ECONOMICS 102
QUEENS COLLEGE
2nd MID-TERM
Student's Name____________________________________________
Prof. Dohan
Fall 2001
Seat Number_________
Read each question carefully. Do try to answer every question, however. Please be fair to your fellow students.
Remember that this is a closed book exam. No books, no notes and no similar study aids are permitted. No
talking. Do not facilitate or permit other students to benefit from your exam and do not represent other's work as
your own. Failure to observe these standards will automatically result in at least an F for the course.
I. Relating concepts and definitions to the real world
Match the phrases in the three lists which are best related to the concepts or words in the table below each list.
* Indicates a tricky problem. Some concepts in the table may not be used, some may be used twice. 1 point each term
___ S. For two goods, A (apples on the horizontal axis) and B (bananas on the vertical axis), the slope of the his/her
indifference curve represents _____
___ S. In the above question, if the consumers more A and less of B by moving along his/her indifference curve,
then _____
___ P. If for two products A and B, the consumer’s indifference curve just touches (is tangent to) the budget line,
(budget constraint), then we can know that at that point __
___ A. For a consumer to maximize his/her utility from spending a given income on A and A, they will adjust their
consumption along their budget line so that ____
___ A. If the price of A falls then in order for the consumer to maximize his/her utility now, we know that______
___ C*. Marginal rate of substitution (MRS) in consumption of A for B measures _______
___ L The budget line (income constraint) for a consumer ______________ if the price of a good “B” falls
TABLE C.
C1. MUa = MUb
C10. MUa/MUb is unchanged
C2.
C3.
C4.
C5.
MUa/Pa=MUb/Pb
Pa=Pb
= (A/B) =MUa/MUb
slope of both lines is positive
and equal to one.
C9. ratios of marginal utilities
MUa/MUb
C11. MUa/MUb rises
C12. MUa/MUb falls
C8. substitute labor in place of capital
C6. not change anything because they were
already minimizing cost
C7. substitute capital in place of labor
C15. buy less of A and more of B
C16. buy exactly the same as before
C13. buy more B and less of A
because of the income effect
C14. most likely buy more of A
because of the substitution effect
___ S. When inputs are owned by a producer, such as a farmer (e.g., capital or land), then in order to calculate total
costs properly, the producer must include_______
___ N. The iso-cost line (equal cost line) shows what? ______
___ N. The isoquant curve (for a given amount of output Q) shows what? ______
___ O. In analyzing cost-minimization, the slope of the iso-cost curve measures___________.
___ Q. If the price of labor rises because of a shortage of labor, then the iso-cost line would _____
___ Q. If the price of labor rises because of a shortage of labor, in choosing how to produce any given level of
output, the producers would probably _____
____ R. When trying to minimize the cost of producing any given level of output, producers choose a combination of
labor and capital, so that the relationship between prices and marginal products meets this condition.
C1. shift inward on both axis
C2.
C3.
C6.
C7.
C17. MPPk = MPPl
C16. economic profit
C21. the product produced at that cost
shift outward on the labor axis
C18. MPPk/Pk = MPPl/Pl
C22. combinations of inputs which can
shift inward on the labor axis
C19. MPPk – MPPl = 0
be used for that quantity of Q
C13.
only
the
costs
paid
out
by
the
C20.
the
minimum cost combination of
not change anything because they
producer.
inputs
were already minimizing cost
substitute capital in place of labor C14. normal profits & the opportunity costs C22. the combinations of inputs which
of not using these inputs elsewhere
can be purchased for that cost
C8. substitute labor in place of capital C15. depreciation
___
___
___
___
___
___
___
___
H. If a line from the origin to a point is just tangent to the total cost curve, we know that at that output (Q)_____
I. The slope of a line just tangent to a point on the total variable cost curve measures__________
K. The increase in total cost from an increase in one more unit of output at Q is called the_____
J. In perfect competition, the increase in total revenue from an increase in sales of one unit (TR/Q) is called__
K. In perfect competition, the increase in total revenue from an increase in sales is always equal to the_____
K. In perfect competition, the assumed goal of the firm is to _____
D. For a firm to continue producing in the short run, its total revenue _______
M.In the long-run, competitive firm will shut down operations if the price falls below_____________
TABLE B.
B1. marginal revenue
B9. the marginal cost at Q
B15. cover all its total fixed costs
B2. total revenue
B9. average fixed costs
B16. cover all its total variable costs
B3. average revenue
B10. average variable cost
