Midterm Exam #3; Page 1 of 14 Economics 101 Sample Midterm Exam #3, Version #2 Professor Scholz December 3, 2009 DO NOT BEGIN WORKING UNTIL YOU ARE TOLD TO DO SO. READ THESE INSTRUCTIONS FIRST. You have 75 minutes to complete the exam, which consists of 33 multiple-choice questions. The exam is worth 100 points. Each question is worth 3 points: you get 1 point for filling in the requested information correctly. Please answer the questions on your coding sheet with a #2 pencil. Be sure to fill in the coding sheet carefully and accurately. Please also turn in your exam with name, ID, and student number. Name____________________ ID _________________ Student number _____________ How to fill in the coding sheet: 1. Fill in the bubbles on your answer sheet with your last name, first name, and middle initial. 2. Fill in the bubbles so we know your student identification number. 3. Fill in the bubbles under "Special Codes" spaces ABC so we know the discussion section number for which you are officially registered. Discussion sections are listed below: 4. Finally, after filling in your section code, please put the exam version in the вЂњSpecial CodesвЂќ spaces. You will end up with a 4-digit вЂњSpecial CodesвЂќ number вЂ“ a three digit section number followed by a one digit exam number. Georgy Loginov William Nicholson Jiao Shi 305 306 309 313 307 314 318 302 316 F 1:20 W 4:35 W 3:30 F 9:55 W 4:35 F 11:00 F 8:50 F 2:25 F 12:05 Fumihiko Suga 301 304 311 312 W 3:30 F 8:50 F 11:00 F 9:55 Carly Urban Matthew Friedman Irina Merkurieva Michael Pistone 310 315 317 319 331 332 347 335 341 343 345 337 338 F 2:25 F 12:05 F 8:50 F 1:20 Evangelos Stravelas 330 333 334 342 W 3:30 W 4:35 F 1:20 F 2:25 W 3:30 W 4:35 F 8:50 F 1:20 F 9:55 F 11:00 F 2:25 F 2:25 F 12:05 Yuan Yuan 336 339 340 346 F 11:00 F 12:05 F 9:55 F 8:50 If you have a question during the exam, stay seated and please raise your hand. To show respect to your fellow students, please stay seated in your exam seat for the full 75 minutes. All exams and answer sheets must be turned in as you leave the exam. The exam will be discussed in section next week. Relax. Stop, take a deep breath, and think carefully before you answer any questions. Good luck! Midterm Exam #3; Page 2 of 14 Answer these multiple choice questions on the scantron sheet, selecting the best answer. 1) Joe owns a restaurant. Many of the restaurants that he competes with recently closed, shifting his perceived demand curve. The following 2 tables show his old and new perceived demand curves. Assume that Joe can only choose from the quantities of output given in the table. By how much does the price that he charges change after the restaurants leave the market? Original demand curve Price Quantity Total Cost $20 0 $1,000 $18 100 $1,100 $16 200 $2,000 $14 300 $4,000 $12 400 $7,000 New Demand Curve $25 0 $1,000 $23 100 $1,100 $21 200 $2,000 $19 300 $4,000 $17 400 $7,000 a) b) c) d) e) Increase by 3 Decrease by 3 Increase by 4 Decrease by 4 Increase by 5 2) вЂњAromaвЂќ is a coffee shop chain that sells cups of coffee in a perfectly competitive market at a price of $2 per cup. In the short run, when other factors of production are fixed, AromaвЂ™s production function is given by Q=80L-4L2, where Q is output in thousands of coffee cups and L is labor in thousands of workers. AromaвЂ™s marginal product of labor is MPL=80-8L. Assume the labor market for AromaвЂ™s employees is perfectly competitive. If the equilibrium wage rate Aroma faces is of $80 per worker per day, how many workers (in 1000s) should it hire? a. 0.5 b. 1 c. 5 d. 10 e. There is not enough information to determine the wage. 3) The supply for the textbook of Econ 101 is given as Qs=100+5*P and the demand is given as Qd=5005*P. Assume that this market is perfectly competitive. Now, Jonathan wants to hire workers to produce the textbooks and the wage in the market equilibrium is $100. How many workers should he employ? Number of workers Quantity of textbooks produced 0 0 1 6 2 10 3 14 4 17 5 19 6 20 Midterm Exam #3; Page 3 of 14 a) b) c) d) e) 0 3 4 5 6 4. In a monopolistically competitive market, if some firms exit the market, the perceived demand curve for firms remaining in the market will a. b. c. d. Shift to the left Shift to the right Not change Either shift to the right or left, depending on the