DSME 1030 Final Exam Sample

NAME: ID: SECTION:

I understand that cheating is unacceptable in DSME 1030. By signing below, I pledge my

honor that I will be honest during the exam by not copying solutions from others, not
using any notes, textbooks, and calculators.

SIGNATURE:

ANSWERS:

1 A 21 D
2 C or D 22 C
3 A 23 C
4 C 24 B
5 D 25 B
6 A 26 D
7 C 27 B
8 D 28 C
9 C 29 D
10 B 30 A
11 C 31 C
12 A 32 B
13 D 33 D
14 A 34 C
15 A 35 C
16 D 36 D
17 E 37 D
18 B 38 E or D
19 A 39 E
20 B 40 B

1
2
1. Industries where economies of scale exist will tend to be
A) served by a single seller or a few sellers. D)less concerned with expanding output.
B) resistant to cutting price. E)perfectly competitive.
C) comprised of many equal sized firms.

2. Assume that a Coase Theorem solution (private negotiation) is impractical for solving
the externality problem illustrated. The efficient equilibrium could be achieved
by
A) banning production of the good.
B) compensating those injured by the externality.
C) taxing the good by an amount equal to the external cost.
D) subsidizing the good by an amount equal to the external benefit.
E) informing the public of the external cost produced by production of the good.

5. The reason economists consider monopoly socially undesirable is the monopolist

A) always earns excessive profits.
B) can charge any price he wants.
C) exploits the inelastic nature of demand.
D) produces less than the socially efficient amount.
E) can treat its consumers with complete indifference.

6. Price discrimination usually _____ consumer surplus and _____ producer surplus.
A) decreases; increases D) increases; increases
B) increases; decreases E) does not change; increase
C) decreases; decreases

7. Market equilibrium in a perfectly competitive market with no externality is considered

efficient because
A) prices are low.
B) the price consumers pay equals the profit producers receive.
C) no more trades remain that benefit some without harming others.
D) excess supply is positive.
E) excess demand is negative.

3
9. Suppose you quit your job to start a business. In the first month, your total revenue
was $6,000. You paid the following costs:
1,000 in monthly rent for office space.
$ 200 in monthly rent for equipment.
$3,000 to your workers in wages for the month.
$1,000 for the supplies you used that month.

You determine that your true profit that month was negative $200. Why?
A) You did the math incorrectly.
B) You accounted for lost salary of $200.
C) You accounted for lost salary of $1000.
D) Your equipment rent is an implicit cost.
E) You inflate your costs to increase business deductions.

10. The existence of a negative externality will result in

A) economic efficiency if there is no government intervention in the market.
B) a greater than socially optimal level of production.
C) prices that are artificially high.
D) elimination of deadweight loss.
E) a less than socially optimal level of production.

4
The following graph is also about a perfectly competitive market. Answer questions 11-
15:

P r ic e
S + Tax
12
S

9 .2 0
8 .8 0
8 .2 0
5
D
4

0 7 8 Q u a n t it y

11. In the absence of a tax, the total economic surplus in the market is
A) $64. B) $40. C) $32. D) $16. E) $8.

12. Suppose a $1 per unit tax is imposed on sellers. The new equilibrium price is ______
and the new equilibrium quantity is ______.
A) $9.20; 7 B) $8.88; 8 C) $8.80; 7 D) $8.20; 7 E) $8.20; 8

13. Suppose a $1 per unit tax is imposed on sellers. The distribution of the tax burden
between consumers and producers is
A) 100% - 0%. B) 60% - 40%. C) 50% - 50%. D) 40% - 60%. E) 0% -
100%.

14. Suppose a $1 per unit tax is imposed on sellers. The total tax revenue raised is
A) $7. B) $5.60. C) $4.80. D) $2.80. E) $1.

15. The deadweight loss from imposing a $1 tax on sellers is

A) 50 cents. B) $1. C) $3. D) $4.50. E) $7.

