Download Study guide 2005 1 st mid-term

ECONOMICS 100.14
WINTER MID-TERM
FEB. 11, 2000
QUESTIONS FROM LAST TERM IN THE ‘NEW FORMAT’ They are marked
on the explanation, not the true or false.
1. 30 points; 45 minutes
Indicate whether the following statements are true or false, and explain your answer.
Use diagrams in your explanation as appropriate.
a. The total product is at the maximum when marginal product is also at a
maximum.
Sample Answer: False. Marginal product is at a maximum when the
change in output given a change in input is largest. It indicates that the
slope of the TP curve is steepest. When TP is at a maximum, it passes
from a positive slope to a negative slope, so that MP will be zero.
Diagrams of the TP and MP curves could be used to show the answer with
very few words.
b. When the marginal product of labour is greater than the average product of
labour, the average product of labour is increasing.
c. A price ceiling set about the equilibrium price has no effect on the market.
d. When marginal product is at a maximum, marginal cost is also at a
maximum.
e. The difference between the Average Total Cost Curve and the Average
Variable Cost Curve is constant because it equals the Average Fixed
Costs.
f. If marginal costs are rising, then average total costs are also rising.
g. If marginal costs are greater than average variable costs, then average
variable costs are rising.
SECTION A: ANSWER ALL OF THE FOLLOWING QUESTIONS:
1. (25 points) a. Complete the following table indicating the costs of a firm.
Table 1.
OUTPUT TC
MC AFC ATC AVC
0 200
10 250
20 270
30 320
40 400
50 510
60 650
70 820
b. The maximum loss this firm ever needs take is _______.
c. The shut-down point for this firm is _______.
d. Indicate the output this firm would produce and the profit it would make at
each of the prices given below if this firm were operating in a perfectly
competitive market.
Table 2.
PRICE OUTPUT PROFIT (LOSS)
3
8
11
e. The price of this product when the industry is in long-run equilibrium is
________. Explain your answer.
f. Will this firm in a perfectly competitive industry achieve productive and
allocative efficiency in the long-run? Explain your answer.
2. (25 points) Assume that Table 1. in the previous question refers to a firm with a
monopoly in the production of the good.
a. Complete the following table which represents the demand curve facing the firm.
PRICE OUTPUT
TR
MR
20
0
18
10
16
20
14
30
12
40
10
50
8
60
6
70
b. The profit maximising output of this monopoly is ______ and the profit is ______.
c. Will this firm achieve productive and allocative efficiency? Explain your answer.
3. (25 points) Draw a diagram of the costs and demand curves of a firm operating under
the conditions of monopolistic competition in short-run equilibrium with a profit.
Explain how this industry reaches long-run equilibrium.
4. (15 points) Suppose Leslie is operating a saw mill under conditions of perfect
competition and Shirley is operating a restaurant under conditions of monopolistic
competition. Compare and contrast the strategies each can use to attempt to make
their businesses as profitable as possible through time.
1. (30 points) Assume that a retail clothing store is operating under conditions of
monopolistic competition. First draw a diagram showing the firm when the industry is
in long-run equilibrium. Then draw a diagram showing the impact of an increase in
the demand for clothing on its output, price and profits. Describe the process of
adjustment which leads to a return to long-run equilibrium. Discuss whether or not
this industry will achieve allocative and productive efficiency
2. ( 5 points) Assume a pig farm operating in a perfectly competitive industry produces
a stench which reduces neighbours’ enjoyment of their property. Does this farm
achieve allocative and productive efficiency? Explain your answer.