Download Midterm - Wake Forest University

Midterm
ECN150
Spring 2006
Wake Forest University
Instructor: McFall
Directions: In the spirit of the month, this exam consists of five types of questions- layups, free throws, mid-range jumpers, three pointers, and last second half court heaves.
Lay-ups are the easiest type of question and, as such, are worth two points each. Free
throws are worth three points. Mid-range jumpers are worth four points. Despite its
name, three pointers are worth five points. The last second heave is worth 10 points.
Finally, there is a short answer question that is worth 20 points. (You can earn at most 81
points on this exam.)
Section I- Lay-ups
Use the PPF for Gondwanaland to answer questions 1 & 2.
Agriculture
A
F
B
E
C
D
Tourism
1. What does Gondwanaland have to do in order to produce at point F?
a) Experience an increase in its population.
b) Experience an increase in technological discoveries.
c) Start trading more.
d) All of the above are correct.
e) None of the above is correct.
2. If Gondwanaland is producing at point E, then
a) it faces no opportunity cost of obtaining more tourism.
b) it is not using its resources efficiently.
c) Both a) and b) are correct.
d) None of the above is correct.
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Use Tweedy’s budget constraint to answer questions 3.
Tweedy consumes cigarettes and coffee. He can buy at most 15 units of cigarettes and
20 units of coffee in each time period.
3. Given the information presented above, the opportunity cost of Tweedy
consuming a unit of coffee is
a) 4/3 cigarettes.
b) 3/4 cigarette.
c) not possible to calculate because his income needs to be known in order to
calculate the opportunity cost of a good.
d) not possible to calculate because the price of both goods need to be known
in order to calculate the opportunity cost of a good.
4. The market for widgets is in equilibrium at $2/unit. The price of an input of
widgets rises. What happens to the market for widgets?
a) The price of a widget will rise and the quantity of widgets exchanged will
fall.
b) The price of a widget will fall and the quantity of widgets exchanged will
fall.
c) The price of a widget will rise and the quantity of widgets exchanged will
rise.
d) The price of a widget will fall and the quantity of widgets exchanged will
rise.
5. Cole’s Bagels, Inc. can make 70 bagels if three workers are employed. It can
make 95 bagels if four workers are employed. Which of the following is a correct
statement given this information?
a) The average product of labor when three workers are hired is 70/3.
b) The marginal product of labor of the fourth worker is 25.
c) Cole should stop hiring after three workers.
d) All of the above are correct.
e) Both a) and b) are correct.
f) None of the above is correct.
Section II- Free throws (3 points each)
1. For this question, use the PPF for Gondwanaland that was shown above.
At which point is the opportunity cost of obtaining another unit of tourism the
lowest?
a) A
b) B
c) C
d) D
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2. With regards to Tweedy’s budget constraint, assume the price of coffee rises.
What can be said about his new budget constraint after the price change?
a) The opportunity cost of coffee will rise.
b) The opportunity cost of coffee will fall.
c) The intercept on the coffee axis will be further from the origin.
d) Both a) and c).
e) Both b) and c).
3. The market for mattoons, an inferior good, is shown below. What might have
caused the demand change?
$/unit
Supply
D1
D0
a)
b)
c)
d)
e)
Quantity
The price of a complement good of a mattoon rose.
The price of a substitute good of a mattoon fell.
The income of mattoon consumers rose.
All of the above.
None of the above.
4. The elasticity of a mattoon is 1.2. This means
a) that if the quantity demanded fell by 10%, then the price of a mattoon rose
by 12%.
b) that if the quantity demanded fell by 12%, then the price of a mattoon rose
by 10%.
c) that a mattoon is an inelastic good.
d) that both a) and c) are correct.
e) that both b) and c) are correct.
5. The cost structure at Mick’s Matoons is shown below. What is the marginal cost
of producing the twelfth good?
Average Total Cost
9
10
10
9.8
11
10
12
10.25
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Section III- Mid-range Jump Shots (4 points each)
1. The price of a mattoon is P*. The number of mattoons exchanged between
suppliers and consumers is Q*. The price of a mankoon, a complement good of a
mattoon, rises because of the price of a mankoon input rises. Which of the
following is a correct statement given the above information?
a) The supply of mattoons will increase.
b) The demand for mattoons will increase.
c) The quantity of mankoons exchanged will fall.
d) All of the above are correct.
e) None of the above is correct.
f) Both a) and c) are correct.
g) Both b) and c) are correct.
