University of Michigan - ECONOMICS 101
Economics 101
Principles of Microeconomics
Exam 3 – Sample Exam
Winter 2015
Your scantron – make sure your name, UMID number, section and key number are marked;
___In our production model, we describe a factor as “fixed” if the quantity of that factor used is not variable or avoidable in the short-run, even though that factor is fully variable (and avoidable) in the long run
Your scantron – make sure your name, UMID number, section and key number are marked;
___In our production model, we describe a factor as “fixed” if the quantity of that factor used is not variable or avoidable in the short-run, even though that factor is fully variable (and avoidable) in the long run. If the price of one of these “fixed” factors were to rise, what would we expect to happen in the short run?
Each firm will increase output, but will generate a short run loss.
Each firm will decrease output, but will generate a short run loss.
Each firm will decrease output and will secure a short run profit.
Each firm will continue to produce the same quantity as before, but will generate a short term loss.
Each firm will choose to shut down immediately to avoid short term losses.
___Which of the following costs appears most likely to be sunk?
By signing a twelve-month lease for retail space, Adam commits to pay $2000 rent each month. But the lease does allow him to sublet the space.
To operate a McDonald’s franchise, Betty must pay a $25,000, non-refundable franchise fee. The franchise is fully transferable.
Cassandra, a cherry farmer, pays itinerant workers to harvest her crop during the short picking season.
Dataflex Corp pays for two years of business school education for its chief financial officer.
Edgar buys a second-hand ergonomic chair on eBay for use in his new legal practice.
___ A firm produces output using two factors of production: capital and labor. Suppose the price of labor is W = $100/unit, the price of capital is R = $200/unit, the marginal product of labor is 60 and the marginal product of capital is 100. Also, suppose the price of output is $ In order to maximize profits, this firm should:
reduce output and use less labor;
reduce output and use less capital;
not change its current production choices;
increase output and use more labor;
increase output and use more capital.
The next 3 questions refer to the data in the following table.
Complete the table showing output (Q), marginal product of labor (MPL), the price of output (P) and the marginal revenue product of labor (MRPL) all as determined by the labor input (L). Assume the firm takes both output and input prices as given, and that labor is the only variable factor of production.
L
Q
MPL
P
MRPL
1
16
2
29
260
3
200
4
7
5
50
___If the wage is $120 per unit of labor, then the profit maximizing firm will choose to employ
1 unit of labor
2 units of labor
3 units of labor
4 units of labor
5 units of labor
___What is the firm’s marginal cost when it is producing between 46 and 50 units of output? (The wage is still $120/unit of labor).
$30
$12
$0.33
$120
$15
___Suppose the price of output in the market falls by 50%. How much output will the firm produce? (The wage is still $120/unit of labor).
0 units of output
50 units of output
39 units of output
29 units of output
16 units of output
___A firm supplies widgets in a competitive market. It is a price taker in the market for variable inputs (capital and labor). The firm currently produces 17,500 widgets, and does so at the lowest possible cost. After inspecting operations, the CEO discovers that the marginal unit of capital produces 20 times of the output of the marginal unit of labor. The wage paid to workers is $20/hour. What is the hourly rental price for one unit of capital?
$0.50
$1.00
$20.00
$400.00
$2000.00
___The lighthouse at Siren’s Beach wards sailors away from the rocks at the north end of the beach. The lighthouse is particularly valuable to the fishing fleet. Each of the 20 boats in the fleet has the same marginal valuation function for lighthouse operation:
MV = 40 – 4 Q
where Q is the number of hours the lighthouse operates each night. Suppose the marginal cost of operating the lighthouse is constant and equal to $160 per hour. How many hours will the lighthouse be operational each night if resources are allocated efficiently?
