Download Version A - Midterm #2 - November 15, 2008

ECMA04H
Second Term Test - November 15, 2008
Professor Gordon Cleveland
Time: 90 minutes
Version A
Instructions: PLEASE READ CAREFULLY
1. On the Scantron answer sheet, you must
 PRINT your last name and first name
 enter your student number as the identification number
 FILL IN THE BUBBLES under your name and student number
 FILL IN THE BUBBLE ASSOCIATED WITH YOUR TEST VERSION
NOTE - THIS IS VERSION A
2. If you fail to carry out all the tasks indicated in part 1, 4 marks will be deducted
from your final score.
3. This exam consists of 25 multiple choice questions (and a 26th which will
confirm your exam version). For each question, choose the correct answer. If two
multiple choice answers both seem to be approximately correct, choose the best of
the two answers. Enter the answers to the multiple choice questions on the
Scantron sheet provided to you by filling in the appropriate bubble. If
answers are not written on this sheet, there will be no marks given for
answers. Each correct answer is worth 4 marks (except for question 26, where the
correct answer simply confirms your exam version); incorrect answers receive 0
marks.
4. When entering your answers on the Scantron sheet:
 Use a medium (HB) pencil
 Fill in the bubble neatly and completely
 Erase any changes as completely as possible
 Be very careful to place each answer in the correct place
Note: this exam consists of 9 pages, including this cover page. Make sure that all 9
pages are included in your exam, and notify an invigilator immediately if any are
missing.
ECMA04H SECOND TERM TEST
November 15, 2008
This term test consists of 25 questions (plus a 26th identifier question). Answer each question by choosing the best
alternative and indicating your choice in the appropriate place on the scantron sheet provided with this exam (it is
the only thing you will turn in at the end of the exam). You may take the rest of the exam away with you, so you
can use the fronts and back of these pages for your rough work. If you wish to keep a record of your answers, make
a note of them on the exam. The scantron sheet will not be returned to you, but correct answers will be posted, and
your grade will be communicated to you through the website.
Each correct answer to questions 1 through 25 is worth 4 marks (there is no deduction for wrong answers).
1-6. A firm in a perfectly competitive constant cost industry has total costs in the short run given by:
TC = 0.5q2 + 2q + 128
where q is output per day and TC is the total cost per day in dollars. The firm has fixed costs of $96
(already included in the TC equation above). The TC equation generates minimum average costs of $18
(per unit) at q = 16. You are also told that this size firm generates minimum long run average costs (that
is, minimum LRAC occurs at q = 16, with min LRAC = $18). Questions 1 through 6 concern this firm
and this industry.
1. In the short run, this firm’s shut down price is:
(A) $0
(B) $6
(C) $8
(D) $10
(G) $18
(H) $24
(I) $32
(J) $36
(E) $12
(F) $16
2. You are told that in the short run there are 200 firms, including this one, in the industry, all with the
same cost curves described above. Suppose that the demand curve facing the industry is given by the
equation
P = 38 - .004Q
where P is the price per unit and Q is the number of units demanded per day. The equilibrium price in the
short run is:
(A) $10
(B) $16
(C) $18
(D) $20
(E) $22
(F) $24
(G) $26
(H) $30
(I) $32
(J) $34
3. Continuing the problem begun in question 1, the individual firm in the short run will earn profits of:
(A) $0
(B) $26
(C) $32
(D) $48
(E) $52
(F) $68
(G) $72
(H) $84
(I) $90
(J) none of the above
4. Given the demand curve described in question 2, suppose that we are now in the long run. The total
output of the industry per day in the long run (to the nearest integer) is:
A) 0
(B) 2000
(C) 3000
(D) 4000
(E) 5000
(F) 6000
(G) 7000
(H) 8000
(I) 9600
(J) none of the above
5. Given the demand curve described in question 2, suppose that we are still in the long run. The
increase in the number of firms in the industry (moving from short-run to long-run equilibrium and
rounding to the nearest integer) is:
A) 0
(B) 20
(C) 95
(D) 113
(E) 125
(F) 147
(G) 156
(H) 166
(I) 192
(J) none of the above
6.
Now, in the very long run, there is a technological change that reduces the long run minimum
average cost of the typical business firm to $10 at q = 14. Now how many firms will there be in the long
run?
A) 0
(B) 200
(C) 300
(D) 357
(E) 414
(F) 500
(G) 600
(H) 615
(I) 643
(J) none of the above
7. Which of the following statements about monopoly is (are) generally true?
I) The monopolist will never produce where demand is elastic.
II) In the long run, entry of new firms drives profits down to zero.
III) The monopolist will always produce where MC=MR, as long as PAVC.
