Download Test questions - November 16, 2007 - Version A

ECMA04H
Second Term Test - November 16, 2007
Professors Michael Krashinsky and Gordon Cleveland
Time: 90 minutes
Version A
Instructions: PLEASE READ CAREFULLY
1. On the Scantron answer sheet, you must
 PRINT your last name and first name
 enter your student number as the identification number
 FILL IN THE BUBBLES under your name and student number
 FILL IN THE BUBBLE ASSOCIATED WITH YOUR TEST VERSION
NOTE - THIS IS VERSION A
2. If you fail to carry out all the tasks indicated in part 1, 4 marks will be deducted
from your final score.
3. This exam consists of 25 multiple choice questions (and a 26th which will
confirm your exam version). For each question, choose the correct answer. If two
multiple choice answers both seem to be approximately correct, choose the best of
the two answers. Enter the answers to the multiple choice questions on the
Scantron sheet provided to you by filling in the appropriate bubble. If
answers are not written on this sheet, there will be no marks given for
answers. Each correct answer is worth 4 marks (except for question 26, where the
correct answer simply confirms your exam version); incorrect answers receive 0
marks.
4. When entering your answers on the Scantron sheet:
 Use a medium (HB) pencil
 Fill in the bubble neatly and completely
 Erase any changes as completely as possible
 Be very careful to place each answer in the correct place
Note: this exam consists of 7 pages, including this cover page. Make sure that all 7
pages are included in your exam, and notify an invigilator immediately if any are
missing.
Page 2 of 7
ECMA04H SECOND TERM TEST
November 16, 2007
This term test consists of 25 questions (plus a 26th identifier question). Answer each question by
choosing the best alternative and indicating your choice in the appropriate place on the scantron
sheet provided with this exam (it is the only thing you will turn in at the end of the exam). You
may take the rest of the exam away with you, so you can use the fronts and back of these pages
for your rough work. If you wish to keep a record of your answers, make a note of them on the
exam. The scantron sheet will not be returned to you, but correct answers will be posted, and
your grade will be communicated to you through the website.
Each correct answer to questions 1 through 25 is worth 4 marks (there is no deduction for wrong
answers).
1-4. A consumer has a utility function for a good X given by the following function:
U = 10X - (1/10)X2 - (1/30)X3 X<9.05
where X is the quantity of the good purchased each month (quantity need not be an integer) and U is
measured in dollars. Questions 1 through 4 concern this consumer.
1. If the price of X is set at $5.20 per unit, the quantity of the good purchased by this consumer each
month will be:
A) 2
F) 6
B) 4
G) 6.4
C) 4.8
H) 7
D) 5
I) 8
E) 5.2
J) 9.04
2. If the price of X is set at $5.20 per unit, the consumer surplus gained by this consumer each month
through purchasing X will be:
A) $0
F) $15.60
B) $49.20
G) $21.60
C) $31.20
H) $24.00
D) $18.00
I) $28.80
E) $14.40
J) $30.00
3. Suppose that the government imposes a tax of $3.30 per unit on this good, and that the effect of the tax
falls entirely on consumers (so that the price paid by consumers rises to $8.50). The tax revenue raised by
such a tax would be:
A) $1.65
F) $9.90
B) $3.30
G) $11.55
C) $4.95
H) $13.20
D) $6.60
I) $16.50
E) $8.25
J) $19.80
4. Continue with the tax described in question 3. The deadweight loss associated with such a tax would
be:
A) $5.40
F) $10.20
B) $5.60
G) $12.40
C) $8.10
H) $14.40
D) $7.20
I) $15.30
E) $9.90
J) $15.60
Page 3 of 7
5-8. In the long run, a firm producing skyhooks has the following production function:
q = (K1/3 + L1/3)3
where q is output, K is physical capital, and L is labour. In the short run, the firm has plant and equipment
that in total account for 8 units of physical capital. Questions 5 through 8 concern this firm in the short
run.
