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## Last Name: ____________________

First Name: ____________________
Student Number: ________________

Economics 100
Professor James E. Pesando

Term Test 2 December 4, 2009

Length: 1 hour, 5 minutes

Answer ALL questions in the space provided

Aids: Pen/ Pencil and non-programmable calculator

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1 2 3 4
5 6 7 8
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Examiners report:
question points
1
2
3
4
5

total

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Question 1 (16 points)

The market for beer is perfectly competitive and in long-run equilibrium. Each firm is
identical and its marginal cost and average cost curves have their usual shapes.
The demand curve is downward sloping. Suppose the demand for beer falls sharply
due to unusually cold weather.

(a) Show with the appropriate diagram what happens in the short-run to market
output, market price, and the output and profits of each firm.

(b) Will market price remain at the level in part (a) in the long-run? Explain your

(c) Assume that the market is in long-run equilibrium. The government removes a
\$10,000 tax (a license fee) that had been paid by each producer of beer. Will
this government policy lower price in the short run? Explain your answer.

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Question 2 (12 points)

The total cost to a firm varies with the number of toys it makes as follows:

Toys per week Total Cost

0 \$100
1 \$140
2 \$160
3 \$170
4 \$200
5 \$250

(a) If the firm produces 2 toys, what is the average fixed cost?

(b) If the firm produces 3 toys, what is the marginal cost?

(c) If the firm produces 4 toys, what is the average total cost?

(d) If the firm produces 5 toys, what is the average variable cost?

(e) What is the Law of Diminishing Returns? Is this cost schedule consistent with
the Law of Diminishing Returns? Explain.

Question 3 (16 points)

A monopolist is in long-run equilibrium, sells its output at a single price, and is
earning an economic profit.

(a) In an appropriate diagram, show the monopolists DD curve, MR curve, output,
price and level of profits.

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(b) Is the level of output produced by the monopolist allocatively efficient? Why or
why not?

(c) Suppose the market demand curve is perfectly elastic. In a new diagram, show
the monopolists price, output, and marginal revenue. Is the level of output
allocatively efficient? Explain.

Question 4 (24 points)

Explain whether the following statements are True, False, or Uncertain. (All marks
are for the explanation).

(a) If a monopolist practices perfect price discrimination, consumer surplus will be
the same as in perfect competition.

(b) If both of two firms spend \$1 million for advertising, each earns a profit of \$10
million. If neither advertises, each earns a profit of \$12 million. If one firm
advertises but the other does not, the firm that advertises earns \$13 million, while
the other firm earns \$9 million.

As a result, each firm will earn \$12 million.

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(c) If a profit-maximizing monopolist is producing a level of output that maximizes
total revenue, fixed costs must be zero.

(d) A perfectly competitive industry is in long-run equilibrium, and the market
demand curve is unit elastic (i.e. elasticity is equal to one). If this is a constant
cost industry, and the government imposes a tax of \$10 on each unit sold,
market price will increase by \$5 in the new long-run equilibrium.

5. Multiple Choice. Circle the correct answer. (32 points, 4 each)

1. If a monopolist can segment the market and engage in (imperfect) price
discrimination, the monopolist will produce where:

(a) Price is the same in each market
(b) MR = P in each market
(c) P = MC in each market
(d) Output is equal in each market
(e) None of the above

2. For a monopolistically competitive firm, if average revenue is less than average
variable cost, the firm should:

(a) Shut down, so its losses equal its fixed costs
(b) Increase output
(c) Reduce output
(d) Shut down, so its losses equal its variable costs
(e) Not enough information to answer

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3. A perfectly competitive industry is in long-run equilibrium with a constant cost
industry supply curve. The government then provides a subsidy to every firm of
\$10 per unit of output. As a result, which one of the following statements is
correct in the long run?

(a) Consumer price will decrease by \$10 and industry output would rise.
(b) Consumer price would decrease by less than \$10, and industry output
would rise.
(c) Industry output would decrease and consumer price would be unchanged.
(d) Industry output would increase and consumer price would be unchanged.
(e) None of the above.

4. The price set by a monopolistically competitive firm will increase if:

(a) Marginal costs increase
(b) Fixed costs increase
(c) Average variable costs fall
(d) Fixed costs fall
(e) None of the above

5. A firm has a 15-year patent on a drug (and is thus a monopoly). As usual, the
market demand curve slopes downward. When the patent ends after 15 years,
and other firms can sell the drug:

(a) Market price will rise
(b) Economic profits will rise
(c) Market output will rise
(d) Total costs will fall
(e) None of the above

6. If all the oligopolists in a market collude to form a cartel, total revenue for the
cartel is ________ that of a monopolist.

(a) less than
(b) greater than or equal to
(c) greater than
(d) equal to
(e) none of the above

7. The intersection of a monopolists marginal revenue and marginal cost curves
occurs where output is 20 units, price is \$18, and marginal revenue is \$10. What
is the monopolists profit?

(a) \$360
(b) \$200
(c) \$160
(d) \$320
(e) Not possible to determine

8. An oligopoly has only two firms, which have agreed to charge the monopoly price
of \$40 and to divide the market equally. The monopoly level of output in this
industry is 200. Which of the following statements is true?

(a) Market price will be greater than \$40 if the cartel breaks down.
(b) Marginal cost will fall if the cartel breaks down.
(c) Market output will exceed 200 if the cartel breaks down.
(d) Fixed costs will fall if the cartel breaks down.
(e) None of the above.