Download Midterm 2 Solution Key

Econ 200 Fall 2012
Sinan Sarpça and Thomas Crossley
Second Midterm
25 Multiple Choice questions
/100
Instructions:
•
Circle one and only one answer for each question. Circling more than 1 answer will be
treated as a wrong answer.
•
Each question is worth 4 points if your answer is correct, 0 point if it is wrong, and 1
point if you unambigously leave it blank.
•
If the first question starts with:
o “Sizable …” then mark “a”
o “Which …” then mark “b”
o “A monopolist’s …” then mark “c”
as the answer to question 26 on the optical form. Otherwise your exam will be graded
according to the key that gives the minimum score for your answers.
1. Which of the following best explains the source of consumer surplus for a good, e.g. good A?
a. Many consumers would be willing to pay more than the market price for good A.
b. Many consumers pay prices that are greater than the equilibrium price of good A.
c. Many consumers think the market price of good A is greater than its cost.
d. Many consumers think the price elasticity of demand for good A is unit elastic.
2. If it costs Wilfred the window cleaner €9.60 to clean the windows in a house but he is paid €15.00 for
doing the job
a. Wilfred customer receives consumer surplus of €5.40.
b. Wilfred customer receives consumer surplus of €15.00.
c. Wilfred receives producer surplus of €5.40.
d. Wilfred receives producer surplus of €9.60.
3. In the long run, freedom of entry into a market forces a __________ to charge a price equal to average
total cost, but average total cost exceeds its minimum level.
a. perfectly competitive firm b. monopolistically competitive firm
c. oligopolistic firm
d. pure monopoly
4. Producer surplus tends to be large when
a. supply is price elastic. b. demand is price elastic. c. supply is price inelastic. d. demand is price inelastic.
5. An economically efficient situation is one in which
a. everyone has everything they need. b. everyone has above-average income.
c. total surplus is maximized.
d. all producers are operating at the lowest possible marginal cost.
6. Which one of the following is an example of a negative externality?
a. air pollution
c. a consumer who buys a dress but gets home to find that it doesn’t fit
b. a firm that dominates its market
d. a nice garden in front of your neighbour's house
7. Deadweight loss measures the
a. the amount people would pay to gain an additional unit of a good.
b. the loss from economic inefficiency.
c. the difference between two efficient situations.
d. the amount required to compensate producers for lost surplus due to the imposition of a sales tax.
8. Which of the following groups has a relatively price elastic supply of labour?
a. Heads-of-households who must support other people with their incomes.
b. Older people in semi-retirement, who can choose whether or not to work.
c. Second earners in a household, who earn lower wages than the primary wage earner.
d. b and c both have relatively elastic labour supplies.
9. Refer to Figure 2. Which shows the greatest deadweight loss to its tax? a. A b. B c. C d. D
10. Refer to Figure 1. Consider the impact of a €5 per unit tax in the market described in this diagram. The
government will collect: a. €100 b. €95 c. €50
d. no money, consumers will refuse to buy this good with the €5 tax.
11. Which of the following is the best example of a variable cost?
a. monthly payments for hired labour
b. property tax payments (emlak vergisi ödemeleri)
c. monthly rent payments for a warehouse d. pension payments to retired workers (emeklilik ödemeleri)
12. At a firm's current output level of 200 units per week, it has 10 employees at a weekly wage of €500
each. Raw materials, which are ordered and delivered daily, cost €1,000 per week. The weekly cost of the
firm's capital is €1,250. Which of the following sets of cost figures is correct?
Total Variable Cost
Total Fixed Cost
Total Cost
a. €5,000
€2,250
€7,250
b. €6,000
€1,250
€7,250
c. €1,250
€6,000
€7,250
d. €2,250
€500
€2,750
13. Given the cost curve described in the diagrams below, the efficient scale of production occurs at point
a. A. b. B. c. C. d. D.
14. If a firm experiences constant returns to scale at all output levels, then its long-run average total cost
curve would: a. slope downward. b. be horizontal. c. slope upward.
d. slope downward for low output levels and upward for high output levels.
15. The total cost to the firm of producing zero units of output is
a. zero in both the short run and the long run.
b. its fixed cost in the short run, zero in the long run.
c. its fixed cost in both the short run and the long run.
d. its variable cost in both the short run and the long run.
16. One of the defining characteristics of a perfectly competitive market is
a. a small number of sellers.
b. a large number of buyers and a small number of sellers.
c. a standardized product.
d. significant advertising by firms to promote their products.
17. The firm will make the most profits if it produces that quantity of output for which
a. marginal cost equals average cost.
b. profit per unit is greatest.
c. marginal revenue equals total revenue.
d. marginal revenue equals marginal cost.
18. Joe's Garage operates in a perfectly competitive market. At the point where marginal cost equals
marginal revenue, ATC = €20, AVC = €15, and the price per unit is €10. In this situation,
a. Joe's Garage will break even.
b. Joe's Garage will shut down immediately.
c. Joe's will lose money in the short run, but stay in business.
d. the market price will fall in the short run.
19. If all firms in a perfectly competitive market have the same costs of production, then in long-run
equilibrium,
a. price exceeds all firms' average cost. b. price exceeds all firms' marginal cost.
c. some firms have positive profits.
d. all firms have zero profits.
20. The textile industry is composed of a large number of small firms. In recent years, these firms have
suffered economic losses and many sellers have left the industry. Economic theory suggests that these
conditions will
a. shift the demand curve outward so that price will rise to the level of production cost.
b. cause the remaining firms to collude so that they can produce more efficiently.
c. cause the market supply to decline and the price of textiles to rise.
d. cause firms in the textile industry to suffer long-run economic losses.
21. Sizable economic profits can persist over time under monopoly if the monopolist
a. produces that output where average total cost is at a maximum.
b. is protected by barriers to entry.
c. operates as a price taker rather than a price maker.
d. realizes revenues that exceed variable costs.
22. Carmen's Café is a monopolistic competitor. If Carmen is currently producing at the output level where
her average total cost is minimized and the café is earning economic profits, then in the long run output will
a. decrease and average total cost will increase.
b. decrease and average total cost will decrease.
c. remain unchanged as Carmen’s Café is doing the best it can.
d. increase and average total costs will decrease.
23. Refer to Table 1. What is George's profit-maximizing price? a. €4
b. €3
c. €2
d. €1
24. A monopolist's profits with price discrimination will be
a. lower than if the firm charged a single, profit-maximizing price
b. the same as if the firm charged a single, profit-maximizing price.
c. higher than if the firm charged just one price because the firm will capture more consumer surplus.
d. higher than if the firm charged a single price because the costs of selling the good will be lower.
25. When a monopolistically competitive firm raises its price,
a. quantity demanded falls to zero.
b. quantity demanded declines, but not to zero.
c. the market supply curve shifts outward.
d. quantity demanded remains constant.
Table 1
George sells chickens and faces the following demand curve:
Price
Quantity
€5.00
1
€4.00
2
€3.00
3
€2.00
4
€1.00
5
George has marginal cost of €0.50 per unit.
Figure 1
Figure 2
Figure 3