Eco100PesandoSolvedTest2s

Eco100PesandoSolvedTest2s - Page 1 of 6 Professor James E...

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Unformatted text preview: Page 1 of 6 Professor James E. Pesando Student Last Name: Student First Name: Student Number: Economics 100 Mid-Term Test: December 8, 2004 Students Must Answer _A_fl Questions in the Space Provided. No Aids Allowed. 1. (20 points) The market for widgets is perfectly competitive and in long-run equilibrium. The demand curve is downward sloping and the cost curves have their usual shapes. 1. In a diagram, show the initial position of a representative firm and of the industry as a whole. What is the level of economic profits of the representative firm? Why? 2. To raise revenues, the government imposes a tax of $10 on each widget sold, to be paid by sellers. In your diagram, show what happens to: (a) the industry supply curve (b) market price (0) market output 3. If this is a constant cost industry, how will the new market price in the long run compare to the original market price (ie. before the tax)? II. Page 2 of 6 (19 points) The manufacturer has determined that the profit-maximizing price for a new car is $30,000. The marginal cost of producing each car is $20,000. The manufacturer sells the car at two dealerships. The demand curve is downward—sloping, and the same at both dealerships. l. A car salesperson at the first dealership is able to determine the maximum price that each customer is willing to pay for a new car and sells each customer a car at his/her maximum price. What is the total consumer surplus of customers who buy cars from this salesperson? Why? 2. A salesperson at the second dealership does not try to determine the strength of each customer’s demand, and sells the new car for $30,000 to all customers. (i) Which salesperson sells the most cars? Explain your answer carefully. (ii) Will total surplus be higher or lower if all customers pay the identical price? Why? 3. If the government imposes a price ceiling of $20,000 on the new car, what will happen to the profit-maximizing level of output at the second dealership (where the salesperson charges the same price to all customers)? Explain your answer carefully. (All marks are for your explanation.) III. IV. Page 3 of 6 (18 points) A drug company has a monopoly on a drug, and the patent will expire in 10 years (at which time, any firm can produce and sell the drug). The marginal cost of producing each unit of the drug is $5. The average total cost is also $5, and the monopolist is earning economic profits. The demand curve is downward sloping. 1. On a diagram, show the current price and output of this drug. Why is the price of the drug greater than $5? 2. On the same diagram, show the price and output of the drug after the patent expires (i.e. after 10 years). What is the price of the drug? Why? 3. The government decides to encourage the production of this drug, and pays the monopolist a subsidy of $8 on each unit sold. On a new diagram, show the new profit maximizing price and output. (8 points) A monopolist is currently producing 1,000 units of output and selling at a price of $10. At a price of $10, the demand curve for this industry is inelastic. If the marginal cost of producing each unit is $5, is the monopolist maximizing profits (or is there insufficient information to determine if this is the case)? Explain your answer. (All marks are for explanation.) Page 4 of 6 V. (35 points) 1. A perfectly competitive industry is in short run equilibrium. Under these circumstances, which one of the following statements is correct in the short m? (a) if fixed costs increase, then the industry would experience an increase in price and a decrease in output; (b) if fixed costs increase, then the industry would experience a decrease in price and a decrease in output; (c) if fixed costs increase, then the industry would experience an increase in price and an increase in output; ((1) if fixed costs increase, then the industry would experience a decrease in price and an increase in output; (e) none of the above are correct. A perfectly competitive industry is in short run equilibrium with “n” identical rms and each firm is earning zero economic profits. Under these circumstances, which one of the following statements is correct in the short m? (a) with an increase in industry demand, each firm would make economic profits and new firms would enter the industry; (b) with an increase in variable costs, each firm would make economic losses and some existing firms would leave the industry; (c) with a decrease in industry demand, each firm would make economic losses and would produce a higher output; ((1) with a decrease in variable costs, each firm would make economic profits and would produce a lower output; (e) with an increase in industry demand, each firm would make economic profits and would produce a larger output. In a perfectly competitive industry, the market price is $20. An individual firm is producing the output at which MC = ATC = $15. A VC at that