l 9;; ii) Price Charged by Big Byte iii) Royalty Payments to Rick 3,500 x" “:2 // iv) Big Byte's Profits ""00 b. (1 point) Which option would Rick ta . Iggccaufi Mk fuel“) W “(Shay (’bgali‘y Wt)“ aPYlon It c. “WWRQ tion is mor rofitable for Big Byte? l Oflhwi I: d. 1c course in economics and realizes that he could extract more from Big Byte. If he maximizes his income from the program (and minimiz i g Byte's bite) he will (Fill in the appropriate line.) i) (2 points) charge of a lump sum royalty of $ (3000 or S W“ ' a/ ii) (1 point) charge a per unit royalty of $ 2gC) .***** e. (2 points) If Rick wants to find the socially efficient price and quantity, regardless the implications for his income then, given the fact that the computer program as already been developed what price would he want Big Byte to char . g l D 60“ > f. (1 point) How many copies will besaved at this price? g. (1 points) What is Rick's royalty income? h. (1 point) What are Big Bytes profits? 1 2 1 p, a m / ***** You get 5 BONUS POINTS if you answer this question correctly and providing your total score without these 5 points is less than 100. 1’) 4. (6 points) Kimberly Kent is a monopolist in the market for paper. In the diagram below, you are given the demand for paper, marginal revenue, marginal cost, and average cost of producing paper. Assume that the monopolist charges the same price QI‘D/l to all consumers. P , “Lst \ \, T 18 _ C)" r ‘1'; V“ 14 g _ -_ 6 MC (a) ( 2 points) The uantity produced the monopolist is “D and price is \i’s . (b) (1 point) Profit is \Kpt) . (c) (1 point) The deadweight loss associated with the monopoly is Z . u o (mum) U004} : has You are a government regulator interested in promoting economic efficiency. Assume that you have the power to set the price for the industry but not t power to offer a subsidy to the monopolist. #3" (d) (1 point) The price that you will set is 03 . 5 r (9% VS (e) (1 point) The monopoly profits will be 0 V {\w m H ...
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This note was uploaded on 05/02/2008 for the course ECON 211 taught by Professor Na during the Fall '08 term at Rice.

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economics midterm - ECONOMICS 211 SECOND MIDTERM...

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