2. Mick’s Mattoons can produce X goods at an average total cost of Y and X+1
goods at an average total cost of Y. What is the marginal cost of producing the
X+1st good?
3. The price of a mattoon is $10. The cost structure for Mick’s Mattoons, a profit
maximizing firm, is given below. How many mattoons will Mick produce?
(Fixed cost for Mick’s operation is 50 and the average variable cost of producing
eight goods is 3.75.)
Number of Mattoons
9
10
11
12
Variable Cost
35
42
51
63
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4. The figure below shows the cost and demand structure that Mick’s Monopoly
faces. Use this information to answer questions about this profit maximizing
monopolist.
$/unit
MC
ATC
Demand
MR
Quantity
a) 200
b) 300
c) 400
d) 600
Section IV- Three pointers (5 points each)
1. The market for mattoons is in equilibrium. The price of a mattoon is P*.
The number of mattoons exchanged is Q*. The price of a widget falls.
Widgets are inputs of mattoons. Given this information, which of the
following statements is correct?
a) The demand for mattoons will rise.
b) The supply of mattoons will rise.
c) Prior to the new equilibrium being established, there will be a shortage
of mattoons.
d) Prior to the new equilibrium being established, there will be a surplus
of mattoons.
e) Both a), b), and c) are correct.
f) Both a), b), and d) are correct.
g) Both a) and c) are correct.
h) Both b) and c) are correct.
i) Both a) and d) are correct.
j) Both b) and d) are correct.
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2. The president of Mattoons, Inc. calls you seeking advice. The firm has
recently increased the price of his company’s flagship product, the
Mattoon6.0 and has seen the revenue the firm earns from selling this
product fall. Which of the following options explains the situation
Mattoons, Inc. finds itself?
a) The price elasticity of demand for a Mattoon6.0 must be less than one
or inelastic.
b) The price elasticity of demand for a Mattoon6.0 must be less than one
or elastic.
c) The price elasticity of demand for a Mattoon6.0 must be greater than
one or inelastic.
d) The price elasticity of demand for a Mattoon6.0 must be greater than
one or elastic.
3. BigCountry and LittleNation are trying to determine a terms-of-trade that
makes both countries better off relative to their world if they did not trade.
BigCountry can make at most 70 units of agriculture or 100 units of
manufacturing. LittleNation can make at most 40 units of agriculture or
40 units of manufacturing. Which of the following is a true statement
about the countries’ negotiations?
a) LittleNation has the comparative advantage in agriculture production
and will want at least 10/7 units of manufacturing for each unit of
agriculture it sends to BigCountry.
b) LittleNation has the comparative advantage in manufacturing
production and will want at least 1 unit of agriculture it sends to
BigCountry.
c) LittleNation has the comparative advantage in manufacturing and can
expect for BigCountry to want at least 7/10 unit of agriculture for
every unit of manufacturing it receives.
d) None of the above.
Section V- Half court buzzer beater (10 points)
Mick, the owner of Mick’s Mattoons, a firm in the perfectly competitive mattoon
industry, has decided that he is going to produce 10 mattoons in order to maximize profit
during this production period. At this output level, the average total cost of a mattoon is
20 and the average variable cost of a mattoon is 16. The price of a mattoon is 15. He
asks for advice on this decision. What is the level of profit that the firm will earn in this
production period?
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Short Answer Section
The market for mattoons, which is shown below (and on your answer sheet), is in
equilibrium at P* and Q* prior to the government imposing a per unit tax of τ on the sale
of each mattoon.
$/unit
Stax
S0
P*
Demand
Q*
Quantity
1) On the graph, show the amount of the tax, τ.
2) On the graph, show the price that consumers will pay as Pc and
the price producers will earn after they pay the tax as Pp.
3) On the graph, shade the area that represents the deadweight loss
that will be created by the imposition of the tax. Also, define
deadweight loss.
4) The burden of this tax will be shared by both the producers and
consumers of mattoons. When do consumers bear the entire
burden of a tax?
Final Question (5 points)
Identify two costs that India has had to reconcile since the country decided to repeal
patent rights in the pharmaceutical industry.
Extra Credit
Name a song from Bruce Springsteen’s debut album, “Greetings from Asbury Park, NJ”.
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