Economics 310

Midterm #2 Study-guide

Spring 2014

Instructor: William L. Koch

Midterm #2 Exam Study Questions: Practice Multiple-Choice Questions 1.

A firm’s short-run average cost is defined as a. the ratio of total output to short-run total cost. b. the ratio of short-run total cost to total output. c. the additional cost of producing one more unit of output while some input is fixed. d. the additional cost of producing one more unit of output while all inputs are fixed.

2.

An increase in the wage rate will have a greater effect on average costs a. the larger the proportion labor costs are of total costs and the easier it is to substitute capital for labor. b. the larger the proportion labor costs are of total costs and the harder it is to substitute capital for labor. c. the greater is the diminishing marginal product of labor. d. the greater are returns to scale.

3.

4.

A firm that sought to “maximize market share” might be modeled as a a. profit-maximizing firm. b. cost-minimizing firm. c. mark-up maximizing firm. d. revenue-maximizing firm. The markup pricing technique involves determining the selling price of a good by a. finding where marginal cost equals marginal revenues. b. adding a profit markup to the marginal cost of producing the last unit of output. c. adding a profit markup to the average cost of producing some “normal” level of output. d. maximizing revenue.

5.

The short-run market supply curve is a. the horizontal summation of each firm’s short-run supply curve. b. the vertical summation of each firm’s short-run supply curve. c. the horizontal summation of each firm’s short-run average cost curve. d. the vertical summation of each firm’s short-run average cost curve.

6.

If the market for hula-hoops is characterized by a very inelastic supply curve and a very elastic demand curve, an inward shift in the supply curve would be reflected primarily in the form of a. higher prices. b. higher output. c. lower prices. d. lower output.

7.

A deadweight loss of consumer and/or producer surplus occurs when

Economics 310

Midterm #2 Study-guide

Spring 2014

Instructor: William L. Koch a. b. c. d. 8.

9.

10.

producers fail to maximize profits. mutually beneficial transactions cannot be completed. consumers do not maximize their utility. the price of inputs increases.

Quotas that limit the quantity of imports of a foreign good provide an incentive for foreign suppliers to: I. Provide higher quality goods. II. Seek more open markets elsewhere. III. Lower prices to be more competitive. IV. Stop all trade with the country imposing the quotas. Which of the above statements are true? a. I and II. b. I and III. c. II and IV. d. I, III, and IV. e. III only. One example of Ricardian rent is a. rent paid to landlords under price controls. b. the difference between the price of a highly demanded unique piece of artwork and the opportunity cost of maintaining it. c. the amount paid to a seller above the equilibrium price of tourist class tickets in order to receive higher quality seats in first class. d. the price rise of wool from a disease among sheep. The slope of the production possibility frontier shows a. the marginal rate of substitution between the two goods. b. the relative marginal costs of the two goods. c. the efficient combination of outputs possible using fixed amounts of input. d. the relative marginal productivities of the two goods.

Answer Sheet for multiple-choice 1.

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3.

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9.

5. 10. Short-answer questions for Microeconomic Concepts

Economics 310

Midterm #2 Study-guide

Spring 2014

Instructor: William L. Koch A subset of these questions will be on the exam. 1. What is meant by the phrase “optimal Scale” when referring to cost curves? Use a graph to illustrate your answer. 2. What are entrepreneurial costs? Give two examples. 3. What is the cost minimizing input choice for a firm? Use a graph to illustrate your answer. 4. What is the definition of a firm’s expansion path? 5. What does it mean to say a firm is a price-taker and how does this affect a firm’s business decisions? 6. What is the definition of the shut-down price for a firm and specifically, what does this mean in the short-run? 7. Describe one alternative to profit maximization. Why would a firm use this strategy instead of profit maximization? 8. Define the Principal-Agent model. What is the major conflict in this model? 9. What’s the rationale behind infant industries and trade policy? Does this correspond to most real world examples? 10. What are two functions of the equilibrium price in the short run? 11. What are two equilibrium market conditions in the long run? 12. What are the distinctions between the Very Short Run, the Short Run and the Long Run? 13. What are the definitions of Consumer and Producer Surplus? 14. What are two reasons why markets fail to achieve economic efficiency? 15. What is the law of one price? 16. What are two assumptions about consumers under a perfectly competitive price system? 17. What are two assumptions about firms under a perfectly competitive price system? 18. Consider the following sentence: “In a competitive market, each firm is a price taker.” Is this true or false? If true, why is it true? If false, why is it false? 19. Country A produces good X with a market price of PDx and prohibits importation of widgets from outside the country. If the World Price for X is less than the domestic price (i.e. P Wx < PDx), what would happen to the domestic price of X in country A if trade restrictions on X were dropped? How would domestic producers of X be affected? 20. In a perfectly competitive market, in the Very Short Run, what can a firm do in response to a shift in market demand and why? In the Short Run what can a firm do in response to a shift in market demand?

Economics 310

Midterm #2 Study-guide

Spring 2014

Instructor: William L. Koch

Practice Quantitative Questions: 1)

A firm has a demand curve given by: q 

and a Total Cost function given by: TC 

324 p2 q3  100 30

where q is output and p is the price

a) What is this firm’s Revenue function and Average Cost function? b) What is the firm’s Marginal Cost function? c) At what level of output will the firm maximize profits? d) The firm’s fixed costs have increased such that q3 Total Cost function is now: TC   150 30 Given this new Total Cost function, will the profit maximizing output level change? If so, why? If not, why not? 2)

Kalget Corporation makes ceiling fans. Its Short-Run Total Cost curve is given by: STC = 4q2 + wq + 20, where w  wage rate of fan makers q  output level of fans a) What is Kalget Corporation’s short-run supply curve as a function of price and wage rate? b) What would the wage rate be if the market price were p = 100 and the firm produced 10 fans?

c) If there are 200 firms, all producing ceiling fans with identical cost structures from part a), what would the market supply curve be as a function of price and wage rate? d) If ceiling fan industry wages were given by, w = 10, and Market demand were defined by: Qd = -50P + 1250 What would the market equilibrium output and price (i.e. Q*, P*) be?

Economics 310

Midterm #2 Study-guide

Spring 2014

Instructor: William L. Koch 3) Jakob owns a jewelry store in Bremen that specializes in Bremerhafen Beach Agates (a semi-precious stone). He pays workers to gather stones on the beach and there are no capital costs (i.e. k = 0). Jakob calculates that his production function is: q  16 h , where

q  number of agates found a day h  number of hours he pays employees to look for stones a)

If w  wage rate, what are Jakob’s Total Cost, Average Cost and Marginal Cost curves as a function of q and w?

b)

Observing some of his competitors, he figures he should have average costs of around AC = 10 when his workers gather 160 stones a day. Given this, at what level should he set the wage rate? (i.e. w = ?)

c)

At the wage rate found in part b), what is the Marginal Cost of the 40th stone? What is the Marginal Cost of the 80th stone?