EC101
Sections 04
Fall 2010
NAME: _________________
ID #: ___________________
SECTION: ______________
MIDTERM I
December 9, 2010
GROUP A
Instructions:
• You have 60 minutes to complete the exam. There will be no extensions.
• Students are not allowed to go out of the exam room during the exam. Those
students who leave the exam room will not be readmitted.
• The exam consists of 30 multiple choice questions. Each multiple choice
question is worth 1 point for a total of 30 points.
• Use a pencil to mark your answers on the answer sheet. Make sure you write
your name and ID number on the answer sheet as well.
• Please mark the group of your test on the answer sheet under “Test Form.”
• No calculators, dictionaries or formula sheets are allowed.
• The use of cell phones is strictly prohibited. Make sure your cell phone is
turned off and inside your bag. Do NOT use your cell phone even for
timekeeping purposes.
• This is a closed books/notes exam.
• Choose only one answer for each question.
• TWO WRONG ANSWERS WILL TAKE AWAY ONE CORRECT
ANSWER.
• There is absolutely no talking during the exam.
• The proctors will NOT answer any questions.
• There are 8 pages in this exam booklet.
Version A
Page 1
1. If the marginal profit from increasing output by one unit is negative, then to attain an
optimum the firm should
A) increase output until marginal profit is maximized.
B) reduce output until marginal profit is maximized.
C) reduce output until marginal profit equals zero.
D) increase output until marginal profit equals zero.
2. A monopolist will operate where
A) MR = MC and charge a price corresponding to demand at that level.
B) MR = MC and charge a price equal to marginal revenue.
C) MC = MR and charge a price corresponding to average cost.
D) MR = MC and charge a price equal to marginal cost.
3. The airline industry often engages in Bertrand behavior. This means that firms often
_____ prices until profits _____.
A) lower; are maximized
B) raise; approach zero
C) raise; are maximized
D) lower; approach zero
4. A 50 percent tax on the profits of a monopolist will
A) cause no change in profit-maximizing price and quantity.
B) change price but not quantity.
C) raise price and lower quantity.
D) be totally shifted to the consumer.
5. Which of the following is a fixed cost to a farmer?
A) fertilizer
B) seed
C) gasoline
D) insurance
6. Economists object to monopoly because
A) monopolists keep output below efficient levels.
B) monopolies are usually polluters.
C) monopoly profits go to the rich.
D) monopolies overproduce to maximize profits.
Version A
Page 2
7. Suppose Susan owns a business that operates in a market characterized by monopolistic
competition. Susan's profit-maximizing price is $12, her profit-maximizing output is
900 units per week, and her profits are $1,800 per week. Susan decides that she needs
more profits and therefore raises her price to $15. At the new price of $15:
A) profits will remain at $1,800.
B) marginal revenue will be greater than marginal cost.
C) marginal revenue is less than marginal cost.
D) profits will increase.
8. Suppose the price elasticity of demand for coffee at the CoffeeWorld equals 1.71 for
women and 0.55 for men. A successful price discrimination strategy would lead to:
A) higher prices for men and lower prices for women, as long as the CoffeeWorld
could prevent women from reselling drinks to men.
B) lower prices for men and women.
C) lower prices for men and higher prices for women.
D) lower prices for men and higher prices for women, as long as the CoffeeWorld
could prevent women from reselling drinks to men.
9. A monopolistically competitive industry such as baked goods and a perfectly
competitive industry like wheat farming are alike in that:
A) there are many firms in each industry.
B) barriers to entry in both industries are large.
C) firms in both types of industries produce identical products.
D) firms in both types of industries produce similar but not identical products.
10. Austin's total fixed cost is $3,600. Austin employs 20 workers and pays each worker
$60. The average product of labor is 30, the marginal product of the 20th worker is 12.
What is the marginal cost of the last unit produced by the last worker Austin hired?
A) $240
B) $720
C) $5
D) $0.20
Version A
Page 3
Use the following to answer questions 11-12:
Figure: Prices, Cost Curves, and Profits
11. (Figure: Prices, Cost Curves, and Profits) In the accompanying figure, if the price is P1,
then the firm earns:
A) a loss equal to (ca) x Q1.
B) zero.
C) a loss equal to (ba) x Q1.
D) a loss equal to (bc) x Q1.
12. (Figure: Prices, Cost Curves, and Profits) In the accompanying figure, if the price is P2,
then the maximum profit the firm can earn is:
A) (fg) x Q2.
B) (de) x P2 .
C) (de) x Q2.
D) (fg) x Q3.
13. In the perfectly competitive guidebook industry, the market price is $35. A firm is
currently producing 10,000 guidebooks; average total cost is $38, marginal cost is $30,
and average variable cost is $30. The firm should:
A) shut down, because the firm is losing money.
B) raise the price of guidebooks, because the firm is losing money.
C) keep output the same, because the firm is producing at minimum average variable
cost.
D) produce more guidebooks, because the next guidebook produced increases profit
by $5.
Version A
Page 4
14. If there are two gas stations in the town of Smalltown, then the gasoline industry in
Smalltown is probably best characterized as:
A) monopolistic competitive.
