Midterm1answers 2007

Midterm1answers 2007 - Department of Economics University...

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Department of Economics Professor Kenneth Train University of California, Berkeley Fall 2007 ECONOMICS 1 FIRST MIDTERM EXAMINATION OUTLINE SOLUTIONS – NOT FOR DISTRIBUTION October 3, 2007 INSTRUCTIONS 1. Please fill in the information below: Your Name: Your SID #: Your GSI’s Name: Your Section Day/Time: 2. This exam ends at 12:58pm. 3. If you finish early, please remain in your seat so that you do not disturb others. 4. When time is called, stop writing and pass your exam to the aisle. Please stay in your seat until all of the exams are collected. 5. There is a total of 100 points, seven questions and nine pages, including this cover- sheet. Points for each question are in parentheses. 6. Answer the questions in the space provided. NO BLUE BOOKS. If you need extra room to answer the questions, use the backs of the pages. 7. Calculators are not permitted. Do not turn the page until you are told to begin the exam. Page 1 of 9
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Question 1. (20 points) True, False or Uncertain. Decide whether the following are true, false, or uncertain. Your grade is determined by your explanation; an answer without an explanation receives no credit. a) (5 points) In a perfectly competitive industry, firms always price at the minimum average cost in Stage 2 equilibrium. TRUE. Profit-maximization for a competitive firm implies that P = MC. Free entry implies that P=AC in the Stage 2 equilibrium. This means that in stage 2 equilibrium, P = MC = AC. If marginal cost is equal to average cost, the firm must be operating a the minimum of its average cost curve b) (5 points) In a market with completely inelastic supply (that is, a vertical supply curve), consumers bear the entire burden of an excise tax. FALSE. Producers bear the entire burden of the tax when supply is completely elastic. The market price will not change, but firms will have to pay the tax out of that price, so they bear the burden. Page 2 of 9
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c) (5 points) In a purely competitive industry, an outward shift in the market demand curve does not change consumer surplus in stage 2 equilibrium since the equilibrium price remains the same. FALSE. Consumer surplus is the area above price and below the demand curve. While the
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This note was uploaded on 07/21/2009 for the course ECON 1 taught by Professor Martholney during the Spring '08 term at Berkeley.

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Midterm1answers 2007 - Department of Economics University...

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