University of Michigan - ECONOMICS 101

Economics 101

Midterm Examination 2, Version 1

November 6, 2013 Name:

Section number:

True / False

1. If there is no fixed cost, then the firm should always choose to produce a positive quantity in the short run.
2. Inferior goods might have upward-sloping demand curves.
3. If a firm’s total revenue is less than its variable costs, its producer surplus could be positive.
4. There is no deadweight loss caused by a binding price floor if demand for the product is perfectly inelastic.
5. There is no shortage caused by a binding price floor if the supply of the product is perfectly inelastic.
6. The rational spending rule implies a consumer’s marginal utility is maximized when she spends the same amount on both goods.
7. A person’s utility can continue to increase with more consumption of a good, even if her marginal utility is diminishing.
8. An increase in workers’ wages shifts a firm’s marginal cost curve up and its workers’ marginal product of labor curve down.
9. If, due to an increase in demand for a good, a competitive firm sells at a higher price, the increase in its profit is equal to the increase in its producer surplus.
10. If the long-run average total cost is constant over a range of output, then the industry is a constant-cost industry.

Multiple Choice

11. Ellie and Mac are the only two consumers of hamburgers. Their marginal benefit schedules are given below along with the marginal cost schedule for all producers together. The government decides the equilibrium price of $6 is too high and imposes a price ceiling of $3 on a hamburger. After the price ceiling is in place, Mac is the first in line and he purchases all of the available hamburgers. What is the deadweight loss resulting from this price ceiling?

A. $6

B. $12

1. 1. 3. $20
      4. $24
      5. $26

 

 

12. The following graph represents the market for tobacco. If the government imposes a quota of 10,000 pounds of tobacco, then the rectangle in the graph labeled A represents the resulting ...

A. transfer from consumer surplus to producer surplus.

B. transfer from producer surplus to consumer surplus.

1. 1. 3. transfer from deadweight loss to producer surplus.
      4. loss of consumer surplus.
      5. loss of producer surplus.

 

 

13. Susie spends all of her income on juice and salads. The price of a salad is $4. The table below gives two bundles on her budget line and the corresponding marginal utilities of juice and salad when she consumes these bundles. Given the information in the table, Susie’s optimal choice is ... A. Bundle X                b.  Bundle Y.
    1. 3. A bundle with more juice than Bundle Y.
       4. A bundle with more salads than Bundle X.
       5. A bundle on her budget line between Bundle X and Bundle Y.

 

 

14. Sam spends all of his income on movies and sandwiches. When the price of a movie ticket increases, the income effect of that price increase causes him to consume fewer sandwiches. For Sam, ...
    1. 1. sandwiches are an inferior good and could be a Giffen good.
       2. sandwiches are an inferior good but not a Giffen good.
       3. sandwiches are an inferior good and also a Giffen good.
       4. sandwiches are a normal good.
       5. sandwiches are a synergistic good.
15. A competitive firm with typical U-shaped cost curves produces 20 lobster rolls. The total cost is $60 and the fixed cost is $5. The marginal cost of the 20th lobster roll is $3.50 and the market price of a lobster roll is $3. To increase its profit the firm should...
    1. 1. keep producing 20 lobster rolls because the price is equal to its average total cost.
       2. reduce output because the price is less than its marginal cost.
       3. increase output because its average variable cost is less than the price.
       4. exit the industry because its marginal cost is greater than price.
       5. increase output because its average fixed cost is less than the price.
16. Chris owns a business that produces Go Blue soda can coolers. The opportunity cost of his time spent designing his coolers plus the cost of renting his factory and machinery is $20,000. The marginal cost of producing each of the first thousand coolers is $2; each of the second thousand is $4; each of the third thousand is $6; each of the fourth thousand is $8; each of the fifth thousand is $15. He does not have the capacity to produce more than 5,000 can coolers. What is the break-even price for Chris’ business?

A. $10.67

B. $2.00

16. 1. 3. $13.00
       4. $11.00
       5. $10.00
17. Harim earns $35 from grading quizzes and spends it all on pumpkin pie and coffee. The price of a pumpkin pie is $10 and the price of a cup of coffee is $5. The table below lists her marginal utilities of pie and coffee. Which of the following bundles will Harim choose?

