ECON 500 – Spring 2007 Name: _____________________________ Exam 2 Multiple Choice: (circle the letter of the best response; 4 points each) 1. In a “Perfectly Competitive Market” a. all firms sell the same “standardized product.” b. there are “many buyers” and “many sellers.” c. productive resources are “mobile.” d. All of the above answers are correct. e. None of the above answers are correct. 2. Evan’s preferences are “transitive.” Comparing the consumption bundles )4,20(=A , )12,12(=B, )16,8(=C, and )18,6(=D he states: DAf, AC f , and CB f . It follows that a. ABf. b. DBf . c. DC f . d. All of the above answers are correct. e. None of the above answers are correct. 3. The observation that all (“non-express”) checkout lines in a grocery store tend to be of roughly the same length is an illustration of a. a socially inefficient outcome. b. Adam Smith’s Invisible Hand in action. c. individuals making irrational decisions. d. a firm engaging in First Degree Price Discrimination. e. a firm supplying a good in the short run, even though their profit is negative. 4. “Marginal Utility of good one” a. provides a measure of how total utility changes as consumption good one is increased, with consumption of all other goods fixed. b. provides a measure of the total satisfaction that an individual gets from consuming a bundle of goods. c. provides a measure of the rate at which a consumer is willing to substitute consumption of good one for consumption of good two, while maintaining a constant level of utility. d. specifies which consumption bundles are affordable for a consumer. e. can be illustrated by the area below the demand curve, but above price paid, over all units purchased. 5. Brady sells footballs. His revenue per year is $5,000, his explicit costs are $4,000, and his implicit costs are $1,750. From this information, his Accounting Profit a. is negative $750. b. is zero. c. is $1,000. d. is $3,250. e. cannot be determined.6. Suppose the market for lemons is perfectly competitive. In the Short Run, Lee currently sells 10,000 pounds of lemons at a price of $2.30 per pound, while incurring Average Total Costs of production equal to $1.80 per pound. In the Long Run, Lee should expect a. to be able to earn a profit greater than $5,000. b. some of his current rivals to exit the industry. c. the price of a pound of lemons to be above $2.30. d. new firms to enter the industry. e. More than one of the above answers is correct. 7. _________________ serves to distribute scarce goods to those consumers who value them most highly. a. Adam Smith b. The Rationing Function of Price c. The Allocative Function of Price d. Deadweight Loss e. None of the above answers are correct. 8. A firm with “Market Power” a. is able to avoid Fixed Costs of production in the short run. b. is always guaranteed a positive economic profit in the short run. c. can typically increase it’s price slightly without losing all customers. d. faces a horizontal demand curve for it’s output. e. More than one of the above answers is correct. 9. Explicit Costs a. refer to the actual payments a firm makes to its factors of production and other suppliers. b. refer to the opportunity costs of resources supplied by the firm’s owners. c. enter directly into Accounting Profit, but not directly into Economic Profit. d. enter directly into Economic Profit, but not directly into Accounting Profit. e. More than one of the above answers is correct. 10. Which of the following is an example of “Third Degree Price Discrimination”? a. “A ticket to see Kickin’ It Old Skool at the Regal Town Center Cinema in Kennesaw, GA costs “Adults” $9.75, but costs “Seniors” only $7.50.” b. “A gallon of gasoline currently costs $3.45, which is $1.00 more than it costs three years ago.” c. “All consumers of corn pay the exact same price of $4.57 per bushel.” d. “Cingular Wireless offers two different plans – one with a low fixed monthly fee but no free minutes, another with a high monthly fee and unlimited weekend minutes. Each consumer is able to individually self-select the plan that is best for them.” e. “A discriminating consumer will not be willing to pay a high price for a third rate bottle of wine. 11. A firm operating in the Short Run a. will always want to produce a positive level of output. b. is able to vary the amount hired of every single factor of production. c. is not able to vary the amount hired of at least one factor of production. d. will incur zero Fixed Costs of production. e. More than one of the above answers is correct.12. “Price Discrimination” a. refers to the practice of a firm charging different prices for different units of a good. b. can only be practiced by firms in Perfectly Competitive markets. c. will always make all consumers better off. d. is never practiced in any form by any firms in the “real world.” e. More than one of the above answers is correct. 13. A situation is efficient if a. no change is possible that will help some people without harming others. b. the well-being of everyone can be increased. c. a firm with market power is maximizing profit. d. Deadweight Loss is positive. e. None of the above answers are correct. For Questions 14 and 15, consider a market with supply and demand as illustrated by the linear functions illustrated below: 14. In comparison to the outcome that would result with no intervention in this market, imposing a price floor of $16.00 would decrease Consumers’ Surplus by a. area (f). b. areas (c)+(d). c. areas (a)+(c). d. area (h). e. areas (a)+(b). 15. If 2,000 units are traded in the market a. the realized outcome is efficient. b. the resulting Deadweight Loss is equal to area (a). c. the resulting Deadweight Loss is equal to area (c). d. the resulting Deadweight Loss is equal to areas (a)+(c). e. the resulting Deadweight Loss is equal to areas (b)+(d). p q20 000,10 0 Demand Supply 10 13 16 6 000,2 500,3 000,5 c a b d e f ghi jkm“Short Answer” Questions: 1. Mo likes to consume 1x=(ice cream) and 2x=(broccoli). Each unit of ice cream costs 21=p , each unit of broccoli costs 42=p , and he has income of 120=I. His preferences can be summarized by the utility function