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Unformatted text preview: l'l;\l I 10 micro\exams sO‘)\e2mu_l01_s09_OV.doc Econ 1110 _ Wissink  SO9
MAKEUP PRELIM #2 — April 10, 2009 YOURNAME: KE 1 ‘ YourC.U.Netid: YOUR C.U. STUDENT NUMBER: Check YOUR TA’s NAME:
JinYoung (Tuesdays am) Qingqing (Thursdays am)
Jonathan (Tuesdays pm) J ingxian (Thursdays pm) iLee (Fridays) INSTRUCTIONS: There are three sections in this exam:
0 Part I: 15 multiple choice questions (3 points each) ANSWER ON EXAM PAPER BY C‘ [RCLING TIIE BEST CHOICE
 Part III: 3 problems (18. 18 and 19 points) — Answer each on the test. . ANSWER ALL QUESTIONS. TOTAL POINTS = 100. TOTAL TIME = 90 minutes HINTS:
o Read all questions carefully.
I Write legibly and remember to label all graphs and axes in diagrams. NO QUESTIONS CAN BE ASKED DURING THE EXAM: If you need to use the restroom, quietly bring
your exam papers up to the TA proctoring and they will hold your materials while you are out at the restroom. ONLY SIMPLE FUNCTION LOW TECH CALCULATORS ARE ALLOWED. NO CELL PHONES OR GRAPHING CALCULATORS ARE ALLOWED. NO DEVICES THAT HAVE CALCULATOR "apps" AS WELL AS OTHER FUNCTIONS ARE
ALLOWED EITHER. NO BOOKS. NO NOTES. NO HELP SHEETS. NO TALKING TO EACH OTHER. NO ASKING THE PROCTORS ANY QUESTIONS. GOOD LUCK! Hill 1 10 micro\exam5 309\e2mu710i_509_OV.doc
Part 1: Multiple Choice: Circle the best answer. Do them ALL. 1. A firm’s average total cost is $80/unit, its average variable cost is $75/unit, and its output is 50 units.
Its total fixed costs are a) less than $10. b) between $10 and $100. c) between $100 and $200.
@between $200 and $300. e) .more than $300. 2. Which one of the following statements about cost curves is true? a) The AVC curve only includes explicit variable accounting costs.
@ncreases in input prices for variable factors of production will shift the ﬁrm’s marginal cost curve up and
also shift the firm’s total variable cost curve up.
c) The FC curve only includes implicit fixed opportunity costs. ‘ _
d) An increase in the price of a fixed factor of production will shift the firm‘s marginal cost curve up.
e) A competitive ﬁrm’s short run supply curve is identical to its short run marginal cost curve. 3. Which of the following economic situations best describes INTERNAL economies of scale‘in the long
run for a typicalfirm in the automobile industry? a) As more firms enter the auto industry, the industry becomes more competitive and demand rises for
increasingly sophisticated cars. This raises the price of making cars.
13) As more firms enter the auto industry, new technologies are copied from new firms, lowering everyone’s costs to make cars.
@s a result of being able to sell more cars, the ﬁrm becomes more capital intensive and long run average
0 tal costs fall.
d) As a result of decreased demand for cars, many firms exit the industry driving down the price of steel used in making cars.
e) As car plants become larger, internal communications infrastructures are congested and average costs begin to rise. EU H.\] I It) miero\cxauis 509\e2mu_lGl_sD9__OV.doc Pace Quantity 4. In the figure above, which letter most likely denotes the long run market supply curve(loeus) in a
constant cost perfectly competitive market? a) A.
' b) B.
c) C. @D. e) E. 5. Bob the Builder builds houses for a living. However, by building houses Bob forgoes a great job at the
local library that would pay him $40,000 a year. In any given year, including the forgone salary from the
library along with all other building costs, the cost of building the first house is $50,000. The cost of
building the second house is $60,000, the cost of building the third house is $70,000, and so on. If the
price that is offered to Bob to build houses is $100,000 per house, how many houses will he build in a year and what is his producer’s surplus? a) He builds as many houses as he can and gets zero producer‘s surplus.
b) He builds l lieuse and gets $50,000 in producer’s surplus. c) He builds 2 houses and gets $90,000 in producer’s surplus. d) He builds 4 houses and gets $140,000 in producer‘s surplus. .{e builds 6 houses, and gets $150,000 in producer’s surplus. H‘.\l I if) micro\exams 509\e2m1171017509_OV.doc 6. Which one of the following statements is false? a) At each and every bundle along a given budget constraint income is held constant. b) At each and every bundle along a given budget constraint the consumer is using up all his or her income. c At each and every bundle along a given budget constraint the Economic Rate of Substitution is the same.
