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# test2 - I Multiple Choice 3 points each Put your answer in...

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Unformatted text preview: I. Multiple Choice. 3 points each. Put your answer in the blank. 1. Suppose that if you buy one Big Mac that gives you marginal utility of 500 and a second Big Mac that gives you marginal utility of 200, total utility of buying (and eating) two Big Macs is: A) 200. B) 300. C) 500. D) 700. {’1 2. You' re maximizing utility when: A) (MU of X)/ (P of X) > (MU of Y)/ (P of Y) B) (MU of X)/ (P of X) < (MU of Y)/ (P of Y) C) (MU of X)/ (P of X) = (MU of Y)/ (P of Y) D) (MU of X)/ (P of Y) = (MU of Y)/ (P of X) (g 3. Diamonds cost more thaﬂ water because: A) the total utility of diamonds is greater than the total utility of water. B) the marginal utility of diamonds is greater than the marginal utility of water. C) the opportunity cost of diamonds is greater than the opportunity cost of water. D) diamonds have more substitutes than water. Output TP Number of workers C 4. Refer to the graph above which shows total product. At point B: A) marginal product is minimum. B) marginal product is maximum. C) marginal product is zero. D) average product is maximum. i [5 5. Which short -run cost curve continually declines as output increases? A) Total cost B) Average variable cost C) Average ﬁxed cost D) Marginal cost é , 6. The marginal cost curve intersects the: A) total cost curve at its minimum point. B) variable cost curve at its minimum point. C) average variable cost curve at its minimum point. D) average ﬁxed cost curve at its minimum point. i >3 7. Which oft he following is one of the necessary conditions for perfect competition? A) Diminishing utility. B) Large number of ﬁrms. C) Differentiated products. D) Indivisible set up costs. C! 8. A perf ectly competitive ﬁrm‘s marginal revenue is: A) less than the selling price. B) greater than the selling price. C) equal to the selling price. D) sometimes below and sometimes above the selling price. Quantity Total Cost Total Revenue ff): 10 s 25 so 2:? 20 60 100 3 > 30 105 150 if 40 160 200 > 5’ C/ 9. Based on th e above information, a perfectly competitive proﬁt-maximizing ﬁrm would produce: A) 10 units of output. B) 20 units of output. C) 30 units of output. D) 40 units of output. {£10. A perfectly competitive ﬁrm in the long run earns: A) positive economic proﬁts but [email protected]ﬁts. B) positive @roﬁts but zero economic proﬁts. C) positive economic proﬁts and positive @roﬁts. D) zero economic proﬁts and zerognﬂgﬁﬁpproﬁts. Q11. For a monopolist, the pri ce of the product: A) equals the marginal revenue. B) is less than the marginal revenue. C) exceeds the marginal revenue. D) equals the marginal cost. E12. I n 2004 Microsoft created a special version of its Windows operating system that it sold at a low price in countries where cheap, pirated software was widespread. Since the cost of producing another copy of this software will be the same as the cost of producing another copy of the regular Windows product, why is Microsoft charging this lower price? A) It is trying to take advantage of the different demand elasticities in the different countries. B) The price differential is explained by the lower cost to