econ 2302 final practice problems

econ 2302 final practice problems - ECONOMICS 2302...

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Unformatted text preview: ECONOMICS 2302 Principles of Microeconomics University of Texas at Dallas Dr. Susan Williams McElroy SOLUTIONS TO PRACTICE FINAL EXAM Instructions: a. Please write your answers and calculations on your exam paper. You do not need to use a scantron. b. Each question indicates the number of points. Questions 18 and 19 are optional EXTRA CREDIT questions. Answer only one of these for a maximum of 10 points. SECTION 1: Multiple Choice (2 points each — 20 points total) Circle the correct answer. 1. More unequal distributions of income produce Lorenz Curves that are the 45-degree line. a. closer to b. farther from c. equivalent to (1. parallel to 2. Market failure refers to an unequal division of resources between the private and public sectors. the market process that does not yield any useful outcomes. a market-based allocation of resources that is inefficient. an unequal distribution of income. P-‘P F7?” 3. The automobile industry in the United States is an example of monopoly. perfect competition monopolistic competition. . oligopoly. more . Wheat is produced in a perfectly competitive market. Market demand for wheat increases. This will cause the individual what farmer’s marginal revenue to and their profit-maximizing level of output to a. increase; increase b. increase; decrease 0. decrease; increase d. decrease; decrease . The marginal product of labor formula is a. L/ q. b. (AL)/Aq). c. q/L. d. (Aq)/AL). . When Hurricane Andrew passed through Louisiana in the summer of 1992, approximately our fourth of the sugar cane crop was destroyed. Ceteris paribus, a. the supply of sugar decreased and the price of sugar increased. b. the supply of sugar decreased and the price of sugar decreased. 0. the demand for sugar decreased and the price of sugar increased. (1. the demand for sugar decreased and the price of sugar decreased. . An example of an ineffective price ceiling would be the government setting the price of gasoline at per gallon when the market price of at $2.00 per gallon. 21. $1.25 b. $1.50 c. $1.75 (1. $2.25 8. Refer to the figure below. Bill’s budget constraint is BD. If the price of bell peppers increases, Bill’s new budget constraint is 21. AD. b. AO. c. CD. (1. EF. 9. Amy is consuming good X and good Y so that MUX/Px = 6 and MUY/Py = 10. To maximize utility, Amy should 21. continue to consume the same amount of good X and good Y, as the consumer is already maximizing utility. b. consume less of both good X and good Y. c. consume more good X and less good Y. d. consume less good X and more good Y. 10. The cost-minimizing equilibrium condition can be written as MPL = MPK PL 2 PK (MPLXPL) = (MPKXPK) . MP1]? L = MPK/P K «ca-99‘s» SECTION 2: Problems (50 points) 11. A monopoly has the following demand and cost schedules (per day): Quantity Total Demanded Revenue $100.00 $280.00 a. Write down the definitions of total revenue, marginal revenue, and marginal cost. (3 points) Total revenue = price * quantity Marginal Revenue = A Total Revenue A Output Marginal Cost = A Total Cost A Output b. Fill in the table (numerical values). (3 points) Price —_ $90-00 Revenue Revenue Cost $0.00 _— $90-00 $160-00 $21000 $240.00 $250.00 $240.00 c. What is the firm’s profit—maximizing level of output per day? Show your work and explain your answer. (5 points) Quantity Demanded $60.00 {I} U1 O O O $280.00 The decision rule is Marginal Revenue equals Marginal Cost (MR=MC), so the firm should keep increasing output as long as marginal revenue is greater than marginal cost. So, the firm’s profit—maximizing level of output per day is the 3 units of output, where MR=$50.00 and MC=$40.00. At 4 units of output, marginal revenue is less than marginal cost so the firm is producing too much according to the criterion of profit maximization. d. What daily profit do you predict the firm will have if it produces the profit- maximizing output level? (4 points) We can predict that the firm.will have a profit $210.00 — $90.00 (total revenue minus total cost) of at the profit~ maximizing output level of 3 units of output. NOTE: Question 12 was omitted from the exam, but the answer is included here for your information and learning. 12. The graph below shows the demand curve facing a monopolist, as well as the marginal revenue, marginal cost, and average cost curves. You are also given the following information: P1 : P2 = $8.00 Q1 = 30 Q2 = 50 a. What is the monopolist’s profit—maximizing level of output? Explain how you came up with your answer. (5 points) The monopolist’s profitemaximizing level of output is 02:50, the output level at which marginal revenue equals marginal cost. b. What would theprofit-maxirnizing level of output be for the perfect competitor? Explain how you came up with your answer. (5 points) The profit—maximizing level of output for the perfect competitor would be is 01:50, the output level at which marginal revenue equals marginal cost. 13. The following cost information corresponds to the production of electric toy trains at Opal’s Choo—Choo Trains International, Inc. Average Average Average Total Output per Cost month a. Complete the table. (5 points) Average Average Average Fixed Variable Total Fixed Variable Total Marginal Output per Cost Cost Cost Cost Cost Cost Cost Month TFC TVC TC AFC AVC ATC MC 0 s:.2o.oo ~ v — — — — ~ — — — — ~ — — — ~ — — ~- 1 $120.00 $180.00 $60.00 2 $100.00 $20.00 3 $10-00 