Mid3F06 - vl Name Third Midterm Examination Economics 101...

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Unformatted text preview: vl Name December 13, 2006 Third Midterm Examination Economics 101 Unless a question explicitly says otherwise, assume that all 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. If a lump—sum tax of $40 is imposed on a profit—maximizing monopolist, then the output produced by the monopolist in the short run will remain unchanged and the price of the good will rise. 2. The supply curve for a monopolist is the same as its marginal cost curve at and above the minimum of average variable cost. 3. If there is positive economic profit in an industry that is monopolistically competitive, entry will continue until price falls to the minimum of the average total cost curve. 4. An important factor for a market to be considered monopolistically competitive is the existence of barriers to entry into the industry. 5. A central difficulty facing cartels is that it pays any single member of the cartel to cheat by increasing output. 6. A profit maximizing firm will hire more labor if the marginal revenue product of labor is greater than the wage rate. 7. Market demand for an input is obtained by horizontally summing the marginal revenue product curves of all firms that use the input. 8. When a firm's production causes a negative externality, one way to counter these negative effects is for the government to subsidize the output of the firm that causes the negative externality. Page # 9. When a quota is imposed in a market and imports fall, the result is a loss of both domestic consumer and producer surplus. 10. Suppose there are 2 countries and 2 goods in the world. Both countries have differently sloped straight~line PPFs. For their production to be on the world PPF, each must specialize in the production of one good. 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. The following graph shows the market for flu vaccines. Flu vaccines generate an external benefit for those who do not get the vaccine. Which of the following policies should the government pursue to make the market efficient? $ : : : i : : : : : : S 70 ——————— ——————— --J. -------- -—: ------- ---- —- 60 ____ __: _________________ __: ________________ ____ _. 50 ——————————————————————————————————————————— —- 40 ———— ———————————————————————————————————————— —v 30 _____ i ___________________________________ _- MBMMI 20 "" ’1 ‘ ' ' ' ' ' ‘ ' ' ' ' ' ‘ ‘ ‘ ‘ ’ ' ' ‘ ' ‘ ' ‘ ' ' ' ‘ ‘ ' ‘ ‘ ' ' ' ‘ ' ‘ ' ' ‘ " 1 0 ____ _ -E ____________________________________ _ _ MBpiiyate 1O 25 40 55 70 Q (a) A one time payment of $20 to flu vaccine producers. (b) A tax of $20 per flu vaccine. (c) A $40 subsidy per flu vaccine. (d) A $20 subsidy per flu vaccine. (e) A quota of 40 million flu vaccines. Page # l2. ___ The firm EcoEnViroHippies, Inc. produces hackey—sacks. It emits pollution in the production process, with the costs and benefits of pollution abatement illustrated in the graph below. If EcoEnViroHippies is allowed to pollute its optimal amount, which area represents the deadweight loss? $ Almgfiudbenefitof abalement E) bdarghialgnivatc benefitofabafinnent i I I l I l I D l l f 1 I I l Tonsof PoHuflon (a) D+E+F (b) C+D+E (c) 3 (d) c (e) E Page # 13. There are two firms in the coal—mining industry: Michikan and Ohaio. The following graph shows the marginal cost of abatement curves for both firms. To reduce pollution, the government gives 3 permits to each firm. Assume that one permit allows the firm to emit one unit of pollution and the permits are tradeable. Which of the following is TRUE? I I l I I I I I l I l I '1--P-h—+—fi——P—f-fi—fl--r—+-fi-- _4__L_L_4_4__L_L_4_4__L_4_4__ 80 '.-'I"T"I"I"r-T"I" I I 1"l"T-1"l__l'—T_1"" 60 —+—4——F-+—4—-F—F—+—H—— _h__L._L_.J__L__L._J_.J__ 40 —:__':'_‘:“:":'":"":_— -+-1MC -fi-- 20 —I—AQ'I_—-L__l—_ 0 2 4 6 8 10 12 Pollution After trading, Ohaio's abatement cost decreases by $45. Michikan will sell permits to Ohaio. The equilibrium price of a permit is $60. After trading, Michikan's abatement cost decreases by AMAAAA (D U‘I Q0 (79) vavvv After trading, Michikan produces 6 tons of pollution. 14. 15. equilibrium to the efficient quantity. The graph below shows the market for copper production. Consider a reduction in output from the competitive What is the resulting reduction in the external cost from copper production? 33886 P vvvvv '--¢--!--t--1--$--!—-r--t—-J-—r-1—-$-— $t1139tiitllt ()10 __t__!__L—J——&——¥——L——$—_!