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MIDTERM 2 - ECONOMICS 1311

October 31, 2024

Name____________________________________________

This exam contains 20 multiple choice questions, each worth 3 points and 4 short answer ques-
tions (each worth 16.25 points) (125 point total). All questions on this exam should be answered.

You have 75 minutes to complete this exam; GOOD LUCK!

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Choose the single best answer for the following 20 questions.

1. A skincare company increases the price of a moisturizer from $40 to $50, and the quantity demanded
decreases from 1,000 units to 800 units. Using the arc price elasticity of demand formula, what is the elas-
ticity of demand for the moisturizer?
a. -0.67.
b. -1.00.
c. -1.33.
d. -1.50.
e. -2.00.

2. Suppose an increase in the price of hair dryers leads to an increase in total expenditures on the hair dry-
ers. Which of the following is true for this price change?
a. Hair dryers are an inferior good.
b. The demand for hair dryers is perfectly elastic.
c. The demand for hair dryers is inelastic.
d. The demand for hair dryers is elastic.

3. Suppose the value of income elasticity of demand for a private college education is equal to 1.5. This
means that
a. every $1 increase in income provides an incentive for a $1.50 increase in expenditures on pri-
vate college education.
b. every $1.50 increase in income provides an incentive for a $1 increase in expenditures on pri-
vate college education.
c. a 10 percent increase in income causes a 15 percent increase in the quantity of private college
education purchased.
d. a 15 percent increase in income causes a 10 percent increase in the quantity of private college
education purchased.
e. a 10 percent decrease in private college tuition will have a large enough income effect to in-
crease spending on private college education by 15 percent.

4. The demand for a product is likely to be more elastic when

a. the share of the total budget spent on the product is small.
b. more complementary products are available.
c. the consumer has a short time to adjust to price changes.
d. more good substitutes for the product are available.
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5. Sophia has a business using no owned capital and makes an accounting profit of $60,000 a year. Sophia
could have worked for Apple with a pay of $50,000 a year, but she would not have had time to run her
business. The economic profit from Sophia's business per year is
a. $110,000.
b. $50,000.
c. $10,000.
d. −$10,000.

6. If a firm's average total costs fall as it produces a larger output,

a. average variable cost must also decline as output expands.
b. marginal cost must also decline as output expands.
c. average fixed cost must be less than average variable costs.
d. marginal cost must be less than average total cost.

7. The long-run average total cost (LRATC) curve

a. indicates the per-unit cost of producing various rates of output with a specific size of plant but
variable levels of labor and technology.
b. indicates the minimum per-unit cost that can be achieved at various output rates when the firm
is free to choose among plant sizes.
c. will be falling when diseconomies of scale are present and rising when economies of scale are
present.
d. is a U-shaped curve.
e. is both a and d above.

8. Which one of the following decisions most clearly reflects a lack of understanding of the concept of
sunk costs?
a. You pay to have your car towed back to the repair shop because it was not fixed properly the
first time.
b. You decide to get a master's degree because you cannot find a job in the field in which you
majored.
c. You decide to purchase a piece of machinery for your business that will eliminate three em-
ployees' positions.
d. You study eight hours for a final exam even though there is no way now that you can pass the
course.

9. If a price-taker firm selling in a competitive market offers its product at a higher price than others, it
will
a. increase its profits.
b. maintain its profit base if the demand for the product is inelastic.
c. be able to expand output.
d. not be able to sell any output.
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10. The price-taker firm should discontinue production immediately if

a. the market price exceeds the firm's average total costs.
b. the market price is less than the firm's average variable costs.
c. the market price is less than the firm's average total costs but greater than its average variable
cost.
d. its accounting statement indicates that it is suffering losses.

11. If resource prices rise and the average total cost of producing a product increases as the firms in an
industry expand output in response to an increase in demand, the long-run market supply curve for the
product will
a. be perfectly elastic (a horizontal line).
b. be perfectly inelastic (a vertical line).
c. slope upward to the right.
d. be more inelastic than the short-run supply curve for the product.

Use the figure below to answer the following question.

12. The average total cost (ATC) and marginal costs (MC) of a firm producing in a price-taker industry
are depicted in the above figure. If the current market price of the firm's product is $3, what output should
this firm produce per day?
a. 10
b. 15
c. 20
d. 25
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13. Which of the following is a true statement?

a. A price-taker firm can sell additional units of output without having to lower its price, while a
price-searcher firm must lower its price in order to sell additional units.
b. A price-searcher firm can sell additional units of output without having to lower its price,
while a price-taker firm must lower its price in order to sell additional units.
c. Both price searchers and price takers can sell additional units of output without having to
lower their price.
d. Both price searchers and price takers must lower their price in order to sell additional units of
output.

