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Unformatted text preview: Professor Richard V. Burkhauser ECON 101 Fall 2006 Name:__________________________________ Section Number:_______ TA: _________________ EXAM 2-A This exam is in two parts. For the first part, pencils only may be used. Turn the bubble sheet so that the space for your name appears in the upper left corner. Enter your name in the space provided, one letter to a box. Enter last name first, then your first initial. If your name is longer than the space provided, enter only that portion of your name that will fit. Under each letter of your name blacken the box corresponding to the letter. For each digit, blacken the numbered box below it which corresponds to the digit entered. Then in the same manner, fill in your 6 digit student identification number. Also, write either Exam 2-A or Exam 2-B (depending on the version you are taking) above your name on your bubble sheet. Read each question carefully and select the best answer. Mark the corresponding box on the answer sheet by neatly filling in the entire box. If you decide to change an answer, erase completely your previous answer. Do not make any other marks on this answer sheet. If you don't know the answer, guess. There is no additional penalty for doing so. Each Multiple-Choice Question is worth 3 points (Total 39 points). 1. The long-run supply curve of an industry with a constant returns-to-scale production function and increasing factor costs is a. upward sloping b. horizontal. c. initially downward sloping but eventually upward sloping. d. initially upward sloping but eventually downward sloping. e. downward-sloping. 2. A decrease in the price of capital used in the production of automobiles: a. will increase the price of automobiles but have no effect on the demand for automobile workers. b. will simply decrease the demand for capital and thus have no effect on the price of automobiles. c. will reduce the demand for automobile workers. d. will increase the demand for automobile workers. e. may increase or decrease the demand for automobile workers. 3. Mary quits her $40,000 job as a high school teacher and opens her own tutoring business. Her financial report for the past year shows the following Market value of her offices $200,000 (beginning and end of the year) Sales revenue 100,000 Operating expenses 20,000 If the market rate of interest is 10 percent, an economist would say her profits were: a. $ 0 b. $ 10,000 c. $ 20,000 d. $ 30,000 e. $ 40,000 4. Unions will be more likely to fight the introduction of new machines: a. the greater the substitutes for the final product. b. the faster this technological changes is occurring in the industry. c. the less elastic the supply of labor in the economy as a whole. d. the less elastic the demand for the industry's product. e. the less the substitutability of machines for workers in the production process. 5. If a firm has decreasing returns-to scale and increasing factor costs, then: a. its supply curve is downward sloping in the short-run but may be upward sloping in the long-run. b. its supply curve is upward sloping in the short-run but may be downward sloping in the long-run. c. its supply curve is upward sloping in the short-run but downward sloping in the long-run. d. its supply curve is upward sloping in both the short-run and the long-run. e. its supply curve is downward sloping in both the short-run and the longrun. 6. When firms in a competitive market have different costs, it is likely that: a. some firms will earn excess profits in the long run. b. free entry and exit in the market is likely to be violated. c. the market will no longer be considered competitive. d the short-run market supply will be downward sloping. e. the long-run market supply will be downward sloping. Exam 2A -- Fall '06 2 7. Consider the following information about cookie production at Tubby's Bakery: Worker 1 2 3 4 5 6 7 Marginal Product 3 5 8 7 5 2 1 Tubby pays all his workers the same wage and labor is his only variable cost. Tubby's marginal cost: a. declines as output increases from 0 to 8, but increases after that. b. declines as output increases from 0 to 16, but increases after that. c. declines as output increases from 0 to 25, but increases after that. d. increases as output increases from 0 to 8, but declines after that e. continually increases as output rises. 8. From the information in the table below, what is average variable cost when output is 50 units? Output Total Cost 0 40 10 60 20 90 30 130 40 180 50 240 a. b. c. d. $3.60 $4.00 $4.40 $4.80 9. Since the 1980s, Wal-Mart stores have appeared in almost every community in America. Wal-Mart buys its goods in large quantities and, therefore, at cheaper prices. Wal-Mart also locates its stores where land prices are low, usually outside of the community business district. Many customers shop at Wal-Mart because of low prices. Local retailers, like the neighborhood drug store, often go out of business because they lose customers. This story demonstrates that a. there are economies of scale in retail sales. b. consumers are boycotting local retailers whose prices are relatively higher. c. there are diseconomies of scale in retail sales. d. there are diminishing returns to producing and selling retail goods. Exam 2A -- Fall '06 3 10. Carla's Candy Store is maximizing profits by producing 1,000 pounds of candy per day. If Carla's fixed costs unexpectedly increase and the market price remains constant, then the short run profit-maximizing level of output a. is zero. b. is less then 1,000 pounds but above zero. c. is still 1,000 pounds. d. is more then 1,000 pounds. 