Student Name: __________________________________________

Class: Microeconomics Final Exam December 8-10, 2004

Read these Instructions carefully! You must follow them exactly!

I) On your Scantron card you must print three things: 1) Your full name clearly; 2) The day and time your class meets (for example MW 1:25); 3) The number I have written in ink on the upper right corner of your copy of this test. (This number tells me which version of the test you have. Without it your test cannot be graded properly and you get no credit for your answers.) II) Answer on your Scantron card, using a #2 pencil. III) Warning: SOME QUESTIONS MUST BE ANSWERED SEVERAL TIMES! Such questions will begin with a phrase such as this: (Repeat answer on lines 37, 38 and 39) Remember to do it! IV) You must turn in this printed exam along with your Scantron card. Otherwise your score on this exam is "F".

Questions:
1. Short run decisions are: A) constrained because all inputs are variable. B) constrained because all inputs are fixed. C) constrained because some inputs are fixed while others are variable. D) unconstrained. 2. (Repeat your answer on line 28.) As compared to a normal monopolist, a pricediscriminating monopolist produces a: A) smaller output at a lower profit. B) smaller output but at a larger profit. C) larger output at a larger profit. D) larger output but at a lower profit. 3. (Repeat your answer on line 29.) A perfectly competitive seller faces a: A) downward sloping demand curve. B) downward sloping supply curve. C) horizontal demand curve. D) horizontal supply curve.

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Use the following to answer question 4:

P r ic e

M 1 2 3 A B C D

P P P

M Q 1

R Q 2

e m Q 3

a n d

u a n t i t y

4. (Repeat your answer on line 30.) Refer to the graph above. If the government's goal is to eliminate the welfare costs of monopoly, it will: A) establish a price ceiling at P3. B) establish a price ceiling at P2. C) establish a price floor at P1. D) not attempt to control price. Use the following to answer question 5:
$ $ $ $ $ $ 5 4 3 . 5 3 2 . 5 2 5 M 1 5 R 2 5 3 0 D 5 0 M C

P r ic e

$ $1 1. 2 $ 0

u a n t i t y

5. (Repeat your answer on line 31.) Refer to the graph above. If the monopoly firm maximizes profit, it will produce _____ units of output and charge a price of _____ per unit. A) 15; $3.50 B) 15; $2.00 C) 25; $2.50 D) 30; $2.00

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Use the following to answer question 6:

P r ic e

A 2 . 5

B 5

CD Q

e m

a D n d

7 . 5 1 0 u a n t i t y

6. (Repeat your answer on line 32.) Refer to the graph above. If the demand curve is curve D, the marginal revenue curve is: A) A, which intersects the x-axis at 1/4 the quantity where the demand curve intersects the x-axis. B) B, which intersects the x-axis at 1/2 the quantity where the demand curve intersects the x-axis. C) C, which intersects the x-axis at 3/4 the quantity where the demand curve intersects the x-axis. D) D, which intersects the x-axis at the same quantity where the demand curve intersects the x-axis 7. A monopoly firm is different from a competitive firm in that: A) there are many substitutes for a monopolist's product while there are no substitutes for a competitive firm's product. B) a monopolist's demand curve is perfectly inelastic while a competitive firm's demand curve is perfectly elastic. C) a monopolist can influence market price while a competitive firm cannot. D) a monopolist earns economic profits in the long run while a competitive firm does not. 8. (Repeat your answer on line 33.) Can accounting profit be positive, while economic profits are negative? A) No. The two concepts are identical. B) Yes, if total revenue covers opportunity costs but not explicit costs. C) Yes, if total revenue covers explicit costs but not opportunity costs. D) No. Economic profits must always be larger than accounting profits.