number of firms remaining in the marker and on the degree of product differentiation. e. None of the above 5. Suppose workers in the corn and wheat industries are identical and that the marginal product of labor of the last worker in the corn industry is twice the marginal product of labor of the last worker in the wheat industry. Assuming a competitive, efficient labor market, which of the following is true? a. b. c. d. e. The wage of workers in the corn industry is half the wage of workers in the wheat industry The wage of workers in the corn industry is twice the wage of workers in the wheat industry The price of corn is twice the price of wheat The price of corn is half the price of wheat a and c are true Use the following table to answer question 6. Assume all markets are competitive and that the economy is efficient in output. Workers Q of Rutabaga Workers Q of Candy 0 0 0 0 1 16 1 35 2 20 2 43 3 23 3 46 4 24.5 4 48 5 25 5 49 6. If there are four workers producing candy and four workers producing rutabaga, which of the following could be the prices in the economy? a. Rutabagas $24.5 and candy $48 b. Rutabagas $1.50 and candy $2 c. Rutabagas $4 and candy $3 d. Rutabagas $4 and candy $4 e. There is not enough information to tell 7. You have a monopoly over the supply of your autograph (i.e. signature), which has suddenly become valuable to other people due to your newfound celebrity status as an economics 101 wizard. Assume that it costs you nothing to provide an autograph (i.e. no fixed or marginal costs) and that you would like to maximize your profit from giving your autograph out to people. Both men and women want your Midterm Exam #3; Page 4 of 14 autograph, but each group has a different demand function for your autograph. Specifically, the demand function for men is given by Q M =8-P and the demand function for women is given by Q W =4-P. What is the maximum profit you can obtain for your autograph? a) $18 b) $20 c) $16 d) $22 e) None of the above 8. Suppose now that each autograph you give out costs you $4 (but there are still no fixed costs), and assume that you can only charge a single price to men and women. What is the maximum profit you can obtain for your autograph? a) $0 b) $2 c) $4 d) $16 e) None of the above 9. You read an article on the antitrust actions against Microsoft, вЂњU.S. Judge Says Microsoft Violated Antitrust Laws with Predatory BehaviorвЂќ from the New York Times. Those bringing Microsoft to court hoped the remedy would result in a) Microsoft switching business to become the worldвЂ™s best supplier of girl scout cookies. b) Break up Microsoft into separate fully independent companies that would separately produce an operating system, a web browser, software, etc. c) Large payments that would help offset state fiscal deficits. d) Microsoft apologizing for inhibiting competition. e) Microsoft no longer existing as a software company and its executives serving long jail sentences. Use the following information to answer the next THREE questions. Assume that a monopolist has a Total Cost function given by TC = 10 + 2Q + (1/2)Q2, so Marginal Cost is given by MC = 2 + Q. 10. Assume the market demand curve facing this monopolist is Q = 20 вЂ“ P. What is the Deadweight loss due to monopoly? a. 30 b. 18 c. 12 d. 9 e. 6 11. Now assume that a change in tastes results in a new demand curve of Q = 36 вЂ“ 2P. Given the same cost functions as before, consumer surplus in the new equilibrium is: a. 144 b. 72 c. 32 d. 16 e. 8 Midterm Exam #3; Page 5 of 14 12. As a result of the change in demand, the monopolistвЂ™s profit will increase by: a. 6 b. 10 c. 38 d. 44 e. 54 Figure: Market Demand Schedule for Burritos Price 10 9 8 7 6 5 Quantity 400 500 600 700 800 900 13. The figure above shows the market demand schedule for burritos in the Madison area. Assume that Chipotle and Qdoba are the only two producers of burritos in the market and that marginal costs are zero for each producer. Initially, Chipotle and Qdoba collude and agree to share output equally. If Qdoba cheats, expanding its output by 100 units, what will be QdobaвЂ™s revenue in the market if Chipotle does not cheat? a) $2400 b) $2450 c) $2700 d) $3600 e) $4800 14. Suppose that McDonaldвЂ™s and Burger King are the only producers of french fries, which consumers consider perfect