Principles of Microeconomics Professor Edward Morey ECON 2010-300 Midterm 2 October 1, 2008 Version A? Edward’s comments on the midterm. These questions might not be word for word what you saw on your exam. Many of these questions and concepts will appear in one form or another on your final. I have decided to accept two answers to question 39, see your T.A. if this affects you. As a University of Colorado at Boulder student, I affirm that I have neither given nor received assistance on this exam. Name: ___________________________________ Date: ______________ Signature: ______________________________Use the following table to answer Question 1. Table: Willingness to Sell The table below shows the willingness to sell their tickets to the ballet The Nutty Nutcracker by five students who received those tickets as part of their student activity fees. Student Willingness to sell Cailin $1 Dudley $25 Evan $60 Francisco $90 Grace $100 1. (Table: Willingness to Sell) Each of these students could sell their ticket for $75. Dudley's producer surplus if he sells his ticket is : A) $15. B) $25. C) $50. D) $240. $50: Dudley gets $75, but would have sold it for $25 2. The widget industry is competitive. Assume all Widget producers are identical. Is the following statement True or False? A permanent increase in the demand for Widgets will cause a permanent increase in each firm’s profits. A) True and there will be more firms in the industry B) True and there will be the same number of firms in the industry C) False and there will be more firms in the industry D) False and there will be the same number of firms in the industry. Note that all firms are identical. In the new LR equilibrium the firms in the industry will just be making a normal rate of return, so there will not be a permanent increase in each firm’s profits. The increase in demand will cause entry until excess profits are eliminated. So the new LR equilibrium price will equal the original equilibrium price. Use the following graph to answer questions 3-4. Figure: Supply of Ice Cream Cones3. (Figure: Supply of Ice Cream Cones) If the price of ice cream cones is $2, producer surplus will equal: A) $20. B) $40. C) $60. D) $80. Producer surplus is the firm’s revenues for selling 20 units at $2 ($40), minus the minimum they would have to be paid to sell the 20 units. The minimum the firm would have to be paid to supply the first 20 units is $20 (the area under the supply curve up to 20 units). So the producer surplus is $20 the area above the supply curve and below $2 4. (Figure: Supply of Ice Cream Cones) If the price of the good increases from $3 to $4, producer surplus will increase by: A) $5. B) $15. C) $25. D) $35. Many student got this wrong, many more than question 3. It is a more complicated question. At a price of $3 producer surplus is =45=.5(3x30). At a price of $4 producer surplus is =80=.5(4x40) The difference is $15 Graphically it is?5. Who won the presidential election? A) John McCain B) Barack Obama C) Mickey Mouse D) Bob Barr 6. The short run is defined as a: A) period of time less than 1 year. B) period of time less than 6 months. C) time period in which some inputs are considered to be fixed in quantity. D) time period in which some inputs are fixed, but it cannot exceed 1 year. 7. A fixed input is one: A) that exists in nature and there is only so much of it. B) that can be used for one thing only. C) that can never produce more or less in any time period. D) whose quantity cannot be changed in the decision-making period. 8. The change in total output resulting from a 1-unit increase in the quantity of an input used, holding the quantities of all other inputs constant, is: A) average cost. B) average product. C) marginal cost. D) marginal product. 9. Consider the competitive widget industry where all firms are identical. Which graphical shift most likely represents what happens to the market supply curve for widgets when more firms enter the industry? A) Supply curve from the point where profits are non-negative shifts to the right parallel B) Supply curve rotates to the right from the point where marginal cost equals average variable costs. C) Supply curve from the point where profits are non-negative shifts right but not parallel. D) There is not enough information to tell The wording of A) leaves a bit to be desired. The supply curves shift rightDraw a picture. Use the following to answer questions 10-11. Table: Costs of Producing Bagels Quantity of bagels (per period) Total variable costs Total fixed costs 0 $0.00 $0.10 1 0.20 0.10 2 0.30 0.10 3 0.35 0.10 4 0.45 0.10 5 0.60 0.10 6 0.80 0.10 7 1.05 0.10 8 1.35 0.10 10. (Table: Costs of Producing Bagels) The average total cost of producing 7 bagels is; the total cost of producing 7 bagels is: A) $0.16; $1.15. B) $0.17; $1.25. C) $0.20; $1.10. D) $1.15; $1.16. The total cost of producing 7 bagels is $1.15 (7(1.05+.10)). $1.15/7=.16 11. (Table: Costs of Producing Bagels) The marginal cost of producing the sixth bagel is: A) $0.10. B) $0.15. C) $0.20. the increase in total variable cost because the 6th bagel was produced D) $0.80. 12. Average variable cost is: A) the firm's variable cost per unit multiplied by the output. B) total variable cost divided by output. C) the difference between average total cost and average fixed cost. D) the difference between total cost and total variable cost. E) B and C F) B and D Draw a graph13. Marginal cost decreases over the range of increasing marginal returns and increases over the range of diminishing marginal returns. A) increases; decreases B) decrease; increases C) is constant; increases D) increases; is constant This an important relationship many of you had trouble with. Draw a SR production function then flip it Use the following to answer question 14. Figure: Short-Run Costs 14. (Figure: Short-Run Costs) The vertical difference between curve B (Average Total Cost) and curve C (Average Variable Cost) at any quantity of output is: A) marginal cost. B) fixed cost. C) average fixed cost. D) average variable cost. ATC=AFC+AVC, so ATC-AVC=AFCUse the following information to answer Question 15 Consider two worlds: A and B. In both worlds Los Angeles has only two beaches: North Beach and South Beach: The current flows along