economic

Take home portion of the Midterm (80 points (in class vocab will be 20 points))

Part 1: Multiple Choice (1 point each, 20 points total)

Chapter 6—Demand and Elasticity

1. Demand D is said to be elastic when percentage changes in quantity demanded are

a.	less than the percentage changes in price.
b.	higher than the percentage changes in price.
c.	equal to the percentage changes in price.
d.	zero when price changes. Fig.: 6-3

2. In Figure 6-3(a), demand is

a.	perfectly elastic.
b.	perfectly inelastic.
c.	unit elastic.
d.	fixed at one particular quantity.

Chapter 7—Production, Inputs, and Cost: Building Blocks for Supply Analysis

3. . In the long run,

a.	all of the firm's input quantities are variable.
b.	the firm can vary the quantities of some but not all inputs.
c.	managers become less efficient.
d.	the total cost of producing any given level of output is greater than or equal to the short-run total cost of producing that level of output.

Table 7-1

Workers	Toys
1	5
2	12
3	22
4	30
5	35

4. In Table 7-1, the marginal physical product of labor after the addition of the fourth worker is

a.	8.
b.	7.
c.	10.
d.	5.

5. Which of the following is a fixed cost to farmer McDonald?

a.	gasoline
b.	fertilizer
c.	insurance
d.	seed

6. Which of the following formulas defines average cost?

a.	AC = TC/Q
b.	AC = MRP = MFC
c.	AC = MPP/Q
d.	AC = TC  Q

Chapter 8—Output, Price, and Profit: The Importance of Marginal Analysis

7 The goal of the business firm is maximization of ____, and the goal of the consumer is maximization of ____.

a.	total sales; income
b.	total profit; utility
c.	total output; utility
d.	total sales; utility

8. To find its profit-maximizing output level, a firm should operate where

a.	AVC = MC.
b.	MC = MR.
c.	TFC = TVC.
d.	AFC = AVC.

Chapter 10—The Firm and the Industry under Perfect Competition

9. A perfectly competitive firm is a price

a.	giver.
b.	taker.
c.	maker.
d.	leader.

10. . Perfect competition is the term used to describe

a.	an industry in which all businessmen are honest and accommodating.
b.	an industry in which numerous firms produce identical products.
c.	an industry untouched by government regulation.
d.	the kind of industry any American would support.

11. For a perfectly competitive firm, marginal revenue equals average revenue because the

a.	firm's supply curve is horizontal.
b.	industry's demand curve is horizontal.
c.	firm's demand curve is horizontal.
d.	industry's supply curve is horizontal.

Figure 10-1

12. If the profit-maximizing firm depicted in Figure 10-1 is perfectly competitive, how much output should it produce?

a.	A
b.	B
c.	C
d.	D

Chapter 11—Monopoly

13. The product supplied by a monopoly firm has

a.	a few substitutes.
b.	no close substitutes.
c.	a large number of substitutes.
d.	two or three close substitutes.

14. Which of the following is not a barrier to entry?

a.	Legal restrictions
b.	Patents
c.	Large sunk costs
d.	Survivor rights

15. A monopolist is best described as a price

a.	taker.
b.	searcher.
c.	maker.
d.	follower.

Figure 11-2

16. In Figure 11-2, at what quantity would the monopolist maximize profit?

a.	A
b.	B
c.	C
d.	D

Chapter 12—Between Competition and Monopoly

17. Identify the market structure characterized by many small firms selling somewhat different products.

a.	Monopoly
b.	Monopolistic competition
c.	Perfect competition
d.	Duopoly

18. Oligopoly occurs when

a.	a few firms sell many different products.
b.	a few firms sell to a few large buyers.
c.	many firms dominate a single market.
d.	a few firms dominate a single market.

19. Cartels are relatively rare because

a.	they are illegal in some countries, including the United States.
b.	members find it difficult to agree on key decisions.
c.	members frequently have an incentive to cheat on the cartel.
d.	All of the above are correct.

