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Which of the following statements about types of market or industry is false?

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Intermediate Microeconomics (ECON 021)

Midterm Exam 2

July/31/2020

STUDENT NAME: __________________________________ SCORE:________/65

Answer All Questions (Time Allowed: 105 Minutes)

PART I

Read each question carefully and select the best response. Circle the appropriate letter of the

response.

1. Which of the following statements about profit maximization is true? A. It is something that all firms actually do. B. It is something which economists believe that all firms actually do. C. It is what economists believe is the most common aim of firms. D. It means that no firms ever make losses.

2. Which of the following statements about types of market or industry is false?

A. There are many firms in both perfect competition and monopolistic competition.

B. Costs must be kept as low as possible in both monopolistic competition and monopoly. C. There may be homogeneous products in both perfect competition and oligopoly.

D. There are barriers to entry in both oligopoly and monopoly.

3. In the short-run, which of the following always gets smaller as output increases?

A. Average fixed cost.

B. Average variable cost.

C. Short-run average cost.

D. Short-run marginal cost.

4. Which of the following would NOT be a factor that would result in a downward sloping

learning curve?

A. The proverbial “practice makes perfect.”

B. The firm is encountering constant or diminishing returns to scale.

C. A decrease in cost per unit of output as workers become more proficient in the

production process.

D. All of the above are reasons for downward sloping learning curves.

5. Which of the following would NOT result in increased efficiency of production through

economies of scope?

A. The firm’s inputs are unique to the final good it produces, which is equally unique.

B. The firm produces two types of goods which have similar inputs and production

processes.

C. The firm develops a complementary service for the good it produces.

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D. All of the above situations would result in increased efficiency as specified under

economies of scope.

6. Which of the following statements about a firm’s average cost curves is false?

A. Its SAC curve will stay put if the price of an input that is fixed in the short run increases.

B. Its SAC curve will stay put if the price of an input that is fixed in the short run increases.

C. Its SAC curve will generally lie above its LAC curve.

D. Its LAC curve will shift upwards if new firms enter its industry and there are external

diseconomies of scale.

7. Which of the following statements about a fixed input is true?

A. Its price is fixed.

B. The quantity of it that a firm can use in the long run is fixed C. The quantity of it that a firm can use in the short run is fixed.

D. The quantity of output that the firm can produce with it is fixed.

8. Which of the following factors does not affect the slope and position of a consumer’s budget line between two products, A and B?

A. The shape and position of the consumer’s indifference curves.

B. The price of A.

C. The price of B.

D. The consumer’s income.

9. When the law of diminishing returns is in effect A. The firm’s marginal product is rising.

B. The firm’s marginal cost is falling.

C. The firm’s average product and average variable costs may be rising, falling, or

remaining constant.

D. None of the above is accurate.

10. The short-run cost functions do NOT work under which of the following assumptions: A. For 2 inputs, labor and capital, labor is variable, capital is fixed.

B. The firm operates with a given level of “state-of-the-art” technology.

C. The firm uses the inputs to produce multiple products.

D. The firm is a price taker in the input market.

11. Which of the following statements about a price ceiling is false?

A. The number of buyers who gain from the ceiling is smaller than the original number of

buyers.

B. The ceiling creates an excess demand.

C. The ceiling generates losers as well as gainers.

D. To have any effect, the price ceiling must be set at a higher level than the original

market price.

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12. Suppose the government introduces a prohibition on the supply or purchase of some substance. Assuming that some suppliers and some users ignore the law, which of the

following could not occur?

A. The price might rise.

B. The price might stay the same.

C. The price might fall.

D. There would be no price because the market would disappear underground.

13. A profit-maximizing perfect competitor is in short-run equilibrium with an output of 100 per

day.

Which of the following events would not cause it to alter its output in the short-run?

A. A change in the demand for the product it makes. B. A change in the number of other firms in its industry. C. A change in the price of a fixed input. D. A change in the price of a variable input.

14. Which of the following describes the relationship between production and cost? A. Cost is production expressed in monetary terms.

B. The limiting assumptions of short-run production analysis apply to short-run cost

analysis.

C. Total variable cost is the ‘mirror image’ of total product.

D. All of the above accurately describe the relationship between production and cost.

15. The effect of the law of diminishing returns to a variable input can be seen in the short-run

cost curves as:

A. Total cost increases at a decreasing rate when the firm is encountering diminishing

returns.

B. Marginal cost is increasing.

C. The firms total cost per unit of output (ATC) is increasing.

D. All of the above are true

16. Under which of the following circumstances would the incidence of a specific tax fall wholly on consumers?

A. Demand is perfectly elastic. B. Supply is perfectly elastic C. Both demand and supply have unit elasticity. D. Under all circumstances.