12
10 (c) 8
6
4
___A firm is a price taker in both the input and output markets. It produces some output, which is sold for the price of $40 per unit. An investigation of its production technology shows that the marginal product of labor (the only variable factor of production) is 10 units of output. From this we can conclude
if a unit of labor costs $400, the firm is maximizing profits.
if a unit of labor costs $50, the firm is hiring more than the profit maximizing quantity of labor.
if a unit of labor costs $100, the firm is maximizing profits.
if a unit of labor costs $720, the firm is hiring less than the profit maximizing quantity of labor.
if a unit of labor costs $450, the firm is hiring less than the profit maximizing quantity of labor.
The following 2 questions refer to Monofirm, a monopolist in the widget industry.
The inverse demand function in the widget market is
P(Q) = 120 – Q
and the marginal revenue function is
MR(Q) = 120 – 2Q.
Suppose Monofirm is a monopolist in the widget market, with marginal costs given by the function:
MC(Q) = Q
and no fixed cost.
___In order to maximize profit, Monofirm should charge a price per widget of
$1
$40
$80
$100
$120
___The deadweight loss associated with the misallocation of resources in the monopolized widget market is
$200
$400
$800
$1600
Impossible to determine with the given information.
___ A firm uses labor as its only input into production. The price of output in the market is $15/unit, and the firm maximizes profits by producing 6000 units of output. If the price of labor is $60/unit of labor, then the marginal product of labor must be
900
400
100
4
0
___A fireworks display comes close to satisfying the traditional definition of a public good. Which of the following statements, contrasting private and public provision of a fireworks display, is supported by the economic arguments we have developed in this course?
If fireworks displays were only provided privately, we would be likely to see fewer than the efficient number of displays since consumers would seek to “free ride” on those displays provided by others.
If fireworks displays were only provided privately, the displays would likely be larger than the efficient size due to the non-excludability of the displays.
Since the government can raise revenue through the taxation system, there exists no impediment to efficient public provision of fireworks displays.
If the government gathers voluntary contributions and then spends those contributions on fireworks displays, we would see more displays than would be provided by a free, private market.
It is impossible for the government to determine how consumers value fireworks displays. This is why the private market will always deliver more efficient outcomes than public provision.
___Firm EZPZ is a price taker in both input and output markets. They use two variable inputs, labor and capital, in the production process. Currently, the price of EZPZ’s output is P=$2. Each unit of labor costs W=$10 and each unit of capital costs R=$20. It is revealed that, at their current daily output levels, MPL = 10 units of output and MPK = 15 units of output. Which of the following statements is TRUE if EZPZ seeks to maximize profits?
The real wage is greater than MPL, so EZPZ should hire fewer workers.
The real price of capital is greater than MPK, so EZPZ should employ more capital.
The cost of increasing output using either labor or capital is less than the market price of output, so the firm should increase output.
Capital is twice as expensive as labor, but is more than twice as productive on the margin. Therefore, EZPZ should substitute away from using labor and increase capital usage.
EZPZ is currently maximizing profits.
The following two questions refer to the production decisions of ABCorp.
The widget market is monopolized by ABCorp. ABCorp bears no variable costs when producing widgets, but must pay a fixed but avoidable cost of $F.
Inverse demand function: P(Q) = 40 – 0.25 Q
Marginal revenue function: MR(Q) = 40 – 0.5 Q.
___If F (the avoidable fixed cost) is too high, ABCorp would choose not to produce any widgets and would exit the market. What is the highest value of F at which the profit maximizing ABCorp would choose to produce?
$800
$1600
$3200
$6400
None of the above.
___Suppose that F = $400. Also suppose that regulators announce that the highest price ABCorp is allowed to charge per widget is $2.50. We should assume that this price ceiling is well enforced. If ABCorp maximizes profits, which of the following will be observed?
ABCorp sells 150 widgets at a price of $2.50 each.
ABCorp sells more than 150 widgets at a price of $2.50 each.
ABCorp sells fewer than 150 widgets at a price of $2.50 each. (d) ABCorp sells more than 150 widgets at a price less than $2.50 each (e) ABCorp shuts down.
___A firm’s costs of production are specified by the following function, where Q is output, W is the price of labor and R is the price of capital:
C = 100 + (2W + R)Q2.