output is $10. What should the firm do to maximize its short-run profits? (a) shut down; (b) expand output, (c) contract output; (d) leave output unchanged; (e) insufficient information to answer. If a monopolistically competitive firm is earning economic profits, then other firms will enter the industry and: (a) the firm’s MC schedule will shift left (b) the firm’s ATC schedule will shift left (0) the firm’s MR schedule will shift left (d) the firm’s total fixed costs will increase (e) none of the above Page 5 of 6 In the case of a natural monopoly with falling average costs, if regulation sets the price equal to marginal costs (a) the firm would operate at a loss and eventually go out of business. (b) shortages would result. (0) the demand curve would shift to the left. (d) the firm would earn economic profits. (e) none of the above A profit-maximizing perfectly competitive firm is able to sell its product for $9, and realizes an average total cost of $10. Its marginal cost curve crosses the marginal revenue curve at an output level of 10 units. What is the total profit earned by this firm? (a) $10 (b) $200 (c) $200 (d) $90 (e) none of the above The intersection of a monopolist’s marginal revenue and marginal cost curves occurs where output is 10 units, price is $16, and marginal revenue is $8. What is the monopolist’s profit? (a) not enough information given (b) $100 (c) $160 (01) $80 (e) $124 Which of the following is probably NOT an example of price discrimination? (a) A doctor charging for his service according to the income of his patients. (b) Train fares that are less expensive for weekend travel than weekday travel. (0) A theatre charging children under 12 less for a movie ticket than it charges an adult. (d) Provincial universities charging out-of—province students higher tuition fees. (e) A supermarket in Toronto charging more for fresh vegetables in December than in June. 10. Page 6 of 6 If all the oligopolists in a market collude to form a cartel, total revenue for the cartel is that of a monopolist. (a) less than (b) greater than or equal to (c) greater than (d) equal to (e) none of the above In the short run, a basket—producing firm can produce 36 baskets per day with 3 workers and 44 baskets per day with 4 workers. Which of the following statements is false: (a) The marginal product of the fourth worker is 8. (b) The total product of the four workers is 44. (c) The firm has passed the point of diminishing average productivity. (d) The marginal product is below the average product. (e) None of the above James E. Pesando EC0100 Test #2 (December 8, 2004) Answers: I. 1. II. 1. III. 1. See Figure 14.8, page 311 of text. The level of economic profits is zero (P = ATC). In long run equilibrium, the freedom of entry and exit ensures that the representative firm earns zero economic profits. Industry supply curve shifts up by $10. Market price increases by leg than $10. Market output decreases. In the long run, price will increase by $10. The ATC curve of a representative firm, as well as its MC curve, will have shifted up by $10. For there to be zero profits in the new long run equilibrium, enough firms will leave the industry until the market price increases by $10. Total consumer surplus is zero. Each customer pays the maximum price that he/she is willing to pay for a new car, in this example of perfect price discrimination. (i) The salesperson who engages in perfect price discrimination sells the most cars. This salesperson will sell cars for less than $30,000 (but more $20,000), while the second salesperson will not. (ii) Total surplus will be lower if all customers pay the same price. In this case, price exceeds marginal cost for the last unit sold. In the case of perfect price discrimination, the salesperson replicates the level of output of a perfectly competitive industry. Total surplus is maximized, although all of the surplus goes to the producer. The profit-maximizing level of output will increase. With the price ceiling, MR = P = $20,000 (whereas MR < P before) and thus the profit- maxirnizing level of output will increase to the point where P = $20,000. See Figure 15.6, page 329 of text. The current price exceeds $5 because the monopolist produces where MR equals MC equals 5, and thus where price exceeds MR. The price of the drug is $5. After the patent expires, the industry is perfectly competitive and the zero economic profits condition requires that P = ATC = $5 IV. The MC schedule is constant (at minus 3). The profit-maximizing output occurs where MR = MC = -3. The monopolist’s output increases and the price falls. If the subsidy is interpreted as an increase in MR of $8 on each unit sold, the demand curve does not shift. MR and MC intersect at a higher level of output, and the (lower) price that corresponds to this output is determined from the unchanged demand curve. The monopolist is not maximizing profits. If the demand curve is inelastic, the monopolist could increase its revenues and reduce its costs by reducing output. Multiple Choice Answers 1. 