Exam 2 Study Guide PDF

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Villanova University Department of Economics Economics 1001 Principles of Microeconomics

Dr. Zech Fall 2012 EXAM II

1. (25 Points). Complete the following table for a perfect competitor:: Q 0 1 2 3 4 5 6 7 8

FC

VC

TC

MC

AFC

AVC

50

ATC -----400 225 170 148 140 140 146 156

a) How many units will this firm produce if the price is $182? What will its profits or losses be? Explain. Sketch this situation graphically. b) Answer part a) for a price of $108 c) Answer part a) for a price of $60. 2. (25 points). Assume that Frisbees are an inferior good and that the Frisbee industry is a perfectly competitive, increasing cost industry. Each firm is currently producing at its long run break-even point. Now consumer incomes decrease. Graphically demonstrate and verbally explain the effect on the Frisbee industry in the long run. 3. (20 points). Suppose that Henry Ford had continued to experience increasing returns to scale no matter how large an automobile factory he had built. Graphically demonstrate and verbally explain what the implications of this would have been for the automobile industry. 4. (10 points). According to Gregory Mankiw in his lecture ”The Fiscal Challenges Ahead”, what are the fiscal challenges ahead? 5. (20 points). Answer each of the following:

The following is cost information for the Creamy Crisp Donut Company: Entrepreneur's potential earnings as a salaried worker = $50,000 Annual lease on building = $22,000 Annual revenue from operations = $380,000 Payments to workers = $120,000 Utilities (electricity, water, disposal) costs = $8,000 Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000 Entrepreneur's forgone interest on personal funds used to finance the business = $6,000 1. Refer to the above data. Creamy Crisp's excess profit is: A. $150,000. B. $80,000. C. $230,000. D. $94,000. 2. The basic difference between the short run and the long run is that: A. all costs are fixed in the short run, but all costs are variable in the long run. B. the law of diminishing returns applies in the long run, but not in the short run. C. at least one resource is fixed in the short run, while all resources are variable in the long run. D. economies of scale may be present in the short run, but not in the long run.

3. Refer to the above diagram. The vertical distance between ATC and AVC reflects: A. the law of diminishing returns. B. the average fixed cost at each level of output. C. marginal cost at each level of output. D. the presence of economies of scale.

4. If a firm increases all of its inputs by 10 percent and its output increases by 10 percent, then: A. it is encountering diseconomies of scale. B. it is encountering economies of scale. C. it is encountering constant returns to scale. D. the marginal products of all inputs are falling. 5. Price is constant or given to the individual firm selling in a perfectly competitive market because: A. the firm's demand curve is downsloping. B. of product differentiation reinforced by extensive advertising. C. each seller supplies a negligible fraction of total supply. D. there are no good substitutes for its product. 6. In the short run the individual perfectly competitive firm's supply curve is that segment of the: A. average variable cost curve lying below the marginal cost curve. B. marginal cost curve lying above the average variable cost curve. C. marginal revenue curve lying below the demand curve. D. marginal cost curve lying between the average total cost and average variable cost curves. 7. In a perfectively competitive industry: A. there will be no economic profits in either the short run or the long run. B. economic profits may persist in the long run if consumer demand is strong and stable. C. there may be economic profits in the short run, but not in the long run. D. there may be economic profits in the long run, but not in the short run. 8. When compact disc (CD) players first came on the market, they sold for over $1,000. Now they cost only $100. These facts imply that: A. the CD industry was once competitive, but is now monopolistic. B. fewer firms produce CD players than was the case five or ten years ago. C. the demand curve for CD players has shifted leftward. D. the CD player industry is a decreasing-cost industry. 9. What do economies of scale, the ownership of essential raw materials, and patents have in common? A. They must all be present before price discrimination can be practiced. B. They are all barriers to entry. C. They all help explain why a monopolist's demand and marginal revenue curves coincide. D. They all help explain why the long-run average cost curve is U-shaped. 10. A pure monopolist is producing an output such that ATC = $4, P = $5, MC = $2, and MR = $3. This firm is realizing: A. a loss that could be reduced by producing more output. B. a loss that could be reduced by producing less output. C. an economic profit that could be increased by producing more output. D. an economic profit that could be increased by producing less output....