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LOUISIANA STATE UNIVERSITYECONOMICS 2030

SPRING 2010: EXAM 2

SIGNATURE:*

NAME:

LAB MEETING DAY: (^WEDNESDAY FRIDAY

LAB MEETING TIME: 11:40 , 12:40

LAB INSTRUCTOR: MR EMRE UNLU MS TONG ZENG

VERSION JINSTRUCTIONS

1. Read these instructions carefully and DO NOT TURN THIS PAGE until you are told that youmay begin the examination. Fill in the information in the blank spaces above, signing your name whereit says "SIGNATURE" and printing your name where it says "NAME." In addition, CIRCLE your labmeeting day, time, and lab instructor's name.

2. The only materials you may use on the exam are a pencil, an eraser, a highlighter, and asmall scantron (Form no. 882-E). You may NOT use calculators, other electronic devices, scrap paper,or any other materials. Please place all unusable items in a closable receptacle, close the receptacle,and place that under your seat. All electronic devices must be turned off for the duration of the exam.

3. On your scantron please print the following information: Name, Lab Instructor's Name,Lab Section Number, and Test Version Letter.

4. Each question is worth 0.80 points. Each question has only one correct answer: MARK yourchoice clearly on your scantron. Any question on which a single answer is not marked clearly will beconsidered incorrect.

5. To sit for the exam you must have a valid LSU STUDENT ID card. Please place it on your deskwhere it can be seen and leave it there for the duration of the exarn.

6. Once the instructor begins to distribute the exam you may not talk. If you have a question,raise your hand. The question will be answered by the instructor.

7. You have 50 minutes in which to complete the exam. If you finish early, please remainseated and raise your hand. An instructor will collect your test, after which you may leave the room.Please do so quietly.

8. By signing this cover sheet you acknowledge that you have read, understood, and agreedto the conditions enumerated in this list of instructions. Violations of the exam instructions willbe treated as a violation of the Code of Student Conduct and dealt with in accordance with theCode.

v;Suppose the price elasticity of demand for a good is 2.1 and the price elasticity of supply forthe good is 0.9. Suppose further than an excise tax of $10.00-per unit is placed on thegood. Everything else held constant, the j^icejsejlers receive for the good after the tax islevied will be the price they received prior to the tax.A) the same asB) $1.00 lower thanCJ_^ $2.10 lower than

" $7.00 lower than$9.00 lower than

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r;70%)

7 003 ,7

10.60

Suppose that mac and cheese is an inferior good and national income is increasing.Everything else held constant, consumer surplus in the market for mac and cheese will

and producer surplus will . i i Pvice-a

'0

$700

: SOlCf {pf - fVDfl :/•'. .

ambiguous; decreasedecrease; be ambiguousincrease; increase

^increase; be ambiguousEf be ambiguous; increase

LA 'If the price a profit-maximizing firm charges in a perfectly competitive market is less than itsaverage total cost in the , then the firm is earning an economic profit <:" zero,everything else held constant.A)—long run; equal toBJ") short run; less thanC) long run;-less thanD) long run; greater thanE) short run; greater than

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4. Suppose you calculate that the total cost of producing 74 units of output is $370 for yourperfectlyCompetitive firm. If the total cost of producing 75 units of output is $375 and themarket price for your good is $5 per unit, your firm .

[)is operating at its long-run equilibrium when it produces 75 units. $^> ST. M (_will earn a positive economic profit by producing 75 units,should shut down immediately,should decrease output below 74 units.

5. Suppose Michelle's Mitten Mill operates in a perfectly competitive market and is producingits profit-maximizing level of output. Suppose further that at this level of production itsaverage total cost of producing mittens is $18, average variable cost is $16, and marginalcost is $14. Michelle shouldA) increase production since it will increase her economic profit.B) continue to produce since she is covering some of her fixed costs.C) decrease production since it will increase her economic profit.

(J5j[) shutdown immediately.E) continue to produce since she is earning a positive economic profit.

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/e6. Suppose Matt is a manufacturer of magic markers and has a u-shaped average total costcurve. Suppose further that at his current level of production Matt's average total cost ofproducing a magic marker is 60 cents and his marginal cost of producing a marker is 50cents. If Matt wishes to minimize his average total cost, he should his level of market^production, everything else held constant. ^A) not change

increasedecrease

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7. Which of the following is necessarily a characteristic of an oligopolistic market?The goods sold in the market are homogeneous.Firms face significant barriers to entering the market.

LThe goods sold in the market are differentiated.There are many firms selling the good in the market. -r-cJ(/JFirms are price-takers. (yv/ /v * r

8. Which of the following conditions MUST hold if a firm is to engage in price discrimination?-A) -The costs of one consumer transferring the product to another consumer must be lew.'^Sif A firm must be a monopolist in its market.

Consumers must have very similar preferences for the product.A firm must be a price maker in its market.