__L—.1_ -mc I‘ ____ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ Sada ‘1"—r'-r— —-I-—1——i---l-—4— 6_J____L_ 4 _ "'2" MCPrivate ——t——i-—z---:- —. --!--3--t‘-1-'— 2-4-4 __¥__§__.t.__i——!—_L—.l——3_— ; : t s 1 t 3 i D U ‘IU 20 30 40 50 60 Q (tons) $70 $60 $80 $40 $30 Page # Suppose that for every gallon of gasoline consumed, pollution is emitted into the environment and causes $6 worth of damage. A $7 per—gallon tax on gasoline will: reduce consumption to the socially efficient level. reduce the deadweight loss to $0. increase consumption to the socially efficient level. reduce consumption but still result in a deadweight increase the total social cost of production. 5 Page # 16. The table below shows the total revenue schedule for a monopolist. Its marginal cost is constant at $5 and its fixed cost is $6. _n order to maximize its profits, the firm produces units. Quantity Total Revenue 1 10 18 NJ 24 ‘ _ H28 \ 30 30 28 \J 0) out» (a) 3 (b) 4 (c) 5 (d) 6 (e) 7 17. ___ Which of the following statements comparing a profit—maximizing monopolist and a profit—maximizing competitive firm is true? a) Both firms maximize total revenue. b) Both firms make no profits in the long run. c) Both firms will produce where marginal revenue is equal 0 d e marginal cost. ) Both firms produce an inefficient quantity. ) Both firms face barriers to entry. l8. 19. Page # Based on the information given below for a monopolist facing a linear market demand curve, which the following is the best recommendation? Profits>$0 ATC>$O ATC is at its minimum Price elasticity of demandz—l (a) The firm is in the correct position. (b) The firm should shut down immediately. (c) The firm should increase price and decrease output. (d) The firm should decrease price and increase output. (e) The firm is in the correct position for the short run only. In the long run it should exit the market. You are given the following information for a monopolist. What is the best recommendation for this firm? Producer Surplus=$80 MR=$3.50 P=$7 Profit=$40 TC=$1OO AVC is at a minimum ) Increase output and decrease price ) Decrease output and increase price ) The firm is currently in the correct position ) Increase output and increase price ) Shut down modgm Page # 20. Consider the situation for a monopolist illustrated below. Suppose the government sets a price ceiling at $15. The monopolist's response would be to produce units of output. (a) O (b) 20 (c) 40 (d) 50 (e) Between 20 and 40 21. ___ The Oldies Forever rock band, a group of economists singing oldies, sets two prices for its concert tickets — $50 per ticket for a senior citizens and $30 per ticket for people who are not senior citizens. According to the economic theory that you have learned this semester, which of the following is the best explanation for their pricing scheme? (a) They would rather sing to seniors. (b) Senior citizens have more inelastic demand for their concerts than people who are not senior citizens. (c) Senior citizens have higher incomes than people who are not senior citizens. (d) r“hey have more fans who are senior citizens than fans who are not senior citizens. (e) The marginal cost is lower for a senior citizen than for people who are not senior citizens. 22. Page # The Panthers, a university football team, prices tickets for their football games in the following way. Each ticket costs a student $20 and there is a required annual donation of $200 to the team before a student may purchase any tickets that year. Tickets for people who are not students cost $20, and the required donation to the team is $100. According to the economic theory that you have learned this semester, which of the following is the best explanation for their pricing scheme? (a) If there were no required donation, a student who purchases tickets would have higher consumer surplus than someone who is not a student. (b) If there were no required donation, a student would buy more tickets than someone who is not a student. (c) A student has a lower income than someone who is not a student. (d) The high fixed cost of football games makes them profitable only with the required donation. (e) Most of the fans who attend games are students. Page # lO 23. Santa Inc. is a profit—maximizing firm that produces holiday cheer. Its cost curves and the demand curve it faces are depicted below. If Santa Inc. is a monopolistically competitive firm, then its producer surplus is $ 20 15 1O $1,500 $900 $2,000 $1,000 $0 (DCLOO‘QJ 24. Page # ll Firm A and Firm B are duopolists producing oil. Firm A faces the market demand and marginal cost curves