@ At each and every bundle along a given budget constraint the Marginal Rate of Substitution is the same. e) it‘X is on the horizontal axis and Y on the vertical axis, then the slope ofthe budget constraint is ~Px/Py. 7. Suppose Eric quits his $55,000/year job and withdraws $20,000 from his mutual fund stock account
(yielding a 10% yearly interest) to start his own firm, EriCorp. Eric puts the $20,000 in the company safe
just in case he might need it someday in a hurry. EriCorp spends $35,0007yr. on employee wages,
$30,000fyr. on office supplies at Staples, $2,000fyr. on food at Wegmans, $20,000/yr. on rented ofﬁce
space from the Pyramid Group and $5,000/yr. on utilities and telephone from various vendors. Which one of the following statements is true? a) EriCorp’s annual implicit costs are $75, 000 and its explicit costs are $57, 000.
b) EriCorp’s annual implicit costs are $92, 000 and its explicit costs are $57, 000. EriCorp’s annual implicit costs are $57, 000 and its explicit costs are $92, 000.
d) EriCorp’s annual implicit costs are $77, 000 and its explicit costs are $92, 000.
e) EriCorp’s annual implicit costs are $57, 000 and its explicit costs are $57, 000. 8. Suppose Charlie consumes carrots and zucchini. A pound of carrots costs $2, while a pound of
zucchini costs $3. Charlie has a weekly income of $60. He tells you that, holding income and the price of
carrots constant, he chooses to consume 10 pounds of zucchini optimally, regardless of their price (within
reason). What happens to Charlie’s optimal bundle if the price of zucchini increases (within reason) to $4 per pound? a) He consumes 15 pounds of carrots and 10 pounds of zucchinis at the new price.
CB) lie consumes 10 pounds of carrots and 10 pounds of zucchinis at the new price.
c) He consumes 10 pounds of carrots and 13.33 pounds of zucchinis at the new price.
d) ilc consumes 13.33 pounds ofcarrots and it) pounds of zucchinis at the new price.
c) There is not enough information to determine how much of each good he consumes at the new price. H:\l l 10 micro\exams 509\e2mu_l01_509_MOV.doc 9. Dan and Heather have exactly the same cost structures for baking apple pies except for one thing: Dan
used his own money to buy his baking oven while Heather borrowed money from the bank to buy hers.
The prevailing market interest rate in 15% for both savings and borrowing. Both Dan and Heather
would work for Tops Friendly Markets and earn salaries of $35,000lyear if they quit working for
themselves. Assume that the apple pie baking business is a perfectly competitive industry. In the short run, a) Dan must go out of business. b) Heather must go out of business. 0) Dan and Heather earn the same amount of accounting proﬁt.
@) Dan and Heather earn the same amount ofeconomie proﬁt. e) Dan earns more economic proﬁt than Heather. Hats 20 10 Bunnies 10. The graph above depicts Mike the Magician’s budget constraint. If the price of hats is $10 per hat,
what is the price‘of a bunny?
a) $10.
b) $1 5.
C3 $20.
d) $25.
6) $30. 11. Jackie consumes only candy bars and apples. She tells you that at her constrained utility
maximization optimal bundle she consumes a bundle ofcandy bars and apples such that the marginal
rate of substitution equals 2 (assume apples are on the vertical axis). An apple costs $1. Based on this
information, what is the price of a candy bar? a) $0.50. b) $1. c $1.50.
