Micro Exam 2 [Weston]

5/14/2018 Micro Exam 2 [Weston]

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, . ,, I -v- :; ,\ ....117xam 2 -I... ~-(1 " " ~I'\,... ' Spring 2008sco 3312

2. For a pe ctly competitive fum the value of the marginal product oflabor is always equal toth arginal product of labor, . loa Pe price of a unit of output times the physical marginal product of labor. p . ( t A f , _ , : : : . V 1"'" i:the nominal wage. \/MV\.(d) the real wage. M~L~r . t\\l...(e) the value of the marginal product of capital.3. What is Th Big Thing you need to know in explaining the perfectly competitive firm's demandlabor?(a) De nd for labor is inelastic because a business cannot operate without every position filled.b T marginal cost of hiring a unit of labor is generally less than the wage.e fum's demand for labor curve is the value of the marginal product curve. 0: M~c..The firm's demand for labor curve is its marginal cost curve.(e) The demand labor is derived from the demand for capital.

~4 ' i demandfor steelworkers will increase if t..\~ - t 'Wt ! : ) steelworkers' wages fall.. @ , -7J \ '1' l . . -e demand for steel increases.the cost of iron ore, coal, and other steel-making materials increases)((d) there is a reduction of investment in the steel industry.jc '~~ .I' II I ' \)The s pply of labor to produce steel wiIl increase if( ages rise.the demand for steel increases.

1 \ (c) the population grows.(d) a stro, economy creates lots of jobs in all industries. ,.6. The co petitive firm's short-run demand for labor curve has negative slope bec"a:-s-e~:"--+I-'

(a) fi s substitute capital for labor as the wage rises.(b) price per unit of the good falls as more is produced.ore firms enter the industry when the wage falls.() e marginal product of labor decreases as more labor is hired.e FALSE. The demand for labor is vertical because firms need a certain amount of labor regardlessof the wage.


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7. A profit- imizing firm is a price-taker in its input and output markets. At its current level of output. finds at the value of the marginal product of labor is greater than the wage. The firm should( h' more labor. Jire less labor. ~ r \ . . 7(c) reduce wages.(d) increase wages.(e) celebrate and pay a dividend to share holders.eAn increas in the legal minimum wage is likely to cause a decrease in employment because(a) wag come out of profits; firms must hire less labor to maintain their profit level.

w ers can meet their consumption needs with less hours~rk.me workers will have a marginal product that is valued than the higher wage.FALSE. There is no reason to believe that higher minimum wages will cause moreunemployment.

9. What does the principle of compensa ting d if feren t ia ls predict about the earnings of the "keeper of aninn or tavern, who is never master of his own house, and who is exposed to the brutality of everydrunkard ... " (W e alth o f N atio ns, Bk.I, Ch.IO)?r J (a) They will be lower than normal because only low class sorts of persons will be attracted to thatV kind 0 ork.(b) The illbe higher than normal because of the cost of the advanced training required.c T y will be higher than normal to compensate for the unpleasantness of the job.

ey will be the same as anyone else's earnings because of arbitrage.cordi to marginal productivity theory a fum should rent more landsong as the extra value the firm expects to be able to produce by renting that land exceeds theental price of the land.

(b) only if the rental price of the land is less than the wage rate.(c) only if the rental price of the land is less than the value of the marginal product of an additionalunit oflabor.(d) FALSE arginal productivity theory applies only to labor,A

11. Accordi g to marginal productivity theory a firm should invest in more equipment( so ong as the extra value the firm expects to be able to produce by operating that machineryceeds the cost of investing init.(b) only if machines are cheaper than labor.

(c) only if the cost of additional machinery is less thanthe value of the marginal product of anadditional unit of labor.

(d) FALSE. Marginal productivity theory applies only to labor.12. Borrowe . are willing to pay interest and lenders are able to demand interest because

(a) mo ey is a scarce good.(b) pe pie confuse money with wealth.

e banking system has a monopoly on lending.urrently available goods are worth more than goods that don't become available until some timein the future. ~ /.'.\".;(/.-~'..,v fi". r .&,VFt~

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monopoly w e m ean a m arket in w hichthere' a single seller of a product.th e is a single buyer of a product.(c few firm s dom inate a market.