A. 1 pie, 5 cups of coffee

B. 2 pies, 2 cups of coffee

1. 1. 3. 2 pies, 3 cups of coffee
      4. 3 pies, 1 cup of coffee E. 4 pies, 4 cups of coffee

 

 

18. There are three competitive industries producing goods X, Y and Z, respectively. Industry X is a constant-cost industry, Y is a increasing-cost industry and Z is a decreasingcost industry. The short-run cost curves (ATC, AVC, MC) in these industries are all currently identical. The industries are in long-run equilibrium. Now, suppose that demand for goods X, Y and Z decreases due to a decrease in consumers’ incomes. Which of the following could be the new long-run equilibrium prices for goods X, Y and Z?
    1. 1. X: $5, Y: $7, Z: $6
       2. X: $4, Y: $2, Z: $3
       3. X: $4, Y: $3, Z: $5
       4. X: $5, Y: $6, Z: $4
       5. X: $4, Y: $4, Z: $4
19. Consider the perfectly competitive market for health insurance initially in long-run equilibrium. After the Patient Protection and Affordable Care Act was signed into law, the demand for health insurance increased. Suppose the health insurance industry exhibits increasing costs. Which of the following does NOT correctly describe a consequence of the increase in demand?
    1. 1. Moving from the initial long-run equilibrium to the new short-run equilibrium, the price of insurance increases.
       2. Moving from the initial long-run equilibrium to the new long-run equilibrium, the price of insurance increases.
       3. Moving from the new short-run equilibrium to the new long-run equilibrium, the price of insurance decreases.
       4. Moving from the new short-run equilibrium to the new long-run equilibrium, the quantity of insurance decreases.
       5. Moving from the initial long-run equilibrium to the new short-run equilibrium, the quantity of insurance increases.
20. Bert and Ernie Inc. is a perfectly competitive firm that produces paper clips. The firm hires you as an economic consultant to recommend what it should do to maximize its profit. Based on the following information, what is your advice to Bert and Ernie Inc.?

TR = $4000 Q=500

TC = $3000 MC=ATC

20. 1. 1. Increase production in the short run, remain in the industry in the long run.
       2. Increase production in the short run, exit the industry in the long run.
       3. Decrease production in the short run, remain in the industry in the long run.
       4. Decrease production in the short run, exit the industry in the long run.
       5. Produce the same in the short run, remain in the industry in the long run.
21. A state is considering raising the minimum wage from $8.00/hr to $8.50/hr. Suppose, in the market for unskilled labor, the minimum wage is binding at $8.00/hr, the demand for labor is price elastic, and the supply of labor is price inelastic in the wage range under consideration. The increase in the minimum wage causes total earnings of minimumwage workers to and the of workers in the labor market to increase.

 

 

A. increase; shortage

B. decrease; shortage

1. 1. 3. stay the same; shortage
      4. increase; surplus E. decrease; surplus

22. The Wonderful World of Widgets company produces widgets using labor as the only variable input. The company can hire either 1, 2, 3, 4, or 5 workers. The corresponding production and total cost schedules are given below. Marginal cost is minimized going from            workers to     workers.

 

 

1. 1. 1. 0; 1
      2. 1; 2
      3. 2; 3
      4. 3; 4
      5. 4; 5

 

 

23. The graph below shows the marginal cost curve for a firm that produces cookies and has typical U-shaped cost curves. Given this information, which of the following statements must be true?
    1. 1. The average total cost is decreasing for all quantities greater than 250 cookies.
       2. The average total cost is minimized at a quantity of 150 cookies.
       3. The average total cost is equal to the marginal cost at a quantity of 150 cookies.
       4. The average total cost must be higher than $0.50 at a quantity of 100 cookies.
       5. More than one of the above must be true.

 

 

24. Clayton plans to retire tomorrow. He is entitled to a pension that pays $750 on each anniversary of his retirement until he dies. Somewhat pessimistic about his health, Clayton believes he will only live to receive two pension payments. Clayton’s employer believes he will live a very long time and offers him a fixed amount tomorrow as a substitute for the pension. Given a prevailing interest rate of 5%, Clayton will not accept any offer lower than . His employer will not make any offer higher than even if his employer believed Clayton would live forever.

