Mid3W06 - v1 Name April 18, 2006 Third Midterm Examination...

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Unformatted text preview: v1 Name April 18, 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. ___ Alison and Bob produce socks and mittens. Alison has an absolute advantage in producing both. Also, Alison's per unit opportunity cost of a sock is lower than Bob's. Then, Alison must have a comparative advantage in the production of knitting mittens. Private Benefit for all levels of consumption, then the competitive equilibrium quantity will be less than the efficient quantity. 2. If the Marginal Social Benefit is greater than the Marginal 3. If there is a positive externality in a competitive equilibrium, then the larger the government's per unit subsidy, the smaller the resulting deadweight loss. 4. For a natural monopolist, the deadweight loss from Average Total Cost pricing will be larger than the deadweight loss from Marginal Cost pricing. 5. In a cartel, a condition for firms to sustain collusion —— and resist the temptation to undercut other members of the cartel —— is that the members of the cartel play a game that is infinitely repeated. 6. In a long—run equilibrium, it is impossible for a monopolistically competitive firm to produce at a quantity where AVC is at its minimum. 7. A profit maximizing monopolist that does not price discriminate will produce on the inelastic portion of her demand curve. Page # 8. Price Discrimination will always lead to a deadweight loss. 9. The marginal revenue product of labor is everywhere inverSely related to average variable cost. 10. If leisure is a normal good, then the income effect from a higher wage is to reduce the quantity of labor supplied. 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 Acidity Inc. and Sulfite Corp. are the only two firms that emit pollution. Their marginal costs of abatement are shown in the graph below. _._;-__-__L_ ——-—4—-——-+—-—-r— _—___4_-——_-4_————_4— ___L_-___J_,____J____ -J-_____L____-_L_ _-_F_-_-_4_--__- _____-L____-4------4______4_____-A______L- _--_-4_-_-__4-____- % p a E I 5 1o 15 20 25 30 35 4o 45 P““m°”“°"” The government has allocated 10 pollution permits to Acidity Inc. and 20 to Sulfite Corp. Each permit allows 1 ton of pollution. When the permits are traded, in equilibrium, the firms save a total of in abatement costs, compared to when the permits are not traded. (a) $31.75 (b) $35.75 (c) $40.00 (d) $29.25 (e) $37.50 Page # l2. ___ Suppose the law firm Dewey, Cheatum and Howe employs 9 promising law students to write long—winded reports. The firm is a profit maximizer in a competitive market. If the price of the firm's output is $8 per report, and the additional output of the last worker is 10 reports, what is the wage per worker? (a) $90 (b) $80 (0) $85 (d) $95 (e) $100 13. ___ In the diagram below, which area represents the deadweight loss from the externality in the competitive equilibrium? ($) Marginal Social Cost Marginal Private Cost Marginal Benefit (DQOO‘QJ J K L M N one of the above 14. 15. music CDs in Ann Arbor. Using the market demand schedule in the table above, many CDs will Wazoo produce to maximize its profits? (a) 7 (b) 4 (c) 5 (d) 6 (e) 3 FC =$l,OOO PS =$2,000 AVC=$1 ATC=$2 hAarket Demand 1 ATC is at its minimum. Page # Wazoo and Encore are the only two suppliers of underground Wazoo assumes that Encore will supply 2 CDs no matter how many CDs Wazoo produces. Wazoo has a constant marginal cost of $5 per CD. Also, how Based on the information given below for a profit maximizing monopoly, which is the appropriate recommendation? (a) If MR=$l.5 the firm is in the correct position both in the short run and long run. (b) If MR=$2.0 the firm is in the correct position in the short run but has to exit in the long run. (c) If MR=$2.0 the firm should shut down immediately. (d) If MR=$2.5 the firm should decrease production and increase price. (e) If MR=$2.5 the firm should increase production and decrease price. 16. Page # The graph below represents the domestic market for whiskey in Chile. The world price of whiskey is $3 per liter. government imposes a tariff of protect domestic producers, imports is (a) $4 per (b) $2 per (c) $1 per (d) $2 per (e) $3 per ($flier) I I I I I I -_L__L-;-___J____ ______-_----- _ . . _ q . . -— _,L__ -5- __J-_-_J___---——_---- _______L__ _..L.-_ _.l._ __J_---J-___-_——_____ _———_-_|___ _- —_y_§____ ___-4-_-_-.---____ ———————p__ I I I I I I I I Domestic Supply I I I -___‘ _ . . _ -. I I I I ----4 _ _ _ _ _. I _-.._.1 _ . . . _. I I ____4 _ _ _ _ -. F" 'F"F'T"“1' “1"“""""' 10 25 40 55 70 85 100115 130 Q (thousands oflflers) liter; liter; liter; liter; liter; 10,000 30,000 30,000 40,000 60,000 If the Chilean on whiskey in order to the resulting decrease in 5 17. Page # Econ Inc. is a profit—maximizing monopolist in the market for producing garbage. The graph below shows the firm's costs, as well as market demand for garbage. Pfice($) How much profit does this firm make? (a) $4.5 (b) $3 (c) $5 (d) $2 (e) Cannot be determined from the information available. 