$2. e) $0 H;\l I It) Inicro‘iexams SD9\e2mu_l Ol_309_OV.doc 12. Gerrit’s SwimFast company makes swim caps. They are currently producing 4589 caps a month
using 200 hours of labor and 10 units of capital. The marginal product of labor at 200 hours is 63 caps. The marginal product of capital at 10 units of machinery is 120 caps. Gerrit’s input prices are as follows:
The price of labor is $9 per hour and the price of capital is $24 per unit of machinery. If Gerrit wants to cost minimize he should a) do nothing, his costs are minimized already. b) use more capital only since it is more productive. c) use less labor only since it is not very productive.
use more labor and lesscapital. e) use less labor and more capital. 13. In a perfectly competitive industry with identical firms, a) ﬁrms with P<SRATC fall out of the market immediately.
(:15) ﬁrms with SRAVC<P<SRATC stay in the market in the short run. c) the short run supply curve ofeach firm is its marginal cost curve.
d) the short run supply curve of each ﬁrm is the portion ofits marginal cost curve above the minimum of the average total cost curve.
e) the short run supply curve of each ﬁrm is horizontal. l4. Bree and Dan have the same cost structures for stringing tennis rackets except that Bree used her
own money to buy her stringing machine while Dan borrowed money from the bank to buy his. The
prevailing market interest rate is 12% for both savings and borrowing for both Bree and Dan. Both Bree
and Dan would work for Venus Williams and earn salaries of $r‘ltl,(}(ll}/year if they quit working for
themselves and joined her “team”. Assume that the stringing business is a perfectly competitive industry. Which one of the following is true? a) Bree earns more accounting proﬁt and more economic proﬁt than Dan does. b) Bree earns the same accounting proﬁt and more economic proﬁt as Dan does. 0) Bree earns the same accounting proﬁt and the same economic proﬁt as Dan does. d) Bree earns less accounting proﬁt and less economic proﬁt than Dan does.
®Bree earns more accounting proﬁt and the same economic proﬁt as Dan does. 15. Suppose Michael spends his weekly income on pizza and beer only. prizza is an inferior good and
beer is a normal good for Michael, when the price of beer decreases a) Michael will consume more beer, but pizza consumption may rise, fall or remain the same.
@Miehacl will deﬁnitely consume more beer and less pizza.
0) Michael will deﬁnitely consume more beer and more pizza. cl) Michael will deﬁnitely consume less beer and more pizza.
e) Michael will consume more pizza, but beer consumption may rise, fall or remain the same. Hill I ll) miero‘iexams 509\e2mu_l Ol_509_IOV.doc Part II: 3 Problems — Do them all. 1. Carley Cornell, a consumer in Ithaca with a very nicely behaved indifference curve map, has an income of
$480 and consumes only two goods, food and clothing. The price of food is $10 per unit and the price of
clothing is $12 per unit. Carley is a utility optimizer and chooses a bundle that maximizes her happiness subject
to her budget constraint. In this personal "best bundle" she buys 30 units of food. a. Draw a carefully labeled and detailed indifferencecurve/budget—line diagram illustrating Carley's
equilibrium. Put food on the horizontal and clothing on the vertical. b. How many units of clothing are in the optimal bundle?
c. What must be the value of Carley’s marginal rate of substitution (MRS) between food and clothing at her optimal bundle? Suppose we Ii ‘ ‘ ‘ he opportunity U ' ' ~villageF
can then uy food for $9 er unit and othing for $6 per unit. d. Illustrate on your graph for part (a) how jOining the co—op affects Carley's bud get— line/indifference~curve
diagram. e. Should she join the co—Op? Explain. F. If she joins the co—op and re—optimizes, what will be the value of Carley’s MRS at the new equilibrium
bundle? g. If she decides to join the co—Op, what is the value of Carley’s MRS at her original optimal bundle? h. On your diagram, illustrate the MAXIMUM entry fee the co—op could charge Carley to join. CO—Op. The membership fee is $120. Members =LlEvo F=3C> a '
$PF 5 5’0 *Pc =*\‘2.. b. a}; :K g
“IS’O _1IO,3D + ”'3. 'Co
a, 3m MRS = essaér (FEE—‘33
Wan SilOCﬂ fe$= PF/P¢= [OIL
“e“? MRs= ll’12— = 57a «“33. H:\l 110 micro\exams 509\62le_!01_sO9_OV.doc
more answer space for question 1 . . _ . . ‘ ‘ . u n +9 “Lion
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ER‘» == P/Pc. :— /GL=>MRSa n.— ab.— 5% ‘3 (Dame we \rqrnpok Mm} HRS u—k (5‘5 25/“ “A w‘\\\ (lung‘s ‘0!— 57/“ (Un\r:s qu\£~\\& RNJ‘e/vmcng ‘9; =Q\ "i s'Rpcz"k H:\1 1 IO micro\exams sO9\e2mu_l 01_309MOV.doc 2. The Carpet Bazaar, a rug cleaning service in downtown Ithaca has a short run total cost situation as given in
the following table. Output is the number of rugs cleaned per week. The Carpet Bazaar is a perfectly
competitive ﬁrm. (Extra columns have been added in care you want to use them for work.) Output $short run $variable
rugs total cost cost
cleaned 0 —
1 $200 $150 ' a. Determine short run marginal cost, aVerage total cost and average variable cost in the table and graph all three curves on one graph.