5" 9°89???” l—‘KO (e) (e) (b) (C) (a) (a) (a) (e) (d) (6) None of the above With an increase in industry demand, each firm would make economic profits and would produce a larger output. Expand output the firm’s MR schedule will shift left the firm would operate at a loss and eventually go out of business ~10 Not enough information is given a supermarket in Toronto charging more for fresh vegetables in December than in June. equal to None of the above Page 1 of 5 Last Name: First Name: Student Number: Economics 100 Professor James E. Pesando Term Test 2 - December 9, 2005 Length: 55 minutes Answer ALL questions in the space provided Aids: Pen] Pencil and non-programmable calculator lease enter the multi le choice answers in the box below: examiner’s report: question Page 2 of 5 Part I (18 points) The licorice industry is perfectly competitive. Each firm produces 2 million strings of licorice per year. The strings have an average total cost of $0.20 each, and they sell for $0.30. a) b) C) What is the marginal cost of a string of licorice? Explain your answer. What is the level of economic profits of each firm? Will price remain at $0.30 in the long-term? Explain your answer. Part II (24 points) A monopolist is in long—run equilibrium and earning an economic profit. a) b) in an appropriate diagram, show the monopolist’s output, price and level of profits. The monopolist’s economic profit is $50 million per year. If the government imposes a lump sum tax of $50 million on the monopolist, what will happen to the monopolist’s price and output? Why? (Note: a lump sum tax is a tax the monopolist must pay regardless of its level of output). Is the level of output produced by the monopolist before the tax is imposed allocatively efficient? Why or why not? How will allocative efficiency be affected by the imposition of the tax? Page 3 of 5 Part Ill (10 points) The market for widgets is a perfectly competitive industry and in long—run equilibrium. One firm experiences a technological innovation which causes the average variable cost curve for mi_s_ firm to decrease by $10 at each level of output. (a) Show, with the appropriate diagram, what happens to the output of the firm that benefits from the technological innovation. (b) What happens to the market price of widgets? Explain your answer. Part IV (16 points) Explain whether the following statements are true or false. All points are for the explanation. a) For a monopolist which practices perfect price discrimination, output will not be allocatively efficient since consumer surplus will be zero. b) The government imposes a price ceiling on a monopolist at the price that would prevail under perfect competition. As a result of this lower price, the profit- maximizing monopolist will increase its level of output to the perfectly competitive level. Page 4 of 5 Part V (32 points) 1. Consider a perfectly competitive firm in the following position: output = 4000 units, market price = $1, fixed costs = $2000, variable costs = $5000 and marginal cost = $1.10. To maximize profits the firm should: a) reduce output b) expand output 0) shut down d) not change output e) not enough information to determine A monopolist is in long—run equilibrium with economic profits. Material costs fall such that the monopolist’s marginal cost curve decreases by $5.00 per unit of output. Which one of the following statements is correct as a result of this change: a) industry price and output will both increase b) industry price increases but industry output decreases c) average total cost decreases by $5.00 d) fixed costs decrease e) none of the above Suppose a monopolist can sell 30 units of output per day for a price of $11 each, and 31 units of output for $10 each. The marginal revenue for the 31St unit sold is equal to: a) $0 b) $11 c) $10 d) minus $10 e) none of the above According to the law of diminishing returns, in the short run: (1) marginal productivity eventually rises (2) marginal productivity eventually falls (3) marginal cost eventually rises (4) marginal cost eventually fails a) (1) and (3) b) (1) and (4) c) (2) and (3) d) (2) and (4) e) (4) Page 5 of 5 A monopoly has two types of customers: those willing to pay up to $10 and those willing to pay up to $5. The average total cost of producing the good is $2. If the monopolist is able to charge each of its customers the maximum price the customer is willing to pay (rather than setting a single price for all customers), then which of the following statements is true: a) output will fall b) output will not be allocatively efficient c) producer surplus will decline d) consumer surplus will increase e) none of the above In the long run, a monopolistically competitive firm will produce the output where price equals: a) marginal cost b) marginal revenue 0) average variable cost d) average total cost e) none of the above If oligopolists are r321 able to collude, then: a) price will be greater than the monopoly price b) industry profits will be less than monopoly profits 0) the industry demand curve will become more elastic d) the industry demand curve will become less elastic e) none of the above An oligopoly has only two firms, which have agreed to charge the monopoly price of $50 and to divide the market equally. The monopoly level of output in this industry is 500. Which of the following statements is true? a) industry output will be less than 500 if the cartel breaks down b) if marginal cost is less than 50 when each firm is producing 250 units, the cartel is likely to break down c) if one of the firms decides to “cheat,” it will reduce its level of output (in order to increase price) d) if there are no fixed costs, the cartel will not break down e) none of the above Page 1 of 5 Last Name: First Name: ..W___~.