B17. cover all its total costs
B4. price
B11. average total cost
B17. cover all its marketing costs
B1. the marginal cost is undefined
B14. Maximize quantity sold.
B18. fixed average marginal cost
B8. the marginal cost is starting to rise B14 Maximize profit per unit of output B19. minimum average variable costs
B8. average total cost is minimized
B14. Maximize total revenue.
B20. minimum average fixed cost
B21. average profit is maximized
B14. Maximize TR minus TC
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___ B. Any firm is usually at a profit maximizing output level when ___________
___ B. At a profit maximizing output level, for any additional output beyond this point, the following must be true
for any firm.__
___ G.If a firm expands and its long run average cost curve shifts downwards, then this firm is experiencing___.
___ E. If firm in a competitive industry that relies on a resource that is particular to that industry, such as vineyards,
then, the firm will experience _________________as the industry expands.
Extra Credit.
___ A more technical term for the above phenomenon as the industry expands is called (write in the answer below.)
___________________________________________________________
TABLE A.
14. price < marginal cost
1. rising cost of purchasing inputs
18. internal economies of scale
15. marginal revenue > marginal cost 2. no change in cost of inputs
19. constant returns to scale
16. MC > MR
3. falling cost in buying inputs
20. internal diseconomies of scale
21. moving up the envelope curve
D2. MC = MR
3. economic profits
II. MULTIPLE CHOICE (1.5 points each unless otherwise noted)
____
____
____
____
____
____
Place the correct answer in the space next to the number. Hint: sketch curves. 20 points
1. Which of the following is not a reason for internal economies of scale?
a. spreading of fixed overhead costs over a the higher volume of output.
b. inherent in the technology such as in oil pipelines and warehouses.
c. specialization in the division of labor (the pin factory).
d. technologies such as drilling which must be embodied in costly capital to be used.
2. An increase in the wage rate will ______ the quantity of labor supplied, according to the
substitution effect, and will _____ the quantity of labor supplied, according to the income effect.
a. increase, increase
c.
decrease, increase
b. increase, decrease
d.
decrease, decrease
3. A perfect competitor who is producing where P is less than MC but more than AC, should
a. increase production in the short run.
d.
raise prices to AC
b. reduce price in the long run.
e.
shut down in the short run
c. reduce production in the short run
5. We discover that our Mucoffee / Pcoffee < Mutea/Ptea . This implies that
a. we are inside our budget constraint and should buy more of both.
b. coffee is more expensive than tea.
c. tea is more expensive than coffee.
d. switching some funds from coffee to tea will increase my utility.
e. switching some funds from tea to coffee will increase my utility.
6. Px is $9 and Py is $3. These prices indicate that as individuals move along their budget line, they can
a. increase his utility by buying more units of the cheaper Good Y.
b. increase his utility by buying more of the more highly-valued Good X
c. must give up 3 units of Good X for 1 of Good Y in the market place.
d. must give up 1 unit of Good X for 3 of Good Y in the market place.
e. must give up 3 units of Good X for 1 of Good Y in the market place.
7. Fred has had 6 hamburgers and 1 hot dog this week and is now indifferent between them.
Hamburgers cost $2 and hot dogs cost $1 currently.
a. Fred’s total utility of hamburgers is double that of hot dogs.
b. Fred’s total utility of hamburgers is equal to that of hot dogs.
c. Fred’ marginal utility of hamburgers is equal to that of hot dogs.
d. Fred’s marginal utility of hamburgers is double that of hot dogs.
e. Fred’s marginal utility of hot dogs is double that of hamburgers.
8. In choosing between two input to minimize the cost of production, (capital and labor), the slope of
the iso-quant (or equal production line) is determined by____
b. the total cost of production
b. the number of units produced.
c. the marginal product of labor and the marginal product of capital.
d. the marginal product of labor divided by the price of labor.
e. the price of capital and the wage of labor.
____ 9. The diamond-water paradox illustrates the fact that the price of a product tends to reflect
a. that products vital to our life should have a low price. c. consumer surplus
b. its marginal value to society of the last units used.
d. total value
____ 10. Based on the firm’s total cost curve shown on the right, its marginal cost
a. rises as output increases.
b. falls as output increases.
c. is horizontal.
d. is horizontal and equal to zero .
e. first falls and then begins to rise.
____ 11. Based on the firm’s total cost curve shown on the right, its average cost
a. rises as output increases.
