F2005 MT2 Solutions

F2005 MT2 Solutions - 10/5/11 2:32 PM Answers to Spiegel...

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10/5/11 2:32 PM Page 1 of 6 https://courseweb.library.upenn.edu/@@/88BCE870944DE3A80DE4E9717…Econ%201%20Fall%202005%20MT2%20Spiegel%20solutions%20Andrew.txt Answers to Spiegel Fall 2005 Midterm 2 By Andrew Clausen <clausen@econ.upenn.edu> Part I: Multiple Choice Questions (4 points each/20 points total): 1. Greg spends all of his income on apples and oranges. If his income increases by 20 percent and the prices of both goods also increase by 20 percent then: a. Greg will purchase more apples. b. Greg will purchase more oranges. c. Greg will purchase less of both goods. d. Gregâ ™s consumption bundle will not change. ANSWER: D, because his consumption possibility frontier did not change. 2. Which of the following is NOT consistent with a perfectly competitive industry in the short-run equilibrium? a. Each firm is facing a horizontal demand curve. b. Market demand curve is downward sloping. c. Firms are making only normal profit d. Firms are making a positive pure economic profit if the market price is above ATC. ANSWER: Dunno. .. they are all consistent with short-run. (!) 3. Consider the following total revenue (TR) and total cost (TC) curves of a firm operating in a perfectly competitive market with price P given. How many units will the firm produce? [ i n s e r t g r a p h h e r e ] a ) Q 1 b ) Q 2 c ) 0 d ) C a n n o t b e d e t e r m i n e d ; o n e w o u l d n e e d t o k n o w t h e T V C ( t o t a l v a r i a b l e c o s t ) c u r v e . ANSWER: C. They make no profit or loss at Q=0, but make a loss everywhere else since TC > TR. 4. The paper industry is in a long run equilibrium under perfect competition. Suppose the demand for paper increases. What will happen in the paper industry in the short run in response to this shift in demand? a. Nothing will change because profits must be zero. So price, quantity, and the number of firms will stay the same as before. b. Price and quantity produced by each firm will increase, but the number of firms will stay constant. c. Price, total quantity produced by all firms, and the number of firms all increase.
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F2005 MT2 Solutions - 10/5/11 2:32 PM Answers to Spiegel...

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