Exam2_20080408_sol

Exam2_20080408_sol - 1 Massachusetts Institute of...

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1 Massachusetts Institute of Technology Department of Economics 14.01 Principles of Microeconomics Midterm Exam #2 Tuesday April 8th, 2008 Last Name (Please print): ______________ First Name: __________________ MIT ID Number: __________________ Instructions. Please read carefully. The exam has a total of 100 points. You have 2 hours. Answers should be as concise as possible. This is a closed book exam. You are not allowed to use notes, equation sheets, books or any other aids. You are not allowed to use calculators. You must write your answers in the space provided between questions. DO NOT attach additional sheets of paper. This exam consists of 22 sheets (18 pages + 4 blank pages for scratch work). Please write your name on the blank pages if you use them. Please circle the section or recitation which you are attending below. The marked exam will be returned to you in the section or recitation that you indicate. R01: F10 (Jeanne LaFortune) R02: F11 (Jeanne LaFortune) R03: F12 (Monica Martinez-Bravo) R04: F1 (Jeanne LaFortune) R05: F1 (Monica Martinez-Bravo) R06: F2 (Monica Martinez-Bravo) S01: MWF9 (Brandon Lehr) S02: MWF10 (Brandon Lehr) S03: MWF10 (David Walton Brown) S05: MWF11 (David Walton Brown) S06: MWF12 (Roger Ke) S07: MWF2 (HeiWai Tang) S09: MWF3 (HeiWai Tang) DO NOT WRITE IN THE AREA BELOW: Question 1 __ /20 Question 2 __ /30 Question 3 __ /25 Question 4 __ /25 Total __ /100
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2 True/False/Uncertain (Total: 20 points) 1. Explain whether each of the following statements is True, False or Uncertain, and provide an explanation. (Note: You will not get points for a correct answer without an explanation.) a. (5 points) The Law of Diminishing Marginal Returns states that if a firm doubles all of its inputs, then its output would increase by less than twice as much. False. The Law of Diminishing Marginal Returns refers to a short run analysis in which all but one of the factors of production are fixed. Increasing this factor will cause output gains to decrease eventually. Doubling all inputs for a less than double increase in output occurs when a firm has Decreasing Returns to Scale.
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3 b. (5 points) In the short-run, a profit-maximizing perfectly competitive firm may operate even if it is earning a negative profit. True. If the Average Total Cost at the profit maximizing output level is above the price, then the firm will be making a loss. However, if the fixed costs the firm faces are sunk, then the firm will stay in operation as long as the price is above the Average Variable Cost at the profit maximizing output level.
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c. (5 points) When marginal cost is increasing, the average cost must be increasing too. False.
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This note was uploaded on 04/20/2010 for the course ECON 14.01 taught by Professor Pindyck during the Spring '08 term at MIT.

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Exam2_20080408_sol - 1 Massachusetts Institute of...

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