Download 25 MCQs in Review 2 Exam - Introductory Economics | ECO 101 and more Exams Economics in PDF only on Docsity!
Name: Principles of Economics Davidson College Fall 2002 Mark C. Foley
Review # 2
DUE MONDAY, NOVEMBER 4 TH^ BY 9:30 A.M. IN CHAMBERS 202
Directions: This review is closed-book, closed-notes, but you may take as long as you want in one sitting. You may use a calculator if you wish. There are 150 points on the exam. Each multiple-choice question is worth 2 points. Each short answer is worth 5 points. The problems in Sections III and IV are worth 25 points each. You must show all your work to receive full credit. Any assumptions you make and intermediate steps should be clearly indicated. Do not simply write down a final answer to the problems without an explanation. Think clearly and work efficiently. Carpe diem. Honor Pledge
- Assume that a monopolist produces output at a constant marginal cost of $12. If the monopolist sells in two different markets, market A where the elasticity of demand is -2 and market B where the elasticity of demand is -4, what will be the profit- maximizing prices in the two markets? (a) Price in market A will be $12 and Price in market B will be $24. (b) Price in market A will be $24 and Price in market B will be $16. (c) Price in market A will be $20 and Price in market B will be $10. (d) Price in market A will equal the price in market B, but the actual level can not be determined without more information.
- As the number of firms in an oligopoly market grows larger, the price will approach (a) marginal revenue. (b) marginal cost. (c) zero. (d) the monopoly price.
- If fixed costs increase, in the short-run, a competitive firm will (a) go out of business. (b) decrease its rate of output. (c) continue to produce the same level of output. (d) increase its output level in order to make up for the higher fixed costs.
- Which of the following is true regarding the relationship between accounting profit and economic profit when a competitive industry is in long-run equilibrium? (a) Accounting profit will equal economic profit. (b) Accounting profit may vary among firms, but economic profit will be zero for all firms. (c) Both accounting profit and economic profit must be zero. (d) Economic profit will vary among firms, but all firms will report the same accounting profit.
- After some level of output, marginal cost begins to rise because (a) total costs always increase. (b) marginal product eventually decreases. (c) poorer quality inputs are hired as output expands. (d) average variable costs eventually increase.
- Pigovian taxes are typically advocated to correct for (a) positive externalities. (b) negative externalities. (c) regulatory burden. (d) high transaction costs.
- State the Coase Theorem. Be specific and detailed. List and explain at least two circumstances under which bargaining would fail to produce a solution.
- Suppose a natural monopolist were required by law to charge a price equal to average total cost. On the graph below, label the price charged PATC, and identify the deadweight loss to society relative to marginal cost pricing (PMC). Label all your curves clearly. Are there any problems with marginal-cost pricing (forcing the monopolist to charge price equal to MC), and if so, how do regulators deal with these in practice? Q Natural Monopolist $/unit
- Explain why the marginal revenue curve of a monopolist lies below the demand curve.
- Define increasing returns to scale and explain what factors give rise to increasing returns as well as decreasing returns to scale.
(c) On the “Market” graph above, draw the long-run supply curve with free entry. Explain why you drew it where you did. (d) Suppose industry demand is QD = 660 – 20P, where P is the market price of the product. What are the long-run equilibrium price and output? (e) Suppose the demand curve shifts to QD = 840 – 20P. What happens to price, firm output, market output, and firm profit in the short-run? Calculate their values and indicate them on your graph. (f) What happens to price, firm output, market output, and firm profit in the long- run? Calculate their values and indicate them on your graph.
- A strawberry monopolist can produce at constant marginal cost of $5 per bucket. The firm faces a market demand curve given by P = 53 - Q. Marginal revenue is given by MR = 53 – 2Q. (a) Calculate the price and quantity combination which maximizes the monopolist’s total revenues. (b) What is the price range over which the monopolist’s demand is price elastic? (c) Calculate the profit-maximizing price and quantity as well as the allocatively (socially) efficient price and quantity. What is the deadweight loss for this monopolist?
- Given the following short-run production information for Jack’s Barber Shop, answer the questions below. Jack must pay his barbers $10 per day. Number of Barbers (Labor, L) Number of Haircuts per day (Quantity of output, Q) Short-run Total Cost ($) 0 0 1 5 2 12 3 20 77 4 26 5 30 (a) What is the marginal product of the 3rd^ barber? (b) With which barber do diminishing returns to labor set in? (c) Explain why diminishing returns to labor begin. (d) What is the average product of labor when there are 3 barbers? (e) What are total fixed costs? (f) What is the average total cost for 30 haircuts?
- (a) A satellite company broadcasts TV to subscribers in Los Angeles and New York. The demand functions for the two groups are: QNY = 50 – (1/3)PNY QLA = 80 – (2/3)PLA where Q is in thousands of subscriptions per year and P is the subscription price per year. The marginal cost of providing service in any location is $30. Total cost of providing Q units of service is C = 1000 + 30Q, where Q = QNY + QLA. If the satellite company can successfully price discriminate, what are the profit- maximizing prices and quantities for the NY and LA markets? (b) Bob’s lawn-mowing service is a profit-maximizing, competitive firm. Bob mows lawns for $27 each. His total cost each day is $280, of which $30 is a fixed cost. How mows 10 lawns per day. Does Bob shut down in the short-run? Explain. Will Bob exit the lawn-mowing business in the long-run? Explain.
Section V: Extra Credit (a) List the 10 Principles of Economics in Chapter 1 of Mankiw’s text.
(b) Why is popcorn so expensive at the movies? Argue that a high price for popcorn is or is not price discrimination (identifying all the factors that are or are not present, enabling price discrimination by the theatre owner).
(c) Is a lower price for a second scoop of ice cream a form of price discrimination? Explain.