 

 

24. 1. 1. $1,390 ; $15,000
       2. $1,560 ; $15,000
       3. $1,390 ; $7,500
       4. $1,430 ; $7,500
       5. $1,560 ; $7,500
25. The owner of a hamburger stand, facing the cost curves below, has hired you to advise him on maximizing profit. What do you suggest?
    1. At a price less than or equal to $8 per hamburger his profit will be zero or negative so he should shut down.
    2. At a price lower than $6 he will decrease his losses by shutting down.
    3. At a price between $6 and $8, he should keep producing in the short run but exit the market in the long run.
    4. For any price below $8 he should exit the market in the long run. V) For a price equal to $8 he should exit the market in the long run.
       1. I and II only
       2. II and III only
       3. II and IV only
       4. II, III and IV only
       5. II and V only

 

 

26. A chocolate producer may choose among four different plant sizes: W, X, Y, and Z. Its current plant is of size W. The short-run ATC curves for these plant sizes are shown in the graph below. If the firm produces 35 units of chocolate, then what is its long-run ATC?
    1. 1. Between $1 and $2
       2. Between $2 and $3
       3. $3
       4. $4
       5. $5

 

 

27. Consider the market for firecrackers, shown in the figure below. Suppose the government receives noise complaints, so it decides to implement a policy that reduces the quantity of firecrackers sold to 100. It is considering two policies that could achieve the desired outcome: (i) a tax on each firecracker sold and (ii) a price floor in the market for firecrackers. Which of the following is correct?
    1. 1. The tax would create a larger deadweight loss than the price floor.
       2. Consumer surplus would be higher under the tax than the price floor.
       3. Producer surplus would be higher under the tax than the price floor.
       4. Total expenditure would be higher under the tax than the price floor.
       5. Total revenue received by suppliers would be lower under the tax than the price floor.

 

 

28. You work for a consulting firm which advises struggling businesses. A client who owns a business restoring antique tables seeks your advice.

The client provides you with the following data detailing the costs involved in restoring each table. The client’s only fixed cost is the rent for his workshop. He has already paid this year’s rent, but hasn’t yet paid next year’s rent, which will cost $200. The client tells you that the market price for restored antique tables is $60.

The client would like to know how many tables he should sell this year, and whether he should continue operating or exit the industry next year. What would you advise?

1. 1. 1. Sell 1 table this year, and exit the industry next year.
      2. Sell 1 table this year, and continue operating next year.
      3. Sell 5 tables this year, and exit the industry next year.
      4. Sell 5 tables this year, and continue operating next year.
      5. Sell 0 tables this year, and exit the industry next year.

 

 

29. If the marginal product of labor curve is downward sloping, then, for the corresponding quantities produced, you know for sure that ...
    1. 1. the average variable cost curve is upward sloping.
       2. the average fixed cost curve is upward sloping. C.
       3. the average total cost curve is upward sloping.
30. 1. 4. the marginal cost curve is upward sloping.
       5. the marginal revenue curve is upward sloping.
31. Which of the following correctly states the relationship between a marginal and average curve?
    1. 1. If the marginal curve is upward sloping, then the average curve is upward sloping.
       2. If the average curve is downward sloping, then the marginal curve is downward sloping.
       3. If the marginal curve lies above the average curve in a graph, then the average curve is upward sloping.
       4. If the average curve lies below the marginal curve in a graph, then the marginal curve is downward sloping.
       5. If the average curve lies above the marginal curve in a graph, then the marginal curve is upward sloping.
32. The short-run supply curve for a competitive firm is given by ...
    1. 1. its marginal cost curve, at and above the minimum of its average variable cost curve.
       2. its average variable cost curve, at and above the minimum of its marginal cost curve.
       3. its average total cost curve, at and above the minimum of its marginal cost curve.
       4. its marginal cost curve, at and above the minimum of its average total cost curve.
       5. its marginal cost curve, at and above the minimum of its average fixed cost curve.
33. Assuming rent is a fixed cost, which of the following correctly describes some effects of an increase in a firm’s rent?
    1. 1. Its average total cost curve shifts up and its profit-maximizing quantity increases.
       2. Its average variable cost curve shifts up and its profit-maximizing quantity decreases.
       3. Its marginal cost curve shifts up and its profit-maximizing quantity decreases.
       4. Its average total cost curve shifts up and its profit-maximizing quantity stays the same.
       5. Its average variable cost curve shifts up and its profit-maximizing quantity stays the same.
34. In lecture, the example we used when we introduced fixed cost and variable cost was                                                                                                    A. The product development of new kitchen products by Ikea.
    1. 2. The research and development of Amazon Kindle e-Book readers.
       3. The planting of trees in Mackintosh apple orchards.
       4. The necessary infrastructure for Makerbot 3D printing.
       5. The expense of building the Mackinaw Bridge.