ECON 251 Exam 2 Pink Spring 2011Practice Exam 2A for Fall 2011

1. Andy spends his entire income on Coca Cola and orange juice. Suppose that the price of Coke is $0.50, and the price of orange juice is $1.50. If the quantity of Coke is graphed on y-axis and the quantity of juice is graphed on the x-axis, what is the slope of the budget line? a. -3 b. -1/3 c. -0.75 d. -8.5 2. Andys income is $4. His total utility derived drinking Coca Cola and drinking orange juice is shown in the chart below. What is Andys marginal utility per dollar spent on the 4th Coke? (Assume prices as given above.) Quantity 0 1 2 3 4 5 6 a. b. c. d. 6 9 12 15 Utility from Coke 0 12 22 30 36 40 42 Utility from Juice 0 24 34 40 45 49 50

3. Given the same information above, when Andy maximizes his utility given his budget, how much utility does Andy get? a. 56 b. 64 c. 84 d. 110 4. Miles has a monthly income of $100 to spend on bird watching trips and fishing trips. The price of one bird watching trip is $20 and the price of one fishing trip is $10. Suppose Miles chooses a consumption bundle such that he is spending all of his money, the marginal utility of his last bird watching is 200 and the marginal utility of his last
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fishing trip is 75. Based on this information, how should Miles change his consumption of bird watching trips and fishing trips, if at all, to maximize his utility? a. Miles should buy more bird watching trips and fewer fishing trips b. Miles should buy fewer bird watching trips and more fishing trips c. Miles should buy fewer bird watching trips and fewer fishing trips d. Miles should not make any changes because he is already maximizing his utility 5. If bird watching trips are an inferior good for Miles, we would expect a decrease in the price of bird watching trips to result in which of the following when Miles maximizes his utility? a. An income effect that increases the quantity of bird watching trips he purchases and a substitution effect that increases the quantity of bird watching trips he purchases. b. An income effect that increases the quantity of bird watching trips he purchases and a substitution effect that decreases the quantity of bird watching trips he purchases. c. An income effect that decreases the quantity of bird watching trips he purchases and a substitution effect that increases the quantity of bird watching trips he purchases. d. An income effect that decreases the quantity of bird watching trips he purchases and a substitution effect that decreases the quantity of bird watching trips he purchases. 6. Rafaela spends all her income on berries and cream. Berries cost $3 per pound, and cream costs $2 per ounce. Currently, she purchases 4 pounds of berries per month and 12 ounces of cream per month. If that combination of berries and cream maximizes Rafaelas utility, then which of the following must be true? a. The marginal utility per dollar spent on the last pound of berries is 1.5 times as great as the marginal utility per dollar spent on the last ounce of cream. b. The slope of Rafaelas budget line is -2/3. c. The marginal utility Rafaela receives from purchasing the last pound of berries is equal to the marginal utility Rafaela receives from purchasing the last ounce of cream. d. None of the above must be true.

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7. The above graph illustrates the effect of a decrease in the price of coffee on Carries consumption and utility. Carrie has $12 of income. Based on the graph, which of the following is true? a. Carrie prefers point B to point A b. Carrie prefers point D to point B c. Carrie prefers point E to point B d. Carrie prefers point E to point C 8. Using the same information, as a result of the decrease in the price of coffee, Carrie changes the number of cups of coffee she drinks from a. 5 to 2 b. 2 to 2.85 c. 2.85 to 5 d. 2 to 5 9. What is Carries marginal rate of substitution at point A? a. 2 b. c. 3/2 d. 1

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10. Based on Carries income and the graph above, the price of coffee fell from ______ to _____. a. $2 to $1 b. $3 to $1.50 c. $6 to $3 d. $4 to $1 11. Based on the same graph and information about Carries income, how much does bundle D cost after the decrease in the price of coffee? a. $8 b. $4 c. $12 d. Cannot be determined 12. Based on the graph above, what type of good is coffee? a. Its a perfect complement of tea b. Its a perfect substitute for tea c. Its a normal good d. Its an inferior good 13. Based on the graph above, the substitution effect of the decrease in the price of coffee ______ Carries consumption of coffee from _____ to ______. a. Increases; 2; 2.85 b. Increases; 2; 5 c. Decreases; 4; 2 d. Increases; 4; 5 14. Diminishing returns imply which of the following? a. Marginal product is negative b. Marginal product decreases c. Profits cannot be positive in the long run d. Diseconomies of scale exist 15. When Pams Paper Patch produces 10 units of output, the marginal cost of production is $18, and the average variable cost of production is $20. For the 11th unit of output, a. The average variable cost must be greater than $20 b. The average variable cost must be less than $20 c. The average total cost must be less than $20 d. The marginal cost must be less than $18

