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Econ 211 Exam 4 Marietta College Fall 2000 Part I: Answer each question on the answer sheet. Each is worth 2 points. 1. a) b) c) d) Given the data below, which worker hired at Jefferson’s Cleaners is the first to yield diminishing marginal returns? the first worker the third worker the fourth worker the fifth worker Daily Productivity at Jefferson’s Cleaners Number of Workers 0 1 2 3 4 5 Number of Suits Cleaned Daily 0 12 26 46 60 73 6 84 7 94 8 102 9 109 2. a) b) c) d) Which of the following would cause the MC curve to shift down at Barney’s Bagel Bakery? An increase in the hourly wage that Barney pays his workers. A decrease in the hourly wage that Barney pays his workers. An increase in the fixed amount of local property taxes that Barney pays on the building he owns. Both (b) and (c). 3. a) b) c) d) Which of the following would be classified as a fixed cost for the local supermarket the cost of the boxes of cereal sold in the store. the salary and any overtime paid the store’s manager. the rent for the building the store uses. the social security tax the store pays the federal government on the workers’ income. 4. a) b) c) d) Which of the following is incorrect? AVC = ATC + AFC MC = VC/Q TC/Q = VC/Q + FC/Q FC = AFC x Q 5. Electric utility companies have built larger and larger electric generating stations and, as a result, the cost of producing each kilowatt hour decreased. This is an example of: increasing marginal returns. diminishing marginal returns increasing returns to scale. decreasing returns to scale. a) b) c) d) 6. a) b) c) d) The former president and chief executive officer of Jitters Coffee Company has been running his own coffee company since resigning his $100,000 a year job at Jitters one year ago. His profit from self-employment after one year was $88,000 so: he has made an economic loss of $12,000 in his first year. he has incurred a sunk cost of $12,000 in his first year. he has suffered an economic loss of $100,000 in his first year. he has made an economic profit of $88,000 in his first year. 7. a) b) c) d) e) The characteristics of a perfectly competitive industry are: price taking behavior, homogeneous products, significant entry barriers. perfect information, many buyers and sellers, and economies of scale price searching behavior, homogeneous products, and ease of entry. price taking behavior, homogeneous products, ease of entry. price taking behavior, heterogeneous products, and ease of entry. 8. a) b) c) d) In a perfectly competitive market, the demand curve for a single firm’s product is: always perfectly inelastic. always perfectly elastic. always as elastic as the market demand. inelastic, but not perfectly inelastic. Question 9 refers to the table below. Output Total Cost 0 15 1 35 2 50 3 65 4 85 5 110 6 140 7 175 8 218 9 276 10 350 9. a) b) c) d) e) The marginal cost of the seventh unit produced is: 175 25 5 35 impossible to determine from the data given. 10. a) b) c) d) e) A profit maximizing firm will produce the level of output such that: average revenue equals average cost. average revenue equals variable cost. marginal revenue equals marginal product. marginal revenue equals marginal cost. marginal revenue exceeds marginal cost by the maximum amount. 11. a) b) c) d) In a perfectly competitive market in the short run, as market demand decreases, the perfectly competitive firm increases output and profits will typically increase. the perfectly competitive firm decreases output and profits will typically increase. the perfectly competitive firm increases output and profits will typically decrease. the perfectly competitive firm decreases output and profits will typically decrease. 12. a) b) c) d) When firms leave a perfectly competitive market, ceteris paribus: market supply will decrease and price will rise. market supply will decrease and price will fall. market demand will increase and price will rise. market demand will decrease and price will fall. 13. a) b) c) d) e) In a perfectly competitive industry, the market price is $11. Firm A is currently producing 200 units. The firm's marginal cost is $13, its fixed costs amount to $1000 and its average total cost equals $14. If this firm is to maximize its profits in the short run, it should: reduce its output. expand its output. raise its price. temporarily shut down maintain its current output. 14. a) b) c) d) Monopolies may be able to earn economic profits in the long run because there are: inelastic consumers. free entry and exit. numerous close substitutes for the firm’s product. barriers to entry. 15. a) b) c) d) The demand curve facing the monopolist is the same as the market demand curve. more elastic than the market demand curve. less elastic than the market demand curve. upward sloping. 16. Assume that at the current output level, a monopolist is earning positive economic profit, has a marginal revenue of $7, and a marginal cost of $4. Which of the following is an accurate conclusion with regard to the monopolist's profit? the firm is producing the profit maximizing output. the firm could increase its profit by increasing its price. the firm could increase its profit by decreasing its output. the firm could increase its profit by decreasing its price. none of the above a) b) c) d) e) 17. a) b) c) d) Which of the following is NOT necessary for a monopoly to increase its economic profit by discriminating among groups of buyers? The firm must be able to separate different buyer types. The firm must be able to identify each individual consumer’s precise willingness to pay. Each group of buyers must have a different average willingness to pay. Resale of the product is difficult or unlikely. 18. a) b) c) d) In the case of a perfectly price-discriminating monopolist, there is no: transfer of consumer surplus to the producer. deadweight loss. short-run economic profit. long-run economic profit. 19. a) b) c) d) e) A monopolist has divided its market into two segments according to gender. The elasticity of demand for the product by men is equal to 3. The elasticity of demand for the product by women is equal to 5. If the marginal cost of selling the product to each segment is a constant $20 per unit, what price should the monopolist charge each segment? Price for men = $30; Price for women = $25 Price for men = $25; Price for women = $30 Price for men = $20; Price for women = $20 Price for men = $60; Price for women = $4 Impossible to determine from the information provided. 20. a) b) c) d) Compared to a single-price monopoly, a competitive industry produces: less output at a lower price. less output at a higher price. more output at a lower price. more output at a higher price. Part II: Answer ANY TWO questions. Each is worth 4 points. 21. What is the difference between diminishing marginal returns and diseconomies of scale? 22. Starting from a long run equilibrium, what effect does a leftward shift in the market demand curve have on a perfectly competitive firm's output, price, and profits in both the short run and long run? (No graphs please.) 23. Why is the definition of the relevant market important in antitrust cases? Part III: Answer BOTH questions. 24. a) b) c) The graph below represents the cost curves for a perfectly competitive firm. [6 points] At what level of output does diminishing marginal returns begin for the firm? If the market price is $65 per unit, how many units will the profit maximizing firm produce? If the market price is $30 per unit, how many units of output will the profit maximizing firm produce? MC $ ATC 65 AVC 51 50 35 30 20 25. a) b) c) 40 50 60 QUANTITY 70 The graph below depicts a single-priced monopolist. [6 points] What level of output maximizes the firm's profits? What single price will the profit maximizer charge? How much profit will the firm earn at the above price and quantity? $ MC ATC 42 35 30 20 D 60 70 80 90 QUANTITY MR