13. Suppose the market price for carpet cleaning is $171 per carpet. How many rugs should Carpet Bazaar clean in order to maximize proﬁt?
c. What is Carpet Bazaar”s level of proﬁt at your solution?
d. Suppose the market price of carpet cleaning drops down to $149. What should Carpet Bazaar do in the short run? Explain your answer.
e. Indicate Carpet Bazaar’s short run supply curve on your graph.
f. What should Carpet Bazaar do in the long run? Explain your answer. ANSWER SPACE q) 53 l _ «grﬁ;
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“M M34132: 4.6:»??? 5 mm 10 ll:\l 1 l0 micro\exams 509\e2mu7] Ol_st)9_OV.doc 3. Consider the New York State apple market. Aekles Apples of Cortland is a typical perfectly competitive
apple orchard in long run equilibrium. Suppose there are no EXTERNAL economies or diseconornies in the
apple market, that is to say, the apple market is a constant cost market. Suppose all of Ackles Apples cost
curves have typical “text book” shapes. Assume that: l) the minimum value of a typical apple farm’s long run
average total cost is $500 per ton; 2) there are 50 identical farms currently in the market; 3) market demand for
apples is: QD = 3,000  2.50P where Q is measured in tons and P is the price per ton. a. Graph the present longrun equilibrium situation for both the Aekles farm and the entire apple market.
b. Find the values of P*, q’l‘, Q* and N* at the present long run equilibrium. Now suppose that Governor Patterson and the New York State legislature pass a bill requiring that each apple
farm in New York State immediately start paying the state ESL for a license to grow and sell apples. c. How will the apple license law impact the apple market? Suggest what happens to the diagram you drew
for your answer above. d. How would your answer above (that is. for part b) change, if, instead of the license law, the legislature
passed a law that states, as of today, there is now a tax 01’th per ton imposed on all New York State apple
transactions. Assume that the tax revenue is collected from demanders ol‘New York State apples. HM 1 l0 micro\exams $09\e2mu_l01_sf)9_UV‘doc
more answer Space for question 3 l—l:\1 l 10 micro\exams 509\c2niuml0]_st)')_()V.cloc ANSWERS TO THE MULTIPLE CHOICE QUESTIONS
1 D. AFC : ATCT — AVC = $80 u $75 = $5/unit, FC : $5/unit x 50 units = $250. 2 B. As the cost ofa variable factor o'fproduction increases. the variable cost (VC) curve shiﬂs up in the vertical direction. Consequently. so does
the marginal cost curve — which isjust the change in VC for a unit change in quantity. Note that (e) is wrong since a competitive lirm‘s short
run supply curve is only the part of its marginal cost curve that is above the tirm's average variable cost curve due to the short run shut down
rule. 3 C. INTERNAL economies ofscale refers to the firmlevel phenomenon of decreasing average production costs as output increases, until the firm
reaches the minimum of the Ushaped longrun ATC curve. A situation where the firm is lowering its input costs by becoming more capital
intensive is one where the firm is producing on the decreasing portion of its LRATC curve. 4D, By deﬁnition. a constant cost industry is one where the production costs are constant as ﬁrms enter and exit the industry. There are no
EXTERNAL economies or diseconomies of scale. Hence. the longrun supply curve is a horizontal line. corresponding to a price: minimum
ATC of the most efﬁcient technology in the market. 5 E. Bob would like to maximize his producer’s surplus. The first house costs him $50,000 to make and he gets a price of$ 1 00,000 for building the
house. so his producer surplus on the ﬁrst house is $50,000. The second house costs him $60,000 to build. and he gets a price 0f$100,000 for
it. so he builds the second house. and gets a producer surplus of $40,000 for the second house. Continue with this reasoning, adding up the
producer surpluses that he receives for each house built Continuing. you lind that Bob builds 6 houses. and his total producer surplus is
$150,000. 6 D. The Marginal Rate of Substitution is the absolute value of the slope of the indifference curve at a bundle. and all along a budget line we would
