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Massachusetts Institute of Technology Department of Economics 14.01 Principles of Microeconomics Midterm Exam #2 Tuesday April 14, 2009 Last Name (Please print): __________________________________ First Name: _____________________________________________ MIT Email Address: ______________________________________ MIT ID Number: _________________________________________ Instructions. Please read carefully. This is a 120-minute closed book exam. No notes, calculators, books, or other aids are permitted. Concisely answer all questions in the space provided, below each question. Do not attach additional sheets of paper. Write your name and MIT ID number at the top of each of the 15 pages. If you think that a question is ambiguous, you should explain in your written answer what you found unclear and how you resolved the ambiguity. Please check the recitation or section that you are attending. Lecture + F10 (12-122) Chia-Hui Chen MWF9 (4-159) Jesse Edgerton Lecture + F11 (12-122) Chia-Hui Chen MWF10 (4-159) Jesse Edgerton Lecture + F12 (12-122) Nirupama Rao MWF11 (12-142) Tal Gross Lecture + F1 (12-122) Nirupama Rao MWF11 (12-142) Eric Weese Lecture + F1 (1-190) Eric Weese/ Chia-Hui Chen MWF12 (12-142) Eric Weese Lecture + F2 (12-122) Nirupama Rao MWF2 (4-163) Brandon Lehr Do not write below this line. #1 5 #4 10 #7 10 #10 15 #2 5 #5 10 #8 15 #11 20 #3 5 #6 10 #9 15 Total 120

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Name ____________________________ MIT ID ________________________ 2 1. (5 minutes) Consider the production function F K , L ( ) = K α L β . Under what conditions on α and β will this production function exhibit increasing returns to scale and diminishing marginal product of both capital K ( ) and labor L ( ) ? If you believe that there are no such values of the parameters α and β , then you should say so. ANSWER: All three of the following conditions must hold: α + β > 1 α < 1 β < 1
Name ____________________________ MIT ID ________________________ 3 2. (5 minutes) In the diagram below, the point A represents the minimum of the firm’s Long Run Average Cost ( LRAC ) curve. The points A , B , K , and G lie on the Long Run Marginal Cost ( LRMC ) curve. The point F represents the minimum of a specific Short Run Average Cost ( SRAC ) curve, while the point H represents the tangency between the LRAC curve and the SRAC curve. Not shown in the diagram is the corresponding Short Run Marginal Cost ( SRMC ) curve. Through which point(s) in the diagram must the SRMC curve pass? ANSWER: The SRMC curve must go through F and G . Quantity \$/unit A B J F H G LRAC SRAC LRMC K

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Name ____________________________ MIT ID ________________________ 4 3. (5 minutes) Explain whether the following statement is True or False : If a firm’s marginal cost is increasing at output q , then its average variable cost must also be increasing at output q . ANSWER: False . The diagram below provides a counterexample. In the range of output q < q 0 , the marginal cost ( MC ) is increasing but the average variable cost ( AVC ) is decreasing. AVC ATC MC q 0 Output
Name ____________________________ MIT ID ________________________ 5 4. (10 minutes) There are two firms in the copper industry. Firm A has total cost function C A q A ( ) = q A + 1 2 q A 2 , where q A is the firm’s output. Firm B has total cost function C B q B ( ) = 1 2 q B 2 . Assume that the copper industry is competitive and that both firms are price takers. Let Q denote the total industry output of copper and let P denote the price of copper. Derive the market supply function and then graph the supply curve in the Q , P ( ) plane.

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