Midterm 2 60 minutes Econ 1101 Principles of Microeconomics November 11 2013 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 next 7 questions on this page and the next page refer to the graph below Wildcat consumes tacos and nachos and the graph illustrates his indifference curves 2 From Wildcat s indifference curves we can determine that Wildcat is indifferent between having 10 tacos 10 nachos and a 8 tacos 16 nachos b 32 tacos 8 nachos c 16 tacos 2 nachos d 8 tacos 32 nachos e 4 tacos 24 nachos 3 Suppose Wildcat has an income of 48 that PNacho 3 and that Ptacos 6 Draw Wildcat s budget constraint in the above figure From this we can see that the opportunity cost of one more taco equals a nachos b 1 nachos c 2 nachos d 3 nachos e 4 nachos 2 4 a b c d e At this income and prices of tacos and nachos the optimal consumption bundle for Wildcat is 4 tacos 8 nachos 4 tacos 16 nachos 8 tacos 4 nachos 8 tacos 16 nachos 10 tacos 10 nachos 5 Suppose Wildcat s income rises to 96 The change in Wildcat s demand for nachos from the change in income equals a 0 b 2 c 4 d 6 e 8 6 Suppose Wildcat initially has an income of 48 and the initial prices are PNacho 3 and that P 6 Then the price of tacos falls to Ptacos 2 while the price of nachos remains unchanged The substitution effect of the price change increases the demand for tacos by how many units a 3 b 0 c 3 d 5 e 8 tacos 7 Again suppose Wildcat initially has an income of 48 and the initial prices are PNacho 3 and that Ptacos 6 Then the price of tacos falls to Ptacos 2 while the price of nachos remains unchanged The income effect of the price change increases the demand for nachos by how many units a 3 b 0 c 3 d 5 e 8 8 Regarding the effect of the decrease of the price of tacos in the previous question which of the following statements are true a The substitution effect and the income effect on the demand for nachos go in the same direction b The substitution effect and the income effect on the demand for nachos 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 tacos is zero d None of the above 3 The next 3 questions refer to the follwing figure 9 a b c d e 10 a b c d e 11 The above figure shows that There is a negative externality with a per unit cost of LN There is a negative externality with a per unit cost of AB There is a positive externality with a per unit benefit of AB There is a positive externality with a per unit benefit of HN Both positive and negative externality are present and the positive externality is larger than the negative externality The policy that results in the socially efficient quantity is a subsidy of IK a subsidy of LN a subsidy of LO a tax of FH a tax of LN What is the change in the amount of total surplus when the government intervenes with the policy that gets the market quantity to be the same as the socially efficient quantity a ILN b ABKI c FIKH d FHI e HIK 4 12 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 There are no barriers to entry in the industry iii The average total cost is constant constant of scale over the entire range of Q iv Input prices do not change as the industry expands v The long run demand curve is perfectly elastic a i and ii b iii and iv c i ii 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 Use the figures below for the next 7 questions 26 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 26 MC ATC AVC q 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 D2 D1 Q 0 300 600 900 1200 1500 1800 2100 2400 0 1 2 3 4 5 6 7 8 9 10 11 12 13 a b c d e 14 Fixed cost equals 2 4 8 16 25 If the price equals 16 in the short run the firm will produce The resulting maximum profit in the short run equals a 6 b 8 c 36 d 48 e 64 5 For the next four questions assume demand is D1 and the industry is in long run equilibrium 15 The price PLR is a 6 b 8 c 10 d 12 e 15 a b c d e Long run output per firm qLR equals 2 4 5 6 8 a b c d e Long run industry quantity QLR equals 600 900 1200 1500 1800 a b c d e Long run number of firms NLR equals 90 150 180 200 300 16 17 18 19 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 8 b 12 c 14 d 18 e 20 6 Name Willingness to Pay D1 2 D2 2 D3 2 D4 0 20 In MinnesotaLand …