Mid2W06 - Vl Name Second Midterm Examination Economics 101...

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Unformatted text preview: Vl Name March 15, 2006 Second Midterm Examination Economics 101 Unless a question explicitly says otherwise, assume that all short—run supply curves slope upward and all demand curves slope downward. True/False. Mark box A for True and box B for False. Each correct answer adds 2 points to your score. Each blank answer gives you 1 point. 1. In the short run, a firm's total cost is equal to the sum of its marginal costs for all units produced. product of labor is positive. 2. A firm's total product is increasing as long as the marginal the good it sells. 3. A competitive firm's marginal revenue is equal to the price of 4. If a firm produces 2 units of output, and generates a profit of $30 and a producer surplus of $40, then the firm's fixed costs are $10. 5. In the long run, a firm with increasing returns to scale can lower its average total cost by reducing its production. 6. In a competitive equilibrium, the last unit produced by all firms in the market is produced at the same marginal cost. 7. Decreasing returns to scale implies declining marginal product of the variable factor while the fixed factor is held constant. 8. Suppose that there are external economies of scale in the soda industry. Then, if the demand for soda increases there will be positive profits in the new long—run equilibrium. Page # Multiple Choice. Mark the box corresponding to the best answer. Each correct answer adds 5 points to your score. Each blank answer gives you 1 point. 9. The graph below shows the cost curves for a competitive profit—maximizing firm that produces water pistols. Using the information in the graph, if the price of a water pistol is $12, then the firm should produce __ water pistols. 1o 17 7 .7 Water pistols (a) 38 (b) 40 (c) 42 (d) 45 (e) 49 Page # 3 10. The chart below shows the production information for a firm whose only variable input is labor. Find the values of A, B, and C in the following chart. Total Total Average Marginal Labor Product Product Product 0 O u 2 6 A 4 B 4 6 4 4 8 3 10 C 1 (a) A=6, B=l6, C=3.2 (b) A=3, B=12, C=2 (C) A=6, B=12, C=l (d) A=3, B=l6, C=3.2 (e) A=3, B=l6, C=2 11. ___ The firm Songs—R—Us creates new songs using only song—writers and synthesizers. The firm's production process exhibits increasing returns to scale. Last year, Songs—R—Us created 64 songs using 10 song writers and 8 synthesizers. This year, the firm employed 15 song writers and 12 synthesizers. Which of the following could be the number of songs that Songs—R-Us produces with the new level of inputs? (a) 32 (b) 64 (c) 96 (d) 78 (e) 112 Page # 12. Currently a competitive firm is producing where: Q=350 TR=$2450 TC=$3lSO AFC=$3 What should the firm do in the short run to maximize profits? (a) Continue to produce the current quantity. (b) Decrease quantity. (c) Increase quantity. (d) Shut down operations. (e) Cannot be determined from the information given. 13. Gigli's Greenhouse is a competitive firm in the Tulip market. Suppose that the price for a bouquet of pink tulips is $9 and Gigli's has the following production costs: Quantity of Total cost bouquets If a technological improvement decreases total cost by $4 at every level of production, then Gigli's should produce __ bouquets before the technological change and __ bouquets after the change. (Assume nothing else in the market has changed.) (DQOC‘SD owmww ower—I Page # l4. ___ Consider a profit—maximizing firm with standard U~shaped cost curves. The firm currently produces a positive quantity. If fixed costs increase by $400, the firm's producer surplus will , and the firm's profits will not change; decrease by less than $400 decrease by $400; decrease by $400 decrease by more than $400; not change decrease by more than $400; decrease by more than $400 not change; decrease by $400 ('DQ-OU'QJ 15. Mato grows tomatoes and sells them in a competitive market. His farm's current position is summarized below: Producer Surplus: $500 AVC: $5 AFC: $6 MC: $8 Profit: —$100 To maximize his profits, Mato should __ in the short run. (a) increase tomato production (b) decrease tomato production (c) shut down (d) decrease the price he charges for tomatoes (e) increase the price he charges for tomatoes Page # 16. The table