b. falls as output increases.
c. first falls and then begins to rise.
d. is horizontal.
e. is horizontal and equal to zero.
____ 12. Which of the following is not true in the long run about a profit maximizing firm.
a. Marginal cost is equal to marginal revenue.
b. Marginal revenue product of labor is equal to the wage
c. Marginal product of labor/wage = Marginal product of capital/price of capital
d. Total revenue always will equal or exceed total costs.
Page 3
e. The firm will be maximizing its revenue.
____ 13. Marginal cost at any point C on the total cost curve can always be measured as the
a. the distance between the horizontal axis and point C on the total cost curve.
b. slope of a line from the origin to point C on the total cost curve.
c. slope of a line just tangent to point C on the total cost curve.
d. slope of a line from the origin of the variable cost to point C on the total cost curve.
e. none of the above
____ 14. When average cost is less than marginal cost,
a. average cost is rising.
c.
marginal cost is rising.
b. average cost is falling.
d.
marginal cost is falling.
____ 15. A perfectly competitive firm sells its output for $50 per unit. Its current output is 1,000 units. At
that level, its marginal cost is $50 and increasing, average variable cost is $35, and average total cost is
$50. To maximize short-run profits, the firm should
a. shut down
d.
decrease production
b. increase price
e.
increase production.
c. leave production levels unchanged
____ 16. ABC Corp. increases usage of all inputs by 50%. Average costs of producing at the new higher
levels fall 20%. This firm is experiencing
a. external economies of scale.
d.
increasing returns to scale
b. external diseconomies of scale
e.
decreasing returns to scale
c. constant returns to scale
____ 17. In the short run, a perfectly competitive firm already minimizing its losses should still produce if it
can
a. cover its average costs.
c.
cover its fixed costs.
b. cover its variable costs.
d.
sell more at the existing price.
c. raise its prices
____ 18. In the long-run perfectly competitive equilibrium for an industry, where the costs curves are
different from firm to firm, one of the following conditions is true:
a. MC of each profit maximizing firm is the same and is equal to the price.
b. It is possible to reallocate resources from high average cost firms to lower average cost firms and
increase output without spending more resources.
c. Each firm produces at an output level to minimize long-run average total costs.
d. Each firm produces at an output level to minimize short-run marginal cost.
e. MC = minimum average variable cost
Use the following information for the next two questions. James’s income is $100; the price of apples is $5 per
unit: the price of oranges is $10 per unit. Assume a consumer choice diagram with apples on the vertical axis and
oranges on the horizontal axis. (Hint: sketch a diagram)
__ 19. If James’s income increases to $150, but the prices of apples and oranges remain unchanged. Which of
the following is NOT TRUE?
a. James could now by 30 apples instead of 20 apples.
b. There is a parallel shift outwards of Jame’s budget line.
c. James will now be on a higher indifference curve with more satisfaction.
d. There is a parallel shift outwards of the indifference curves.
a If both goods are normal goods, it is likely the James will buy more of both apples and oranges.
__ 20. If the price of oranges decreases to $5 per unit, which of the following is NOT TRUE?
a. James will most likely end up on a higher indifference curve..
b. The budget line will move outward along the horizontal axis only.
c. James will be on the same indifference curve, but more oranges will be consumed.
d. James’s consumption of apples will decrease.
e. Jame’s budget line will move inward along the horizontal axis because orange prices are lower.
____ 21 (2 pts) The market demand curve for pizza is given by Qd = 800 - 50P, where P is the price of pizza in
dollars. If the price of pizza was $6. Its prices falls to $4.The total consumer surplus has
a. fallen by $2 per pizza pie.
b. fallen by $1200.
c. remains unchanged at $2500 because the demand curve did not move.
d. has increased by $1100.
e. has increased to $7200.
Remember the ½ of a rectangle rule for calculating consumer surplus. A sketch is useful.
Problem 1. The Profit Maximizing Firm in Perfect Competition
The graph to the right illustrates the short-run cost
curves for producing various quantities of tomatoes $/Unit
60
by the typical tomato farmer in New Jersey.
1. Label the following curves: ATC, MC, AFC, AVC 50
2 At what quantity (point) does the farmer
______ a. experience:minimum average cost?
______ b. minimum average variable cost?
______ c. minimum marginal cost?
______ 3*. If the price is equal to 40, at what quantity
(output level) would the farmer produce in
order to maximize his/her profit?
Typical tomato farmer
40