4 $15.00 5 $35-00 $120.00 $210.00 $330.00 $20.00 $35.00 $55.00 $70.00 b. Write down the definitions or formulas that you used to complete the table in part (a). (5 points) TFC = total fixed costs, which by definition do not change with the level of output, so TFC is the same regardless of the level of output. TVC = total variable costs; given in the problem TC = total cost = TFC + TVC AFC = average fixed cost = TFC/q AVC average variable cost = TVC/q ATC = average total cost 2 TC/q MC marginal cost = change in TC/change q MC is also change in TVC/change in output II c. What additional information, if any, will the firm need in order to determine the profit—maximizing level of output? Write down the firm’s decision rule for profit maximization and explain the economic reasoning of the decision rule. (5 points) The firm also needs to know the price of the output. Assuming that the firm.is a perfect competitor, the decision rule will be Price = Marginal Cost. Every firm in order to maximize profits, sets Marginal Revenue equal to Marginal Cost. 14. You have just won the lottery. You are now faced with the choice of receiving $200,000 today or $50,000 per year for the next four years. A friend of yours is trying to convince you that it makes no difference which option you choose. a. Write down the formula for present value (PV), or present discounted value, of R dollars to be received t years from now (5 points). ‘Answer: Pr = R {3+ wit where Rt: sum of money to be received in the future r interest rate t = time, or number of years from.now when you will receive the money (or sum) b. Your friend Frank tells you that it makes no difference which option you choose because either way, you are better off than you were before. Is your friend right? Why or why not? Explain your answer using sound economic reasoning. (5 points) Answer: No, your friend Frank is wrong because he or she is comparing “apples and oranges” by not taking account of present value. In horde to make this decision using sound economic reasoning, you need to compare the present values (PVs) of the two sums of money. The present value of $200,000 to be received today is simply $200,000. You compare that to the present value of the stream of payments of $50,000 each for this year and for the next three years. If you are thinking like an economist, you choose the option with the higher present value. SECTION 4: Short answer (30 points — 10 points per question) Answer the questions in this section in three sentences or less. 15. Describe two features of monopolistic competition that differentiate it fiom monopoly. Answer: First, firms in monopolistic competition cannot influence market price as greatly because they are small relative to the size of the market. Second, many good substitutes exist in a monopolistically competitive industry. 16. How should a profit-maximizing firm decide Whether to invest in a project? Answer: A profit-maximizingfirm should compare the net present value of the benefits of the project to the net present value of the cost. Then the firm should follow this decision rule: If the net present value of the cost exceeds he net present value of the benefits, then the firm should invest in the project. 17. How does the profit—maximizing firm decide how many workers to hire? (10 points) Answer: In order to decide how many workers to hire, the profit-maximizing firm should compare the marginal revenue product of each additional worker to the marginal cost of hiring that worker. The marginal revenue product of each additional worker represents the value of hiring the worker to the firm. It is the additional revenue that the firm gains from hiring the worker. MRPL = MPL x @rice of the output) If the gain is greater than the cost of hiring the worker (which is the wage in a competitive labor market), the firm will increase its profits by hiring the additional worker. SECTION 5: Extra credit (10 points total) For 10 extra credit points, answer one of the following four questions. 18. Fill in the following blanks (1 point per blank). a. Poverty thresholds vary according to size of the family and ages of the members. b. The Gini Coefficient is a measure of income inequality derived from a Lorenz curve. It can range from a minimum of peg; to a maximum of 9_n_e. c. Poverty thresholds are set annually by the US. Census Bureau. d. All factors of production are paid a return equal to their marginal revenue piping -- the market value of what they produce at the margin. e. A g_1_1_ip_til_e is an equal one fifth of a distribution. f. The labor force participation rate is the number of persons in the paid labor force divided by number of persons in the population. g. The relationship between the factors of production (inputs) and the level of output is called the production function. 19. Explain clearly in your own words (six sentences or less) what the following graph shows. (10 points) Lorenz Curve we a: E: g g : i; 23.8 ~ 35 an i 4.2 ' , Pememiage of families Answer: The Lorenz curve is a widely used graph of the distributiOn of income, with cumulative percentage of families plotted along the horizontal axis and cumulative percentage of income plotted along the vertical axis. More unequal distributions of income produce Lorenz Curves that are farther fiom the 45-degree line. If income is equally distributed, there is no shaded area. ...
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econ 2302 final practice problems - ECONOMICS 2302...

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