substitutes. McDonaldвЂ™s and Burger King can each choose to sell their fries at a low price or a high price. Their payoffs are as follows. (The first number in each cell is Burger KingвЂ™s payoff; the second number is McDonaldвЂ™s.) Burger King Low price High price M c D o n a l d вЂ™ s Low price High price 20,20 40,0 0,40 30,30 Now suppose Burger King advertises to differentiate its fries from McDonaldвЂ™s fries. If Burger King decides to advertise, the new payoff matrix (not counting advertising costs) will be as follows. Burger King Low price High price M c D o n a l d вЂ™ s Low price High price 25,15 45,0 30,30 50,20 Midterm Exam #3; Page 6 of 14 How much is Burger King willing to spend on advertising? a) 5 b) 10 c) 25 d) 30 e) not enough information 15. Suppose one large monopolist, JonathanвЂ™s Carpet Cleaners, dominates the Madison carpet cleaning business. Market demand for carpet cleaning and marginal revenue is given by the equations QD = 120 в€’ P MR = 120 в€’ 2Q where P is the price of cleaning carpets and Q is the quantity of carpets cleaned per day. Suppose, furthermore, that the total cost and marginal cost of cleaning carpets is given by the equations TC = 10 + 60Q + Q 2 MC = 60 + 2Q What is JonathanвЂ™s profit-maximizing price and quantity? a. b. c. d. e. P=90; Q=40 P=100; Q=20 P=105; Q=15 P=90; Q=15 P=105; Q=7.5 16. The figure below depicts the payoffs in a duopoly Dick advertises Tom gets $104 Dick gets $33 Tom gets $12 Dick gets $34 Tom advertises Tom does not Dick does not Tom gets $98 Dick gets $176 Tom gets $1 Dick gets $205 What is the Nash equilibrium of this game? a. b. c. d. e. Tom and Dick advertise Tom does not advertise but Dick does advertise Tom advertises but Dick does not Tom and Dick do not advertise There are no Nash equilibria 17. Suppose leisure is a normal good. When the hourly wage rises, all else equal, this leads to a. b. c. d. e. decreased labor supply if the income effect dominates the substitution effect decreased leisure if the income effect dominates decreased labor supply if the substitution effect dominates increased leisure if the substitution effect dominates both b. and d. Midterm Exam #3; Page 7 of 14 18. A monopolistic competitor has the following information on cost and demand. What will the firmвЂ™s profits equal in the long run? Quantity Price ($) 0 2 4 6 8 10 12 14 16 18 20 a. b. c. d. e. 25 24 23 22 21 20 19 18 17 16 15 Total Revenue ($) 0 48 92 132 168 200 228 252 272 288 300 Marginal Revenue ($) 25 23 21 19 17 15 13 11 9 7 5 $0 $91 $102 $228 None of the above Figure: Payoff Matrix for Gehrig and Gabriel Total Cost ($) 30 35 45 60 77 100 126 165 210 260 320 Marginal Cost ($) вЂ” 2.5 5 7.5 8.5 11.5 13 19.5 22.5 25 30 Average Cost ($) вЂ” 17.5 11.25 10 9.63 10 10.5 11.79 13.13 14.44 16 Midterm Exam #3; Page 8 of 14 19. (Figure: Payoff Matrix for Gehrig and Gabriel) The accompanying figure shows the payoff matrix for two producers, Gehrig and Gabriel, who sell handmade Davy Crockett figurines in San Antonio. Both Gehrig and Gabriel have two strategies available to them: to produce 5,000 figurines each month or to produce 7,000 figurines each month. For Gehrig and Gabriel, the dominant strategy is to: A) there is no dominant strategy. B) produce 5,000 figurines. C) produce 7,000 figurines. D) produce between 5,000 and 7,000 figurines. E) collude and increase production to more than 14,000 figurines. Figure: Total Surplus with a Regulated Natural Monopolist 20. (Figure: Total Surplus with a Regulated Natural Monopolist) In the accompanying figure, the natural monopoly: A) would incur an economic loss if regulated to produce where price equals marginal cost. B) would incur an economic profit if regulated to produce where price equals marginal cost. C) would incur an economic profit if regulated to charge a price equal to average total cost. D) creates more consumer surplus than if it were unregulated if it was regulated to produce either where price equal marginal cost or price equal average total cost. E) both a and d. 21. Kurt receives a wage of $100 per hour; Jim receives a wage of $10 per hour. To maximize utility, Kurt works 45 hours per week and Jim works 50 hours per week. The equilibrium value of an additional hour of leisure is: A) higher for Jim than Kurt. B) higher for Kurt than Jim. C) not enough information