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Directions: You have 120 minutes to complete this exam. Write your answers on the exam. Be sure to budget your time. You must do all of the questions. Point values are shown. This is a closed book exam. All work must be your own. You may use your own calculator, but no other aids are permitted.

1. Multiple Choice (40 points)

1. Production possibilities curves can be used to illustrate:

1. Scarcity
2. Full employment and efficiency
3. Diminishing returns and increasing cost
4. Opportunity costs, and choice
5. All of the above

1. down and to the left
2. in a clockwise rotation
3. up and to the right
4. counterclockwise
5. none of the above

1. surpluses of the good
2. declines in resource costs
3. pressures for research and development
4. shortages of the good
5. buyers' markets

4. Cross-price elasticities of demand are probably most positive for

1. shoe repairs and new shoes
2. syrup and waffles
3. gasoline and limousines
4. college tuition and textbooks
5. coal and iron

5. 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

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. If the wage rate is $5 per hour, and the average physical product for the 5^th 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

9. 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

10. According to the Austrian school of thought, the major driving force of competition is:

    A.  Freedom of entry and exit

2. Many buyers and sellers
3. Homogenous products
4. Entrepreneurial innovation
5. Zero transactions costs

11. Competition for the resources that generate economic profits may lead to

1. Increased prices for complementary goods
2. Losses of economic efficiency
3. Higher production costs
4. A lack of competition
5. Price-making behavior

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

1. Definitely shut down as soon as possible
2. Continue to operate where P=MC if P>AVC
3. Adopt new technologies
4. Cut back and eliminate overhead
5. Operate as long as price covers all fixed costs

13. A monopolist can sell 10 units for $10 each, but selling 11 units forces a reduction in price to $9.95. Marginal revenue for the eleventh unit is:

1. $10.00
2. $9.95
3. $9.45
4. $9.40
5. $109.95

14. Patents are examples of:

1. legal economies of substitution
2. legal barriers to entry
3. natural barriers to entry
4. natural economies of complementarity
5. illegal marginal diseconomies

15. Compared to the outcome of a perfectly competitive market, a nondiscriminatin monopolist tends to:

1. produce less and charge more
2. maximize total profits wherever possible
3. set price in the inelastic range of the demand curve
4. confront a demand curve where P=MR
5. produce more and charge more

16. A nondiscriminating monopolist chooses an economically inefficient level of output because:

1. the difference between MR and MC is maximized
2. P>ATC, so MSB>MSC when MR=MC
3. All consumer surplus is appropriated
4. P>MR=MC, so MSB>MSC when MR=MC
5. Too much is charged for too much production

17. Defenders of large firms in highly concentrated industries may reasonably argue that:

1. some industries have huge capital requirements for each firm
2. some firms must be large because of substantial diseconomies of scale
3. decreasing cost industries are always concentrated
4. increasing cost industries are necessarily concentrated
5. large firms in all industries are always more efficient than small firms

 18. "Good" trusts were long exempt from antitrust action under the:

1. per se approach
2. Sherman Act
3. Clayton Act
4. Acceptable behavior guideline
5. Rule of reason approach

19. Which of the following is largely exempt from antitrust action because of court decisions rather than because of explicit legislation?

1. Agricultural cooperatives
2. Amateur and professional sports
3. Labor unions and collective bargaining
4. Export associations
5. Regulated industries

20. Most markets in the United States economy are:

1. perfectly competitive
2. primarily unregulated monopolies
3. mixtures of monopolistic and competitive elements
4. regulated monopolies
5. governed by the decisions of union leaders

II. Problems

1. (20 points) Warren Peace has an electronic publishing company. There are countless numbers of publishers and people who read content on the world wide web now number in the millions. Complete the following table then answer the questions below it.

The definitions of the variables in the column heads of the table are:

1. Does Warren's firm exhibit diminishing marginal returns to the employment of programmers? If so, with how many programmers? (Hint: you need another column in the table.)

To do this question it helps to add the last column, labeled MPP. Marginal product declines after the fifth worker.

2. At what output price will Warren's company break even?

The breakeven price is $2.58, the minimum of average total cost.

3. What is the shut down price for Warren's company?

The shut down price is $1.26, the minimum of average variable cost.

4. At what rate of output is the firm maximizing economic profit or minimizing economic losses?

2. (20 points) Warren Peace has proven to be a formidable competitor and business strategist. He has driven all other firms from his niche of electronic publishing. Complete the cost and revenue schedules now confronting Warren:

1. What are the fixed costs for Warren's firm? 150
2. What is the break-even price for this firm? Can't tell from the data
3. What is the shutdown price for the firm? If you add the AVC column you can easily see that minimum average variable cost occurs at $59.
4. What is the profit maximizing position for this firm? P=__105_____, Q=___5____

III. Essay (20 points) Concisely state your team's position in the US v. Microsoft mock trial that we staged last week. Be careful to define (i) the relevant market, (ii) state the relevant section of the antitrust law, (iii) state the economic case for and against monopoly, (iv) summarize the testimony offered by your team, and (v) how that testimony makes the case.