Which of the following statements is FALSE?
Marginal cost is constant.
The average variable cost curve is always upward sloping.
The average total cost curve is U-shaped.
Fixed costs are equal to 100.
Average variable cost is minimized if Q=0.
___Smallville is home to one hundred families, but the nearest fire station is located 45 minutes away in Largeton. The Largeton City Council offers to station one of its fire engines in Smallville, at least on a part time basis – but will only do so if Smallville pays for the service. For each hour the engine is stationed in Smallville, it will cost $200. Each of the one hundred families has an identical marginal valuation curve for fire services (depicted below), and the protection of the fire engine is a non-excludable good that exhibits little or no rivalry in consumption.
$/hour
If efficiency is the goal, how many hours each day should the fire engine be stationed in Smallville?
0
2
16
20
24.
___At an output level of 40 units a firm is producing at minimum average cost. If marginal cost equals $20 and average variable cost equals $12 at this output level, then the fixed cost equals
$0.25
$100
$200
$320
$800
The next two questions refer to the following information.
Firms A and B are competitive widget producers. Their marginal costs and the fixed market price of widgets (P=70) are depicted in the diagram below.
Alas, every widget produced by firms A and B generates one unit of pollution (sulfur dioxide, or SO2). In order to limit that pollution, the government introduces a cap-and-trade program. If one of these firms wishes to produce units of output, then that firm must own permits.
Initially, firms A and firm B are granted 120 permits each. But they are allowed to trade those permits.
Firm AFirm B
40 80 120 160 200 240 20 40 60 80 100 120
___Which of the following statements is FALSE?
Given the initial distribution of permits, Firm A will not pay any more than $30 to buy an additional permit.
Give the initial distribution of permits, Firm B will not wish to buy additional permits at any price above $0.
If permits trade at a price of $10 each, firm A will wish to buy 80 permits.
If permits trade at a price of $20 each, firm B will wish to sell 20 permits.
If permits trade at a price of $30 each, firm B will wish to sell 60 permits.
___Suppose that exactly half the firms in the widget industry are identical to Firm A and half the firms are identical to Firm B. Every firm is given 120 permits. If all pollution permits trade at the one price, the equilibrium price of a pollution permit will be:
$0/permit.
$10/permit
$20/permit
$30/permit
$40/permit
___Dogs-R-Us sells 100 hotdogs each day. Their fixed cost is $200 per day. Average variable cost is at its minimum, and the marginal hotdog costs $0.50 to produce. If each hotdog sells for $3.00, then their daily profit will be:
Impossible to calculate without more information;
$100;
Between $100 and $50;
$50;
Less than $50.
___A price taking firm uses a fixed input (capital – which can only be avoided in the long run) and a single variable input (labor) in the production process. Currently, the firm produces 200 units, average variable costs are at a minimum. Labor costs $50 per unit, and the marginal product of labor is 10. If the price per unit of output in the market is $7.50 per unit, then
the firm should cease operations immediately;
the firm should reduce output in the short run, and shut down in the long run;
the firm should reduce output in the short run and the long run;
the firm should increase output in the short run, but shut down in the long run.
The firm should increase output in the short run, and reassess operations in the long run.
___When ChadCo produces 1,000 widgets per month, its average total cost is minimized. Average variable cost at this level of output is $7.50. Fixed costs are $10,000 per month.
If the technology available to ChadCo is also freely available to any other firm that wants to enter the widget market, and firms always seek to secure the highest possible profit, what price do we expect to prevail in this market in the long run?
$0.00
$7.50
$17.50
$107.50
It is impossible to tell from the given information.