develop the new software. C) The price differences are due to differences in cost among countries. D) The differential pricing reﬂects the differences in the barriers to entry. fly 13. As firms leave a monopolistically competitive industry that is sustaining economic losses: A) the demand curve shifts to the right for the remaining ﬁrms in the industry. B) the demand curve shifts to the left for the remaining firms in the industry. C) total quantity demanded increases for the industry. D) the market supply curve shifts to the right. at £514. Taking explicit account of a rival's expected response to a decision you are making: A) is called economic decision making, and occurs in all industries B) is called monopolistic decision making, and occurs in monopolies C) is called strategic decision making, and occurs in oligopolies D) is called competitive decision making, and occurs in perfectly competitive industries. {2 E115. L azy monopolists are characterized by the tendency to: A) maximize profits at the cost of losing market share. B) pay too much to protect their monopoly positions. C) earn enough profits to keep their shareholders happy without unduly trying to hold costs down. D) minimize losses. II. Short Answer. Answer all questions with words, as well as illustrating, when asked, with diagrams. Brieﬂy explain all diagrams used. 7 points each. 1. A consumer has $24 per week to spend on meat and poultry. Hamburger costs$3 per pound and chicken breasts $4 per pound. (i) Graph the budget constraint illustrating this consumer’s situation. (ii) Do you suppose meat and poultry are substitutes or complements? (iii) Given your answer, illustrate, using indifference curves, plausible combinations of consumption in the initial situation, and a new situation where chicken costs$6 per pound. a»; {am—3V??? M a \ Suggﬁwrﬁ g~ iier. (Ti :5}... :1}ka a warning” was; iii big/:2" warn; 2m) 0M4 PM mMSVW wsulé 3M3 \Qli airfolw mm M M QLme t» ile ELLSZT—i Km "13. {A wane/ii iélw %{W 2. What is the relationship between short—run and long-run average costs at various levels of production? Illustrate with a graph. What is the name for this relationship and what is the key factor lying behind it? «jug, was: its shew; began“; Sgi‘kisﬁ‘” 6:ch 3:5 TQ Qi-Jn Cvrv‘Q. ’3': i m {13;99‘?,‘ rat‘s" 1% EWowh at, fier «Wiggian WEJNW‘A M swat 9i a“; as»); Maia/z 9:" \Aagtxjigg,‘ PM; @ jog?" T‘B A wawﬂ :1 .f L957“ {M UVWM W mﬂrx?§? 3i 3. What is “price discrimination” and What are the conditions required for it to work? Give one example. szu, $13M»Midisfr{mx {3* C’sreﬁibﬁ G’K A {gm w?i\r\ KW WWQWQMK pew T0 dxmgd akiw T‘O (9% W‘ x i1.” C ’i‘vc‘: W W \‘W \At‘gw Mpg” Equ miiwmﬂﬁ» M (is. M MW?» gm. W. we» may) m aﬁrrm paw?“ Low 515th T0 3,52?$512»: YT WEST \JL kak m agamgczsk it: WWW“ i1 Mama mi WQW Wei?" 33‘"? \c-‘ﬂ aLkL W ﬁesta/CC {it gamclwcii‘i 4. What is the meaning of the “zero proﬁt condition?” In what industries, and over what time period, is it likely to occur? M guﬁiam Ln Xﬁvg"{wf {55mg (m m (N 514*; "ﬁ . #- W W 1 CL’V‘SEié’lT} \A a Wmmﬁéﬂ "WSTTD 3 gkm$§L° W57 Welt aux‘icuﬁ‘f‘m: 111. Problems. 1. 