5. In the short run, when L=27, the marginal product of labour is:
A) 1
F) 2/3
B) 125
G) 3/2
C) 25
H) 5/3
D) 8/27
I) 25/9
E) 27/8
J) 9/25
6. Suppose that the price of labour is $9 per unit and the price of capital is $27 per unit. In the short run,
when L=64, the average variable cost (computed to the nearest penny) is:
A) $9.00
F) $0.75
B) $216.00
G) $1.33
C) $7.11
H) $1.50
D) $0.14
I) $2.33
E) $1.00
J) $2.67
7. Suppose that the price of labour is $9 per unit and the price of capital is $27 per unit. In the short run,
when L=64, the average cost (also called the average total cost) (computed to the nearest penny) is:
A) $36.00
F) $1.67
B) $792.00
G) $2.33
C) $1.77
H) $2.67
D) $0.56
I) $3.67
E) $1.00
J) $4.33
8. Suppose that the price of labour is $9 per unit and the price of capital is $27 per unit. In the short run,
when L=8, the marginal cost (computed to the nearest penny) is:
A) $0
F) $2.25
B) $9.00
G) $2.44
C) $1.13
H) $2.50
D) $0.89
I) $2.67
E) $2.00
J) $3.33
Page 4 of 7
9-14. A firm in a perfectly competitive constant cost industry has total costs in the short run given by:
q2
TC = 0.25q2 + 6q + 64
where q is output per day and TC is the total cost per day in dollars. The firm has fixed costs of $48
(already included in the TC equation above). The TC equation generates minimum average costs of $14
(per unit) at q = 16. You are also told that this size firm generates minimum long run average costs (that
is, minimum LAC occurs at q = 16, with min LAC = $14). Questions 9 through 14 concern this firm and
this industry.
9. In the short run, this firm’s shut down price is:
A) $0
F) $10
B) $6
G) $10.80
C) $8
H) $12
D) $8.40
I) $15
E) $9.60
J) $16
10. You are told that in the short run there are 400 firms, including this one, in the industry, all with the
same cost curves described above. Suppose that the demand curve facing the industry is given by the
equation
P = 30 - .00375Q
where P is the price per unit and Q is the number of units demanded per day. The equilibrium price in the
short run is:
A) $8
F) $18
B) $10
G) $20
C) $12
H) $24
D) $14
I) $28
E) $16
J) $32
11. Continuing the problem begun in question 10, the individual firm in the short run will earn profits of:
A) $0
F) $17
B) -$28
G) $36
C) $28
H) $57
D) -$15
I) $78
E) $15
J) $96
Page 5 of 7
12. Given the demand curve described in question 10, suppose that we are now in the long run. The total
output of the industry per day in the long run (to the nearest integer) is:
A) 4800
F) 4500
B) 5000
G) 4450
C) 6000
H) 4267
D) 6400
I) 4233
E) 7200
J) 4000
13. Given the demand curve described in question 10, suppose that we are still in the long run. The
number of firms in the industry, rounding to the nearest integer, is:
A) 1000
F) 300
B) 600
G) 267
C) 500
H) 250
D) 400
I) 233
E) 333
J) 200
14. The best description of the dynamic that gets us to long run equilibrium in this problem would be:
A) positive short run profits cause firms to enter in the short run, driving profits down to zero
B) negative short run profits cause firms to exit in the short run, until profits rise to zero
C) positive short run profits cause firms to enter in the short run, and then they exit in the long
run, until profits are at zero
D) negative short run profits cause firms to exit in the short run, and then they enter in the long
run, until profits are at zero
E) positive short run profits cause firms to enter in the short run, and then more firms enter in the
long run, until profits are at zero
F) negative short run profits cause firms to exit in the short run, and then more firms exit in the
long run, until profits are at zero
G) positive short run profits cause firms to enter in the long run, driving profits down to zero
H) negative short run profits cause firms to exit in the long run, until profits rise to zero
I) none of the above
15. Which of the following statements about the long run average cost curve (LAC) would generally be
true?
I) When the LAC is falling, the production function is exhibiting decreasing returns to scale.
II) The LAC forms an envelope underneath all the possible short run average cost curves
III) Smaller firms can use specialized inputs that allow them to save money, so that larger firms
often find themselves less efficient.