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Q 10 20 30 40 50

AVC AFC 30 30 10

ATC 50

MC

30 40 40

40 4

45 52 80

16. The chart above shows the average variable, average fixed, average total, and marginal costs of producing bicycles. What is the marginal cost of producing the 40th bike? a. 600 b. 45 c. 60 d. 70 17. Based on the same chart above, what are the fixed costs of production? a. $400 b. $300 c. $350 d. $200 18. The chart above indicates that the firm is operating in a. the short run b. the long run c. a perfectly competitive market d. a monopolistically competitive market 19. If average costs fall as output expands in the long run, there are a. Excess efficiencies b. Excess capacities c. Economies of scale d. External diseconomies 20. In the long run, which of the following is true? a. Fixed costs = variable costs b. Total costs = variable costs c. Marginal costs = total costs d. None of the above are true in the long run.

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Firm 1 2 3 4 5

Sales $100 Million $30 Million $300 Million $25 Million $45 Million

21. What is the Herfindahl-Hirschman Index in the market above if only those 5 firms exist in the market? a. 95 b. 475 c. 4, 117 d. 4,142

P MC ATC AVC 40 38 30 MR

20

20

30

22. Based on the graph above for a perfectly competitive firm, what is the market equilibrium price? a. $20 b. $30 c. $38 d. $40 23. If the firm above maximizes profit, the firm will sell a quantity of _____. a. 30 b. 20 c. More than 30 d. Less than 20
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24. What level of profit will the perfectly competitive firm depicted above earn in the short run? a. $40 b. $200 c. $160 d. -$200 25. Based on the same graph of the perfectly competitive firm above, in the long run, firms will _____ this market until profits are _____. a. Enter; zero b. Exit; negative c. Exit; zero d. Enter; positive 26. Which of the following is NOT true of a perfectly competitive market? a. Each firm produces a good that is identical to goods produced by other firms. b. There are many firms in the market c. No firm has any ability to control price d. There are significant barriers to entry Consider the market for a single price monopolist, drawn below (not to scale):

P 30 MC 24 ATC 20 18 12 D 25 Q

MR 15

27. The profit-maximizing monopolist will produce ______units of output and will earn _________ in profit. a. 15; $30 b. 15; $60 c. 25; $105 d. 25; $150
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28. What deadweight loss results from this monopoly? a. $0 b. $30 c. $60 d. $150 29. What level of output would satisfy allocative efficiency in the same monopoly market depicted above? a. 0 b. 15 c. 25 d. The level of output where ATC is minimized. Consider the demand schedule and costs facing a single-price monopolist: Price 10 8 4 2 0 Quantity Demanded 0 1 2 3 4

30. What is the marginal revenue of the 3rd unit sold for the monopolist? a. - $2 b. $2 c. $4 d. $6 31. Based on your answer to the problem above, what can you tell about demand at the quantity of 3? a. Demand is inelastic b. Demand is elastic c. Demand is unit elastic d. Demand is perfectly elastic 32. If the monopoly given in the table above can practice perfect price discrimination, what is the marginal revenue of the 3rd unit sold? a. -$2 b. $2 c. $4 d. $6

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33. Market demand facing the ABC Monopoly Co. is given by the equation Qd = -3P + 240. If the monopolist faces constant marginal cost of $20, what level of output will maximize the monopolists profit? (Assume the monopolist can NOT practice perfect price discrimination.) a. 12 b. 80 c. 90 d. 240 34. Given the equation for demand in the problem above, what is marginal revenue when quantity is 120? a. 0 b. 20 c. 40 d. 80 35. If a natural monopoly is regulated according to a marginal cost pricing rule, a. the monopoly will earn negative profits b. the monopoly will earn positive profits c. the monopoly will earn zero profit d. the monopoly will be forced to set a price equal to the average cost of production 36. Which of the following statements about perfect competition is true? a. In the long run, firm profits are positive b. There is product differentiation across firms c. Firms have some power to influence the price of their product d. Firms are free to enter and exit the industry

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37. The above graph shows the market demand, marginal cost, average total cost, and marginal revenue for a firm in a monopoly. What is this firms profit when it maximizes profit? a. $17.50 b. $55 c. -$17.50 d. -$63 38. A monopoly produces a level of output where __________ in the long run. a. Marginal revenue equals price b. Marginal revenue equals marginal cost c. Marginal cost equals average total cost d. Average fixed cost equals average variable cost 39. Which of the following markets produces a level of output that satisfies allocative efficiency? a. Perfect competition b. Monopoly c. Both a and b d. Neither a nor b 40. When a market achieves allocative efficiency, a. Price equals marginal cost b. Average total cost is minimized c. Marginal cost is minimized d. Marginal revenue equals marginal cost

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