6 Page # 18. ___ Economics—r—Us is a competitive firm that produCes Econ 101 classes. Its fixed costs are $15 and it pays each GSI $10 per hour. The price the firm receives for each Econ 101 class is $50. The following table shows the relationship between the number of Econ 10; classes produced and the hours of GSI labor. Number of Hours of Econ 101 GSI Work Classes The profit—maximizing quantity of Econ 101 classes is: (DQJOO‘QJ U1H>UJNl—‘ Page # 19. The graph below shows a natural monopoly. Its fixed costs are $360, and marginal costs are constant at $6. P($) 36 ---------- -- 30 ___ ___- _-_--_¢_____-L_ 24 ------------- -- 18 - - - - - -- _____4____-_ 12 -------------- -- __-_ _L_____J______J_,_ __-.l____._._1-_____ "‘ —_|—_—_—”1’_'_-_1—"——"\""’-“T__——’—r_ O) I I I I I I I I I I I I _-____I____-.. 10 20 30 40 50 60 70 80 90 Q What is the difference between the price it would charge if it were required to use Average Total Cost pricing compared to Marginal Cost pricing? (a) $12 (b) $6 (c) $3 (d) $18 (62) $9 20. ___ Suppose the market for video games is initially in a competitive equilibrium. Then two firms (Pac—Man Inc. and Ms. Pac—Man Corp.) begin to buy up all of the other firms in the market, eventually resulting in a duopoly. As a result of the acquisitions by the two firms, we in general expect the equilibrium quantity of video games to and the equilibrium price of video games to rise; rise fall; rise fall; stay the same fall; fall rise; fall mQaOU‘QJ 21. Page # During production of its perfume, Le Pew Inc. releases an unpleasant, skunk—like odor into the air. The following graph shows the Marginal Private Cost, the Marginal Social Cost, and the Marginal Private Benefit from Le Pew's production. (fl MSC -J-—_J--—-L----- ___,___,--_ ____F___1___1-___P_____ q————¢——-+--+--—k- —4-—4———-F-——- -— —4_—__;_—- ———l———-L———J—-—J—_-—L—___— O _\ O ___- N O (A) O .h 0 01 O O) O 7OBottmsof Pefiume Currently production in this market is unregulated, resulting in a deadweight loss of ___. If the government imposes a ___ per—unit tax, then the resulting production of perfume will be ___ the efficient quantity. (a) $50; $3; lower than (b) $30; $5; lower than (C) $30; $3; at (d) $50; $5; lower than (8) $50; $5; at Page # 10 22. ___ Mean Machines produces 5,000 SUVs every month. During the production process, it also dumps 200 tons of pollution into a nearby river. Abating pollution requires the rental of cleaning machines. Each cleaning machine costs $1,000 to rent and reduces pollution by one ton. The marginal social benefit of abatement is shown by the curve labelled MSB and Mean Machines' marginal private benefit of abatement is shown by the curve labelled MPB. 17.5 260 Poflufion Hons) 25 50 75 160 126 150 What is the deadweight loss resulting from the firm's optimal pollution level? (a) $25,000 (b) $50,000 (C) $15,000 (d) $30,000 (e) $0 23. 24. Page # 11 Consider a monopolist that faces a downward—sloping demand curve, has an upward sloping marginal cost curve, and a U—shaped average total cost curve. Currently, its profit is zero and its ATC is rising. Which of the following statements must be TRUE? (a) Currently, the firm produces too little compared to the profit—maximizing output. (b) If the firm maximizes its profit, it will still make zero profit. (c) Marginal cost is lower than marginal revenue at its current output. (d) The price charged by the monopolist is lower than marginal cost at its current output. (e) The quantity currently produced by the monopolist is smaller than the efficient quantity. PhD Weight Loss produces kits that instruct people on how to lose weight by not eating, sleeping, or socializing. It is a monopolistically competitive firm, with cost curves (and two hypothetical demand curves) as shown below. $ Not drawn to scale. MC 5O MR2 100 Q In the long~run equilibrium, PhD's variable costs equal: (a) $600 (b) $400 (c) $500 (d) $200 (e) $100 Page # 12 25. There are two types of consumers, students and professionals, who purchase sushi from the local sushi monopoly, Tomo. The demand schedules for both students and professionals are given in the chart below. Price Per Roll (35) Quantity of sushi rolls demanded by students Quantity of sushi rolls demanded by professionals If Tomo has a constant marginal cost of $1.50 per sushi roll and practices third degree price discrimination, then Tomo will charge a price of ___ to students and ___ to professionals. (a) $7; $8 (b) $7; $6 (C) $6; $7 (d) $6; $5 (e) $6; $6 Page # l3 laptops: high quality and low quality. The buyer's and the seller‘s values of both types of laptops are given in the chart below. Sellers know which type of laptop they are selling, but buyers cannot tell the difference between a high and low quality laptop. 