A) only I
F) II & III
B) only II
G) I, II & III
C) only III
D) I & II
H) none of the three
E) I & III
Page 6 of 7
16-20. A firm is the only firm in an industry (and so has monopoly power in the short run). The firm has
total costs in the short run given by:
TC = 0.25q2 + 6q + 64
q2
where q is output per day and TC is the total cost per day in dollars (this is the same cost function used in
questions 9-14). The firm has fixed costs of $48 (already included in the TC equation above). The
demand curve facing the industry is given by the equation
P = 24 - .125Q
where P is the price per unit and Q is the number of units demanded per day. Questions 16 through 20
concern this firm and this industry.
16. In the short run, this firm will charge a price equal to:
A) $24
F) $20
B) $23
G) $19.50
C) $22
H) $19
D) $21
I) $18
E) $20.50
J) $21.40
17. Continuing the problem begun in question 16, the firm in the short run will earn profits of:
A) $0
F) $296
B) $80
G) $128
C) $152
H) $168
D) -$18
I) $225
E) $15
J) none of the above
18. Continuing the problem, suppose that the government imposes a tax on the buyers of this product of
$6 per unit. In the short run, this total price paid by buyers (including the tax) will be equal to:
A) $24
F) $20
B) $23
G) $19.50
C) $22
H) $19
D) $21
I) $18
E) $20.50
J) $21.40
19. Continue the problem begun in question 18 (in which the government imposes a tax on the buyers of
this product of $6 per unit). In the short run, the fraction of the tax that falls on sellers will be equal to:
A) 0
F) 7/12
B) 1/6
G) 2/3
C) 1/4
H) 3/4
D) 1/3
I) 5/6
E) 1/2
J) 1
20. Continue the problem begun in question 18 (in which the government imposes a tax on the buyers of
this product of $6 per unit). The firm in the short run will earn profits of:
A) $0
F) $144
B) $16
G) $156
C) $32
H) $168
D) $96
I) $225
E) $128
J) none of the above
Page 7 of 7
21. Which of the following statements about monopoly is (are) generally true?
I) In the long run, monopolists must always make zero profits.
II) The monopolist will always produce where MC=MR, as long as PAVC.
III) The monopolist will never produce where demand is inelastic.
A) only I
F) II & III
B) only II
G) I, II & III
C) only III
D) I & II
H) none of the three
E) I & III
22. Which of the following statements about monopoly is (are) generally true?
I) In the long run, the monopolist will produce where LAC is minimized.
II) Monopoly is inefficient because production takes place at P>MC.
III) The MC curve above minimum AVC is the monopolist’s supply curve.
A) only I
F) II & III
B) only II
G) I, II & III
C) only III
D) I & II
H) none of the three
E) I & III
23-25. A single firm owns the only bridge across a local river. The Fixed Cost of the bridge is $2100 per
day and there are no Variable Costs. The Demand is P = 10 - 0.01Q, where Q is the number of consumers
using the bridge per day and P is the price charged to each consumer in dollars as a toll to each user (each
user pays only one toll per day).
Questions 23 through 25 concern this bridge.
23. What is the total gain to society (GTS) if a monopoly firm operates the bridge and maximizes profits?
A) $0
F) $1650
B) $400
G) $1850
C) $450
H) $2150
D) $800
I) $2500
E) $1250
J) $2900
24. If the government decides to regulate the bridge and requires the firm to charge a price that reduces
economic profits to zero, what price will be charged?
A) $0
F) $3
B) $1
G) $3.50
C) $1.50
H) $4
D) $2
I) $5
E) $2.50
J) $7
25. When the government regulates the bridge as described in Question 24, by how much does the total
gain to society (GTS) rise over the situation described in question 23 where the monopolist maximizes
profits?
A)$0
F) $1650
B) $400
G) $200
C) $450
H) $250
D) $800
I) $650
E) $1250
J) $900
26. What is the version of the exam which you have just written? Hint - your correct answer is A
A) Version A
B) Version B
C) Version C
D) Version D