(A) none
(B) I only
(C) II only
(D) III only
(E) I and II
(F) I and III
(G) II and III (H) I, II and III
8-12. A firm is the only firm in an industry (and so has monopoly power in the short run). The firm has
total costs in the short run given by:
q2
TC = 0.25q2 + 8q + 64
where q is output per day and TC is the total cost per day in dollars. The firm has fixed costs of $48
(already included in the TC equation above). The demand curve facing the industry is given by the
equation
P = 32 - .125Q
where P is the price per unit and Q is the number of units demanded per day. Questions 8 through 12
concern this firm and this industry.
8. In the short run, this firm will charge a price equal to:
(A) $20
(B) $22
(C) $24
(D) $26
(G) $32
(H) $34
(I) $36
(J) $38
(E) $28
(F) $30
9. Continuing the problem begun in question 8, the firm in the short run will earn profits of:
(A) $200
(B) $220
(C) $240
(D) $260
(E) $280
(F) $300
(G) $320
(H) $340
(I) $360
(J) $380
10. Continuing the problem, suppose that the government imposes a tax on the buyers of this product of
$12 per unit. In the short run, this total price paid by buyers (including the tax) will be equal to:
(A) $20
(B) $22
(C) $24
(D) $26
(E) $28
(F) $30
(G) $32
(H) $34
(I) $36
(J) $38
11. Continue the problem begun in question 10 (in which the government imposes a tax on the buyers of
this product of $12 per unit). In the short run, the fraction of the tax that falls on sellers will be equal to:
(A) 0
(B) 1/12
(C) 1/6
(D) 1/4
(E) 1/3
(F) 1/2
(G) 5/8
(H) 5/6
(I) 1/1
(J) none of the above
12. Continue the problem begun in question 10 (in which the government imposes a tax on the buyers of
this product of $12 per unit). The firm in the short run will earn profits of:
(A) -$90
(B) -$26
(C) $0
(D) $24
(E) $32
(F) $48
(G) $52
(H) $64
(I) $72
(J) none of the above
Page 5 of 9
13. You are given the following information about the transit system in a city:
· the elasticity of demand is 1.00
· the current price of a ticket is $2.00
· daily revenue from ticket sales for the transit system is $200,000
The manager of the transit system wants to increase revenue and is considering increasing the
fare from $2.00 to $2.10. He asks you what the prospective fare increase will do to revenue. A
good estimate for the percentage change in daily revenue from ticket sales in response to the price
increase (rounding to the nearest integer) is:
A) -10%
(B) -5%
(C) 0%
(D) +2%
(E) +4%
(F) +5%
(G) +8%
(H) +10%
(I) +20%
(J) none of the above
14. Which of the following statements about the long run average cost curve (LRAC) would
generally be true?
I) When the LRAC is falling, the production firm is experiencing economies of scale.
II) The LRAC forms an envelope underneath all the possible short run average cost
curves
III) The LRAC shifts upwards as industry output increases if the industry is an increasing
cost industry.
(A) none
(B) I only
(C) II only
(D) III only
(E) I and II
(F) I and III
(G) II and III (H) I, II and III
15. Which of the following statements about monopoly is (are) generally true?
I) Monopoly is inefficient because production takes place at P>MC.
II) Because of the absence of competition, Schumpeter concludes that monopoly firms
are not dynamically efficient
III) In the long run, the monopolist’s supply curve is more elastic than in the short run.
(A) none
(B) I only
(C) II only
(D) III only
(E) I and II
(F) I and III
(G) II and III (H) I, II and III
Page 6 of 9
16.
A firm's total cost function should include a normal return on money invested in the firm
because:
(A) that is the way accountants calculate total costs.
(B) otherwise the average cost curve will not be above the average variable cost curve.
(C) including these in costs reduces the opportunity costs the firm will have to pay upon
bankruptcy.
(D) Economists believe that the opportunity cost of all resources available to the firm should
be counted as costs.
(E) this reduces the breakeven price faced by the firm.
(F) all of the above
(G) none of the above
17. A perfectly competitive firm has cost curves of the normal type and the normal shapes.
Now, the wage level of workers doubles. Which of the following statements is correct about
what happens to the cost curves of the firm?
(A) the total costs and the total revenues of the firm both double.
(B) The average costs and the average revenue of the firm both double
(C) The average costs of the firm will double and the average variable costs will more than
double
(D) The average costs of the firm will double and the average fixed costs of the firm will
more than double
(E) The average fixed costs of the firm will double and the average variable costs will less
than double
(F) The average variable costs of the firm will double and the average costs will less than
double
(G) The average fixed costs of the firm will double and the average variable costs will more
than double
(H) The average variable costs of the firm will less than double and the average costs will
double
(I) The average variable costs, the average fixed costs and the average costs of the firm will
all double
(J) None of the above
Page 7 of 9
18.
