Intermediate Microeconomic Analysis (Econ 173)
Drake University, Fall 2007
William M. Boal
MIDTERM EXAMINATION #3 ANSWER KEY
VERSION A
I. MULTIPLE CHOICE
(1)c. (2)d. (3)b. (4)c. (5)d. (6)e. (7)a. (8)c. (9)d. (10)a.
(11)b. (12)b. (13)c. (14)e. (15)b. (16)a. (17)d. (18)a. (19)f. (20)g.
(21)g. (22)c. (23)d. (24)c. (25)a. (26)b. (27)d. (28)e. (29)d. (30)d.
(31)f. (32)c.
II. PROBLEMS
(1) a. 1800 = 5 x1 x2 .
b. MRSP = MP2/MP1 = x1/x2 .
c. x1* = 15, x2* = 24 .
d. TC(1800) = 15($16) + 24($10) = $480 .
(2) a. P=$4, Q = 400 . b. export.
c. 900 units. d. decrease.
e. by $750. f. increase.
g. by $2100. h. net gain = $1350.
III. CRITICAL THINKING
(1) In the long run, a business should only produce and sell output if can make a
profit, or at least avoid losses. But in the short run, a business has fixed costs
which are sunk—they cannot be recovered by shutting down. So in the short run,
a business should produce and sell output if revenue exceeds variable cost, or
equivalently if price exceeds average variable cost. This might mean the business
produces and sells output at a loss in the short run, although the loss will less than
the fixed cost. (Full credit requires a graph showing short run cost curves, the
breakeven price, and the shutdown price.)
(2) Both commentators are incorrect because both sides of the market will pay part of
the cost of the tracking labels. Like a tax, the labeling law drives a wedge
between the total price consumers pay, including the cost of the labels (PD) and
the net price sellers receive after paying for the labels (PS). Assuming demand for
meat slopes down and supply slopes up, consumers’ price (PD) will be greater
than before, and producers’ net price (PS) will be less than before. Incidentally,
the quantity traded also falls. (Full credit requires a supply-and-demand graph
showing the effect of a tracking-label “tax” on the market for meat.)
