SL 151                                                                                                   Name __________________________________________ CM _____

Bremmer II                                                                                           April 18, 2003

 

                                                                                                        2nd In-Class Exam

 

Part I.  Multiple Choice (3 points each).  Indicate the best answer for each question in the space provided.

 

In Figure 1 shows the case of importing both before and after imposition of a tariff.  Assume P1 is the initial world price.

 

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___ 1.     According to Figure 1, imposition of the tariff:

        A.    transfers area C from consumers to producers.

        B.    transfers area E from consumers to the government.

        C.    results in a social deadweight loss equal to area D + F.

        D.    All of the above.

        E.     Only A ad B are true.

 

___ 2.     According to Figure 1, the tariff causes:

A.    producer surplus to fall from G + C to G.

B.    producer surplus to increase from G to G + C.

        C.    consumer surplus to increase from A + B to A + B + C + D + E + F.

        D.    society welfare to increase by area B + D + E + F.

        E.     government tax revenue to increase by area D + E + F.

 

___ 3.     If the government imposes a $1 per unit excise tax on a firm, then:

        A.    the AFC, MC, and ATC curves all shift up by the amount of the tax.

        B.    the AFC and ATC curves all shift up by the amount of the tax.

        C.    the AFC, ATC, AVC, and MC curves all shift up by the amount of the tax.

        D.    the ATC and AVC curves shift up by the amount of the tax.

        E.     the ATC, AVC, and MC curves shift up by the amount of the tax.

 

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___ 4.     Which of the following statements is true given the total cost function: TC = 10Q + 5Q2+100?

A.    Fixed cost equals $100.

        B.    At Q = 10, average total cost equals $70 per unit.

        C.    The marginal cost function is MC = 10 + 10Q.

        D.    All of the above are true.

        E.     Only A and B are true.

 

___ 5.     According to Figure 2, at what point does the law of diminishing returns initially set in?

A.    point A          B.    point B           C.    point C           D.    point D

___ 6.     In Figure 2, at what point is total output maximized?

A.    point A          B.    point B           C.    point C           D.    point D

 

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___ 7.     If marginal product is falling:

        A.    marginal cost must also be falling.

        B.    average product must also be falling.

        C.    average product must be rising.

        D.    average product may be either rising or falling.

        E.     output is increasing at an increasing rate.

 

___ 8.     In Figure 3:

        A.    at output Q1 marginal cost equals the slope of line 0A.

        B.    at output Q2 average variable cost is minimized.

        C.    at output Q2 marginal cost is equal to the slope of line 0B.

        D.    between outputs Q1 and Q2 average total cost is increasing.

        E.     MC is greater than ATC for all output less than Q2.

 

 

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___ 9.     In the long run, when the firm is using the optimal plant size:

        A.    it is using the existing plant as efficiently as possible.

        B.    it is minimizing long-run average cost.

        C.    it is minimizing short-run average cost.

        D.    long-run average marginal cost equals long-run average cost.

        E.     All of the above.

 

___ 10.  Which of the following is associated with a firm experiencing “diseconomies of scale”?

A.    Diminishing marginal returns.

        B.    Increased specialization of production within the firm as plant size increases.

        C.    Deterioration of information and control within the firm as plant size increases.

        D.    Falling long-run average costs.

        E.     Both B and D.

 

___ 11.  If a firm is experiencing economies of scale, then:

        A.    there must be at least one fixed input.                                      D.    the firm is underutilizing current plant capacity.

        B.    diminishing returns have not yet set in.                                   E.     the firm is overutilizing current plant capacity.

        C.    the long-run average cost curve is upward sloping.

 

___ 12.  If the last unit produced and sold by a competitive firm adds $100 to the firm’s revenue and $75 to the firm’s costs, the firm should:

        A.    leave the industry in the short run.           D.    increase output to increase profit.

        B.    increase product price.                                E.     decrease output to increase profit.

        C.    decrease product price.      

 

___ 13.  Price is constant or “given” to an individual firm selling in a purely competitive market because:

A.    there are no good substitutes for the product.

        B.    the firm’s demand curve is downward sloping.

        C.    each firm supplies a negligible fraction of the total supply.

        D.    of extreme brand loyalty due to extensive advertising.

        E.     the industry demand curve is perfectly elastic.

       

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Figure 4 represents the market for a product where S1 is the initial supply curve, and S2 is the supply curve after a $1 per unit excise tax is imposed on every firm in the industry.

 

___ 14.  According to Figure 4:

        A.    the deadweight social loss of the tax equals area FEI.

        B.    the deadweight social loss of the tax equals area BCEI.

        C.    the deadweight social loss of the tax equals area GFI.

        D.    consumers would be willing to pay as much as area HEIK to increase output from 0H to 0K.

        E.     None of the above.

 

___ 15.  According to Figure 4, because of the tax:

        A.    consumer surplus falls by area BCEF.              D.    All of these statements are true.

        B.    producer surplus falls by area ABFG.              E.     None of these statements are true.

        C.    government tax receipts equal area BCEF.

 

 

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Part II.   Short Answer (55 points).  Give a concise, but complete answer for each of the following questions.

 

1.     List the four (4) assumptions of the perfectly competitive model that were discussed in class.  (8 points)

2.     Illustrate and describe how the long-run average cost curve is derived.  (10 points)

 

3.     Answer both of the following questions about the short-run production function.  (10 points)

 

        A.    Define the law of diminishing marginal returns.  (4 points)

 

        B.    Figure 5 shows a production function that is a straight line coming from the origin.  On a separate diagram, sketch the marginal product and average product curves for this production function.  What reservations do you have about this production function?  (6 points)

 

4.     Figure 6 shows the effects of the government paying a per unit subsidy to producers.  S1 is the before subsidy supply curve and S2 is the after-subsidy supply curve.  (14 points)

 

A.    What is the per unit price that consumers have to pay after the subsidy?  (1 points)

       

        B.    What is the per unit price that firms receive after the subsidy?  (1 points)

 

C.    Fill in the following table regarding the impact of the subsidy on social welfare.  (12 points)

 

 

            Before Subsidy

                After Subsidy

                     Change

       

Consumer Surplus

 

 

 

 

       

Producer Surplus

 

 

 

 

       

Government

 

 

 

 

       

Society Welfare

 

 

 

 

 

5.     Figure 7 shows a typical firm in a perfectly competitive industry at short-run equilibrium.  Answer the following questions based on this figure.   (13 points)

       

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A.    Why is 20 units of output the short-run, profit-maximizing level of output?  (2 point)

 

        B.    If the firm sells 20 units of output in the short-run, what is its revenue?  (2 points)

 

        C.    At 20 units of output what is the firm’s total cost?  (2 points)

 

 

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D.    At 20 units of output what is the firm’s variable cost?  (2 points)

 

E.     What is the firm’s fixed cost?  (2 points)

 

        F.     At 20 units of output, what are the firm’s profits?  (1 points)

 

G.    What will happen to the number of firms in this industry in the long-run?  Why?  (2 points)