Temple University

Department of Economics

Microeconomics Mid-term Exam

Get yourself a MIDI player slice!

Directions: You will have one hour to complete this exam. You must do all parts; do not leave anything blank. You may not give or receive help from another student. The exam is closed book, except for your ONE 3x5 card. While the scene for questions 1 through 5 is Dune, the planet in Frank Herbert's sci-fi book, knowledge of the film or book would not help with this economics exam.

Part 1. PROBLEMS

1. (25 points) On the planet of Dune the hallucinogenic drug Melange (spice) is mined in the deserts. The short run relationship between labor inputs and the production of spice is shown below.

a. You must complete the table:

 Labor Total Product Average Product Marginal Product 0 0 - - 1 50 50 50 2 140 70 90 3 240 80 100 4 280 70 40 5 310 62 30 6 330 55 20 7 315 45 -15

b. At what point does the mining operation begin to show diminishing marginal returns to labor? How do you know?

After the third worker since the MP of the fourth worker is lower than that of the third worker.

c. Over what labor input range will the firm operate? Why?

Between 4 and 6.  With the third worker MP>AP and with the seventh worker MP<0

d. From the above information what can you say about returns to scale in the mining of spice on Dune?

We can say nothing about returns to scale from this data.   Returns to scale is a long run concept and the data is for the short run.

2. (25 points) This question deals with the cost structure of spice mining by the House of Atreides on Dune. The table from question 1 is reproduced in part below.

a. You should transfer your answers from the Total Product column of the previous table to the appropriate column below and complete the table. Note that fixed costs are 50 Acquas (the unit of currency). The fixed costs cover the fixed capital stock: Ornithopters, Sandcrawlers, etc.

Variable costs are 50 Acquas per unit of labor. Complete the following table:

 Labor Input Total Product Fixed Costs Variable Costs Total Costs Marginal Costs Average Variable Costs Average Total Costs 0 0 50 0 50 - - 1 50 50 50 100 1 1 2 2 140 50 100 150 5/9 5/7 15/14 3 240 50 150 200 5/10 5/8 5/6 4 280 50 200 250 5/14 5/7 25/28 5 310 50 250 300 5/3 25/31 30/31 6 330 50 300 350 5/2 10/11 35/33

b. In the short run, below what price will the House of Atreides begin to lose money even if they can sell all they want at that price?

Find the 'price' corresponding to the minimum point on the ATC curve.  That is, 5/6 at an output quantity of 3.

c. Below what price, provided they could sell all they wanted at that price, will the House of Atreides cease its mining operations on Dune?

This happens at the minimum of AVC, namely 5/8 at an output quantity of 3.

3. (10 points) Miss Bea Haven is a patron at a local wine bar known as Grapes of Rath. A glass of the house red costs \$2.50 and Bea's utility schedule (stated in dollars) is shown below:

 Glasses of wine Total Utility Marginal Utility 0 0 1 15 15 2 27.5 12.5 3 32.5 5 4 35 2.5 5 36 1

How many glasses of wine will Bea consume?

Bea will consume 4 glasses of wine.

4. (10 points) Whenever he gets angry the otherwise equable Dr. David Banner turns into The Incredible Hulk. Invariably his transmogrification results in the destruction of some his clothing. At present the doctor has 5 dress shirts in his closet that cost \$10 apiece. In his bureau he has 10 t-shirts that cost \$2 apiece. Banner's research associate has determined that the marginal utility of another dress shirt for the doctor would be 15 and the marginal utility of another t-shirt would be 5. Should Dr. Banner buy more dress shirts or more t-shirts? How do you know?

His current stock of shirts is irrelevant.  We need to know the ratios MU/P for each good.

MUd/Pd = 15/10 = 1.5 and  MUt/Pt = 5/2 = 2.5

The good doctor needs more t-shirts.