below shows the variable costs for Stan's Stationary, a profit—maximizing firm in the competitive stationary market. Quantity Variable Cost What is the value of X if the price of a unit of stationary is $12, the fixed cost is $20, and Stan's profit is $13? (a) $24 (b) $25 (c) $26 (d) $27 (e) $28 17. ___ Betty's Burger Barn uses only beef and buns to make burgers. Even if she makes no burgers, Betty must still pay $65/day to keep the shop open. Betty currently produces 100 burgers per day at an average total cost of $0.85 per burger. If Betty were to produce 120 burgers, her total costs would increase to $120. Betty's marginal cost of producing each of these additional burgers is __ per burger. (a) $1.75 (b) $1.20 (c) $0.85 (d) $1.45 (e) $1.50 Page # 18. ___ Suppose the market for deep—fried pork rinds, shown in the graph below, is in long—run equilibrium. The government then launches a campaign promoting the many health benefits of pork rinds. As a result of the campaign, demand for pork rinds increases by 30 tons at every price level. Furthermore, assume that there are external economies of scale in the pork rind industry. __-__L——__— I I I I I I I I I I I I I I I I I I l I F I I I l I (.0 01 I I I I I F I I I I I I : I ---r-——- ____fi____ _____ __-_L-___I-___J__-_ ___-— ____L__-_L____ --__J____ I | I I p I I I I L I I I I 10 25 40 55 Then, after the campaign the short—run equilibrium is at point __, and the long-run equilibrium could be at point __ (a) A; C (b) A; D (C) A; E (d) B; D (e) B; E 19. Suppose George Bluth Sr. can build 2 model homes in 1 hour, 5 model homes in 2 hours, and 6 model homes in 3 hours. Then, the average product of labor when labor is 3 hours is __ the average product of labor when labor is 1 hour; and when labor is 3 hours, the marginal product of labor is __ the average product of labor. ) less than; less than ) greater than; greater than ) equal to; greater than ) equal to; less than ) greater than; less than (03886? Page # 20. The following table shows the number of calzones that a typical restaurant cook can produce using different combinations of labor and capital. Capflm - 1 oven 2 ovens 3 ovens 3 10cakones 17cakones 22cauones hours E 16 calzones X calzones 38 calzones M 20 calzones Y calzones 50 calzones For which of the following values of X and Y does the technology exhibit decreasing marginal product of labor when capital is fixed at 2 ovens, as well as increasing returns to scale in production over all ranges of output? Labor (a) X=21; Y=25 (b) X=23; Y=27 (C) X219; Y=20 (d) x220; Y=22 (e) X222; Y=28 21. ___ Jack is a cattle farmer who produces beef in the competitive beef market. In 1990, Jack sold 1000 pounds of beef at $10 per pound. In 1991, after the mad—cow disease scare, demand for beef fell, leading many cattle farmers to exit the industry. In 2001, Jack sold 1000 pounds of beef for $8 per pound. Assuming that the market for beef was in long-run equilibrium in both 1990 and 2001, which of the following statements must be TRUE? (a) The market for beef exhibits external economies of scale. (b) The market for beef exhibits external diseconomies of scale. (c) The market for beef is a constant cost industry. (d) Jack's production exhibits increasing returns to scale. (e) Jack's production exhibits decreasing returns to scale. Page # 22. Walter and the Dude own a firm that produces ugly bowling shirts. The ugly bowling shirt market is competitive. Given the information below, what would you advise Walter and the Dude to do? ATC is at a minimum ATC=$lO.50 VC=$9000 Producer surplus=$1500 Quantity=lOOO Increase quantity. Increase price. Decrease quantity. Shut down. The current quantity and price maximizes profit. (004069) 23. ___ Suppose a competitive, profit—maximizing firm sells magic light bulbs for $5 each. If the firm pays its labor a wage of $10 per worker and labor is the only variable input, then what is the marginal product of labor of the last worker employed? (a) 2 light bulbs. (b) 0.5 light bulbs (c) 0.25 light bulbs (d) 4 light bulbs. (e) 5 light bulbs. 