The next two questions refer to the following information
It often rains at the annual Bowling Green Spring Soccer Challenge, and when it rains there is nowhere to take shelter. Organizers can provide tents: but each tent will cost $10,000 to provide. Suppose that 1000 players attend the tournament, and each player’s valuation of tents is reflected in the following marginal valuation table:
Number of Tents
1
2
3
4
5
6
Player Marginal Valuation
$20
$10
$3
$1
$0
$0
There are also 1000 supporters in attendance, and each supporter’s valuation of tents is reflected in the following marginal valuation table:
Number of Tents
1
2
3
4
5
6
Supporter Marginal Valuation
$12
$10
$8
$6
$4
$2
___The efficient number of tents to provide is:
0
2
3
5
6
___Suppose the tournament organizers decided to provide four tents, at a cost of $40,000. It is impossible for them to charge admission to supporters, and so they decide to recoup as much of the cost as possible from the players. When a player registers for the tournament, he or she is given the opportunity to purchase a “tent pass.” Without the “tent pass,” a player will not have access to any of the tents.
What is the maximum amount tournament organizers could charge each player for a “tent pass” before players would simply choose not to purchase the pass?
$0
$1
$34
$40
$80
___Farmer Brown owns two farms: one in south eastern Michigan and one in central Ontario. Both farms are the same size, and operate with the same quantity of capital (which should be thought of as a fixed factor of production). Since Farmer Brown uses the same technology to produce corn on both farms, the production functions for the two farms are identical. Assume that the only variable factor of production used on either farm is labor.
Farmer Brown is able to hire labor at a price of US$20/hour on his Michigan farm, and at a price of C$40/hour in Ontario. All his corn is sold in local markets: a bushel of corn sells for US$120 in Michigan and for C$200 in Ontario.
If Farmer Brown is maximizing his profits, he will
Produce more corn in Michigan than in Ontario
Produce more corn in Ontario than in Michigan
Produce the same quantity of corn on both farms
Only produce corn in Michigan
Only produce corn in Ontario
____ The economics departments at the University of Michigan, Ann Arbor and the University of Wisconsin, Madison are of a similar size, and teach the same number of students using very similar production technology. To provide these teaching services, both departments use two inputs: labor (professors) and capital (computers, projectors etc.). Both departments are price takers in their input markets. In Madison, a unit of labor costs $150 and in Ann Arbor it costs $180. A unit of capital in Madison costs $25 and in Ann Arbor it costs $30. If both departments aim to minimize costs of serving the given number of students, we would imagine that
the department in Madison will use more labor and less capital than the department in Ann Arbor;
the department in Madison will use less labor and more capital than the department in Ann Arbor;
the departments in Madison and Ann Arbor will use similar amounts of both labor and capital;
the department in Madison will use more labor and more capital than the department in Ann Arbor;
the department in Madison will use less labor and less capital than the department in Ann Arbor.
____Barney’s Bagel Bakery is a price-taker in both its output and input markets. Production of bagels requires labor as well as kitchen equipment. We know that the firm is currently maximizing profits. Also, we know that labor is paid $18/hour, and the marginal product of labor is 36 bagels at the current level of production.
What is marginal cost at Barney’s Bagel Bakery?
$0.50
$2
$5
$18
There is not enough information provided.
____ In the US, suppose that apple juice producers are price takers in both input and output markets. Common technologies and access to the same input markets imply that all firms have identical, U-shaped average variable cost curves. They always aim to maximize profits. In the long run, all fixed costs are completely avoidable, so that in the long run firms will enter the market if profits are available and firms will exit the industry if they make losses.
In the short run, though, fixed costs are sunk: firms cannot enter or exit the industry. Market demand for apple juice is known to be downward sloping.
In long-run equilibrium, there is no industry entry or exit expected, so the marginal firm must earn zero profits. If the government imposes a $t/unit tax on apple juice sales, we would expect that:
the price received by the producers will fall by less than $t in the short run, and firms make losses. These losses will cause some firms to exit in the long-run.
consumers pay the whole tax in the short-run.
producers pay the whole tax in the short-run.
the price received by the producers will fall by less than $t in the short run, and firms make losses. As a result, the long-run equilibrium price that producers receive will fall.
the price that consumers pay rises by less than $t in the short run, inducing entry and raising the long-run price.