given in the diagram below, and in addition incurs a fixed cost of $10. It conjectures that Firm B always produces 6 units. If Firm A's guess is correct, and it responds optimally, then its profit will be: P L 14 $20 $100 $0 $60 $50 (DQJOO‘QJ Page # l2 25. Josh Inc. and Dima Ltd. initially agree that each will charge a certain price for their economics tutoring services (collude). The profits to both are summarized in the game matrix below. If both firms use a dominant strategy, then which 0" the following statements is TRUE? Collude Defect (a) Both firms' best strategy is to collude. (b) Josh's best strategy is to collude, but Dima's best strategy is to defect. (c) Both firms' best strategy is to defect. (d) Dima's best strategy is to collude, while Josh's best strategy is to defect. (e) Neither firm has a dominant strategy. Page # 13 26. ___ Chalk Inc. is a profit—maximizing firm producing chalk. The chalk industry is competitive and there are many other similar chalk firms in the industry. The following table shows the total revenue generated from a given number of hours of employment at Chalk Inc. Assume that the only fixed cost for Chalk Inc. is $200. If the wage is $5, then what is Chalk Inc.'s profit? Total Revenue (35) (a) $40 (b) $60 (c) $100 (d) $150 (e) $200 Page # 14 27. ___ Suppose, in 2000, Chile has 100 workers and the USA has 150 workers. Chile can produce 300 bottles of wine or 500 shirts using all of the workers. The USA can produce 450 bottles of wine or 600 shirts using all of the workers. In 2005, the USA gains 50 workers due to immigration (not from Chile), but the productivity of each worker stays the same. Which of following statements is true? (a) There are no possible gains from trade in either 2000 Or 2005. (b) There are gains from trade in 2000, but no gains from trade in 2005. (c) Chile has a comparative advantage in the production of wine in both 2000 and 2005. (d) The USA has a comparative advantage in the production of wine in both 2000 and 2005. (e) The USA has a comparative advantage in the production 0: wine in 2000, but has a comparative advantage in the production of shirts in 2005. Page # 15 28. ___ The countries of Kreplakistan and Canuckistan can each produce two goods, buns and gutters. In Kreplakistan, a bun costs % of a gutter; and in Canuckistan, a bun costs 1 gutter. The combined PPF for these two countries is illustrated below. if a total of 100 buns is being produced efficiently, then: gutters 300 200 200 400 buns (a) Kreplakistan produces only gutters, and Canuckistan produces buns and gutters. (b) Kreplakistan produces only gutters, and Canuckistan produces only buns. (c) Kreplakistan produces only buns, and Canuckistan produces only gutters. (d) Kreplakistan and Canuckistan both produce both buns and gutters. (e) Kreplakistan produces both buns and gutters and Canuckistan produces only gutters. Page # 16 29. ___ The graph below represents the domestic market for watermelons. There was initially no trade and then the US began to import watermelons. If, in the resulting equilibrium, the sum of producer and consumer surplus increases by $40,000, then what is the world price of watermelons. 8 domestic 1O 20 30 40 50 Q (in thousands) (a) $3.00 (b) $3.50 (c) $4.00 (d) $4.50 (e) $6.00 Page # 17 lemons and causes the market 30. ___ The respective valuations of sellers and buyers for peaches are given in the table below. If the probability that a given car is a lemon is 0.75, then of the choices below, what is the lowest value of X that to fail? (a) $1200 (b) $1300 (C) $1450 (d) $1550 (e) $1600 31. ___ The example used in lecture to discuss the impact of a tariff was: (a) The tariff in the US on ethanol (b) The tariff in the US on furniture (c) The tariff in Mexico on lumber (d) The tariff in Canada on pork (e) The tariff in Australia on oil You will only get credit for the following question if your answer is correct for the lecture that you are enrolled in. Page # 18 32. The topic of one of the end—of—the—term GSI presentations in your lecture was: Commercial Shipping in Hawaii. Prisoner of War Camp bartering in Germany. Theme park economics in Florida. Pricing of natural gas in Russia. Education in Australia. (DOJOO‘QJ Third Midterm Examination Economics 101 December 13, 2006 Answer Key — Version 1 Number Answer 1 False 2 False 3 False 4 False 5 True 6 True 7 True 8 False 9 False 10 False 11 D 12 D 13 D 14 A 15 D 16 A 17 C 18 C 19 A 20 C 21 B 22 A 23 A 24 A 25 A 26 w m 3735 OPMUO ...
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