Part 3. MULTIPLE CHOICE (30 points)

1. The principle of equal marginal utilities per dollar suggests that:

1. the additional satisfaction from consuming a good eventually declines
2. every good for which you spend identical total amounts are equally useful
3. \$1,000 worth of water and a \$1,000 diamond are identically satisfying to consumers
4. the last cent spent on any item yields the same satisfaction as the last cent spent on any other item
5. All of these.

2. Which of the following is the best example of a moral hazard?

1. purchasing a used computer at a garage sale
2. paying a cabbie in advance to meet you at "this spot" in two hours
3. paying a guide a bonus at the end of your jungle trek
4. leaving the keys in the ignition of your uninsured car

3. When consumers reduce their purchases of a good because of a rise in price, the

1. total utility enjoyed from other goods declines
2. income effect reduces purchases of inferior goods
3. marginal utility from the good rises
4. substitution effect is positive
5. law of diminishing returns is violated

4. "Double taxation" refers to taxation of
a. last year's tax refund as this year's income
b. both corporate income and corporate dividends
c. dividends earned on shares in a credit union account
d. interest accrued on a savings and loan account
e. married people at rates that exceed those of "singles"

5. Your firm produces sets of synthetic fingernail extensions. There is an accounting cost of \$2 per unit in production. You produce 2,000 units of ouput and sell your product at \$4 per unit. We conclude that

1. your firm has economic profits of \$4,000
2. your firm is breaking even
3. you only earn a normal profit
4. your firm also incurs and implicit cost of \$2 per unit produced
5. none of the above are necessarily correct

6. One of the most important differences between a firm's economic profit and its accounting profit is the subtraction of

1. costs incurred when hiring labor, capital, and land
2. any explicit cost incurred by the entrepreneur for risk taking
3. any implicit charges for the use of capital owned by the entrepreneur
4. any taxes on the retained earnings of the firm
5. the costs of distributing the firm's output

7. If average costs decline as a firm expands its productive capacity, then it is experiencing

1. economies of scope
2. vertical integration
3. financial intermediation
4. economies of scale
5. horizontal integration

8. Costs incurred only when production occurs are known as

1. explicit costs
2. fixed costs
3. variable costs
4. technological expenses
5. implicit costs

9. Least cost production requires firms to adjust their inputs until the relative prices of the inputs are equal to the relative

1. prices of outputs
2. total costs for each resource
3. average productivity per resource
4. economies of scale of production
5. marginal products of the inputs

10. If the wage rate is \$5 per hour, and the average physical product for the 5th worker is 10, then average variable cost when 5 workers are employed is

1. \$0.50
2. \$2.00
3. \$1.00
4. \$0.10
5. impossible to calculate given the information above

11. In the long run for a competitive firm

1. P=MC=AFC
2. P=MR=ATC
3. Economic profits are possible for especially effective managers
4. Pure economic losses may be imposed on inefficient firms
5. All of the above

12. If the competitive price is insufficient to cover average total costs, firms should

1. definitely shut down as soon as possible
2. continue to operate where P=MC, if P>AVC
4. cut back and eliminate their overhead
5. operate as long as price covers all fixed costs

13. The demand curve facing a competitive seller is

1. negatively sloped
2. horizontal at the market price
3. 1/n, where n is the number of competitors
4. upward sloping

14. Economic profits

1. cannot exist in the long run in a competitive market structure
2. are the same as normal accounting profits
3. do not include the opportunity cost of the entrepreneur
4. exist whenever total costs exceed total revenue
5. are always present when marginal revenue exceeds marginal cost

15. When a firm achieves its minimum efficient scale of operation

1. it can reduce its average cost by increasing its scale of operation
2. it will no longer experience any economies of scale if it expands its size
3. its long run average cost decreases as the level of output increases
4. its marginal product curve is falling
5. the marginal cost of producing an extra unit of output is zero

16. The value of an entrepreneur's resources that she uses in production are known as

1. explicit costs
2. sunk costs
3. operating expenses
4. technological expenses
5. implicit costs