17. Which of the following statements about a firm which is a price-taker is false? A. The firm will sell its product at the going market price.

B. The demand curve faced by the firm is downward sloping.

C. The demand curve faced by the firm is horizontal even though the market demand curve

is downward sloping.

D. The firm would sell nothing if it set a higher price than the market price.

18. All of the following describe or affect the behavior of long-run costs EXCEPT:

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A. When the firm is encountering increasing returns to scale, long-run average cost (LRAC)

is decreasing.

B. The long-run is considered to be a part of a manager’s planning horizon.

C. Relatively high fixed costs in the long-run determine the shape of the LRAC curve.

D. If the firm is encountering constant returns to scale, LRAC is constant over that range of

plant sizes.

19. Under which of the following circumstances would a firm be operating at ‘maximum plant

capacity’:

A. The firm is operating at minimum short-run average total cost.

B. The firm is operating at minimum long-run average cost.

C. The firm is operating at minimum efficiency scale.

D. All of the above reflect firms operating at “maximum plant capacity”.

20. Which of the following statements about barriers to entry is false? A. They help to make a market contestable. B. They may include a fear of sunk costs. C. They may include a lack of know-how. D. They may include the well-known brand names of existing firms.

21. To see whether a firm is making an economic profit, which of he following should be

deducted from its revenue?

A. Its explicit costs only.

B. Its explicit costs plus depreciation.

C. Its implicit costs only.

D. Its explicit costs and its implicit costs.

22. Which of the following does the principle of diminishing marginal utility say about what happens when a consumer consumes more of a product?

A. The consumer’s total utility will be unaffected.

B. The consumer’s total utility will diminish.

C. The consumer’s marginal utility will diminish.

D. The consumer’s marginal utility will become negative.

23. Which of the following factors does not help to explain why most indifference curves between consumer products slope down to the right and are curved rather than straight?

A. The principle of diminishing marginal utility.

B. The fact that both products concerned are regarded as desirable.

C. The fact that most pairs of products are not perfect substitutes.

D. The fact that the further an indifference curve is from the origin, the more total utility it

represents.

24. Which of the following describes the point at which the firm moves from the planning

horizon (long-run) to the operating horizon (short-run)?

A. The firm has determined the appropriate plant size to build.

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B. The firm begins construction on a new plant.

C. The firm begins production at a new plant.

D. The firm considers increasing its productive capital (production equipment and

machinery).

25. If marginal cost (MC) for some level of output (q) is $5.00: A. if average variable cost (AVC) at that level of output is $6.00, AVC must be falling.

B. if average total cost (ATC) is $7.00 at that level of output, ATC must be rising.

C. if marginal cost for the next unit of output above the given level (q+1) is $5.50, the firm

is encountering increasing returns to the variable input.

D. if marginal cost for the next unit of output above the given level (q+1) is $4.50, the firm

is encountering diminishing returns to the variable input.

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PART II: Answer all questions in this part. (Total marks 40)

QUESTION 1:

Dongfeng Automobile Company (DAC) a large automaker. The accompanying table shows DAC’s

long-run average total cost.

a. (3 Marks). For which levels of output does DAC experience increasing returns to scale?

b. (3 Marks). For which levels of output does DAC experience decreasing returns to scale?

c. (3 Marks). For which levels of output does DAC experience constant returns to scale?

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QUESTION 2

(a) (5 Marks) Fill in the missing spaces of the table.

Q P TR AR MR

0 $4.50

1 4.00

2 3.50

3 3.00

4 2.50

5 2.00

6 1.50

(b) (2.5 Marks) What is the relationship between P and AR?

(c) (2.5 Marks) What is the relationship between P and MR?

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QUESTION 3 (9 Marks)

Baiyun Airport MacDonald Outlet owns three ice cream machines for its ice cream unit. It also has

other inputs such as refrigerators, ice cream mixer, cups, sprinkle toppings, and, employees. It

estimates daily production function by varying the number of workers employed (and at the same

time, other inputs) as shown in the table below:

i. What are the fixed inputs and variable inputs in the production of cups of ice cream?

ii. Represent the information on a graph.

iii. What is the marginal product of the first, second and third workers? Why does it show a

decline as the number increases?

Quantity of labor

(employees)

Quantity of ice cream

(cups)

0 0

1 110

2 200

3 270

4 300

5 320

6 330

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QUESTION 4 (12 Marks)

i. If the price is rmb10, and wage is rmb250 per person.

ii. Complete the table by filling the spaces

Labor (L)

Number of

Workers

Output

(packs per

week)

Marginal

Product of

Labor

Value of the

Marginal

product Wage

Marginal

profit

0 0

1 100

2 180

3 240

4 280

5 300

iii. Use the data obtained to draw the marginal product of labor curve.

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