(d) there is a large num ber of firm s that do not necessarily dom inate the m arket, but w hich each havea somewh at d istin ctiv e p ro du ct.(e) the g ove rnm en t is hea vily inv olved .1 4. W hich of the follow ing w ould you not ex pect to see in a m onopo lized m arket?(a ) S ign ific ant b arrie rs to entry .

~(b) Econom ies of scale. .

/(c) E xclusive co ntrol of a unique reso urce.~ ~nsum ers are price-takers.~e producer is a price-taker.

1 5. A m onop t's m a rg in al r ev en ue is P.2YjiVe w hen the p rice ela sticity o f d em an d is(a) ela IC (absolute value greater than ;1 \ . elastic (ab so lute va lu e less th an 1 ).1 1 (c) unit elastic (absolute value equal to 1 ).( d) p er fe ctl y e la stic .(e) F AL SE . E lasticity has no thing to do w ith m arginal revenue, only to tal revenue.1 6. A t th e pro fit-m ax im izing lev el o f o utpu t fo r a m o no po list

(a) m arginal revenue exceeds m arginal co st by the greatest am ount.(b ) profit per unit is m axim ized.c m ar m al revenue is m axim ized.inal rev enu e equ als m arg in al co st.price eq uals a verag e to tal c ost.

successfully pri ce d iscr im ina te a firm mustIe to p reve nt its lo w -priced b uye rs fro m re sellin g to its po te ntial hig h-priced b uy ers.( ave exclusive control over a unique resource.(c) face a perfectly elastic dem and curve.(d) pay bribes to legal officials, since this is illegal.(e) have perfect know ledge of the highest price that each custo mer w ould be w illing to pay .

1 8. ich of the follow ing is not a n e xample o f p ric e d isc rim in atio n? O : u -pow er com pany charging higher ra tes for daytim e electricity use than for nighttim e use. .1\ o vie thea tre cha rging d iffe re nt prices fo r ad ults a nd c hildren . .,.(c D ifferent restaurants charging different prices for the same taco dinner, , ..I~b~d) A co llege using financial a id and scholarships to charge different tuition rates to different \T'studen

h 0 the follow ing is a correct statem ent ab out oligopolies?O ey form a cartel, oligopolies can charge as high a price as they w ish.igo po lies are gu arante ed a pro fit.- c ligopolies w ill alw ays produce a level of output that m inim izes average total costT here is a realistic po ssibility o f oligo po lies colluding since only a few firm s do minate thearket.


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20. Most carle Is fail because(a) restri ing supply causes reduced demand, hence prices fall.the overnment prosecutes them.'ther the members cheat, or the cartel lacks the ability to control external competition.FALSE. Most cartels succeed.

21. In game theory, a dominant strategy is a strategy(a) that allows a business to dominate an industry.

\)(b) anti-trust officials use to calculate the number of firms in an industry,(c) used by advertisers in which by claiming loudly and long enough to be "number one",C ; \ . . . . , ~ 0 1 . ~ so believe this.~lrategy that will always be chosen over other strategies.

the public

22. Which oj-the fOlIO.wing statements best describes monopolistic competition']~ M J h Y firms compete to sell a standardized product.()_ ~any firms compete with differentiated products.V (c) In long-run equilibrium price is equal to minimum average cost.(d) One finn uses low prices to drive all competitors out of business.

23. Monopolistic competition is similar to perfect competition because(a) non-price competition does not occur in either type of market.

{""\ (b) both have homogeneous products.Y c both use advertising.ther are a large number of firms in both types of market.F SE. Monopoly and perfect competition are opposites.

24. Monopolistic competition is similar to monopoly because(a) there i a great deal of non-price competition in both types of market.

,f'. (b) ther are strong barriers to entry in both types of market.\) fi s make economic profits i.n both types of m.arket eve.n in long-run equilibrium.both types of market individual firms face negative-sloping demand curves.ALS _Monopoly and monopolistic competition are opposites.

