Mid2F04 - v1 Name November 10, 2004 Second Midterm Exam...

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Unformatted text preview: v1 Name November 10, 2004 Second Midterm Exam Economics 101 If the data in a question are presented as a table, you should assume that the firm can produce only the quantities in the table unless the question explicitly says otherwise. 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. Suppose that labor is the only variable input. If the average variable cost curve is downward sloping, then the average product of labor must be upward sloping. 2. Imagine a firm with no fixed costs. Then the short—run shutdown price is the minimum of the ATC curve. 3. A competitive market equilibrium is efficient because the marginal cost of every unit equals the marginal benefit of every unit. 4. Profit—maximizing firms have zero profits if the market price is equal to the shutdown price. 5. The Second Welfare Theorem says that competitive markets are Pareto efficient. 6. For any competitive firm, total revenue is equal to marginal revenue times the quantity. 7. ___ Suppose that all of the firms in the market for board games are initially in long—run equilibrium. Suppose that the wage rate for skilled labor (an input which every firm uses) increases. Then, once the industry has adjusted to a new long—run equilibrium, we would expect a price increase. 8. The long—run ATC curve is the lower envelope of all possible short—run ATC curves. Page # 9. It is possible to have both increasing returns to scale and diminishing marginal product. 10. A firm's short—run supply curve is its marginal cost curve only when it is above the minimum of the average total cost curve. 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. 11. Suppose the following graph shows the cost structure of a competitive firm. The market price is 20. The firm's producer surplus is: (a) 360 (b) 600 (C) 320 (d) 240 (e) 460 Page # 12. ___ You and Donald Trump decide to make sandwiches for your study snack. On your own, you made 3 sandwiches. With The Donald, you made 5 in total. Denoting the marginal product of labor as MPL and the average product of labor as APL, which of the following can we conclude with certainty? I. MPL is diminishing II. MPL is above APL III. APL is falling IV. MPL is below APL (a) I and II only (b) I and III only (c) I, III, and IV only (d) III and IV only (e) I and IV only 13. The table below shows the production function of a small firm that produces baseball caps using workers and 10 sewing machines. Output (baseball caps) The firm currently uses old-fashioned sewing machines. If it were to replace the old sewing machines with new high—speed ones, the MARGINAL product of a worker would increase by 20 caps for every worker. What would this firm's TOTAL level of output be if it hired 15 workers and used the new high-speed sewing machines? (a) 1,200 caps (b) 1,300 caps (C) 1,500 caps (d) 1,800 caps (e) 2,100 caps 14. Page # Suppose a competitive firm with the production technology given below uses labor as its only variable input to produce tanning services. The firm has fixed costs equal to zero. The price of output in this market is $8 and the wage is $10. The firm will produce units. It's profit will be (a) 20, 100 (b) 20, 60 (C) 25, 0 (d) 25, 100 (e) 15, 7O Page # 15. Suppose that in the following graph, the marginal product curve intersects the average product curve at L = 30. It must be true that: I. Average product of labor is maximized at L II. Average variable cost is minimized at L = III. Marginal Cost is minimized at L = 20 Quantity 100 10 20 30 Labor (a) I and II only (b) Only II (c) Only III (d) II and III only (e) I and III only 16. Page # The table below reports a price—taking firm's variable costs at different levels of output. If the market price is $6 and fixed costs are $10, what quantity will the firm produce to maximize its profits? (DDJOC‘QJ HLooomw 6 Fsge # 1?. Asssne that :he graph belew skews the initial senditiees Eur a sempetitive firm. New assume that the firm faces a deerease in ize fixed nests by $120. The marks: price is 512. Which ef the fellewieg is PALS? after the change in fixed ees:? P 13 lfi 12 EU 2? in Q Es} The firm will preduee the same eutput luvel- is} The firm is still making Lessee. [e] The firm's fiseé eeet decreases te zers. [d] Tetsl Tavenue of the firm LE $324- [el The firm is net at its lung-run equilibrium- Page # 8 18. ___ Distinctive Leatherworks is a profit—maximizing firm in the competitive market for leather wallets. Between 2003 and 2004, the firm's total costs of production doubled as shown in the table below. What happened to producer surplus if the market price was $12 in both 2003 and 2004? Quantity of Initialtotal Doubled total I wallets costs in 2003 costs in 2004 Producer surplus is a third of its initial value. Producer surplus is unaffected. Producer surplus is three times its initial value. Producer surplus is half its initial value. Producer surplus is twice its initial value. (DQJOC‘QJ 19. Suppose a competitive firm has fixed costs of $10. Its marginal cost is listed in the following table. What is the total cost of producing 5 units of output? I! I0] _ 1’ - (a) 24 (b) 34 (c) 48 (d) 10 (e) 50 20. Page # The following graph shows an individual firm's cost curves in the competitive market for radios. Initially, the market price was $20 and the firm produced 100 radios (point A). But now the market price is $25 and the firm produces 150 radios (point B). Assuming that the cost curves do not shift, which of following is true? Pace 25 20 100 150 Qumfiw (a) This firm has negative profits at point B. (b) The change from A to B could have been caused by an increase in the demand for radios. (c) This firm did not maximize profits initially (point A). (d) This firm will produce 150 radios in the long—run. (e) The change from A to B could have been caused by more producers entering the market. 9 21. 