30

20
10



Page 4
$ _____ 4*. What are total revenues at the profit
0
100
200 300
maximizing output level.
400 500 600 700 Bushels of
4*. What are the approximate total costs and total
tomatoes
economic profits at the profit maximizing output.
$ _____ 4a. Total costs.
4100
4b. SHOW ON ABOVE GRAPH.
$______ 4c. Economic profit.
4d. SHOW ON ABOVE GRAPH by shading in area representing total costs
______ 5. Farmer Brown believes that even though the price is $40 per bushel, his profit maximizing output is
500 bushels because he gets the highest average profit per bushel. Show Farmer Brown why he is losing
profit.
______ 5*. If the price of tomatoes rises to 60, how many tomatoes would the farmer produce?
______ 6. Below what price would the farmer stop producing tomatoes in the short run?
Why? ___________________________________________________________________________
______ 7. What is likely to be the long-run price of tomatoes if there are no barriers to entry and no economies
of scale to the “tomato growing industry”.
Why? ___________________________________________________________________________
PROBLEM 3: ANALYZING THE RELATIONSHIP BETWEEN TOTAL COST AND AVERAGE &
MARGINAL COSTS
GRAPH # 1
A

F
E


GRAPH # 2
$/Unit
TC
G
TC
Y
C

X
M
R

K

P

D
q

L

I
B

N
FC

H
Q
Q
CHOOSE POINTS ON THE GRAPHS (1 point each)
______AA.
______BB.
______CC.
____ __DD.
____ __EE
______FF.
Which curve is the average cost curve on Graph # 2 above.
Which point is the minimum average cost point on Graph # 2 above.
Which point is the profit-maximizing point on Graph # 2 above.
Identify the point at which marginal cost equals average total cost on Graph # 1
Identify the minimum marginal cost point on Graph # 1
What point on Graph # 2, corresponds with point E on Graph # 1.
PROBLEM 4 PERFECT COMPETITION AND SUPPLY CURVES.
Output
1
2
3
4
5
6
7
Fixed
Cost
16
16
16
16
16
16
16
Marginal Cost
Total Cost
AVC
ATC
Hint
TR if P=11
Hint
Tprofit if P = 11
$8.00
$6.00
$4.00
$6.00
$8.00
$10.00
$12.00
* ___ 3.1. Complete the table above. The total cost of 7 units is
a. $16.00
b. $28.00
c. $70.00
d. $54.00
____ 3.2. The firm will shut down in the short run if the price falls below
a. $8.00
b. $4.00
c. $10.00
d. $6.00
____ 3.3 The price is currently $9.00. In the short run, to maximize profits, the firm should
a. produce 5 units. b. produce 6 units
d. produce 7 units
d. shut down.
____ 3.4 At this price ($11.00), the firm will have a (Hint: fill in graph at right for TR and Total Profit)
a. loss of $3.00.
b. loss of $16. c. profit of $13
d. profit of $16.
____ 3.5. In the long run, firms will _____ this industry and the price will probably _____
a. enter, increase
b. enter, decrease
c. leave, increase
d. leave, decrease
Page 5
Problem 4 LEAST COST PRODUCTION OF SUGAR
800
4.1 If the price of labor is $40 per unit, the
total cost along the isocost line AC:
Units
Hint: TC = Pl*L + Pk*K
a. is $8000 c. is $2000
b. is $4000 d. depends on the price of capital
E
of
capital