25. The m n difference between ~ profit and economic profit is that( e onomists consider interest to be a cost, even if It recefVed in the form of dividend to a

iareholder.(b) accountants tend to overstate costs in order to minimize tax liability.(c) accountants do not consider a reward for risk bearing to be cost.(d) economists consider accounting profits to be an unearned income.

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Problem1. (10 pts.) Show the profit-maximizing price and quantity, and the total profit, for the monopolisticfirm in the diagram below. Assume the firm charges the same price for every unit sold.$/Q

f l : k th , V - I r - V - : \ - f . Q..~W

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Indicate whether the following are TRUE or FALSE (1 pt. each) and explain why (4 pts. each).What is the relevant principle? Can you show that you understand the principle? Can you show how itapplies to the question? .1. According to economic theory we would not expect women to earn lower salaries than men for ther . : : : l same jobs, if their skill levels and qualifications are the same.

H - WO~(;~ fM"'- fc ....-J J e ~ 5 }lCl(\. ~I'\( A. +'Y'~I I t t c .. J . ~1 \.A)-I) ~.7c..- , . . ( 1 ~ " . f?,,-~ o F - - , . ( ., . { . ,' W " ' i " "tk~ ' - < > " " " " , , _ r - - . t o . . J . k - " " . . . . - . . . ~ "'l' e:s }k_ s l c . i f I, r . f,..., r. .r ~.-.-. = 1 r v.i.:.: J .1 h " " w c , . . -~r~-~(...(..J-.clV\..> f).,W"""_' ~. __.,., VJ(.,~-~, .f:rMl ~'J ~.,I'L "'( ( \ , v ( / y \ ' \ ( ; ; " ~+:( ~ fi.. J ; V \ . ' & k J

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IM ~ e - 1IAPt-; ' 1 . 1 1 " "~\~ , . 1 \ 1 \ . . . P It~PL.. ,& f > ) C rl,-

.~~=-- r2 . T he fact that B angla~eshi w orke~s. w ho are half as productive as. US w orkers earn only 1 11 0 the w agesshow s that the m argm al pro ductivity theory does not do a go od J ob of ex plaining real w orld w ages.

~(~. ~ ~7"~( f r o J_ ,J . ."r~~"'Y sJ-.1 f i.u, . J t - ~bc~~~ i h , - , V . . , L ( . e t- f~ /VLrr ........ P r r . J e r < . t- c) c: I e . . . ' 4 r = ~.u" ~ ~vJ);-7 L . _ " r t o ~ ~ by.ft.v, ~I ~~~; ~ ~ ~e: '. 2 ~ , < - -fi.- rroJ-


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For possible partial credit (2 pts. maximum per question). Choose up to ten multiple-choice questionsand justify your answer (in the space below, or on the back of the page).You will not get extra credit for justifying an answer that is correct. Thus your best bet is to focus onquestions that you are not confident about.Suggested approaches: (1) Whatdefinition orprinciple is relevant to the question? How does it apply ornot apply? (2) Explai hy you eliminated the alternate choices. (3) Perhaps the question is vague ormisleading. Ifyou ink so, explain why.

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ECO 3312Weston - Exam :2Multiple Choice (3 pts. each)I. How many sellers must there be for a market to

(a) One.(b) A few.~ More than 6 bu t less than 100. .C J A large enough number that no single seller can influence the price by his productive actions.

I'../D/Spring 2009

2. If a wheat farmer operates in a perfectly competitive market, the wheat farmer will be a. t m } price-taker. --( ' b ) price-maker.(c) price discriminator.(d) price-maximizer.(e) product differentiator.

3. Which of the following is not characteristic of a perfectly competitive market?(a) Firms seek to maximize profits.(b) Finns may earn temporary economic profits.(c) There are many firms.

I Firms differentiate their products.(e) There are no barriers to firms entering or leaving the market. f

4. If a firm is a price taker then its marginal revenue(a) is less than the selling price of its output

I is equal to the selling price of its output.c) is greater than the selling price of its output.(d) has no relationship with the selling price of its output.

