Economics 53 Introductory Microeconomics Practice Midterm 2



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Economics 53

Introductory Microeconomics

Practice Midterm 2

NAME:________________________



Answer all the questions. Allocate your time according to the points that each question is worth. There are 100 points in the exam. You should plan on spending 100 minutes to complete the exam.

Part I Multiple Choice (24 Points, 1.5 Points each question)

Please write the letter corresponding to the correct answer in the box below.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

D

C

A

D

D

B

B

C

D

D

A

D

A

A

*

C

*Error in Q15 all choices were true.

Figure 1


1. Refer to Figure 1. Which of the curves is most likely to represent average fixed cost?

A) A C) C

B) B D) D
2. Refer to Figure 1. Which of the curves is most likely to represent average variable cost?

A) A C) C

B) B D) D

3. For Firm A, when four units of output are produced, the total cost is $175 and the average

variable cost is $33.75. What would the average fixed cost be if ten units were produced?

A) $4


B) $10

C) $40


D) $135
4. In the long run for Firm A, total cost is $105 when output is 3 units and $120 when

output is 4 units. Does Firm A exhibit economies or diseconomies of scale?

A) Diseconomies of scale, since total cost is rising as output rises.

B) Diseconomies of scale, since average total cost is falling as output rises.

C) Economies of scale, since total cost is rising as output rises.

D) Economies of scale, since average total cost is falling as output rises


5. For a perfectly competitive firm in the long run equilibrium,

A) MC = P

B) ATC=P

C) Economic profits are zero

D) All of the above are correct
6. For a perfectly competitive industry choose the statement THAT IS FALSE:

A) The profit maximizing output is where marginal revenue is equal to marginal cost.

B) If the at the profit maximizing output level, price is less than average variable cost the firm should continue to operate in the short run, but shut down in the long run.

C) At the profit maximizing output profits can be negative.

D) An increase in output above the profit maximizing point would cause a decrease in profits.
7. Consider a firm producing ice cream. The firm is currently using 10 workers, who produce 50 gallons of ice cream per day. The wage per worker is $35 per day. You work in human resources and have to decide whether to lay-off one worker or not (all the other inputs being fixed). Under which of the following should you lay-off the tenth worker:

A) The marginal product of the 10th worker is 8 gallons of ice cream. The price of one gallon of ice cream is $6.

B) The marginal product of the 10th worker is 5 gallons of ice cream. The price of one gallon of ice cream is $6.

C) The marginal product of the 10th worker is 5 gallons of ice cream. The price of one gallon of ice cream is $8.

D) The marginal product of the 10th worker is 8 gallons of ice cream. The price of one gallon of ice cream is $8.
8. Which of the following is an example of social capital?

A) A $10 bill

B) A college education

C) Interstate Highway 5

D) Worker training programs

9. The demand curve for an input will slope downward because of

A) the factor substitution effect.

B) the output effect.

C) decreasing returns to scale.

D) Both A and B


10. A fund that takes household savings and puts them into high -risk ventures in exchange for a

share of the profits if the new business succeeds is a(n)

A) money market fund.

B) mutual fund.

C) exchange traded fund.

D) venture capital fund.


11. Technological breakthroughs revolutionized the calculator industry during the 1970s.

Studying the impact on these technological changes in the calculator industry alone would be

an example of

A) partial equilibrium analysis.

B) general equilibrium analysis.

C) market equilibrium analysis.

D) efficiency analysis.
12. A monopoly will choose their level of output where

A) marginal cost and demand curves intersect

B) average total cost and demand curves intersect

C) revenue and average total cost curves intersect



D) marginal revenue and marginal cost curves intersect

Figure 2

13. Refer to Figure 2. What is the consumer surplus associated with this monopoly?

A) $422.50 B) $845 C) $1690 D) None of the above
14. Refer to Figure 2. What is the deadweight loss associated with this monopoly?

A) $422.50 B) $845 C) $1690 D) None of the above


15. Which of the following statements regarding perfect price discrimination is FALSE?

A) Perfect price discrimination is charging different prices to different buyers.

B) Perfect price discrimination is an attempt by monopolists to capture consumer surplus as

profit.

C) Perfect price discrimination can eliminate the deadweight loss to society of a monopoly.



D) Perfect price discrimination yields the same market price and output result as perfect

competition.

16. The first major piece of anti-trust legislation was the

A) Clayton Act

B) Taft-Hartley Act

C) Sherman Act

D) Smoot-Hawley Act

Section II: Short Essay Questions (21 Points Total)

Answer three (3) questions from Questions (1) through (4). Do NOT answer all four questions. Each question is worth 7 points.


Question 1: List the characteristics that define a perfectly competitive market. Explain why a perfectly competitive firm that is earning above normal-economic profits in the short-run will earn zero economic profits in the long-run.

(a) Perfectly competitive industry will have (1) many small firms, each firm is so small they are price takers, (2) each firm produces identical product, (3) there are no barriers to entry.

(b) If a perfectly competitive firm is earning above normal profits in the short-run this will cause new firms to enter the industry and existing firms to produce more output. The net result would be an increase in market supply (the industry supply curve will shift downward to the right). This will continue until above normal economic profits are eliminated and the industry returns to zero economic profits.

Question 2: From an economic standpoint, patents reduce efficiency because they serve as a barrier to entry and thus limit market competition. Are there any positive economic benefits of patents? Explain. Points)

Yes. Patents provide an incentive for invention and innovation. Research requires resources that have opportunity costs. If research did not lead to expanded profits, little research would be done. Thus, if patents were not available to protect a firm's profits from competition, we would have less innovation.

Question 3: Comment on the following statement: "The output effect and the factor substitution effect work in opposite directions, so it is possible that a decrease in the wage rate can lead to a decrease in the amount of labor hired."
The statement is false. The output effect and the factor substitution effect work in the same direction. In either case, a drop in wage will lead to an increase in the amount of labor hired.

Question #4: What is a barrier to entry? Briefly discuss three sources of barriers to entry that allow a monopoly to remain the sole seller in a market.

A barrier to entry is anything that restricts new firms from entering an industry. There a several sources of barriers to entry

(1) Economies to scale: It could be that the minimum efficient scale is very large. If one firm reaches the MES first, it can effectively prevent other firms from entering since it will have the lowest average total costs. Any new firms who try to enter will have much higher costs and thus will not be able to compete with the monopolist.

(2) Patents: Government may issue patents which gives a single firm the exclusive right to produce and sell the good.

(3) A key resource could be owned by a single firm, thus only that firm can produce the good.

(4) Government may set itself up as a monopoly and legally bar anyone else from entering. Example are state lotteries.

(5) Network effects: The usefulness of a product increases with the number of users. If an established firm has a large number of users, a new firm trying to enter the market will be at a severe disadvantage since only a few people are using the product.





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