Midterm 2 60 minutes Econ 1101 Principles of Microeconomics November 12 2012 Exam Form A Name Student ID number Signature Teaching Assistant Section The answer form the bubble sheet and this question form will both be collected at the end of the exam Fill in the information above and then on the answer form please write the following information name student ID number recitation number Form A see the bottom part of the answer sheet for this bubble Fill in the corresponding bubbles Sign your name on the answer form You will be awarded 1 5 bonus points for filling the correct name and ID on the answer form There are 35 questions All questions are multiple choice Each question has a single answer Select the best answer for each question and fill in the corresponding bubble on the answer sheet Use a Number 2 pencil to fill in your answer You are not permitted to use calculators or to open books or notes 1 1 For question 1 please fill in a on your bubble sheet as this is exam form A We are using this question to verify the exam form a Form A The questions on this page and the next page refer to the graph below Wolverine consumes pizza and soda and the graph illustrates his indifference curves 32 30 28 26 24 22 s20 o18 d16 a14 12 10 8 6 4 2 0 0 2 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 pizza From Wolverine s indifference curves we can determine that Wolverine is indifferent between having 8 pizzas 8 sodas and a 8 pizzas 6 sodas b 32 pizzas 6 sodas c 16 pizzas 2 sodas d 8 pizzas 12 sodas e 4 pizzas 16 sodas 3 Suppose Wolverine has an income of 40 that PPizza 2 and that PSoda 2 Draw Wolverine s budget constraint in the above figure From this we can see that the opportunity cost of one more slice of pizza equals a soda b 1 soda c 2 sodas d 3 sodas e 4 sodas 2 4 At this income and prices of soda and pizza the optimal consumption bundle for Wolverine is a 4 pizza 8 sodas b 4 pizza 16 sodas c 10 pizza 10 sodas d 16 pizza 4 sodas e 20 pizza 0 sodas 5 Suppose Wolverine s income rises to 64 The change in Wolverine s demand for pizza from the change in income equals a 0 b 2 c 4 d 6 e 8 6 Suppose Wolverine initially has an income of 40 and the prices are PPizza 2 and PSoda 2 Suppose there is inflation and Wolverine s income doubles and both prices double The change in Wolverine s demand for pizza from the doubling of prices and income is a 4 b 2 c 0 d 2 e 4 7 Suppose instead Wolverine initially has an income of 32 and the initial prices are PPizza 4 and P 2 Then the price of pizza falls to PPizza 1 while the price of soda remains unchanged The substitution effect of the price change increases the demand for pizza by how many units Soda a 0 b 1 c 2 d 4 e 6 8 Regarding the effect of the decrease of the price of pizza in the previous question which of the following statements are true a The substitution effect and the income effect on the demand for pizza go in the same direction b The substitution effect and the income effect on the demand for pizza go in the opposite direction c The substitution and income effects exactly cancel out and the net effect of the price decrease on the demand for pizza is zero d None of the above 3 9 Suppose there is an industry that has two externalities There is a negative externality on the production side so the social marginal cost SMC in the figure exceeds private marginal cost S in the figure There is a positive externality on the consumption side so the social marginal benefit SMB in the figure exceeds private marginal benefit D in the figure The market equilibrium quantity equals and the socially efficient quantity equals fill in the blanks a T U b T S c S S d T T e U U 10 The policy that results in the socially efficient quantity is a a subsidy of EN b a tax of zero and a subsidy of zero c a tax of HT d a subsidy of VH e a tax of CL 4 11 Under what assumptions will the long run supply curve for the widget industry be perfectly elastic i e perfectly flat i The same technology is available to all firms ii The average total cost is falling economies of scale over the entire range of Q iii There are no barriers to entry in the industry iv Input prices do not change as the industry expands v The long run demand curve is perfectly inelastic a i and ii b iii and iv c i iii and iv d ii iii and v e i ii iv and v Suppose the required assumptions from above hold for the widget industry Each widget firm has the cost structure illustrated in the left graph below The right graph illustrates two different possible demand curves D1 and D2 10 10 9 9 MC 8 8 7 7 6 6 ATC 5 5 4 4 3 3 AVC 2 2 1 1 0 0 12 1 2 3 4 5 6 7 8 q 9 0 D1 0 Fixed cost equals a 2 b 4 c 6 d 8 e 10 5 D2 Q 200 400 600 800 1000 1200 1400 1600 1800 2000 2200 2400 13 If the price equals 8 resulting maximum profit equals a 0 b 8 c 16 d 24 e 32 For the next four questions assume demand is D1 and the industry is in long run equilibrium 14 The price PLR is a 1 b 2 c 3 d 4 e 8 15 Long run output per firm qLR equals a 2 b 4 c 6 d 7 e 8 16 Long run industry quantity QLR equals a 800 b 1000 c 1200 d 1400 e 1600 17 Long run number of firms NLR equals a 400 b 250 c 200 d 250 e 300 18 Suppose the industry is initially in long run equilibrium at demand D1 and the number of firms equals the number in the previous question Demand then shifts to D2 In the short run the equilibrium price will be a 4 b 5 c 6 d 7 e 8 6 19 When demand shifts like in the previous question price changes in the short run than the long run and quantity changes in the short run than the long run a more more b more less c less more d less less 20 Name Willingness to Pay D1 6 D2 4 D3 2 D4 0 In Econland the willingness to pay for a lighthouse is given by the table …