5
The following graph gives the marginal cost curve, demand curve, and marginal revenue
curve. Answer questions 16-22:

16. The distance representing the profit maximizing level of output to the monopolist is
A) 0H. B) GI. C) 0B. D) 0A. E) 0C.

17. The distance representing the profit maximizing price to the monopolist is
A) 0H. B) GI. C) 0B. D) 0A. E) 0C.

18. At the profit-maximizing level of output, the monopolist collects total revenues equal
to the area defined by
A) 0A. B) 0CEA. C) 0GIH. D) 0BKA. E) 0C.

19. At the point of monopoly profit maximization, consumer surplus is represented by the
area
A) CJE. B) GJI. C) BJEK. D) BCEK. E) GCEI.

20. A perfectly competitive equilibrium would have resulted in a price equal to the
distance __________ and a quantity equal to the distance __________.
A) 0B; 0A B) 0G; 0H C) 0C; BK D) 0J; CE E) 0G; AH

21. The socially optimal equilibrium would yield consumer surplus equal to the area
_______.
A) LEI B) GCEI C) 0GI D) GJI E) GCEL

22. The deadweight loss resulting from monopoly is represented by the area _______.
A) LEI. B) KLI. C) KEI. D) GCEL. E) BGLK.

6
The following graph is about market demand and supply curves in a perfectly
competitive market. Answer questions 23-27:
P
$14

12

10 S

2
D

4 8 12 16 20 24 Q

23. If the market is unregulated, the value of consumer surplus is

A) $4. B) $8. C) $16. D) $24. E) $40.

24. If the market is unregulated, the value of the total economic surplus is
A) $20. B) $32. C) $48. D) $84. E) $124.

25. Suppose a price ceiling is imposed at $4. The value of the consumer surplus is
A) $16 B) $20. C) $24. D) $28. E) $32.

26. Suppose a price ceiling is imposed at $4. The value of the producers surplus is
A) $24. B) $16. C) $8. D) $4. E) $2.

27. The deadweight loss due to the $4 price ceiling is

A) $4. B) $8. C) $12. D) $16. E) $20.

7
The following graph gives the demand curve, private marginal cost curve, and social
marginal cost curve. Answer questions 28-32:

P r ic e
S o c ia l M C
A
M C
B

D em and

0 E F U n its p e r d a y

28. This graph describes a production process that

A) generates positive externalities.
B) is used by a perfectly competitive industry.
C) generates negative externalities.
D) is highly regulated by the government.
E) has been negotiated using the Coase Theorem approach.

29. Compared to the socially optimal level, private market incentives (private market
outcome) would result in this good being _____ by_____.
A) overpriced; BD D) underpriced; BC
B) underpriced; BD E) efficiently priced; 0D
C) overpriced; BC

30. Compared to the socially optimal level, private market incentives (private market
outcome) would result in this good being _____ by_____
A) overproduced; EF D) underproduced; BC
B) underproduced; BD E) efficiently produed; 0E
E) efficiently produed; 0F
31. The deadweight loss associated with private incentives in this market is a triangle
with area equal to _______.
A) ½ 0D times 0E B) ½ 0C times 0E C) ½ EF times AC
D) ½ EF times AB E) ½ EF times BC

32. The social optimum in the market illustrated could be achieved by imposing a
_______ per unit.
A) subsidy equal to DB D) tax equal to BC
B) tax equal to DB E) tax equal to BA
C) subsidy equal to BC

8
The graph on the left depicts market demand and supply curves in a perfectly competitive
market. The left graph shows the cost structure of a representative firm in the industry.
Answer questions 33-40: (Note: ATC stands for average total cost, MC marginal cost)

S
$ /L b $ /lb
1
5 S
5
S2 M C
P
4 4 ATC
3 3 P 1
2 .5
2 2 P 2

1 1
D

50 150 250 500 1500 2500 lb s /y r

1 0 0 0 ’s o f l b s / y r

33. If S is the short-run supply curve for a steak producer, what is the profit maximizing
output for a single firm in the short run?
A) 500 B) 1000 C) 1500 D) 2000 E) 2500

34. At the profit maximizing quantity for a single firm when S is the short-run supply
curve, price will ______ the total cost of the resources required to enter the
market, and firms will _____.
A) be less than; exit the market. D) be less than; enter the market
B) exceed; exit the market E) be same as; enter the market.
C) exceed; enter the market.