5. The short-run supply curve for the perfectly competitive firm is(a) its average total cost curve.,~ its short-run marginal cost curve.t c ) its long-run marginal cost curve.(d) its marginal revenue curve.

6. If a perfectly competitive firm smarginal revenue is less than its marginal cost, the firm(a) should raise its price. -(b) should lower its price.(c) increase its output.a decrease its output.

7. The main difference between accounting profit and economic profit is thateconomists consider interest to be a cost, even if it received in the form of dividend to ashareholder.

(b) accountants tend to overstate costs in order to minimize tax liability.(c) accountants do not consider a reward for risk bearing to be cost.(d) economists consider accounting profits to be an unearned income.


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8. ~ monopoly w e mean a m arket in w hichU' there is a single seller of a product.(b) there is a single buyer of a product.(c ) a few finns dominate a market.(d) there is a large number of firms that do not necessarily dominate the market, but which each have

a somewhat distinctive product.(e) the government is heavily involved.

9. Which of the following would ycGect to see in a monopolized market?(a) Significant barriers to entry.(b) Economies of scale.(c) Exclusive control of a unique resource.(d) The consu IIIers are price-takers.

i e , The producer is a price-taker. r- : \ ? M r e c : 7 r Cam Ptk-bon10. A monopolist's marginal revenue is ositiv when the price elasticity of demand iso ~lastic .(absolute value greater than )0) inelastic (absolute value less than 1).

(c) unit elastic (absolute value equal to 1).(d) perfectly elastic.(e) FALSE. Elasticity has nothing to do with marginal revenue, only total revenue.

11. At the profit-maximizing level of output for a monopolist(a) marginal revenue exceeds marginal cost by the greatest amount.(b) profit per unit is maximized ..(c) marginal revenue is maximized,emarginal revenue equals marginal cost.(e) price equals average total cost.

12. In order to successfully price discriminate a finn must, t J l j be able to provent its low-priced. buyers from reselling to its potential high-priced buyers.( ' b ) have exclusive control over a unique resource.(c) face a perfectly elastic demand curve.(d) pay bribes to legal officials, since this is illegal.(ej.Iiave perfect knowledge of the highest price that each customer would be willing to pay.

13. Which of the following is a COITectstatement about oligopolies?(a.) If they form a cartel, oligopolies can charge as high a price as they wish.(b) Oligopolies are guaranteed a profit.(c) Oligopolies will always produce a level of output that minimizes average total cost.

There is a realistic possibility of oligopolies colluding since only a few firms dominate themarket.

14. Most cartels fail because(a) restricting supply causes reduced demand, hence prices fall.(b) the government prosecutes them.t: ) either the members cheat, or the cartel lacks the ability to control external competition.(d) FALSE. Most cartels succeed,

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15. In game theory, a dominant strategy is a strategy(a) that allows a business to dominate an industry.(b) anti-trust officials use to calculate the number of firms in an industry.(c) used by advertisers in which by claiming loudly and long enough to be "number one", the public

comes to believe this.0 ' a strategy that will always be chosen over other strategies.16. Which of the following statements best describes monopolistic competition?

(a) Many firms compete to sell a standardized product. t ' S oo Many firms compete with differentiated products .. e-..( o s + - r c o c f . le6-fCUt.raJt(c) In long-run equilibrium price is equal to minimum average cost.(d) One firm uses low prices to drive all competitors out of business.- - - - ~ ~1,...7-:Monopolistic cOffip.l-ritionis similar t~LcolHJ'letrfion becausey - a : - ) on-price competition does not occur in either type of market.(b) both have homogeneous products.(c) both use advertising,l ! I J there are a large number .Off irms in .bot.h types. of ..market.( C ) FALSE. Monopoly and perfect competition are opposites.

18. Monopolistic competition is similar to monopoly because(a) there is a great deal of non-price competition in both types of market.(b) there are strong barriers to entry in both types of market.(c) firms make economic profits in both types of market even in long-run equilibrium. in both types of market individual firms face negative-sloping demand curves.(e) FALSE. Monopoly and monopolistic competition are opposites.