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9. The period 1750-1900, during which technology and machines rapidly modernized production, is general called the: A) Industrial Enlightenment. B) Industrial Revolution. C) feudalistic period. D) mercantilistic period. Use the following to answer question 10:

P r ic e

P r ic e

D D 1

( a )

u a n t i t y( b )

a n t i t y

P r ic e

P r ic e

0 S 1

( c )

u a n t i t y ( d )

u a n t i t y

10. (Repeat your answer on line 34.) Refer to the graph above. The market is caviar. Which graph best represents the impact of an increase in consumer incomes on the market for caviar? A) A B) B C) C D) D

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Use the following to answer questions 11-12:

8 0 7 0
P r ic e ($ p e r s q u a r e fo o t)

C A T C

L R

6 0 5 0 4 0 3 0 2 0 1 0 0

= M

2 0 04 0 06 0 08 0 10 0 01 02 01 04 0 0 S q u a r e f e e t o f c o n s t r u c t i o n p e r m o n t h

11. (Repeat your answer on line 35.) Refer to the graph above. Assuming that the industry continues to operate under conditions of perfect competition and that the cost curves do not shift, in the long run this firm will produce: A) 800 units of output. B) 1000 units of output. C) 1200 units of output. D) 1400 units of output. 12. (Repeat your answer on line 36.) Refer to the graph above. Assuming that the industry operates under conditions of perfect competition: A) it is currently in equilibrium. B) new firms will soon enter the industry. C) existing firms will leave the industry. D) firms in the industry are earning zero economic profit. 13. (Repeat your answer on line 37.) Which of the following statements regarding the relationship between elasticity of demand and revenue is true? A) If elasticity is greater than one, a rise in price lowers total revenue. B) If elasticity is greater than one, a decline in price decreases total revenue. C) If elasticity is less than one, a decline in price increases total revenue. D) If elasticity is less than one, a rise in price lowers total revenue.

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14. (Repeat your answer on line 38.) Government's role in a market economy includes all of the following except: A) insuring economic stability and growth. B) supplying public goods. C) creating negative externalities. D) enhancing competition. 15. (Repeat your answer on line 39.) A natural monopoly: A) has an average total cost curve that reaches minimum possible average total cost at a low level of output. B) is usually subject to antitrust suits. C) is usually allowed to choose its price so as to maximize profits in the United States. D) occurs when a single firm can supply the entire market demand for a product at a lower average total cost than would be possible if two or more firms supplied the market. 16. (Repeat your answer on line 40.) Monopolistic competition is similar to perfect competition in that: A) long-run profits tend to zero in both. B) output is at minimum average total cost in both. C) both entail the production of differentiated products. D) firms advertise in both cases. Use the following to answer question 17:
18 16 14 12 10 8 6 4 2 0

Chocolate bars

A B 0 2 4 6 8 10 12 14 16 18 20 Cans of Soda

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17. (Repeat your answer on line 41.) Refer to the graph above. Assuming a consumer has $5 to spend, if a soda costs $0.25 and a chocolate bar costs $0.50, the consumer would optimally choose to consume: A) at point A. B) at point B. C) 0 cans of soda and 10 chocolate bars. D) 20 cans of soda and 0 chocolate bars. 18. (Repeat your answer on line 42.) If the quantity of houses supplied in an area increases 10% when the price goes up 25%, the supply: A) is elastic. B) is inelastic. C) has unit elasticity. D) is perfectly elastic. 19. (Repeat your answer on line 43.) A public good is a good that: A) is owned by the public. B) when consumed by one individual, can still be consumed by others. C) when consumed by one individual, cannot be consumed by another. D) is available only to those people who help to pay for it. 20. (Repeat your answer on line 44.) A new fertilizer has been discovered which significantly increases the corn crop yield per acre. As a result, the farmers': A) average total cost curves become downward sloping. B) long-run average total cost curve becomes flatter. C) average total cost curve shifts downward. D) cost curves do not change their shape or position. 21. (Repeat your answer on line 45.) For complements: A) cross price elasticity of demand is negative. B) cross price elasticity of demand is positive. C) price elasticity of demand is negative. D) price elasticity of demand is positive.

