FINAL EXAMINATION (Version-1)
Intermediate Microeconomics(ECON 520)
December 12, 2000 Professor D. Weisman There are two parts to this examination weighted 50 points each. Please write legibly and think carefully about your answers. You may find that graphical and/or mathematical analysis will assist you in answering some of these questions.
Part I. Multiple Choice (50 points). Please indicate your choice for the best answer to each question on both the standardized answer sheet provided.
1. Which of the following is a positive statement?
a.* A course in microeconomics tends to increase student scores on the law school admissions test (LSAT).
b. College football coaches should not be paid more than economics professors.
c. Smoking should be restricted on all airline flights.
d. Requiring all students to take at least one semester of Calculus is a bad idea.
e. None of the above.
Use the following information to answer the next two questions: The demand for books is: QD = 100 – 2P
The supply of books is: QS = 2P
2. What is the equilibrium price of books? a. 5
b. 10 c.* 25 d. 20
e. none of the above.
3. What is the equilibrium quantity of books sold? a. 25
b.* 50 c. 40 d. 100
4. A business firm faces a demand curve for its product that is given by Q = 24-2P. What price should this firm charge to maximize revenue?
a. 24. b. 12. c.* 6. d. 48.
e. none of the above.
5. The own price elasticity of apples is –0.8 and the cross elasticity of apples with respect to the price of oranges is 0.5. Suppose that the price of apples rises by 10 percent and the price of oranges falls by 4 percent. What will happen to apple demand?
a. a 10 percent increase. b.* a 10 percent decrease. c. a 16 percent increase. d. a 5 percent increase. e. none of the above.
6. Mikey has a utility function given by U = 10 min {2C, M} where C is cereal and M is milk. Cereal costs 4 cents per unit and milk costs 6 cents per unit. If Mikey has income of $8 then to maximize utility Mikey purchases
a. 40 units of cereal and 80 units of milk. b.* 80 units each of cereal and milk.
c. 50 units of cereal and 100 units of milk. d. 100 units each of cereal and milk. e. none of the above.
7. A curve that represents all combinations of market baskets that provide the same level of utility to a consumer is called:
a. a budget line. b. a demand curve. c.* an indifference curve. d. a consumers’ surplus curve. e. none of the above.
8. John’s utility function is given by U = 4P + 2B. Suppose that PP = 2. If John
consumes all B and no P in equilibrium, then a. PB = 2
b. PB < 1
c. PB = 1
d. PB > 2
c.* Q = 100 + 3P + 2I. d. Q = 200I/P.
e. a. and d.
10. The price for a good increases and total expenditures for the good increase. This implies that
a. demand is elastic. b.* demand is inelastic
c. the good is a normal good. d. the good is an inferior good. e. demand is of unitary elasticity.
11. According to the law of diminishing returns
a. the total product of an input will eventually be negative. b. the total product of an input will eventually decline.
c. the marginal product of an input will eventually be negative. d* the marginal product of an input will eventually decline. e none of the above
12. A firm’s marginal product of labor is 4 and its marginal product of capital is 8. If the firm reduces its capital utilization by 2 units but does not want its output quantity to change, the firm should
a. increase its use of labor by 8 units. b.* increase its use of labor by 4 units.
c. maintain the same level of labor utilization. d. reduce its use of labor by 2 units.
e. none of the above.
13. A firm is operating in a range of production where the Law of Diminishing Returns has set in. The firm’s total product when 6 units of labor is employed is 20. The marginal product of the 6th unit of labor is 4. The firm’s total product when 7 units of labor is employed is
a. less than 20.
b.* greater than 20 but less than 24 c. greater than 24.
d. 24.
e. none of the above.
14. Which of the following statements is true regarding sunk costs? a. Sunk costs have zero opportunity costs.
b. Sunk costs cannot be recouped once they are incurred.
c. Sunk costs are irrelevant for making forward-looking decisions. d.* all of the above.
15. Suppose that your grade on this examination is described by the production function G = 1.2A0.5E1, where G is your numerical score, A is ability, and E is effort measured in terms of hours studied. Suppose that A = 100. What is the marginal product of E for the eighth hour studied.
a. 16. b.* 12. c. 10. d. 8.
e. none of the above.
16. Which of the following are true for a profit maximizing firm in equilibrium? a. The difference between R(q) and C(q) is maximized.
b. MR = MC.
c. The slope of R equals the slope of C.
d. No other choice of output will generate a higher level of profits. e.* all of the above.
17. A firm will shut down in the short run when: a. it cannot cover its fixed costs. b. it cannot cover its sunk costs. c. it cannot cover its total costs. d.* it cannot cover its variable costs. e. none of the above.
18. A monopolist operating on the inelastic portion of the demand curve should take what action to increase profits.
a.* raise price b. decrease price
c. keep price at the current level d. cease all advertising
e. none of the above
19. A profit-maximizing monopolist has a constant marginal cost of 4 and charges a price of 8. The price elasticity of demand for the monopolist’s product is a. -1
b.* -2 c. -3 d. -4
e. none of the above
a. values of x less than or equal to 8. b. values of x less than or equal to 10. c. values of x greater than 8.
d.* values of x less than or equal to 4.
e. The DOJ will not approve this merger for any value of x.
Part II. Problems (50 points).
1. (25) The competitive firm’s marginal cost function is given by MC(q) = 10 + 2q, Suppose that the firm’s fixed costs are given by F = 40.
a) (6) What is the competitive price in this market if the profit-maximizing output for the competitive firm is 8?
b) (6) What is the producer surplus for this firm at the profit-maximizing level of output?
c) (6) What are the firm’s profits?
d) (6) Suppose that the firm’s variable costs are given by V(q) = 10q + q2. The firm will not produce in the market unless the competitive price exceeds a certain level. What is that level?
2. The inverse demand function in a market is given by P(Q) = 24 –2Q. The cost function is given by C(Q) = 4nQ, where the positive integer n 0 {1,2,3,….} is the number of firms participating in this market. Suppose that the competitive outcome prevails for all n > 1.
a) (8) Find the monopoly level of output and price in this market? What are the monopolist’s profits?
b) (8) Find the competitive level of output and price in this market when n = 2? What are total profits in this market?