19. For a perfectly competitive firm the value of the marginal product of labor is always equal to(a) the marginal product of labor." the price of a unit of output times the physical marginal product of labor.(c) the nominal wage.(d) the real wage.(e) the value of the marginal product of capital.

20. What is The Big Thing you need to know in explaining the perfectly competitive firm's demandlabor? ~(a) Demand for labor is inelastic because a business cannot operate without every position filled.(b) The marginal cost of hiring a unit of labor is generally less than the wage.'0 ' The firm's demand for labor curve is the value of the marginal product curve.(d) The finn's demand for labor curve is its marginal cost curve.(e) The demand labor is derived from the demand for capital.

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21. The demand for steelworkers will increase if(a) steelworkers' wages fall.o the demand for steel increases.(c) the cost of iron ore, coal, and other steel-making materials increases.(d) there is a reduction of investment in the steel industry.

22. The supply of labor to produce steel will increase if(a) wages rise.(b) the demand for steel increases.) the population grows.(d) a strong economy creates lots of jobs in all industries.

23. A profit-maximizing firm is a price-taker in its input and output markets. At its current level of outputit finds that the value of the marginal product of labor is greater than the wage. The finn shouldQhire more labor.(b) hire less labor.(c) reduce wages.(d) increase wages.(e) celebrate and pay a dividend to share holders.

24. What does the principle of compensating differentials predict about the earnings of the "keeper of aninn or tavern, who is never master of his own house, and who is exposed to the brutality of everydrunkard ... " (Wealth of Nations, Bk.I, Ch.l0)?(a) They will be lower than normal because only low class sorts of persons will be attracted to thatkind of work.(b) They will be higher than normal because of the cost of the advanced training required.o They will be higher than normal to compensate for the unpleasantness of the job.(d) They will be the same as anyone else's earnings because of arbitrage.

25. According to marginal productivity theory a firm should rent more landG) so long as the extra value the finn expects to be able to produce by renting that land exceeds therental price of the land.(b) only if the rental price of the land is less than the wage rate.(c) only if the rental price of the land is less than the value of the marginal product of an additional

unit of labor.(d) FALSE. Marginal productivity theory applies only to labor.

26. According to marginal productivity theory a finn should invest in more equipmentG so long as the extra value the firm expects to be able to produce by operating that machineryexceeds the cost of investing in it.(b) only if machines are cheaper than labor.

(c) only if the cost of additional machinery is less than the value of the marginal product of anadditional unit of labor.(d) FALSE. Marginal productivity theory applies only to labor.

27. Diminishing marginal utility means that as a consumer obtains more of a good(!) the total utility decreases.(B ) the marginal utility decreases.(c) the total utility becomes negative.~ (d) the marginal utility becomes negative.

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28. Moving from one point to another on an indifference curve leaves the consumer.(a) worse off.(b) better off.(c) in equilibrium.(j) neither better nor worse off.

29. The marginal rate of substitution in consumption tells us(a) which indifference curve the consumer is on.(b) the price ratio of the two goods.(c) how much of one good the consumer must sacrifice to get some of the other.0) how much of one good the consumer is willing to sacrifice to get some of the other, whileremain ing ind ifferent.

30. What is the connection between the equi-marginal condition and the individual demand curve for agood? -C > Jfthe price of a good decreases the equi-rnarginal condition is disrupted; so the consumer mustbuy more of that good to attain a consumer optimum.

(b) If the consumer is on the margin he will spend his entire budget for one good. lfthe price of thatgood decreases, he can buy more of it.(c) If the price of a good decreases the consumer can afford to buy more of all goods.(d) There is no connection.

Problem1. (10 pts.) Show the profit-maximizing price and quantity, and the total proOt, for the mOllopcli.s.ti_

firm in the diagram below. Assume t1 le""f i f i i lCliargeS' e same pric~ for eve]; unit sold.$/Q

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Micro Exam 2 [Weston]

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