13 points. Grace receives the following utility from consuming apples and oranges _ according to the following table. The price ot‘oranges is$2 and the price of Apples is $1. Grace has$14 to spend. Apples Total Utility Marginal Oranges Total Utility Marginal from Apples Utility from Utility (utils) Oranges (utils) 1 14 14 1 10 10 2 1f} 10 2 18 8 3 32 8 3 “If 6 4 38 “Q, 4 28 4 5 42 4 5 30 :1: 6 44 2 6 31 1 (i) Fill in the four blanks in the table. (2 points) (ii) If Grace is buying 4 oranges and 4 apples, how much is she spending? What is her total utility? Can she do better? (4 points) Shirl k Wag‘hgiynimir‘iljt?) 9%? 38+2E‘2—Qbuwﬂg. Svﬁggg \ weéé, a) {swig}; of 2 Wﬁf‘ﬂ g LL DEV“ grow we“ * (iii) If Grace is buying 5 oranges and 4 apples, how much is she spending? What is her total utility? Can she do better? Illustrate her optimal level of consumption with a graph. (7 points) gkgﬁ \e era/v11 5i Wt [email protected] W «‘v’ik‘m 25 £33: LARY‘:\$‘ Ear CM £3§\,\\ Clvo g”? ermwjig 643,164 \hbx ngx‘vA wk”? rm chl‘w’" wiva Li: M gist 3 sided: La Wat») «\1 1M {AW( 9%; (Jr/W g/u 7‘2 path g x) :g R \NA N t 2. 14 points. A ﬁrm’s marginal cost of producing lamps is 2Q, where Q is the number of lamps produced per day. (In other words the marginal cost of producing the ﬁrst lamp is$2, the second lamp $4, the third$6, and so on.) It turns out, the total variable cost in this case is Q2+Q. (For example, the total variable cost of producing 10 lamps is $110 = 102+10.) The ﬁrm has ﬁxed costs of$100/day. (i) Fill in the 4 blanks in the following table with the ﬁrm’s marginal costs, total variable costs, and total costs. Lamps Marginal Cost Total Variable Cost Total Cost 1 2 2 102 2 4 £9 ‘3 la 3 is 12 112 4 8 20 120 50 K36 2550 age, S’O (ii) At what quantity will the firm produce if the price of its lamps is $100? Illustrate with a graph. A EDg‘ng, new rats-13. was? 2q:\ue. {7:34 «k 3 (iii) Wat is the ﬁrm’s total revenue at this level of production? Its total cost? Its proﬁt? , r t.~ :1 T! 003 Mwﬂ Shaina} S; 2 F ‘1 “115A Cssrlrve +212 :2ng +§e>+me ; Essewemw 4,, 4, 2:52be lira?“ ’3' 313‘“) ""5; ‘55" : 4’ 2553 (iv) Should the ﬁrm produce or shut down in the short run? Will this ﬁrm exit the industry or remain in the long—run? What is likely to happen to the industry as a whole in the long—run? QMQ Eizw ﬁle.le M ’\j pg?“ 32x?” éamﬂ {‘3‘ gal tn im— WM; my ﬂa imam i’ :\ 1‘ Ema T?” {S Witle fforifyg HhWi in [L2, lA‘IUW/V‘h Mb iA’T/Ia‘f f%q WW?L Nfs‘g‘}; m Extra Practice Problems. Short Answer. 1. Illustrate with a graph a firm’s: Average ﬁxed cost, average variable cost, average total cost, and marginal cost. Very brieﬂy explain the relationship between these curves. M l R 3:ch Siew‘uﬂ‘ gkmmgm 5‘$ (ex? ’25 &;,:Dl\&§ LA WW was; *r‘NL a maimem. 93L :3 {Va 5mm «t sec. two {Wt '{5 UV. MAW V? M 3/3 Vi elk: Miaigljj Wat/(ga‘x {we A» Tax? 2. A household has $20 to spend on bananas and Cheerios. Bananas cost$1 per pound and Cheerios cost $4 per box. The household purchases 3 boxes of Cheerios and 8 pounds of bananas. Last year, the household had$20, but bananas cost $0.50 per pound and Cheerios$3 per box. Is the household better or worse off now compared to last year? Illustrate with a diagram. n C\€g{3\~\ W b49552 E‘s/H) Ewan 39:53,? W in; \Q/XWEA _ \M: vgﬁ‘iveiix \KM l0" W 3’1 ‘51: Ag :2 in 3»? l: fr W A 3. How do ﬁrms choose their level of output in an industry characterized by monopolistic competition? What are their long—run proﬁts? Illustrate with a graph. dressage {Lg}; Mgu’r Kiwi?” A \Mwswlﬁ; «NM Wad/Ml YEN/M lurk/«i; «guitar “emf % (item; we? a\lgwg Lawﬁxﬁ‘ﬁw {Fm §2m2\¢f (aéxé‘tﬂ \wﬁx («(WECA') {t M {39%; mg Ln}, Exercises. 