9. Suppose the productivity of automobile workers decreases. Everything else held constant,isumer surplus in the market for automobiles will and economic surplus will

decrease; decreasebe ambiguous; increasedecrease; increasebe ambiguous; decrease

cincrease; increase

10. As opposed to a non-price discriminating monopolist, an effective price-discrimine

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x

->

x/

monopolist produces) less; more

]) more; moreless; less

D) more; less

output and earns profit.

f

11. Suppose a firm producing one unit of output has a marginal cost equal to $15 and a totalcost equal to $25. In the short run, its fixed cost is equal to

: " ~ '5C) $15.D) $25.E) $45. .

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12. In the short run, a firm's economic profit (ninusYits implicit costs isprofit. — QA) greater than r \" Q _. .̂B)) less thanC) equal to

its accounting

on ~i/Y)

13. Answer true or false to the following statement. In the long run, average total cost isgreater than average variable cost for a profit-maximizing firm operating in amonopolistically competitive market.A) _True.,' False

14. If a non-price discriminating monopolist is maximizing its profits, we know that it has. A ) ) equated its marginal cosFwith its marginal revenue.B), " equated its marginal cost with the market price. /V) ̂ ~ f\/\C) minimized its average total costD) maximized its total revenue.E) maximized its marginal revenue.

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15. Suppose, at a given point in time, Kay's Candle Company operates in a perfectlycompetitive market and is producing its profit-rnaxijnizing level of output. Suppose furtherthat at this level of production its average total cost of producing candles is $2.70, averagevariable cost is $2.30, and marginal revenue is $2.50. AtJNsjTiornent Kay is earningeconomic profits. Over time, everything else held constant, the quantity of candles sold inthis market will . ju/) _ •/.A)- positive; increaseB) negative; increase A-T/ n -Jf\) % negative; decrease

DV" -positive; decrease /\VC *.-oO IOV)C|E) zero; remain unchanged

.

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16.

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Suppose that the price elasticity of demand for tomato juice isjL.4 and the pYice elasticity of '*demand for carrot juice isJLS. Suppose further that the price elasticity of supply for both cjuices is 2J1 If a tax of the same percentage is imposed on both markets, consumers in the

market will bear a relatively larger burden of the tax and the deadweight loss will begreater in the market. Q ^ *~}_

tomato juice; tomato juicetomato juice; carrot juice \t juice; carrot juice

-carrot juice; tomato juice C -7 -OJ_

-'

j/ 17. Monopolistically competitive firms face demand curves and can sell at each

•A).,' downward-sloping; as much as they wantB-) horizontal; only a limited amount

orizontal; as much as they wantdownward-sloping; only a limited amount

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18. Suppose Tim owns a hardware store. He pays his employees $150,000 per year and hisinventory costs him $75,000 per year. Prior to running his hardware store, Tim was thehost of a television show and earned $1 00,000 per year. (Assume these are the only costsTim faces.) Tim's explicit cost of running his hardware store for a year is _ , while histotal cost for a year is ,A) $325,000; $225,000 IB) $225,000; $100,000 1 50 000C) $150,000; $325,000D) ) $225,000; $325,000*£) $150,000; $100,000

19. Suppose the demand for a good is perfectly price elastic and the supply of it is perfectlyprice inelastic. If a tax of $1 per unit is imposed on the consumption of this good, everythingelse held constant, the price the buyer pays for the good willA) increase by less than $1.

decrease by less than $1 . J)-e\OL^P\increase by $1.decrease by $1.

)not change. S;

20, Cartel pricing is most likely to be maintained whenA) ) firms can detect cheating and exact punishment.

there are many firms in the cartel,the firms are producing differentiated goods,the industry is subject to government regulation,there is free entry into the market.

21. Suppose Remus decides to go fishing at Lake Pescaccio on his day off from work, but hefaces a choice: he can fish the west, south, or east side of the lake. His expected catch forthe day is as follows: 3 fish on the west side, 4 fish on the south side, or 5 fish on the eastside. Everything else held constant, Remus' economic surplus from fishing the east side ofthe lake is fish.

A) -2 r-B) -1 ^ - L. -C) OD) 4E) 5

22. Answer true or false to the following statement. The non-price discriminating, profit-maximizing monopolist receives more revenue from new customers by increasing output,but it gets less revenue from existing customers because it has to decrease its price.A) True.'B) False.

iC-IV) \2-23. Jerry's Quarry is a profit-maximizing firm selling building materials in a perfectly competitive

market. At its current level of building stone production, Jerry's has marginal costs equal to$57. If the market price of building stone is $49, Jerry's Quarry should

.'A)- continue producing its current level of building stone.B) increase its production of building stone.

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( C]~) decrease its production of building stone.

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\. Suppose a grocery store issues this newspaper coupon,for canned soup: "Buy Three-Get

One Free with this coupon." With thisoffer, the storels(engaging in second-degree price discrimination.

-"•- not engaging in price discrimination.engaging in third-degree price discrimination,engaging in first-degree price discrimination.

25. Suppose that t-shirts are sold in a monopolistically competitive market. Suppose further thatthe marginal revenue is currently $9 per shirt and the average total cost is $9 per shirt.Over time, everything else held constant, we would expect the t-shirt market.

3 no change in the number of firms infirms to exit /^ n~firms to enter MVC "" JV|C

r 0

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