is given. D) less than $100 for Kurt. E) greater than $10 for Jim. Midterm Exam #3; Page 9 of 14 22. Suppose a monopoly is producing at the profit-maximizing level of output. Then at that level of output: A) demand is price elastic. B) demand is price inelastic. C) demand is perfectly price inelastic. D) the elasticity of demand depends on the location of the intersection of MR and MC. E) demand is price unit elastic. Figure: Payoff Matrix II for Blue Spring and Purple Rain 23. (Figure: Payoff Matrix II for Blue Spring and Purple Rain) The accompanying figure shows the payoff matrix for two producers of bottled water, Blue Spring and Purple Rain. Each has two strategies available to it: a high price and a low price. The dominant strategy for Purple Rain is to: A) always charge a low price. B) always charge a high price. C) always adopt the same strategy as Blue Spring. D) Purple Rain does not have a dominant strategy. E) the question cannot be answered with the information given in the Figure. Figure: Profit-Maximizing Output and Price Midterm Exam #3; Page 10 of 14 24. (Figure: Profit-Maximizing Output and Price) In the accompanying figure at the profit maximizing quantity of production for the monopolist, total revenue is _____, total cost is _____ (assume fixed costs are $0), and profit is _____. A) $3,200; $3,200; $0 B) $600; $200; $400 C) $1,600; $3,200; $1,600 D) $4,800; $3,200; $1,600 E) $4,800; $1,600; $3,200 25. A monopoly is producing where average total cost equals $30, marginal revenue is $40, and the price is $50. If ATC is at its minimum level and the ATC curve is U-shaped, in order to maximize profits this firm should: A) increase output. B) take out an advertisement in the USA Today telling the world about its product. C) reduce output. D) do nothing; it is already maximizing profits. E) shut down. Table: Demand for Crude Oil Quantity 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 Price ($/barrel) $160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 Total revenue ($) $0 1,500 2,800 3,900 4,800 5,500 6,000 6,300 6,400 6,300 6,000 5,500 4,800 3,900 2,800 1,500 0 Midterm Exam #3; Page 11 of 14 26. (Table: Demand for Crude Oil) The accompanying table shows the demand schedule for crude oil. For simplicity, assume that the cost of producing crude oil is zeroвЂ”the marginal cost of crude oil equals zero. Suppose the crude oil industry is a duopoly and the two firms collude to share the market equally. Laverne and Shirley own the two firms. In this case, the price of crude oil will be _____, Laverne will produce _____ barrels, Shirley will produce _____ barrels, and both Laverne and Shirley will earn economic profits equal to _____. A) $80; 80; 80; $6,400 B) $80; 40; 40; $3,200 C) $90; 35; 35; $3,150 D) $60; 50; 50; $3,000 E) $40; 60; 60; $2,400 Figure: Income and Leisure Opportunities 27. (Figure: Income and Leisure Opportunities) The accompanying figure shows the income and leisure opportunities for Keisha when she has 100 hours per week for working or at leisure and she can earn $10 per hour working, and the opportunities when she can earn $20 per hour working. As the amount she earns increases from $10 per hour to $20 per hour, Keisha will work ____ hours due to the substitution effect. A) 10 fewer B) 15 more C) 25 fewer D) 15 fewer E) 50 more Midterm Exam #3; Page 12 of 14 Table: Workers and Corn Output Numbers of workers 0 1 2 3 4 5 6 7 Output of corn (units of corn) 0 30 58 79 94 104 108 110 28. (Table: Workers and Corn Output) Laura is a price-taking farmer who produces corn. Assume the wage rate for workers is $125 and the price per unit of corn is $10. Laura's production function is shown in the accompanying table. To maximize profits Laura should employ ___ workers. A) 2 B) 3 C) 4 D) 6 E) 5 29. Oscar's Wilderness Flower Shop maximizes profits by hiring four workers in a perfectly competitive labor market. The workers and their VMPLs are AlfredвЂ”$40, BarbaraвЂ”$35, CalvinвЂ”$27, and DianaвЂ”$15. Which of the following statements is true? A) B) and D) are correct. B) In equilibrium, each worker would be paid his or her VMPL. C) Each worker would be paid a wage equal to the highest VMPL (i.e., $40). D) Each worker would be paid $15. E) We need to know the product price before we can figure out the wage rate. 30. Suppose Billy Bud's