26. In the market for used laptops there are only two types of High Quality Low Quality Buyer’s Value Seller’s Value If buyers think that 40% of the used laptops are high quality, then ___ quality laptops will be sold. (a) both high and low (b) only high (C) only low (d) neither high nor low (e) there is not enough information to tell which Page # 14 27. A monopolist produces fancy plastic key—chains. Given the information in the graph below, how much additional profit will the monopolist make if it is a first degree price discriminator, compared to a monopoly that does not price discriminate? Rte 30 MC 20 10 D 2 3 6 Fancy plastic key-chains (a) $45 (b) $15 (c) $30 (d) $27 (e) $42 Page # 15 The graph below shows the domestic supply and domestic demand curves for canoes. 28. d n mw a m mu m nu a D. e Cu B. ||JI|| clxuul1ulJlnu—|||JI|I D4 40 u n _ u c" 1 S _ _ _ _ fl. c u u _ _ a" .6“ . _ _ 0 s -Iu . . I . u . . . . -|_---F-- I--r-m_ ...... -- nu e n. _ 0.“. 2 m D. 1 o _ n nu _ _ nu _ " nu I x I I p x 1 x x x I n I I y I n z x n o A z 1 u x I z x x I I I I u x x .1. 0 1 — . 0 .-l--_ ................................ -- nu " u 8 — _ _ _ _ _ _ _ _ _ 0 .|_I||. I | I I I I I I I I I I I I I I I I I I I | I I | 4 I I I I I I I I II 0 u u . cu _ — - _ — — — _ - _ - — . _ . 0 ¢-1-T-- T _ nu — — — v 4 c _ _ . — _ _ — _ _ _ — _ _ _ _ _ . _ 0 Ltrlrll F L 0 . . a; — _ — _ - _ — _ _ _ _ _ 12 """' 11 """' Suppose the world price of canoes falls from $6 to $4. Then total surplus decreases by $600. increases by $1,800. increases by $2,400. increases by $600 decreases by $1,800. 29. Page # 16 The United States and Argentina are trade partners. Each nation produCes only the good for which it has a comparative advantage. Each country's productive capabilities are shown in the table below. Output per Worker Argentina Suppose a technological improvement now allows a worker in Argentina to produce 4 units of cotton or 1 unit of wheat. Then, after this technological change, Argentina should: Produce neither good. Switch from producing cotton to producing wheat. Switch from producing wheat to producing cotton. Continue to produce wheat. Continue to produce cotton. (DQJOU‘S-‘U Page # 17 30. ___ George Bush and Dick Cheney enjoy hunting quail together. While out on the range, the two hunters can either shoot high, shoot middle, or shoot low. The number of quail each can shoot under the different strategies is given in the table below. George Bush Middle Low Middle % 0 a 0 a D x .2 Q ma Mi] Mi From the information provided, we can determine that George Bush has a dominant strategy to shoot and Dick Cheney has a dominant strategy to shoot _I (a) high; middle (b) high; high (c) middle; middle (d) low; low (e) middle; high Page # 18 31. Countries A and B produce goods X and Y. Their PPFs are shown below. Country A Country B Y Y 200 200 100 X 300 X If country A and country B trade with each other, which of the following must be FALSE? (a) If the price ratio, PX/Py, is 2/3, then country B produces both X and Y. (b) If the price ratio, PX/Py, is 2, then country A produces both X and Y. (c) If the price ratio, PX/Py, is 1, then country A produces only Y and country B produces only X. (d) If the price ratio, PX/Py, is 5/4, then country A produces only X and country B produces only Y. (e) If the price ratio, PX/Py, is 2, then country B produces only X. 32. 33. Page # 19 The graph below shows domestic demand for beef in Argentina. The world price is $5 per pound. The domestic supply of beef in Argentina is perfectly inelastic at a quantity of 700 pounds. ____--;_--_____ --_»_-+-____-¢____--_- ---_--4_-----1_-----,-__-”--, _-——_— __---_l-______l_-___..A___-__.L________ ______L_____4--____4______ ‘-_-__h-»_-_4-_-_-- _--_-_P--_-- 100 300 500 700 900 Q (pounds) Suppose the Argentinian government wants to reduce the price of beef in Angentina to $3 per pound. Which of the following policies will successfully achieve this result? (a) A ban on the export of all Argentinian beef. (b) Restricting the export of Argentinian beef to 1/3 of its current level. (c) Restricting the export of Argentinian beef to 2/3 of its current level. (d) Restricting the export of Argentinian beef to 1/2 of its current level. (e) Restricting the export of Argentinian beef to 1/4 of its current level. The example used in lecture to illustrate a firm thinking about the optimal amount of product differentiation was: (a) The Detroit Tigers and its move to Comerica Park. (b) United Airlines and its decision to provide more services like spacious seating. (c) Whole Foods and its decision to feature freevrange chicken. (d) Sprint and its internal debate over offering a new family plan. (e) Kmart and its decision to sell Martha Stewart's home furnishings. Third Midterm Examination Economics 101 April 18, 2006 Answer Key - Version 1 Answer False True False True True False False False False True WEIme WUUIVU UZJUJOIZUO mmwwm tUUJU ...
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This note was uploaded on 04/02/2008 for the course ECON 101 taught by Professor Gerson during the Fall '08 term at University of Michigan.

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Mid3W06 - v1 Name April 18, 2006 Third Midterm Examination...

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