_ 4.2 If the price of labor is $40 per unit,
then the price of a unit of capital
a. is $10
c. $40
b. is $20
d. not enough information
G
C
400
F
H
_ 4.3 If the firm chooses to produce 100
units of output, its least-cost mix of
300
110
D
labor and captial is represented by point
B
200
100
a. point A
b. point B c. point C
A
200
d. point D
e. point E
120
400
A
$_____4.4 What is the average cost per unit if this firm is
Units of labor
producing 100 units at its least-cost mix of labor and captial
______4.5 The slope of the isocost line with respect to the labor axis in the diagram above represents
a. Pl/Pk
b. Pk/Pl
c. Pl/L
d. Pk/K
e. L/K
______4.6 The slope of a line (K/L) just tangent to the isoquant for 200 at point A with respect to the
labor axis in the diagram above represents
a. MPPl/MPPk.
b. MPPk / MPPl
c. MPPl
d. MPPk e. L/K
Use the following to answer the next two questions.
a. MPP
MPPk
b. _____
MPPl < _____
MPPk
c._____
MPPl =_____
MPPk d. _____
MPPl=_____
MPPk e._____
MPPl = ___
L
_____l > _____
Pl
Pk
Pl
Pk
Pl
Pk
Pk
Pl
MPPk
K
_______4.7 Which of the above inequalities and/or relationships is true at point D?
_______4.8 Which of the above inequalities and/or relationships is true at point F
_______4.9 What is the cost of producing 300 units of rice, given your answers in questions 4.1 & 4.2
_______4.10 What is happening to average cost between 100 and 300 units.
4.11 If the price of capital fell to $3.00, draw in the graph above the new iso-cost line for producing 100 units of
output and show the new cost-minimizing combination of inputs. (Hint: draw the new iso-cost for the new
price and then shift inward).
Problem 5 MAXIMIZING CONSUMER UTILITY
5.1 If the price of food is $10 per unit and
the price of clothing is $20 per unit, what
is the maximum amount of food that can
be purchased with $800
Units of
clothing
Hint: I = Pf*F + Pc*C
a. 10 units
b. 20 units
c. 40 units
d. 80 units
E
A
____5.2 If income is $800, and if this person buys 30 units of
clothes at point A, how much food can he buy?
a. 20 units
c. 10 units
b. 15 units
d. Not enough information
_____5.3 At what point does this consumer
maximize
his utility from $800
a. point A
b. point B
c. point C
B
IV level utility
C
III level utility
II level utility
Income (budget) line for 800 $
d. point D
D
Units of
food
e. point E
_____5.4 The slope of the income line with respect to the food axis in the diagram above represents
a. Pc/C
b. Pf/Pc
c. Pc/Pf
d. Pf/F
____5.5 The slope of a line just tangent to the indifference curve (C/F) with respect to the food axis in
the diagram above represents
a. MUc/MUf
b. MUf / MUc
c. MUc/Pc
d. MUf/Pf
5.6 What is the slope of a line just tangent to the indifference curve (C/F) with respect to
the food axis at point B, given the prices above?___________
5.7 If the price of clothing fell to $10/unit, draw the new income line, and indicate the new
equilibrium point. Indicate what changes are caused by the income effect and what changes
are caused by the substitution effect. (2 pts)