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Use the following to answer question 22:

m a r g i n a l c o s t d e m a n d

P ric e , c o s t

$ $ $

7 6 5

. 0 . 5 . 0

0 0 0

$ $

3 2

. 0 . 0

0 0

B A
0 2 0 3 0 4 0 5 0 6 0 7 0

. 0 0 0 1

u a n t i t y

22. (Repeat your answer on line 46.) Refer to the graph above. In order to maximize profit, this perfectly competitive firm should produce: A) 30 units of output. B) 40 units of output. C) 50 units of output. D) 60 units of output. 23. (Repeat your answer on line 47.) Which of the following is not an argument in favor of protecting domestic industries from foreign competition? A) National security. B) Reducing structural unemployment. C) Protection against subsidized foreign producers. D) Making domestic firms more efficient. 24. (Repeat your answer on line 48.) Which of the following market structures is characterized by interdependent pricing and output decisions? A) Monopoly. B) Oligopoly. C) Monopolistic competition. D) Perfect competition.

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25. (Repeat your answer on lines 49.) Based on what you learned in lecture, consider whether each of the following statements 1 through 7 describes part of the data needed to calculate the number of firms in a competitive industry. Then select the best answer from A through E below. 1) The value of marginal cost at the lowpoint of the long run marginal cost curve of the typical firm. 2) The level of output at the lowpoint of the long run marginal cost curve of the typical firm. 3) The level of output at the lowpoint of the long run average cost curve of the typical firm. 4) The value of short run marginal cost at the lowpoint of the short run marginal cost curve of the typical firm. 5) The value of long run average cost at the lowpoint of the long run average cost curve of the typical firm. 6) Total industry demand at a price equal to the lowpoint of the long run average cost curve of the typical firm. 7) Total industry demand at a price equal to the lowpoint of the long run marginal cost curve of the typical firm. A) The data in statement 4 is needed but also additional data. B) The data in statements 1, 2 and 7 are all that is needed to make the calculation. C) The data in statements 3, 5 and 6 are all that is needed to make the calculation. D) The data in statements 1 and 2 are needed and also additional data. E) None of this data is needed. 26. Evaluate the following statements. 1. The electric company charges higher prices for electricity during periods of peak demand in the summer, and lower prices at "off-peak" hours. This is evidence of price discrimination. 2. The local movie theater offers a student discount, even at peak times. This is evidence of price discrimination. 3. If a firm is practicing price discrimination, that firm has monopoly power. A) Statements 1 and 3 are true, but not 2. B) Statements 2 and 3 are true, but not 1. C) Only statement 3 is true. D) Only statements 1 and 2 are true, but not 3. E) None of the three statements are true.

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Use the following to answer question 27:

Current prices in two countries, Rahrah and Goofonia

(The money of Goofonia is called the goofus, and the money of Rahrah is called the rah. Prices in each country are expressed in its local currency.) Good 1 Good 2 Good 3 Good 4 Rahrah prices (in rahs) 30 20 15 16 Goofonia prices (in goofuses) 15 20 5 4 27. (Repeat your answer on line 50.) The numbers in the table represent current prices of four goods in two different nations, Rahrah and Goofonia. Each price is expressed in the local currency of that country, which is the "rah" in Rahrah and the "goofus" in Goofonia. These two countries have never traded with each other, but now they begin to trade. There will be no barriers to trade, no transport costs and no tariffs. Here are several statements which may or may not be true. Decide about each statement and then select the best answer below. 1) Good 4 definitely will be the first good exported from Goofonia to Rahrah. 2) The first good to be traded from Rahrah to Goofonia will be Good 3, the lowest priced good in Rahrah. 3) After trade has built up to its eventual equilibrium level, the equilibrium tradecurrency ratio (measured in units of rahs per goofus) will definitely be higher than 3. 4) Good 2 will definitely be exported by Rahrah. 5) If a foreign exchange market comes into existence, the equilibrium exchange rate (measured in of rahs per goofus) will definitely be at least as large as 1, and no larger than 4, but we cannot be more accurate without more data. A) Only statements 2 and 3 are correct. B) Only statements 1, 4 and 5 are correct. C) Only statements 1 and 4 are correct. D) Only statement 5 is correct. E) Only statement 1 is correct.