14. In both price-taker and competitive price-searcher markets, when an increase in market demand dis-
rupts a long-run equilibrium, it will lead to
a. higher short-run prices and long-run profits.
b. higher short-run prices, short-run profits, and the entry of additional firms into the market.
c. higher short-run prices and the exit of firms from the market due to economies of scale.
d. no change in prices in the short run, but new firms will enter in the long run.

15. In a contestable market, but has only a few sellers, the

a. threat of new entrants will prevent prices from rising above the competitive level.
b. producers will be able to charge prices that are high enough to produce long-run economic
profits.
c. producers will not face new competition because the barriers to entry are high.
d. market will never be expected to come close to the competitive result.

16. The strategy underlying price discrimination is to

a. charge higher prices to customers who have better access to substitutes.
b. charge everyone the same price but limit the quantity they are allowed to buy.
c. increase total revenue by charging higher prices to those with the most inelastic demand for
the product and lower prices to those with the most elastic demand.
d. reduce per-unit cost to the firm by charging higher prices to those with the most inelastic de-
mand and lower prices to those with the most elastic demand.

17. One essential characteristic that is distinctive of an oligopoly market is that

a. the demand curve facing each firm is downward sloping, with a marginal revenue curve that
lies below the firm's demand curve.
b. the decisions of one seller often influence the price of products, the output, and the profits of
rival firms.
c. there is only one firm that produces a product for which there are no good substitutes.
d. there are many sellers in the market and each is small relative to the total market.
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18. Assuming that firms maximize profits, how will an unregulated monopolist's price and output policy
compare with ideal market efficiency?
a. The output of the monopolist will be too large and the price too high.
b. The output of the monopolist will be too large and the price too low.
c. The output of the monopolist will be too small and the price too high.
d. The output of the monopolist will be too small and the price too low.

19. Each member of a cartel

a. faces a temptation to cheat on the agreement because lowering its price slightly below the es-
tablished price will usually increase the firm's sales and profit.
b. faces a temptation to cheat on the agreement because raising its price slightly above the estab-
lished price will usually increase the firm's sales and profit.
c. has no temptation to cheat on the agreement because lowering its price slightly below the es-
tablished price will usually have no impact on the firm's sales and profit.
d. has no temptation to cheat on the agreement because raising its price slightly above the estab-
lished price will usually decrease the firm's sales and profit.
e. has no temptation to cheat on the agreement because lowering its price slightly below the es-
tablished price will usually lower the firm's sales and profit.

20. A monopoly is most likely to emerge in a market when

a. the producers in the market have U-shaped average total cost curves.
b. the price elasticity of demand for the product is high.
c. the cost of entry and exit into the market is low.
d. economies of scale are large relative to market demand.
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Answer the 4 following questions.

1. Kate’s Catering provides catered meals, and the catered meals industry is a price-taker indus-
try. Kate’s machinery costs $100 per day and is the only fixed input. Her variable cost consists of
the wages paid to the cooks and the food ingredients. The variable cost per day associated with
each level of output is given in the accompanying table.

Quantity of meals Total Variable Cost

0 $0
10 $200
20 $320
30 $480
40 $700
50 $1,000

a) How much would this firm produce if the price was $30? Explain.

b) How much would this firm produce if price was $15? Explain.

c) Calculate the firm's profit/loss for the optimal number of meals you found in part (b).

d) Find the minimum price for Kate to produce meals in the short run.

e) There is free entry in this industry and anyone who enters will face the same costs as Kate. Sup-
pose the price of meal is currently $21. Is this a long-run equilibrium? Explain.
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2. Assume you own Gouge-em Energy, which is an unregulated monopolist. The following
table illustrates your demand and total cost schedule. Assume fixed costs are $40.

Price Quantity Marginal Total Rev- Marginal Total Cost

Demanded Cost enue Revenue
$60 1 $50
55 2 $20
50 3 $24
45 4 $29
40 5 $35
35 6 $45
30 7 $60

a. Fill in the missing marginal cost, total revenue, and marginal revenue schedules.

b. Given your demand and cost schedules, what price should you charge if you want to maximize
your weekly profit?

c. What output should you produce?

d. What is your maximum weekly profit?

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3. El Rodeo is one of fifteen Mexican restaurants in a competitive price-searching industry.

a. Let the above figure represent El Rodeo's current short-run market conditions. According
to this figure, what is El Rodeo's profit-maximizing price?

b. Calculate El Rodeo's short-run profits.

c. How will El Rodeo's economic profits change in the long run?

d. In the long run, will there be more or fewer firms in the Mexican food industry?

e. How would this scenario have been different if El Rodeo had been the only Mexican res-
taurant in the industry?
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4. a. What is price discrimination? Give an example of price discrimination.

b. What is one of the two requirements for a firm to conduct price discrimination?

c. What is the second of the two requirements for a firm to conduct price discrimination?

d. How do firms set the prices of their good or service when they price discriminate?

e. Would society be better off if price discrimination was banned? Why or why not?