Download MIDTERM EXAMINATION III

FINAL EXAMINATION 1
Intermediate Microeconomics
(ECON 520)
December 14, 2004
Professor D. Weisman
There are two parts to this examination weighted 50 points each. Please write legibly and
think carefully about your answers. You may find that graphical and/or mathematical
analysis will assist you in answering some of these questions.
Part I. Multiple Choice (50 points). Indicate your choice for the best answer to each
question on both the standardized answer sheet provided and the examination so that you
have a record of your answers.
1.
New government regulations that requires automobile manufacturers to increase
the gauge of the steel used in producing automobiles will result in a
a.
a decrease in the equilibrium price of automobiles.
b.*
an increase in the equilibrium price of automobiles.
c.
no change in the equilibrium quantity of automobiles.
d.
an increase in the equilibrium quantity of automobiles.
e.
none of the above.
2.
The market demand function is given by QD = 40 – 2P and supply is perfectly
elastic at a price of 10. If the government imposes a ceiling price of Pmax = 8, then
a.
suppliers would respond by supplying zero output.
b.
suppliers would not change output relative to the free market outcome.
c.
consumers would be better off by 100 relative to the free market outcome.
d.
consumers would be worse off by 100 relative to the free market outcome.
e.*
a. and d.
3.
A business firm faces a demand curve for its product that is given by Q = 16-P.
The firm implements a small price change that results in a decrease in both
revenues and consumers’ surplus. This implies that the
a.
price was reduced and the initial price was greater than 8
b.
price was increased and the initial price was greater than 5.
c.
price was reduced and the initial price was less than 8.
d.*
price was increased and the initial price was greater than 8.
e.
none of the above.
4.
The price elasticity of demand is equal to -2. A 20 percent reduction in price
would be expected to
a.
increase quantity demanded by 5 percent.
b.
increase quantity demanded by 20 percent.
c.*
d.
e.
increase quantity demanded by 40 percent.
decrease quantity demanded by 40 percent
decrease quantity demanded by 20 percent.
5.
The price elasticity of long-distance telephone service is –0.6 and the cross
elasticity of long-distance telephone service with respect to the price of local
telephone service is –0.2. Price changes are implemented that result in an increase
in the quantity demanded of long-distance telephone service of 10 percent. If the
price of local telephone service is reduced by 20 percent, what is the implied
change in the price of long distance telephone service?
a.
a 10 percent increase.
b.*
a 10 percent decrease.
c.
a 20 percent increase.
d.
a 5 percent decrease.
e.
none of the above.
6.
Mikey has a utility function given by U = 20 min {C, M} where C is cereal and M
is milk. Cereal costs 4 cents per unit and milk costs 6 cents per unit. If Mikey has
income of $8 then to maximize utility Mikey purchases
a.
40 units of cereal and 80 units of milk.
b.*
80 units each of cereal and milk.
c.
50 units of cereal and 100 units of milk.
d.
100 units each of cereal and milk.
e.
none of the above.
7.
If Ken’s MRSP-B of pizza for beer is equal to 4, then Ken would willingly give up
a.
4, but no more than 4, beers for an additional 1 pizza.
b.
4, but no more than 4, pizzas for an additional beer.
c.
1/4, but no more than 1/4, pizza for an additional 1 beer.
d.
1/4, but no more than 1/4, beer for an additional 1 pizza.
e.*
a. and c.
8.
Which of the following is most likely to represent the demand function for
automobiles, where PA and PG are the price of automobiles and gasoline,
respectively, and Q is the quantity of automobiles.
a.*
Q = 100I/[2PA + PG]
b.
Q = I/[2PA].
c.
Q = [I + PG]/ PA.
d.
Q = [2PA + PG]/I.
e.
b. and d.
9.
Suppose that Jasper’s utility function for Videos (V) and Movies (M) is given by
U = V + M. Suppose that Jasper is currently in consumer equilibrium and
consuming positive quantities of both V and M. It follows that a reduction in the
price of videos will lead to
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a.
b.
c.
d.
e.*
an increase in Jasper’s consumption of videos
an increased level of utility for Jasper.
no change in Jasper’s level of utility.
a. and c.
a. and b.
10.
The demand curve for beer is given by B = I/PB. This implies that
a.
beer is a normal good.
b.
beer is an inferior good, but not a Giffen good.
c.
beer is an inferior good and a Giffen good.
d.
the demand for beer is of unitary elasticity.
e.*
a. and d.
11.
Which of the following inputs are variable in the long run?
a.
labor.
b.
capital and equipment.
c.
plant size.
d.
land.
e.*
all of these.