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Answer Key
1. C constrained because some inputs are fixed while others are variable. Origin: Chapter 9 Production and Cost ..., 34 Difficulty: Medium Page: 206 Source: Old 2. C larger output at a larger profit. Origin: Chapter 12 Monopoly, 105 Difficulty: Medium Page: 273 Source: Old 3. C horizontal demand curve. Origin: Chapter 11 Perfect Competition, 23 Difficulty: Easy Page: 244 Source: Old 4. B establish a price ceiling at P2. Origin: Chapter 12 Monopoly, 95 Difficulty: Medium Page: 272 Source: Old 5. A 15; $3.50 Origin: Chapter 12 Monopoly, 87 Difficulty: Medium Page: 272 Source: Old 6. B B, which intersects the x-axis at 1/2 the quantity where the demand curve intersects the x-axis. Origin: Chapter 12 Monopoly, 25 Difficulty: Hard Page: 267 Source: Revised 7. C a monopolist can influence market price while a competitive firm cannot. Origin: Chapter 12 Monopoly, 15 Difficulty: Medium Page: 265 Source: Old 8. C

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9.

10.

11.

12.

13.

14.

15.

Yes, if total revenue covers explicit costs but not opportunity costs. Origin: Chapter 9 Production and Cost ..., 26 Difficulty: Hard Page: 205 Source: Old B Industrial Revolution. Origin: Chapter 3 The Evolving U.S. Economy..., 41 Difficulty: Easy Page: 57 Source: Old A A Origin: Chapter 4 Supply and Demand, 126 Difficulty: Medium Page: 99 Source: Old A 800 units of output. Origin: Chapter 11 Perfect Competition, 101 Difficulty: Medium Page: 255 Source: Old B new firms will soon enter the industry. Origin: Chapter 11 Perfect Competition, 99 Difficulty: Easy Page: 255 Source: Old A If elasticity is greater than one, a rise in price lowers total revenue. Origin: Chapter 6 Describing Supply ..., 133 Difficulty: Medium Page: 144 Source: Old C creating negative externalities. Origin: Chapter 2 Trade and Tradeoffs, 102 Difficulty: Medium Page: 34 Source: New D occurs when a single firm can supply the entire market demand for a product at a lower average total cost than would be possible if two or more firms supplied the market. Origin: Chapter 12 Monopoly, 111 Difficulty: Easy

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16.

17.

18.

19.

20.

21.

22.

23.

Page: 276 Source: Old A long-run profits tend to zero in both. Origin: Chapter 13 Monopolistic Competition, .., 82 Difficulty: Medium Page: 292 Source: Old A at point A. Origin: Chapter 8 The Logic of Individual ..., 125 Difficulty: Hard Page: 200 Source: Old B is inelastic. Origin: Chapter 6 Describing Supply ..., 69 Difficulty: Medium Page: 139 Source: Old B when consumed by one individual, can still be consumed by others. Origin: Chapter 2 Trade and Tradeoffs, 115 Difficulty: Medium Page: 37 Source: Revised C average total cost curve shifts downward. Origin: Chapter 10 Production and Cost ..., 108 Difficulty: Medium Page: 230 Source: Old A cross price elasticity of demand is negative. Origin: Chapter 6 Describing Supply ..., 173 Difficulty: Easy Page: 148 Source: Old C 50 units of output. Origin: Chapter 11 Perfect Competition, 39 Difficulty: Medium Page: 245 Source: Revised D Making domestic firms more efficient.

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24.

25. 26. 27.

Origin: Chapter 21 International Trade Policy, 73 Difficulty: Easy Page: 470 Source: Old B Oligopoly. Origin: Chapter 13 Monopolistic Competition, .., 102 Difficulty: Easy Page: 294 Source: Old C The data in statements 3, 5 and 6 are all that is needed to make the calculation. Origin: GTA Micro Questions, 16 B Statements 2 and 3 are true, but not 1. B Only statements 1, 4 and 5 are correct.

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