Download Intro Micro Exam 2, Fall2003

Dr. Eric R. Dodge
493703191
Page 1
6/28/2017
NAME:_______________
You may not attach additional paper to this exam. You may use the back page for additional space.
If something is unclear, please do not hesitate to ask for clarification.
1. Using the income-effect and substitution-effect concepts, explain why consumers buy more of a product
at a lower price than they do at a higher price and vice versa. How can the law of diminishing marginal
utility be used to explain the law of demand? (12 points)
2. A firm employs resources to produce goods. Explain the law of diminishing marginal returns to labor.
Explain how these diminishing marginal returns to labor are related to the marginal costs of producing
those goods. Please also use diagrams to illustrate the relationship. (10 points)
3. What is the difference between marginal, and total utility of the consumption of some good (call it X)?
Can marginal utility from the consumption of good X be negative? Briefly explain with an example. (16
points)
493703191
Dr. Eric R. Dodge
493703191
Page 2
6/28/2017
4. You are choosing between two goods, Beer and Pretzels, and your marginal utility from each is as
shown below. Your daily income is $9 and the price of Beer is $1 and Pretzels are $2.
a. Give an algebraic restatement of the utility-maximizing rule and explain what it means. (6 points)
b. What daily quantities of each will you purchase to maximize utility? (4 points)
c. What total utility will you realize? (3 points)
d. Assume that, other things remaining unchanged, the consumer’s income increases to $12. What
quantities of Beer and Pretzels will you now purchase? (4 points)
e. How was your total utility affected? Does this make sense? Explain. (5 points)
Units of Beer
1
2
3
4
5
6
7
8
MUbeer
8
7
6
5
4
3
2
1
Units of Pretzels
1
2
3
4
5
6
7
8
MUpretzels
10
8
6
4
3
2
1
0
5. a. What is minimum efficient scale (MES)? How can this concept, combined with economies and
diseconomies of scale, be used to describe the number and size of firms in an industry? Feel free to use a
diagram if it helps your explanation. (6 points)
b. If an entrepreneur were making exactly zero dollars of economic profit, would she exit the market in the
long run? Why or why not? (8 points)
493703191
Dr. Eric R. Dodge
493703191
Page 3
6/28/2017
6. The U.S. market for rice is perfectly competitive with thousands of price-taking buyers and sellers
(farmers).
a. Graphically depict both the U.S. market and one typical farmer who is producing at his profit
maximizing quantity when the market price is above his average cost curve. Label everything. (10 points)
b. Thoroughly describe , you do not need to draw, how the above situation, both for the U.S. market and
for the typical rice farmer, will adjust in the long run. (8 points)
c. Is the long run outcome of perfect competition efficient? Explain. (8 points)
493703191