B) oligopolistic.
C) perfect competitive.
D) monopolistic.
15. Heidi quit her job as a chef making $40,000 per year start her own restaurant. The first
year, Heidiʹs restaurant earned $100,000 in revenue. Heidi pays $50,000 per year in
wages to the waitresses and hostess, $20,000 per year to buy food, etc. What is Heidiʹs
economic profit for the year?
A) $50,000
B) -$10,000
C) $30,000
D) $80,000
16. A monopolist's marginal cost curve shifts up, but the firm's demand curve remains the
same and the firm does not shut down. Compared to before the increase in marginal
costs, the monopolist will _______ its price and _______ its level of production.
A) lower; increase
B) raise; decrease
C) not change; decrease
D) raise; increase
17. The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200
+ 5Q. What is the variable cost?
A) 5Q
B) 5+(200/Q)
C) 200
D) 5
18. Toby operates a small deli downtown. The deli industry is monopolistically
competitive. Toby tells you that his and every other deli in town is producing the
quantity that minimizes their average total cost. Assuming the delis are maximizing
profits, you know:
A) the delis have excess capacity.
B) the number of delis will soon decrease.
C) the number of delis will soon increase.
D) the delis's prices equal their average total cost.
Version A
Page 5
19. The market for a perfectly competitive industry is in equilibrium at a price of $3, and
the average cost is $2.50. In the long run, we would expect an increase in
A) each firm's profit.
B) each firm's average cost.
C) the number of firms.
D) each firm's output.
20. Suppose a monopoly is producing at the profit-maximizing level of output. Then at that
level of output:
A) demand is price unit elastic.
B) demand is perfectly price inelastic.
C) demand is price elastic.
D) demand is price inelastic.
21. In economics, the short run is the time frame in which the quantities of ________ and
the long run is the period of time in which ________.
A) all resources are fixed; the quantities of all resources can be varied
B) some resources are fixed; the quantities of all resources can be varied
C) some resources are variable; the quantities of all resources are fixed
D) all resources are variable but technology is fixed; technology is variable
22. In a certain textile firm, labor is the only short term variable input. The manager notices
that the marginal product of labor is the same for each unit of labor, which implies that
A) the average product of labor is always equal to the marginal product of labor
B) as more labor is used, the average product of labor falls
C) the average product of labor is always greater that the marginal product of labor
D) the average product of labor is always less than the marginal product of labor
23. Gary's Gas and Frank's Fuel are the only two providers of gasoline in Smalltown. Gary
summarizes his pricing strategy as: "I'll do to Frank what Frank did to me last time."
This is an example of:
A) irrational strategy.
B) dominant strategy.
C) tit-for-tat strategy.
D) none of the above.
24. The broccoli market is perfectly competitive. This means that the price of broccoli is
_____ than the price would be if the market was monopolistically competitive, and
broccoli output is _____ than if it was monopolistically competitive.
A) lower; less
B) greater; greater
C) lower; greater
D) greater; less
Version A
Page 6
25. In short-run equilibrium, a perfectly competitive firm
A) earns a profit only if the firm has no fixed cost.
B) never earns a profit.
C) may earn a profit or a loss.
D) always earns a profit.
26. At the profit-maximizing level of output, what is true of the total revenue (TR) and total
cost (TC) curves?
A) They must intersect, with TC cutting TR from below.
B) They must have the same slope.
C) They must be tangent to each other.
D) They must intersect, with TC cutting TR from above.
Use the following to answer question 27:
Figure: Monopolistic Competition V
27. (Figure: Monopolistic Competition V) The accompanying figure illustrates a firm in the
_____; in the _____, the demand and marginal revenue curves will shift _____.
A) long run; short run; right
B) short run; long run; right
C) long run; short run; left
D) short run; long run; left
28. The owners of gas stations in Bigtown are trying to set up a cartel that will raise the
price of gasoline. Which of the following will increase the chances that the cartel will
fail due to the cheating by the owners?
A) There are only a few gas stations in Bigtown.
B) The firms are currently producing as much as they can.
C) The stations vary in terms of the services that they provide.
D) All Bigtown gas stations face the same costs.
Version A
Page 7
Use the following to answer questions 29-30:
Figure: Payoff Matrix for Gehrig and Gabriel
29. (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.
If both follow a tit-for-tat strategy equilibrium will be reached when:
A) they each produce 7,000 figurines.
B) Gehrig produces 7,000 figurines and Gabriel produces 5,000 figurines.
C) Gehrig produces 5,000 figurines and Gabriel produces 7,000 figurines.
D) they each produce 5,000 figurines.
30. (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) collude and increase production to more than 14,000 figurines.
B) produce 5,000 figurines.
C) produce 7,000 figurines.
D) produce between 5,000 and 7,000 figurines.
Version A
Page 8
Answer Key
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
C
A
D
A
D
A
B
A
A
C
D
C
D
B
B
B
A
C
C
C
B
A
C
C
C
B
D
C
D
C
Version A
Page 9