11. Assume a certain firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit. To maximize its profit, the firm should a. increase its output. b. continue to produce 1,000 units. c. decrease its output, but continue to produce. d. shut down. 12. Suppose medical research provides evidence that eating bananas provides far greater health benefits than was previously thought. The resulting change in the demand for bananas a. increases the marginal product of banana pickers for any given number of banana pickers. b. increases the value of the marginal product of banana pickers for any given number of banana pickers. c. increases the supply of banana pickers. d. decreases the supply of banana pickers. 13. Suppose that eight workers can manufacture 70 radios per day, and nine workers can manufacture 90 radios per day. If radios can be sold for $10 each, the value of marginal product of the ninth workers is a. $200. b. $900. c. 20 radios. d. 90 radios Exam 2A -- Fall '06 4 Name: ____________________________________ Part II. Essay Questions. (60 points) 1. (20 points) Answer the questions in the space provided. P P Meals Served Meals Served Firm Industry Assume that the fast food restaurant industry has a constant returns-to-scale production function, fixed factor prices, and all firms in the industry have the same production function in meals served. Using the diagram above: 1) Assume some current demand curve (D1) and supply curve (S1) of meals served in the industry. Show the equilibrium price of the product (P*), meals served in equilibrium (Q*), and the long run supply curve (SL). (Be sure to label your graph.) 2) Show the average cost curve (AC1) and the marginal cost curve (MC1) of the average firm in this industry and the number of meals it will serve in equilibrium (q*). How much profit will this firm receive? (Be sure to label your graph.) Profits = Exam 2A -- Fall '06 5 3) Show the effect of new irrefutable scientific evidence that the fat in hamburgers and French fries reduces the risk of cancer on: a. equilibrium in the industry in the short run. (Be sure to label your graph and define new symbols, points and curves here.) b. profits to the average firm in the industry and quantity of meals served by the average firm in the short run. (Be sure to label your graph and define new symbols, points and curves here.) Profit = c. Total number of firms in the industry? (Explain below) 4) What if any will be the long-run consequences of the information on: a. equilibrium in the industry in the long run. (Be sure to label your graph and define new symbols, points and curves here.) b. profits to the average firm in the industry and quantity of meals served by the average firm in the long run. (Be sure to label your graph and define new symbols, points and curves here.) Profit = c. Total number of firms in the industry? (Explain below) Exam 2A -- Fall '06 6 2. (20 points.) Paul's Pumpkins is a firm in the pumpkin industry which can hire as many workers as it wants at $8 per laborer. Paul can also sell as many pumpkins as he desires for $2 per pumpkin. In the table are important pieces of information about this firm. Complete the table below. Answer each part of this question on the back of this page. Use the graph paper for your graphing. Labor 0 1 2 3 4 5 6 7 8 Capital 4 4 4 4 4 4 4 4 4 Competitive Firm Output Decision Table Total MPP VMP Total Output Revenue 0 4 16 24 30 34 36 37 37 MC MR a. Draw this firm's labor demand curve on the graph paper provided. Show the quantity of labor that will maximize profits when pumpkins are $2.00. Explain why. Exam 2A -- Fall '06 7 b. If the price of pumpkins increases to $4, graphically show how this will affect the quantity of labor demanded to maximize profits. Explain why. c. Draw the marginal cost curve of this firm on the graph paper provided. Using your graph, show the output that will maximize profits. Explain why. d. If the price of pumpkins increases to $4 per pumpkin, graphically show how this will affect the output that will maximize profits. Explain why. Exam 2A -- Fall '06 8 Use this diagram for a. and b. $48 $44 $40 $36 $32 $28 $24 $20 $16 $12 $ 8 $ 4 $ 0 0 1 2 3 4 5 6 7 8 9 Labor Use this diagram for c. and d. $10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1 $ 0 0 4 8 12 16 20 24 28 32 36 40 44 9 Exam 2A -- Fall '06 Pumpkins 3. d p* (20 points) Answer the questions in the spaces provided. s MC AC $5.15
Q* d s $9.00 s d L*L Marginal Firm Non-Union Labor Market L*H Union Labor Market Retail Grocery Industry The above diagrams show the retail grocery industry, the cost curves of the marginal firm in this industry and the labor market for lower-skilled non-union workers and high-skilled union workers. Firms in the retail grocery industry use a mix of union and non-union workers. If the government imposes a minimum wage at $7.35 per hour, show in words and in the above diagrams (illustrate any shifts to the curves as necessary, and label and define any relevant points on your graphs): 1) How this affects the equilibrium price and quantity of groceries sold by the marginal firm in the short run. 2) How this affects the equilibrium price and quantity of groceries in the industry. Exam 2A -- Fall '06 10 3) How this affects equilibrium price and quantity in the non-union labor market. 4) How this affects equilibrium price and quantity in the unionized labor market. 5) Assuming no other changes and based on your diagrams, how will this minimum wage increase impact the quantity of cookies produced by this marginal firm in the long run? Exam 2A -- Fall '06 11 ...
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- Fall '06