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ECN100 MT2 F08 Key Parman

# ECN100 MT2 F08 Key Parman - Ecn 100 Intermediate...

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Ecn 100 - Intermediate Microeconomic Theory University of California - Davis November 13, 2008 Professor John Parman Midterm 2 You have until 6pm to complete the exam, be certain to use your time wisely. For multiple choice questions, mark your answer on your scantron sheet. Choose only one answer for each multiple choice question; if more than one letter is chosen for a question it will be marked wrong. Write your answers for the short answer section directly on the exam. For the short answer questions, show your work clearly, place a box around final answers and be certain to label any graphs you draw. Final answers may be left as fractions. Non-graphing calculators may be used but they should not be necessary. Remember to put your name and ID number on both the exam (in the spaces provided below) and on the scantron sheet. Good luck! Name: ID Number: Section: SECTION I: MULTIPLE CHOICE (60 points) 1. For a firm’s production technology, the marginal product of labor is increasing as the amount of labor used increases. When graphed with labor on the horizontal axis and output on the vertical axis, the production function will: (a) Have a positive slope. (b) Have a slope that increases as labor increases. (c) Have a slope that decreases as labor increases. (d) (a) and (b). (e) (a) and (c). (d) If the marginal product of labor is increasing, then as labor increases output will increase by larger and larger amounts. So when graphed, output as a function of labor will be increasing and getting steeper and steeper as labor gets larger. 2. Suppose that cars and burgers are the only two goods we consume, we spend all of our money on cars and burgers and when income goes up our consumption of both cars and burgers goes up. If cars are a luxury good, then the income elasticity of demand for burgers must be: (c) Knowing that consumption of both goods goes up when income increases tells us that the income elasticity is positive for both goods. If cars are a luxury good, the income elasticity for cars will be greater than one. So the income elasticity of the other good must be less than one (otherwise our spending would go up by more than our income went up which isn’t possible). 3. If the price elasticity of demand for newspapers is given by = - p 10 - p where p is the price of newspapers, what price will maximize revenue?

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2 Midterm 2 (b) To get the revenue-maximizing price, we just set the price elasticity of demand equal to one. When we do this and solve for p , we find that the revenue-maximizing price is \$5. 4. If a firm uses a constant returns to scale technology and has positive fixed costs, then profits will . (You can assume the prices of output and inputs remain constant.) (a) Increase when the levels of all inputs are doubled.
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