SO 151
Bremmer
January 24, 1997
Second In-Class Exam - - Chapters 21-24

Part I. Multiple Choice (3 points each). Indicate the best answer for each question.
1. The marginal product of labor is zero:
A. when output is at its short-run maximum.
B. when average product is maximized.
C. when diminishing returns sets in.
D. between stage I and stage II of production.

2. The average product of a variable input falls as more of that input employed:
A. only if marginal product is negative.
B. only if marginal product is less than average product.
C. over the entire range of diminishing returns.
D. only if AVC is decreasing as output increases.
3. Referring to Figure 1, an increase in the price of a firm's fixed cost will shift:
A. curve A upward.
B. curve B upward.
C. curve C upward.
D. All three curves upward.

4. Referring to Figure 1, an increase in the price of a firm's variable input will shift:
A. curve A upward.
B. curve B upward.
C. curve C upward.
D. All three curves upward.

Figure 2 represents a firm operating in the long run. Curves I, II, and III represent different firm sizes.
5. Referring to Figure 2, the output that uses firm size I as efficiently as possible is:
A. output A.
B. output B.
C. output C.
D. output D.

6. Referring to Figure 2, firm size III:
A. illustrates that large firms are always more efficient than small firms.
B. is the most efficient size to produce output D.
C. is larger than the optimum size of the firm.
D. Both B and C.

7. Referring to Figure 2, if the firm produces output A in the long run, it:
A. experiences economies of scale and underutilizes capacity.
B. experiences diseconomies of scale and overutilizes capacity.
C. experiences constant returns to scale and utilizes its capacity as efficiently as possible.
D. None of the above.

8. In a perfectly competitive, decreasing-cost industry:
A. a long-run increase in the number of firms increases the firms' costs at every level of output.
B. a long-run increase in the number of firms decreases the firms' costs at every level of output.
C. a long-run increase in the number of firms doesn't affect the firms' costs.
D. None of the above.

Questions 9-12 refer to Figure 3 which represents a perfectly competitive, constant cost industry and a typical firm in the industry.
9. In the long run:
A. there will be no entry or exit of firms in this industry.
B. entry of firms will shift curve A to the right.
C. exit of firms will shift curve A to the left.
D. entry of firms will shift curve F to the right.

10. Long-run equilibrium price in the industry is:
A. price P1.
B. price P2.
C. price P3.
D. Can't tell.

11. The long-run, industry supply curve is:
A. curve A.
B. curve B.
C. curve C.
D. curve E.

12. The firm's short-run shut-down point is at:
A. price P1.
B. price P2.
C. price P3.
D. price P4.

13. In the long run, a monopolist's economic profit:
A. must be zero.
B. must be positive.
C. must be negative.
D. must be zero or greater than zero.

14. A monopolist faces:
A. a perfectly elastic demand curve because it can't affect market price.
B. a perfectly inelastic demand for its product because there are no close substitutes.
C. the market demand curve for its product.
D. None of the above.

15. A monopolist:
A. cannot maximize profit by producing where demand is unitary elastic.
B. will maximize profit where demand is unitary elastic if all costs are fixed costs.
C. will maximize profit where demand is unitary elastic if all costs are variable.
D. will maximize profit where demand is unitary elastic if it has fixed and variable costs.

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


1. Answer each of the following questions with one or two brief sentences. (15 points)
A. Carefully define the law of diminishing marginal returns. (5 points)
B. Explain why the law of diminishing marginal returns determines the "U" shape of the short-run marginal cost curve. (5 points)
C. Does the law of diminishing marginal returns explain why the long-run average cost curve is "U" shaped? Why or why not? (5 points)
2. Below are the short-run average total cost schedules for three plants of different size which a firm might build to produce its product. Assume that these are the only possible sizes of plants which the firm might build. What is the long-run average cost schedule for the firm? Show it in the second table below and briefly explain how you arrived at your results. (10 points)

Plant Size X Plant Size Y Plant Size Z
Output ATC Output ATC Output ATC
5 $10 5 $13 5 $72
10 9 10 12 10 65
15 8 15 11 15 52
20 7 20 10 20 41
25 6 25 8 25 33
30 9 30 7 30 20
35 12 35 9 35 15
40 18 40 12 40 14
45 20 45 17 45 12
50 23 50 19 50 14
55 29 55 25 55 20
60 31 60 33 60 30




Output		 Long-Run
Average Cost		 Plant Size
Used (i.e., X, Y, or Z)
5    
10    
15    
20    
25    
30    
35    
40    
45    
50    
55    
60    



3. Assume a perfectly competitive, increasing-cost industry is initially in long-run equilibrium. Analyze the short-run and long-run effects of a decrease in demand. Be sure to mention what happens to market price, market output, the output of the typical firm, and the profits of the typical firm in the short run and long run. (Hint: Use two diagrams, one showing the market demand and supply curves, and the other showing the ATC and MC of a typical firm.) (20 points)


4. How does the imposition of a $1/unit excise tax affect a monopolist's profit-maximizing price and output? Show a diagram and briefly explain. (10 points)