# m3s3 - PRINCIPLES OF ECONOMICS Midterm Test #3, Sample #3...

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PRINCIPLES OF ECONOMICS Midterm Test #3, Sample #3 Time Allowed : 60 Minutes This total marks in this test are 50. The test is divided into two parts: Part I - problem format - is worth 40 marks (40 of the total mark of 50) Part II - multiple choice- is worth 10 marks (10 of the total mark of 50) (5 multiple choice questions worth 2 marks each) SHOW YOUR WORK WHERE APPLICABLE . YOU MUST USE A PEN; PENCIL IS NOT ELIGIBLE FOR REMARKING Print your name and student number clearly on the front of the exam and on any loose pages. Name: _______________________________________ (Family Name) (Given Name) Student # : ______________________ There are 6 pages to the exam. - 1/6 -

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Principles of Economics: Midterm Test #3, Sample #3 Part I Place your answers (and work where necessary) in the space provided. Clearly label all axes, curves, and points. 1. Cost Functions. (10 marks) a) Draw Marginal Cost (MC), Average Cost (AC), and Average Variable Cost (AVC) for a typical firm in the short-run. (3 marks) b) Assume that this is a competitive industry and that market price (Po) is below Average Variable Cost . Show the output (qo) produced by the firm if the firm were to produce output. (2 marks) c) Show the economic profit or loss of the firm at this price if the firm was to produce output. (2 marks) d) Now show the fixed cost in relation to economic profit or loss at this price to demonstrate whether the firm produces this output or shuts down. Give a very brief explanation. (3 marks) Cost/unit q qo Po MCo ACo AVCo ACo Po AVCo 1 mark: upward sloping MC at some point with correct axes Cost/unit and q (or Q) 1 mark: AVC falls and rises with MC through min AVC 1 mark: AC (> AVC) falls and rises with MC through min AC 1 mark: P < min AVC 1 mark: qo from MC = P 1 mark: ACo from AC at qo 1 mark: Econ Loss: (ACo – Po)*qo (bold rectangle above) 1 mark: vertical height of Fixed cost = ACo – AVCo at qo 1 mark: Fixed Cost is area qo*(ACo – AVCo) 1 mark: Firm shutdowns because Econ Loss > fixed cost. - 2/6 -
Principles of Economics: Midterm Test #3, Sample #3 2. Competitive Short-Run Equilibrium (10 marks) Assume that the Copper Pot industry is a perfectly competitive industry with downward sloping demand . It is initially in firm and industry equilibrium with firms making zero economic profits. In the grid graphs below, draw a firm and an industry diagram to depict the initial long-run

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## This note was uploaded on 09/30/2011 for the course ECON 1000 taught by Professor Paschakis during the Spring '08 term at York University.

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m3s3 - PRINCIPLES OF ECONOMICS Midterm Test #3, Sample #3...

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