20. All four market forms discussed in the text maximize profit where

a.	P = MC.
b.	AR = AC.
c.	MR = MC.
d.	MC = AR.

Part 2: Problems and Graphs (60 points total, 10 points each)

Chapters 6 to 8

21. Complete the table below by computing the missing numbers from those that are given. (can add column for total cost if it helps)

Q	Fixed Costs		Variable Costs	Average Cost	Marginal Cost
0	$20
1					$8
2			$15
3				$13.67
4					6
5					7
6			42
7			51

22. Here’s the demand schedule for tickets to Wong’s Theater:

Price per ticket	Quantity (tickets per day)
$4	40
$3	175
$2	260
$1	320

a. Graph below:

b. Mr. Wong is now charging $3 per ticket.  In the following table calculate the Revenue per day at each ticket price.

Price per ticket	Quantity (tickets per day)	Revenue (per day)
$4	40
$3	175
$2	260
$1	320

c. Explain where the demand curve is elastic and where it is inelastic using the information in b.? (hint remember rule for when TR is going up or down)

d. Should he lower or raise his price and what price should he charge?

Chapter 10

23. Farmer Dorr figures that her fixed costs are $2,000, and the relevant portion of her total cost curve is:

Thousands of

Bushels Total Cost* MC AC TVC AVC

10 10.70

11 11.45

12 12.25

13 13.10

14 14.00

15 15.00

16 16.10

17 17.32

18 18.75

19 20.30

*(in thousands of dollars)

a) Calculate Farmer Dorr’s schedules of average cost, marginal cost, total variable cost, and average variable cost.

b) If Farmer Dorr is a perfect competitor, what level of output should she produce, if the market price is:

(i) $1.50

(ii) $0.92

(iii) $1.00

(iv) $0.82

Chapter 11

24. Slash and Burn is a monopolist that can sell its output at these prices and with these total costs:

Output Price Total Cost MC TR MR

4 $27 $28

5 26 34

6 25 42

7 24 52

8 23 64

9 22 88

10 21 105

11 20 125

12 19 148

13 18 174

14 17 204

a) What level of output will Slash and Burn choose to produce? What will the selling price and profit be?

b) Suppose that Slash and Burn produced at the level that a perfectly competitive industry would, with marginal cost equal to price. What would be the output, price and profit?

Chapter 12

25. In the beach city of Santa Barbara, California, there are seven bathing suit stores, each with the same schedule of costs and each facing an identical demand curve. Swim N Style is a typical store:

Suits sold (per hour) Price Total Cost TR MR MC AC

1 $68 $70

2 66 80

3 64 85

4 62 90

5 60 100

6 58 115

7 56 136

8 54 164

9 52 200

10 50 245

a) Calculate total revenue, marginal revenue, marginal cost and average cost at each level of sales for the store.

b) If Swim N Style is a profit maximizer, what number of suits will it sell per hour? What will its price and profit be?

26. Three oligopolists, A, B and C, produce an identical product, Q. Q is produced under conditions of constant costs, that is, AC = MC = $100 (if adding to the chart below note Q changes by 25 so MC will be $100 x 25=$2500). The market demand schedule for Q is:

Price Quantity Demanded TR MR

$1,000 0

950 25

900 50

850 75

800 100

750 125

700 150

650 175

600 200

550 225

500 250

450 275

400 300

a) A, B, and C decide to act illegally as a cartel, to divide the market equally among the three of them, and to set the price and output that will maximize their total profits. What price and output do they set?

b) What is the output level that each of the firms agrees to?

c) What profit is earned by each firm and by the three firms together?

Extra Credit (Optional)

Using the information in the last question answer the following:

1) A is impressed with the honesty of B and C, and believes they will keep to their agreements. They do, and A cheats by increasing output by 25 units. What is the new market price? How have the profit levels of A, B, and C changed? How have total profits in the industry changed?

2) What actions are B and C likely to take in retaliation? Show how these actions will affect the market price, and the profit levels of the three firms.

3) What can you learn from this problem about the likely stability of a cartel?