be looking at different bundles that lie on all sorts ofindifference curves. The MRS is sometimes different than the ERS ofthis budget line and
sometimes the SAME w it would depend on which bundle we focus on. So D is false. 7 C. EriCorp’s implicit costs are the opportunity costs ofthe salary given up and the opportunity cost ofinterest earned on the
mutual fund. This is equal to $55,000 + (0.1*$20,000) = $55,000 + $2,000 = $57,000. The explicit costs are cost of wages + cost
ofot'fice supplies + cost of food + rent for the space + cost of utilities = $92,000. 88. We are told that Charlie wants to consume 10 pounds of zucchini regardless ofits price, ceteris paribus and within reason. This means that no
matter what the price ofzucchini. Charlie will consume 10 pounds of zucchini as long as he can afford it. Hence. he spends the remainder of
his income. $20. on carrots, which at $2 a pound buys him 10 pounds of carrots at the new zucchini price. 9 D. Since Heather has borrowed the money from the bank. the interest that is paid on the loan is an explicit cost, whereas for Dan it is an implicit
cost. Hence given all the other costs are identical. accounting costs would be higher for Heather. and hence she earns a lower accounting proﬁt
as compared to Dan. However. their economic profits are the same. I0 C. The graph tells you that Mike the Magician can afford a total of 20 hats if the price of a hat is $10. From this we know his income is $200.
Now. we also know that Mike can afford a total of 10 bunnies. Then the price ofa bunny is $200/10=$20 per bunny. i l D. The optimality condition implies that MRS=ERS=2=absolute value of the slope of budget line. lfapples are on the vertical axis. and the
budget line has a slope of—2 and the ERS=2 and then we know that Pc.,,.d_.,/l’.u,l,l.,, : 2. So if Paw“, '7 flil '9 Penny}. must be equal to $2, 12 D. Gerrit should use inputs so that the marginal product oflabor divided by the price oflabor is equal to the marginal product of capital divided
by the price ofcapital. Since the MPfP= 7 for labor, and the MP/P=5 for capital, Gerrit should simultaneously hire more labor and less capital
which will bring down the marginal product oflabor increase the marginal product of capital. l3 B. Part A is incorrect because from are willing to make a loss in the short run. as long as their variable costs are covered. Part B is the correct
answer. for exactly the reason stated above, In the short run. the firm stays in the market as long as its variable costs are covered. Part C is
incorrect because only the portion ofthe marginal cost curve above the minAVC is the shortrun supply curve for the firm. Part D is incorrect
because the firms short—run supply curve is the portion of its marginal cost curve above the minAVC. Part E is incorrect because of the reason
stated above. l3 H :\1 HO micro\cxams 509\e2mu_l [l [*509_OV .doc l4 15 E. Since Dan has borrowed the money From the bank, the interest that is paid on the loan is an explicit cost. The money Bree spent on the
machine is an implicit cost. Hence. given all the other costs are identical, accounting costs would be higher for Dan, and hence he earns a lower
accounting proﬁt as compared to Bree (since his explicit costs are higher). However, their economic proﬁts are the same, since the opportunity
cost of rent would feature in Bree’s economic costs (which now includes her implicit costs). B. By the law ofdemand, a decrease in the price of beer causes an increase in its quantity demanded. Since it is also a normal good, the positive
income effect associated with the price decrease reinforces the substitution effect. Thus the quantity demanded 0]" beer must rise. As a result of
the substitution effect. less pizza is consumed as the price ofbeer decreases. As a result ot‘the positive income et‘l’ect, the quantity demanded of
pizza decreases. sinCe it is an inferior good, Altogether. the quantity demanded ot‘pizza decreases, and the quantity demanded ofbeer increases. 14 ...
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