35. If S is the short-run supply curve for steak producer, what is the profit (loss) for this
firm?
A) $8000 B) $4000 C) $2000 D) $1500 E) $1000

36. Suppose S is the short-run industry supply curve and all firms are producing at the
profit-maximizing quantity. What will happen to the supply curve in the long run?
A) Quantity supplied will increase but stay on S curve
B) Supply will shift to S1
C) Quantity supplied will increased and will on S1 curve
D) Supply will shift to S2
E) Quantity supplied will decrease

37. What will be the ATC in the long-run equilibrium?

A) $4 B) $3 C) $2.5 D) $2 E) $1

9
38. In the long run, equilibrium price is_____ and firms' profit maximizing quantity is
_______.
A) $4; 100,000 B) $3; 150,000 C) $3; 1,500 D) $2; 200,000 E) $2; 1000

39. What will be the long-run economic profit for this firm?
A) $4000 B) $2000 C) $1500 D) $1000 E) $0

40. If all of the firms in this industry are identical, how many firms will exist in the long-
run equilibrium?
A) 100 B) 200 C) 250 D) 300 E) not enough information to know

10
Short answer questions

1. Larry wants to sell as many drinks as possible without losing money, so he wants to
set quantity where price (demand) equals average total cost, which occurs at
quantity QL and price PL in Figure 6. Curly wants to bring in as much revenue as
possible, which occurs where marginal revenue equals zero, at quantity QC and price
PC. Moe wants to maximize profits, which occurs where marginal cost equals
marginal revenue, at quantity QM and price PM.

2. a. If Kona enters, Big Brew would want to maintain a high price. If

Kona does not enter, Big Brew would want to maintain a high price. Thus, Big
Brew has a dominant strategy of maintaining a high price.

If Big Brew maintains a high price, Kona would enter. If Big Brew
maintains a low price, Kona would not enter. Kona does not have a dominant
strategy.

b. Because Big Brew has a dominant strategy of maintaining a high price,

Kona should enter. This is the only Nash equilibrium.

c. Little Kona should not believe this threat from Big Brew because it is not
in Big Brew’s interest to carry out the threat. If Little Kona enters, Big Brew can
set a high price, in which case it makes $3 million, or Big Brew can set a low
price, in which case it makes $1 million. Thus the threat is an empty one, which
Little Kona should ignore; Little Kona should enter the market.

d. If the two firms could successfully collude, they would agree that Big
Brew would maintain a high price and Kona would remain out of the market.
They could then split a profit of $7 million.

11
3. a. As N rises, the demand for each firm’s product falls. As a result,
each firm’s demand curve will shift left.

b. The firm will produce where MR = MC:

100/N – 2Q = 2Q
Q = 25/N

c. 25/N = 100/N – P

P = 75/N

d. Total revenue = P  Q = 75/N  25/N = 1875/N2

Total cost = 50 + Q2 = 50 + (25/N)2 = 50 + 625/N2

Profit = 1875/N2 – 625/N2 – 50 = 1250/N2 – 50

e. In the long run, profit will be zero. Thus:

1250/N2 – 50 = 0

1250/N2 = 50

N=5

4. When the system is congested, each additional rider imposes costs on other
riders. For example, when all seats are taken, some people must stand. Or if
there isn't any room to stand, some people must wait for a train that isn't as
crowded. Increasing the fare during rush hour internalizes this externality.

12