22. Consider the following graph. maximizing profits and producing 10 units. Assume that the firm is At the firm's current choice of output level, which of the following is FALSE? producer surplus is zero total costs are 90 fixed costs are equal to variable costs profits are negative price is equal to AFC ATC AVC Page # 10 This question concerns a competitive firm. Assume that the marginal cost curve slopes upward. Based on the information choose one recommendation from the list below. AVC is at a given, FC=$18,000, ATC=$lO.50, P=$9, VC=$24,000, minimum (a) The firm should increase price. (b) The firm is now in the correct position. (c) The firm should decrease output. (d) The firm should increase output. (e) The firm should shut down operations. Page # ll 23. The graph below shows the cost curves of a company in a competitive industry. Given the graph and the data below, which of the following is TRUE about this company? VC=$24,000, AFC=$5, MC=$8, AVC=$20 Phce 1000 1500 Quantity It should shut down. It should increase the price. It should increase output. It is in the correct position. It is the correct position for the short—run only. (DCLOU‘Q) Page # 12 24. A competitive firm producing goggles for skiing is consulting you on its operation. The firm provided you with the following information on its current operation: TR=$40,000, Q=2,000, wage=$40, labor=700, current profits are zero In addition to this data, you have estimated that the marginal product of the last worker in this firm is currently 2 goggles. What should you recommend in order for this firm to maximize profit? (a) The firm should produce more. (b) The firm should produce less. (c) The firm should shut down its operation immediately. (d) The firm is in the correct position for the short run b ( ut should exit in the long run. e) The firm is in the correct position both for the short run and the long run. 25. Suppose that firms in a competitive market are in long—run equilibrium at P=5. The government must choose between the following two policies: I. imposing a $1 per unit tax on the good. II. Charging every firm a flat fee of $10 for a license to operate in the market Your report to the government on the effects of each of these policies on the market would include ALL of the following EXCEPT: (a) Both policies will reduce the number of firms remaining in the industry in the long-run. (b) The new long—run equilibrium price for the good will rise. (c) In the short run, existing firms will decrease their production levels under policy I and policy II. (d) In the long run, total output will fall under both policies. (e) In the short run, producer surplus will not change under policy II, but will fall under policy I. 26. 27. The competitive market for good A exhibits external diseconomies of scale. Page # 13 There are 10 identical firms in the market and each firm initially produces 50 units of good A. Suppose the government imposes a subsidy on good A. The individual firm' short run. Market supply of good A will be long run. (a) less than 50, (b) greater than 50, (c) greater than 50, (d) greater than 50, (e) equal to 50, in t in the s production of good A will be equal to 500 equal to 500 less than 500 greater than 500 greater than 500 he If an industry exhibits external economies of scale, a decrease in the demand for the good leads to: (a) A decrease in the short—run equilibrium price and an increase in the (b) An increase increase in the long-run equilibrium price. in the short-run equilibrium price and an long—run equilibrium price. (c) A decrease in the short—run equilibrium price and a decrease in the (d) An increase decrease in the (e) An increase increase in the long—run equilibrium price. in the short—run equilibrium price and a long—run equilibrium price. in the short~run equilibrium price and an long-run equilibrium price. Page # 14 28. ___ The graphs below show the cost curves for a representative price—taking firm in the restaurant industry. The first graph shows the firm's cost curves before an increase in demand for restaurant food, while the second graph shows the firm's cost curves after an increase in demand. Co sts Before Demand Increase Costs Aficr Demand Increase Q If there were no other changes in the market, this industry's long—run supply curve must exhibit: constant cost external economies of scale external diseconomies of scale decreasing returns to scale increasing returns to scale (DD—JOUQJ 29. Page # 15 The graph below depicts a firm's long—run average total cost curve. This firm employs only two kinds of inputs: capital (K) and labor (L). The firm's current operation scale is indicated by the point X in the graph: the firm currently uses 20 units of capital (K=20) and 100 units of labor (L=lOO). Which of the following combinations of the levels of inputs and output (Q) is possible for this firm? P LRATC 800 (Q 300 500 (40,200); Q=l,000 (30,150); Q=800 (4,20); Q=lOO (60,300); Q=l,200 ore than one of the above is possible II II II II Page # 16 30. James owns a company where he hires college students to paint houses during the summer. The chart below shows James' long run total costs. 'OuantitIofHouses 80 ‘ 90 ., 1 TC 0 3000 21.000 32000 I 45000 Given this cost data, James' firm experiences: (a) Constant returns to scale only (b) Increasing returns to scale only (c) Decreasing returns to scale only (d) Constant returns to scale and decreasing returns to scale only (e) Constant returns to scale, decreasing returns to scale, and increasing returns to scale 31. The example used in lecture to illustrate the long—run adjustment to profit in an industry was: (a) Chinese rice farmers switching their production from rice into pearls. (b) The proliferation of introductory economics textbooks. (c) Frito—Lay deciding to introduce low—carb alternatives to their best—selling snack foods. (d) The increase in Ebay sales of Red Sox memorabilia. (e) The expected increase in marijuana dealers after the passage of Ann Arbor's medical marijuana proposal. 15 17 13 19 ED 22 23 25 26 2? 95 29 3D Eecund Midterm Exam Ecumenics 151 Huvenher 10, Eflflé Answer Key - Varaian 1 Answer True True False False False True True True True False EE'JI—JI—JI—J Utlmfiflfi riWFIUEfl lfiuifitfifi :3 ...
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This note was uploaded on 09/28/2008 for the course ECON 101 taught by Professor Gerson during the Spring '08 term at University of Michigan.

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Mid2F04 - v1 Name November 10, 2004 Second Midterm Exam...

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