24. Which of the following best describes the concept of "Minimum Efficient Scale"? (a) It is the fact that once the amount of labor employed reaches a certain level, labor productivity decreases due to a limited number of fixed resources. (b) It is the idea that labor productivity increases as the level of capital increases because both inputs interact with one another. (c) It is the level of output at which the minimum long—run average total cost can first be reached. (d) It is the minimum average total cost at which a given level of output can be produced. (e) It is the fact that after a certain point, every production technology will eventually exhibit decreasing returns to scale. 9 Page # 10 25. Shanthi produces purple hair dye according to the following cost schedule. Quantity Total Cost (bottles) 4 $21 8 $37 12 $53 $89 The purple hair dye market is competitive, and Shanthi maximizes her profits. If the market price of a bottle of purple hair dye is $7, then what are Shanthi‘s profits in the short run? (a) $0 (b) $59 (0) $31 (d) $23 (e) $19 26. ___ Panchero’s Burritos is currently producing where price equals marginal cost and is trying to decide what to do. The price of a burrito is $4 and Panchero's is producing 100 burritos. If their fixed cost is $200 and their total cost is $700, then Panchero's should: (a) Continue to produce the same quantity in both the short and long run. (b) Increase the quantity of burritos they produce in the short run. (c) Decrease the quantity of burritos they produce in the short run, but continue to produce. (d) Continue to produce the current quantity in the short run, but exit the industry in the long run. (e) Shut down. 27. In a competitive market, the short run supply curve is the upward sloping portion of the curve, at and above the minimum of the curve. MC; AVC MC; ATC MC; AFC AVC; MC ATC; MC ('DQ-OO‘QJ Page # ll 28. Broderick owns a competitive, profit—maximizing firm that produces Grade—A Dandelion Juice. The marginal cost and average total cost curves for his Dandelion Juice production are shown below. $/ Liter 0 20 120 Q Broderick's fixed costs are $200. If the market price is currently $6 for a liter of Dandelion Juice, then Broderick's profits are: (a) $60 (b) $120 (c) $360 (d) $160 (e) $240 Page # 12 29. ___ The graphs below show the cost curves for a typical profit—maximizing, competitive firm, along with the demand and supply curves for the entire market. Suppose the firm operates in a CONSTANT COST industry, and the industry is currently in long—run equilibrium. Pm P<$> . . . 1o --------- ‘ ————————— s --------- --------- 4° 60 80 Q 200 400 600 800 1000 Q Suppose that the government decides to impose a subsidy of $2. Then which of the following statements about the new long—run equilibrium is TRUE? a) The market quantity is 1000. b) There are fewer than 10 firms in the market. c) The producer price equals $7. d) The firm's profits are greater in the new long—run equilibrium than in the initial long—run equilibrium. (e) The consumer price equals $4. 30. ___ Some years ago, General Motors agreed with the United Auto Workers to continue to pay laid—off workers. That is, these workers receive full wages even though they aren't actually producing anything for GM. Many workers are receiving these wages even today. Consider a scenario (”Plan B”) in which a laid—off worker would only receive half of his/her wages. Comparing the actual system (of paying full wages) to Plan B (paying half the wages), the MARGINAL COST of the last car produced by GM at its current production level is: (a) Higher than in Plan B by a percentage greater than the percentage of laid-off workers. (b) Higher than in Plan B by a percentage equal to the percentage of laid—off workers. (c) Higher than in Plan B by a percentage less than the percentage of laid—off workers. (d) The same as Plan B. (e) Lower than Plan B. Page # 13 31. The example used in lecture to illustrate that marginal cost is the cost concept used to determine a Pareto efficient outcome was: (a) An analysis of the use of emergency medical helicopters. (b) An analysis of whether foreign companies should manage operations at US ports. (c) An analysis of the UAW‘s negotiations with General Motors. (d) An analysis of OPEC's decision to stick with its output target. (e) An analysis of the FDA's decision to return a MS drug to the US market, with restrictions. Second Midterm Examination Economics 101 March 15, 2006 Answer Key — Version 1 Answer ‘ ~ False True True True False True False False Utfi 0(3iimtn WtjUJWtj Vtfltjmlfl UtUCJWIH W ...
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