Bucking Bronco's employs 20 workers at a daily wage rate of $60 each. The average product of labor is 30 bucking broncos per day, the marginal product of the last worker is 12 bucking broncos per day, and total fixed cost is $3,600 for equipment. What is the marginal cost of the last bucking bronco produced? A) $0.20 B) $5 C) Not enough information is given to answer the question. D) $240 E) $720 Midterm Exam #3; Page 13 of 14 31. A firm that pays $8 per hour to each of its ten workers pays $9 per hour to each of its workers if it hires an 11th worker. The marginal cost of hiring the 11th worker is: A) B) C) D) E) $1 per hour $8 per hour $9 per hour $17 per hour $19 per hour 32. In a competitive market economy the price of corn is $5 per bushel, the price of wheat is $3 per bushel, the marginal product of labor in corn is 7 bushels, and the marginal product of labor in wheat is 12 bushels. If there is just one labor market for both corn and wheat workers: A) labor will move from corn to wheat, since marginal product of wheat is greater than the marginal product of corn. B) labor will move from wheat to corn, since the price of corn is greater than the price of wheat. C) labor need not move from corn to wheat or from wheat to corn, since both markets could be in equilibrium. D) labor will move from corn to wheat, since the value of the marginal product is greater in wheat production than in corn production. E) Not enough information is given. Figure: Payoff Matrix for Jake and Zoe 33. (Figure: Payoff Matrix for Jake and Zoe) Jake and Zoe are the only producers of slushies in Vacatown. Every week, each firm decides whether to price high or price low for the following week. The accompanying figure shows the profit per week earned by the two firms. Suppose the firms each decide to price high initially, and adopt a вЂњtit-for-tatвЂќ strategy for the following weeks. After a few weeks, how much profit would each firm make per week? A) Jake profit = $800; Zoe profit = $800. B) Jake profit = $1,000; Zoe profit = $1,000. C) Jake profit = $1,500; Zoe profit = $200. D) Jake profit = $200; Zoe profit = $1,500. E) Neither will make profit. Note: It is extremely likely that I will ask a fairly substantial number of externality questions. Here are three sample questions. Midterm Exam #3; Page 14 of 14 34. Consider the market for cigarettes in Madison. The market supply curve is 2Qs=4P, and the market demand curve is Qd=40-2P. In addition, suppose smoking inflicts a negative externality of $10/pack in the form of second hand smoke. If the city of Madison imposes a $10/pack Pigouvian tax on consumer purchases of cigarettes, the revenue from this tax will be: a) $500. b) $100. c) -$500. d) $250. e) None of the above. 35. Chip and Dale run separate logging companies in the same forest. Both pollute the river flowing through the forest with debris from their work. In the table below, the first row shows the current level of debris that makes its way into the river from their work. The following rows show how much it would cost each logger to reduce its pollution by additional increments of 10 pounds. If the government imposes a pollution tax of $7 for each 10 pounds of debris, total pollution will fall by ____ pounds, at a total cost of ____. Chip Dale Current debris in pounds 60 80 Cost of reducing debris by 10 pounds $5 $2 Cost of reducing debris by a second 10 pounds $10 $4 Cost of reducing debris by a third 10 pounds $15 $6 Cost of reducing debris by a fourth 10 pounds $20 $8 Cost of reducing debris by a fifth 10 pounds $25 $10 A) 40, $28 B) 40, $17 C) 40, $22 D) 60, $30 E) None of the above 36) A steel firm has the following private marginal cost curve P=Q. They face a demand for their product equal to P=200-3Q. The steel firm uses a river to dispose of their industrial waste. Suppose the marginal damage of the firmвЂ™s production is MD=Q. What is the constant (lump sum) Pigouvian tax that will result in the socially efficient level of production? A) B) C) D) E) T=10 T=20 T=30 T=40 None of the above Midterm Exam #3; Page 15 of 14 sample exam Midterm #3, version 2 answers: 1. e 2. c 3. c 4. b 5. d 6. e 7. b 8. c 9. b 10. d 11. d 12. b 13. c 14. b 15. c 16. c 17. a 18. a 19. c 20. e 21. b 22. a 23. d 24. e 25. a 26. b 27. b 28. c 29. d 30. b 31. e 32. d 33. b 34. b 35. b 36. d