~W~M“ Student Number: Economics 100 Professor James E. Pesando Term Test 2 - December 8, 2006 Length: 55 minutes Answer ALL questions in the space provided Aids: Pani Pencil and non-programmable calculator glease enter the muttigle choice answers in the box below: 1 M“ 2 "W" (10 examiner’s report: question points Page 2 of 5 Part l (14 points) The market for peanuts is perfectly competitive and in long~run equilibrium. There is an increase in the demand for peanuts. a) b) in the short-run, what happens to a representative firm’s marginal cost schedule, demand schedule, level of output, and level of profits? illustrate your answer with an appropriate diagram for this representative flan. Will the market price remain at its new level in the long—term? Explain your answer. Part ll (14 points) A perfectly competitive firm has a factory, and hires workers to produce widgets. 8) b) if the wage rate paid by this single firm increases, what will happen to this firm‘s level of output and profits? Explain your answer. To encourage the production of widgets, the government provides all firms in the industry with a iump~sum grant of $10,000. ln the short—run, what happens to the level of each tirm's profits and to the market pn'ce of widgets? Explain your answer. Page 3 of 5 Part Ill (20 points) A monopolist has a patent for an important dru _ g. The monopolist is in long-run equilibrium and earning an economic profit. a) in an appropriate diagram, show the monopolist’s output, price and level of profits. b) The monopolist's patent expires, so the barrier to entry no longer exists. Other firms can now produce and sell the drug. Explain what will-happen to: (1) the number of firms in this industry (2) the towel of economic profits of each firm, after the industry is in long-term equilibrium (3) consumer surplus (4) atlocative efficiency Part iv (16 points) A monopolist produces widgets. The marginal cost and the average total cost of producing each widget is $2. The firm has two types of customers, as follows: 2,000 " ” customers who will pay $25 per widget 5,000 “8" customers who will pay $5 per widget (a) if the monopolist must charge a single price, what price will the monopolist set? What will be the monopolist's level of output and profit? Page 4 of 5 (b) If the monopolist could price discriminate, what price (or prices) would the monopolist set? ' What would be the level of output and profit? (c) What would be the level of consumer surplus in (b)? Explain your answer. (d) Would the level of output in (b) be allocatively efficient? Explain your answer. Part V - Multiple Choice. Circle the correct answer. (36 points) 1. A perfectly competitive firm decides to issue discount coupons, permitting the coupon~holder to purchase the product at a 10 percent lower price. We can conclude; a) the firm‘s demand curve is inelastic; b) the firm’s average total cost is declining; c) the firm’s marginal cost is declining: d) the firm is not maximizing profits; 6) none of the above. 2. A local pizza parlour is a monopolistically, competitive firm and has the following data: market price is $7.50, output is 100 pizzas, Average Total Cost (ATC) is $8.00 and Average Variable Cost (AVC) is $7.00. Under these circumstances, the firm will: a) Shut down in the short run since its loss will be $50; b) Continue to produce 100 pizzas since price is greater than average variable cost; c) Shut down in the short run since price is less than average total cost; cl) Expand production, since AVC is less than ATC; e) Not possible to answer without more information. 3. lf losses are being made by firms in a competitive industry, some firms will exit. This will shift the industry: a) Demand curve leftward, caueing market price to fall; b) Demand curve rightward, causing market price to rise; c) Supply curve rightward. causing market price to rise; d) ‘ Supply curve leftward, causing market price to fall; e) None of the above. Page 5 of 5 A profitumaximizing monopolist finds that at the present level of output, marginal revenue equals $15 and marginal cost is $14. The price for this output has been determined from the demand curve. What action should the monopolist take to increase profits? 8) b) C) d) 9) increase price and reduce output; increase output an...
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