12.
Suppose that a firm’s production function is given by Q = 6K0.5L, where K is
capital and L is labor. What is the marginal product of labor when 16 units of
capital are employed?
a.
16.
b.*
24.
c.
1/2.
d.
6.
e.
none of the above.
13.
In a production process, all inputs are doubled; but output less than doubles. This
means that the firm experiences
a.*
decreasing returns to scale.
b.
constant returns to scale.
c.
increasing returns to scale.
d.
decreasing costs.
e.
c. and d.
14.
A firm is currently producing its output efficiently using both K and L. Suppose
that the price of labor rises and the firm reduces the level of L and increases the
level of K with which it operates. Which one of the following production
functions is the firm operating with?
a.
Q = 2K + L
b.
Q = 2 min {K, 4L}
c.
Q = 4 min {3K, 3L}
d.
Q = 2K0.5L0.5
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e.*
a or d.
15.
Which of the following statements is true regarding sunk costs?
a.
Sunk costs have zero opportunity costs.
b.
Sunk costs cannot be recouped once they are incurred.
c.
Sunk costs are irrelevant for making forward-looking decisions.
d.*
all of the above.
16.
Profit is maximized at an output rate at which
a.
price is equal to marginal revenue.
b.*
marginal revenue is equal to the marginal cost of production.
c.
average revenue is equal to the marginal cost of production.
d.
total revenue is at a maximum.
e.
b. and d.
17.
A firm will shut down in the short run when:
1. price is less than average total costs.
2. price is less than average variable costs.
3. total revenues are less than total variable costs.
Which of the following is correct?
a.
1 only.
b.
1 and 2 only.
c.*
2 and 3 only.
d.
1 and 3 only.
e.
1, 2, and 3.
18.
A monopolist operating on the inelastic portion of the demand curve should take
what action to increase profits.
a.*
decrease output
b.
increase output
c.
keep output at the current level
d.
cease all advertising
e.
none of the above
19.
A monopolist faces a demand curve given by Q = 10P-2, where Q is quantity
demanded and P is price. Suppose that the monopolist’s profit-maximizing price
is given by PM = 8. This implies that monopolist’s cost function is given by
a.
C(Q) = 8Q
b.*
C(Q) = 4Q
c.
C(Q) = 2Q
d.
C(Q) = 10Q.
e.
none of the above
20.
Suppose that the Department of Justice (DOJ) vetoes all mergers that are likely to
lead to an increase in the price of the product. The market demand function is
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given by P(Q) = 28 – Q. Pre-merger, the market is competitive and the cost
function is given by C(Q) = 18Q. Post-merger, the market will be controlled by a
monopolist and C(Q) = xQ. For what values of x will the DOJ approve this
merger?
a.*
values of x less than or equal to 8.
b.
values of x less than or equal to 12.
c.
values of x greater than 8.
d.
values of x less than or equal to 16.
e.
The DOJ will not approve this merger for any value of x.
Part II. Problems (50 points). Answer both questions. Each question is worth 25 points.
Show all of your work to receive partial credit. Please write legibly, be precise with your
answers, and remember that economy of presentation is a desirable attribute.
1. (25) The market demand function is given by Q = 18 - P, where Q is output and P is
price.
a) (8)
What price would a profit-maximizing monopolist charge if C(Q) = 2Q?
Determine the monopolist’s profits in equilibrium?
b) (10) How much would consumers have to bribe the monopolist to produce at the
competitive level in this market? [Assume the same cost function as in part a)] If
this bribe was successful, what is the resulting (net) level of consumers’ surplus
in this market?
c) (6)
Suppose the cost function is now given by C(Q) = 2nQ, where the positive
integer n  {1,2,3,….} is the number of firms participating in this market.
Suppose that the competitive outcome prevails for all n > 1. If consumers could
choose the number of firms participating in this market, what value of n would
they choose? Provide a clear economic rationale for your answer.
2. (25) The competitive firm’s marginal cost function is given by MC(q) = 4 + 2q and its
variable costs are given by VC(q) = 4q + q2.
a) (6)
What is the profit-maximizing level of output for the competitive firm if the
market price is equal to 12? If fixed costs were to increase, how would the firm
alter its profit-maximizing level of output?
b) (6)
What is the producer surplus for this firm at the profit-maximizing level of
output?
c) (6)
What are the firm’s profits if average fixed costs equal 2?
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d) (6)
Suppose that the market price falls to 6 and the firm decides not to produce. Has
the firm made a rationale decision? Explain.
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