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Midterm 2 Exam Principles of Microeconomics ECO 201 Date: Semester: Instructor: Khusrav Gaibulloev Instructions: This is a closed books and closed notes exam. You may use calculator that is nonprogrammable and without graphing function. For the problem solving questions, write answers legibly in the spaces provided, and on the back of the page, if necessary. I encourage you to show all your work, so that I can decide whether to give a partial credit or not. The total number of possible points on the exam is 60 points. Make sure you have all pages of the exam. Statement of academic honesty: This exam is entirely my own work. I have not received assistance from anyone in completing this exam. I have not given assistance to anyone in completing this exam. Student: ___________________ Signature: ___________________ AUS ID: ___________________ ECO 201, Exam 2: Page 1 of 7 Part I – Multiple Choice/True False. Mark the correct answer on the scantron sheet – there is only one. Each question worth 2 points, 40 points total. 1. Refer to the figure above. S and D are initial supply and demand curves and S' represents a new supply curve after the tax. The amount of the tax revenue collected is equal to the area A. EAHI. B. AGJH. C. EGJI. D. IJC. 2. Refer to the figure above. S and D are initial supply and demand curves and S' represents a new supply curve after the tax. The deadweight loss from the tax is equal to the area A. IJC. B. EGJI. C. IHC. D. HCJ. 3. Refer to the figure above. S and D are initial supply and demand curves and S' represents a new supply curve after the tax. The share of the tax burden borne by producers is equal to the distance A. AG. B. EA. C. EG. D. HC. 4. Consider a per unit tax imposed on a good. The more elastic demand is, the A. less likely that the deadweight loss will be affected. B. larger the deadweight loss from the tax to producers. C. smaller the deadweight loss from the tax. D. larger the deadweight loss from the tax. 1 ECO 201, Exam 2: Page 2 of 7 5. Refer to the figure above. The burden of the tax illustrated in the graph A. is borne completely by the consumers. B. is borne mostly by the consumers. C. is borne mostly by the producers. D. is shared about equally by consumers and producers. 6. According to the textbook and class discussions, a less costly alternative to the price control would be A. price floor. B. price subsidy. C. income transfers. D. taxing exported goods. Sara, a peer-tutor, can help only three students at a time. Sara makes appointments with five students for each tutoring slot, anticipating a high proportion of no-shows. On the night before the final exam all five students show up for a 7:00 am appointment. Their respective arrival times and the maximum amounts each would be willing to pay to avoid not being able to get help for homework are as given in the table. Amr Jawad Ahmad Lamya Mohsen Arrival time 6:30 am 6:35 am 6:40 am 6:50 am 6:55 am Reservation prices($) 5 8 6 11 12 7. If Sara operates on a first come, first served basis, who will not be able to get any help with homework that day? A. Amr and Jawad. B. Ahmad and Lamya. C. Jawad and Ahmad. D. Lamya and Mohsen. 2 ECO 201, Exam 2: Page 3 of 7 50 45 price S 40 35 30 25 20 15 10 5 D 100 200 300 400 500 600 700 800 quantity 8. Refer to the figure above. Suppose government decides to support poor people through price control. If government imposes price ceiling of $15, the quantity supplied will be _______ and the value of producer surplus will be _______. A. 400; 4000 B. 200; 2000 C. 200; 1000 D. 600; 1000 9. Refer to the figure above. In the equilibrium shown, quantity is ________, consumer surplus is ___________ and __________. A. 25; 8000; total economic surplus is minimized B. 25; 4000; total economic surplus is maximized C. 400; 4000; the difference between benefits and costs is minimized D. 400; 4000; total economic surplus is maximized 10. Amir buys a new car for Dhs. 100,000. He receives consumer surplus of Dhs. 25,000 on his purchase. His willingness to pay is A. Dhs. 125,000. B. Dhs. 100,000. C. Dhs. 75,000. D. Dhs. 25,000. 11. A market equilibrium is efficient only when A. buyers and sellers each earn equal surplus from the transaction. B. costs imposed on others are not accounted for. C. total economic surplus is maximized. D. income is distributed equitably. 3 ECO 201, Exam 2: Page 4 of 7 Table 1 Number of Workers 0 1 2 3 4 Output 0 90 170 230 240 Fixed Cost $50 $50 $50 $50 $50 Variable Cost $0 $20 $40 $60 $80 Total Cost $50 $70 $90 $110 $130 12. Refer to Table 1 above. The marginal product of the third worker is A. 230 units. B. 60 units. C. 80 units. D. 170 units. 13. Refer to Table 1 above. If the price of output is $0.30 per unit, the profit-maximizing output is a. 240 units. b. 90 units. c. 170 units. d. 230 units. 14. If a firm produces nothing, which of the following costs may not be zero in the short run? a. fixed cost. b. variable cost. c. total cost. d. opportunity cost. 15. The amount by which total cost changes when the firm produces one additional unit of output is called a. average total cost. b. total variable cost. c. change in total cost. d. marginal cost. 16. Which of the following is true? a. all inputs that were fixed in the short run remain fixed in the long run. b. inputs that were variable in the short run become fixed in the long run. c. inputs that were fixed in the short run become variable in the long run. d. all inputs are fixed in the long run. 4 ECO 201, Exam 2: Page 5 of 7 17. Refer to the figure above. When the demand is P2=15, what is the profit maximizing output for this firm? a. 45. b. 100. c. 60. d. 80. 18. Refer to the figure above. When the demand is P2=15, what is the amount of profit or loss for this firm? a. loss of 60. b. loss of 180. c. profit of 60. d. profit of 180. 19. Refer to the figure above. When the demand is P2=15, should the firm shut down in the short run? a. Yes because P < ATC. b. No because P > AVC. c. Yes because P < AVC. d. Uncertain. Table 2 The Flying Elvis Copter Rides Quantity Total Fixed Cost Cost Variable Cost Marginal Cost 0 1 2 3 $0 B I O -C $120 P $50 $150 G M $50 A H N Average Fixed Cost -D J Q Average Variable Cost -E K $120 Average Total Cost -F L R 20. Refer to Table 2. What is the value of C? a. $100 5 ECO 201, Exam 2: Page 6 of 7 b. $150 c. $50 d. Uncertain. 6 ECO 201, Exam 2: Page 7 of 7 Part II – Problem Solving Questions. There is one question worth a total of 20 points. 1. (20 points) Jawad owns and manages a café in Collegetown whose annual revenue is $5,000. Annual expenses are as follows Labor Food and drink Electricity Vehicle lease Rent Interest on loan for equipment $2,000 500 100 150 500 1,000 a) Calculate Jawad’s annual accounting profit b) Jawad could earn $1,000 per year as a recycler of aluminum cans. However, he prefers to run the café. In fact, he would be willing to pay up to $275 per year to run the café rather than to recycle. Compute economic profit. Is the café making an economic profit? Should Jawad stay in the café business? Explain. c) Suppose the café’s revenues and expenses remain the same, but recyclers’ earnings rise to $1,100 per year. Is the café still making an economic profit? Explain. See Practice Problems to Ch.6 (Chapter 6, problem 1) for solution. 7