In a perfectly competitive firm, at the current level of output, we know that P = MR =
MC >AC > AVC. We can tell from this information that if the output of this firm
increases by a little bit:
(A) average cost is rising, average variable cost is rising, average fixed cost is falling, and
marginal cost is rising
(B) average cost is falling, average variable cost is falling, average fixed cost is falling,
and marginal cost is falling
(C) average cost is falling, average variable cost is rising, average fixed cost is falling,
and marginal cost is falling
(D) average cost is falling, average variable cost is falling, average fixed cost is rising,
and marginal cost is falling
(E) average cost is rising, average variable cost is rising, average fixed cost is falling, and
marginal cost is falling
(F) average cost is rising, average variable cost is rising, average fixed cost is rising, and
marginal cost is rising
(G) average cost is rising, average variable cost is falling, average fixed cost is falling,
and marginal cost is rising
(H) average cost is falling, average variable cost is rising, average fixed cost is falling,
and marginal cost is falling
(I) none of the above
19.
Suppose that a perfectly competitive constant cost industry is initially in short and longrun equilibrium. What is the effect of an increase in fixed costs on the short-run
equilibrium price, the industry output, the output of the firm, and profit of the firm?
(A) no change in price, firm output, or profit, but a decrease in industry output
(B) no change in price, industry output, firm output, or profit
(C) no change in price, firm output, or industry output but a decrease in profit
(D) increase in price, industry output, firm output, and profit
(E) increase in price, industry output, and firm output, but decrease in profit
(F) increase in price and industry output, decrease in profit but no change in firm output
(G) increase in price and firm output, decrease in profit but no change in industry output
(H) increase in firm output and industry output, decrease in profit but no change in price
(I) none of the above
20. What is the shut down price for a competitive firm with Total Variable Cost = q3 – 6q2 +
14q and Fixed Costs = 84?
A) 0
B) $2
C) $3
D) $4
E) $5
F) $6
G) $7
H) $8
I) $9
J) none of the above
Page 8 of 9
21. What is the long-run effect on a perfectly competitive constant-cost industry of a $1 per unit
government tax?
(A) rise in price by less than $1 and decrease in firm output, industry output and profit
(B) rise in price by less than $1, decrease in firm and industry output and no change in
profit
(C) rise in price by $1 and decrease in firm output, industry output, and profit
(D) rise in price by $1, decrease in firm output and industry output, and no change in
profit
(E) rise in price by $1, decrease in industry output, but no change in firm output or
profit
(F) rise in price by $1, decrease in firm output, but no change in industry output or
profit
(G) rise in price by $1 but no change in firm output, industry output, or profit
(H) none of the above
22. Suppose that Variable Cost = 6q + 0.2q2 and Fixed Cost = 500 for a typical firm in a
perfectly competitive constant cost industry. All firms in the industry are identical. The
firm is currently in both long run and short run equilibrium. What is the equilibrium price
and output of this typical firm?
(A) it is not possible to tell without additional information
(B) output is 40 and price is $24
(C) output is 80 and price is $8
(D) output is 80 and price is $24
(E) output is 100 and price is $13
(F) output is 50 and price is $26
(G) output is 50 and price is $24
(H) none of the above
Page 9 of 9
23-25. A single firm owns the only bridge across a local river. The Fixed Cost of the bridge is
$850 per day and there are Variable Costs of $2 per trip. The Demand is P = 20 - 0.02Q, where Q
is the number of consumers using the bridge per day and P is the price charged to each consumer
in dollars as a toll to each user (each user pays one toll per day). Questions 23 through 25
concern this bridge.
23. What is the total gain to society (GTS) if a monopoly firm operates the bridge and maximizes
profits?
(A) $2000
(B) $2025
(C) $2700
(D) $2825
(E) $3200
(F) $4845
(G) $5225
(H) $6475
(I) $7225
(J) none of the above
24. If the government decides to regulate the bridge and requires the firm to charge a price that
reduces economic profits to zero, what price will be charged?
(A) $0
(B) $1
(C) $2
(D) $3
(E) $4
(F) $5
(G) $7
(H) $9
(I) $11
(J) none of the above
25. When the government regulates the bridge as described in Question 24, by how much does
the total gain to society (GTS) rise over the situation described in question 23 where the
monopolist maximizes profits?
(A) $2000
(B) $2025
(C) $2700
(D) $2825
(E) $3200
(F) $4845
(G) $5225
(H) $6475
(I) $7225
(J) none of the above
26. What is the version of the exam which you have just written? Hint - your correct answer is A
(A) Version A
(B) Version B
(C) Version C
(D) Version D
.