SL 151
Bremmer II
April 21, 2000

2nd In-Class Exam - - Chapters 7-9, 13-14

Part I: Multiple Choice (3 points each). For each of the following questions, indicate the best answer.

Questions 1 - 3 refer to Figure 1 which represents a constant-cost, perfectly competitive industry and a firm in the industry.

  1. According to Figure 1, in the long run:
    1. there will be no entry or exit of firms in this industry.
    2. firms will enter and curve F shifts to the right.
    3. firms will exit and curve F shifts to the left.
    4. firms will exit and curve A shifts to the left.
    5. firms will enter and curve A shifts to the right.Answer

  2. In Figure 1, long-run equilibrium in the industry will be reached at a price of:
    1. P1
    2. P2.Answer
    3. P3.
    4. P4.

  3. Referring to Figure 1, the industry's long-run supply curve is:
    1. curve A.
    2. curve F.
    3. curve B.
    4. curve C.Answer
    5. curve E.

  4. If the government impose a $100 lump-sum tax on a firm:
    1. its ATC, AFC, and MC curves shift upwards, but its AVC curve is unaffected.
    2. its ATC, AVC, and MC curves shift upwards, but its AFC curve is unaffected.
    3. its ATC and AFC curves shift upwards, but its MC and AVC curves are unaffected.Answer
    4. its ATC and AFC curves shifts downwards, but its MC and AVC curves are unaffected.
    5. its ATC, AVC, and MC curves shifts downwards, but its AFC curve is unaffected.

  5. Assume a firm's labor union agrees to a wage cut. Then the firm's:
    1. ATC, AFC, and MC curves will shift downwards, but its AVC curve is unaffected.
    2. ATC and AVC curves will shift downwards, but its AFC and MC curves are unaffected.
    3. ATC and MC curves will shift downwards, but its AFC and AVC curves are unaffected.
    4. ATC and AFC curves shifts downwards, but its MC and AVC curves are unaffected.
    5. ATC, AVC, and MC curves shifts downwards, but its AFC curve is unaffected.Answer

  6. In Figure 2, the long-run average total cost curve (LRATC) indicates that there are diseconomies of scale:
    1. between points A and B.
    2. at points A and B.
    3. to the left of point B.
    4. to the right of point B.Answer
    5. to the left of point A.

  7. In Figure 3, what level of labor usage maximizes output?
    1. A.
    2. B.
    3. C.Answer
    4. D.
    5. Can't tell with the information given.

  8. In Figure 3, at what level of labor does diminishing returns sets in?
    1. A.
    2. B.Answer
    3. C.
    4. D.
    5. Can't tell with the information given.

  9. In Figure 3, when is AVC rising?
    1. Only between A and B.
    2. Only between A and C.
    3. To the right of point C.Answer
    4. Only between B and D.

  10. Assume Figure 4 shows a perfectly competitive, increasing-cost industry in short run equilibrium (Note: AC = ATC). What will happen in this industry in the long-run?
    1. Firms will enter and S will shift to the right.
    2. Firms will exit and S will shift to the left.
    3. The MC and the ATC curves will shift down.
    4. A and C.
    5. B and C.Answer

  11. When marginal cost is increasing:
    1. average variable cost must be increasing.
    2. average total cost must be increasing.
    3. total cost is increasing.Answer
    4. average fixed cost is increasing.
    5. marginal product is increasing.

  12. Given a normal, upward-sloping supply curve, suppose that the demand for French bread decreases. What will happen to producer surplus in the market for French bread?
    1. It increases.
    2. It decreases.Answer
    3. It is unaffected by this change in demand.
    4. It decreases briefly, then increases.

    Figure 5 shows the before-trade and after-trade position of Spain in the oil market.

  13. According to Figure 5, before trade, consumer surplus in Spain was:
    1. C.
    2. C + B.
    3. A + B.
    4. A + B + C.
    5. A.Answer

  14. In Figure 5, after trade, producer surplus falls from ____ to ____ .
    1. A + B + C; C
    2. A + B + C; B + C
    3. C + B + D; C + B
    4. C + B; CAnswer
    5. C + B + D; C

  15. Given the information in Figure 5, after trade, society welfare ___ by ___ .
    1. increases; B + D
    2. increases; DAnswer
    3. decreases; B
    4. increases; A + B + D + C
    5. decreases; C

Part II. Short-Answer Questions (55 points). Give a concise, but complete answer for each of the following questions. When appropriate, use math, graphs, or equations to help explain your answers.

  1. Suppose a firm has the short-run production function listed below. Calculate the average product and the marginal product for this production data. Do you feel such a short-run production is plausible? Why or why not? (10 points)
     
    Q 0 30 60 90 120 150 180 210 240 270
    L 0 10 20 30 40 50 60 70 80 90
    AP                    
    MP                    

  2. "A perfectly competitive firm will never operate in the short-run at an output where its average total cost curve is downward sloping." True or false? Explain. (10 points)

  3. Describe how the long-run average cost curve is derived. Why does a firm need to know its long-run average cost curve? Explain which plants would be used over- and under- capacity. Identify the optimal sized plant and tell why its optimal. (15 points)

  4. Starting from long-run equilibrium, trace the short-run and long-run effects of a decrease in demand for a perfectly competitive, constant-cost industry. (10 points)

  5. Assume a market has a downward-sloping demand curve and an upward-sloping supply curve. Using a demand and supply diagram, illustrate and explain what happens to consumer surplus, producer surplus, and society welfare after the imposition of a $1 excise tax on producers. (10 points)