2. A ﬁrm produces dehumidiﬁers with robots and workers. It can produce 100 dehumidiﬁers per day with the following combinations: {10 robots, 2 workers}, {6 robots, 3 workers}, {4 robots, 4 workers}, {3 robots, 6 workers}, {2 robots, 10 workers}. It can produce 125 dehumidiﬁers with {5 robots, 4 workers} or {4 robots, 5 workers}. (i) What is the marginal physical product of one more worker if there are 4 robots and 4 workers? Of one more robot if there are 4 of each? yﬁgw‘i’ium 2" Mijﬁrskﬁs "2' 25 Mew;£égmi {Bic %§,V\E 82m 95' us we mm gin? (ii) If the price of workers is $100/day and the price of robots is also$100/day, how many of each should the ﬁrm employ if it wants to produce 100 dehumidiﬁers? How do you know? Ki": gkmwkj “was the? a} MA is Jim (XX, 50 keen“ M «(x/vim M 9% IN ﬂag “ﬁrm WWU 31; iv» ﬁdtldvm I Mfﬁwsrlm» 2f,“ laweriu/ i513 m Wéf‘liﬁkvi Di {QLbTi‘ Mr M . “Wag? 2‘: ﬂash? 5 B13, (111) How much does it cost the ﬁrm? \T, W,“ M 4%,”, ¥%L\{3 {3: Lg.1sb+‘1~ibo§‘ 2. A ﬁrm has a patent to produce a special drug for Lupus. It faces a demand curve characterized by the equation P=100—QD, where QD is the quantity purchased in the market place. The ﬁrm has a marginal cost schedule of producing the drug of 10+Qs, where Q3 is the quantity it supplies. (Ie, the marginal costs are 11,12,13,l4. . . .) It turns out, in this case, total variable costs are 10+(Q2+Q)/2. (E.g., the total variable cost of producing 10 units is 65 == 10+(102+10)/2. (i) Draw the demand curve and the marginal revenue curve facing the ﬁrm. What is the equation describing the marginal revenue curve? r ,1 mg 2 tag: road—2a. R 7 i (ii) At what qdiariaiity should the ﬁrm produce? Illustrate with a graph. ﬂinging; ‘i‘ﬂﬁzt‘ot. Ii“ \bar-Eq '1. \Ee— Q “3‘9 (to ~29 1 0x 7% ?{\3JV\L VMZ’YS: (ii) " ' the ﬁrm’s proﬁt? them ’2- sizm Ast 2 3 4,2371 (iv) How will this industry change in the long run? 1% {\Nv \W§,;Vv\ gag- {1%qu mile ‘3 gem Mm ) Wm. M \iéﬁi‘ MAM gig; Wkiiﬁ/i Mfr/3 {mgsgsiigh‘ L‘s/W it M ii; («wig ¥:rm§ mat WE weevil—1T; Will/i mail 571M “Wifa wtt’l 332% T0 3. Suppose DeBeers and a Russian state ﬁrm are the only countries in the world producing diamonds. They can produce two quantities per year, 50 or 100 tons. The demand curve for diamonds is characterized by P=75 - (15/100)Q. The marginal cost of producing diamonds is constant at $10. KEX {,0 "2' ii? ﬁg . . “a 249 . . (i) Set up a game—theory matrix With the two ﬁrms’ strategies and payoffs. (Hint: what are the two things they can each do? What are the total quantities and what would be the price under each combination of strategies? What would be each ﬁrm’s proﬁt under that combination of strategies?) //// (Em/l“ frmiwgﬁ LA} Tm 5Tb;ng ,ﬂ / V‘VL’U» 50 0’" 'Y’fﬁcizwu M, g/ gamma lei; wi \wvik freéuu$3,; AW icimgdm g0 inﬁth “O @9373? :s {Q {:gsrm) \g* M Egg/x {fﬁéVi—K. REC} ﬁves , fre-g?’?'§s 1% SN /{i M g) My {hint mo; g5 j 5 (Axis frowéﬁis R23". // (ii) What will be the outcome? ’{Lgﬁ kxérL (itsqu me. (iii) Can they do better? What would it take for them to achieve a better result? ...
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