Temple University
Department of Economics
Economics 52
Principles of Microeconomics
Exam 2
Spring 2005

Key
Mutliple choice answers are at the end of the exam.

Name_______________________________________

Directions: You have 50 minutes to complete the exam.  You must do all questions.  You may neither give nor receive help.  This is a closed book exam.  

Multiple Choice (48 points)

	1.	Supply curves of the form P = a + b*Q, where (a, b) >0, will always have a price elasticity of supply 
	A)	equal to 0. 
	B)	equal to "1/b." 
	C)	equal to 1. 
	D)	that becomes more elastic at higher levels of output. 
	E)	that becomes more inelastic at higher levels of output. 

Use the following to answer question 2:

	2.	The total labor cost of 132 units of output is 
	A)	$55. 
	B)	$5. 
	C)	$10 
	D)	$35. 
	E)	$20. 

	3.	For firms that use crude oil as an input, an increase in the price of crude oil will cause the firm's 
	A)	quantity supplied to increase. 
	B)	supply curve to shift right. 
	C)	quantity supplied to decrease. 
	D)	output price to rise. 
	E)	supply curve to shift left. 
	4.	The long run is defined as 
	A)	a period in which all factors of production are variable. 
	B)	a period in which at least one factor of production is fixed. 
	C)	three years or more. 
	D)	one year or more. 
	E)	a period in which only one factor of production is fixed. 

	5.	The cumulative difference between what buyers are willing to pay and the price they actually pay is 
	A)	consumer surplus. 
	B)	producer surplus. 
	C)	conspicuous consumption. 
	D)	total economics surplus. 
	E)	deadweight loss. 

Use the following to answer question 6:
Figure 7.3

	6.	When the market is unregulated, consumer surplus equals 
	A)	½ *(AJ)*(JE). 
	B)	½*(EH)*(HC). 
	C)	JEHB. 
	D)	½*(AG)*(GI). 
	E)	½*(AB)*(BC). 

	7.	If a per unit tax is imposed, the less elastic the supply curve, the 
	A)	smaller the deadweight loss. 
	B)	smaller the deadweight loss to consumers. 
	C)	more likely the deadweight loss is to be affected. 
	D)	larger the deadweight loss to producers. 
	E)	larger the deadweight loss. 
	8.	If a market is in equilibrium then 
	A)	supply equals demand. 
	B)	the price is "too high." 
	C)	some mutually beneficial transactions between consumers and producers have not taken place. 
	D)	all mutually beneficial transactions between consumers and producers have taken place. 
	E)	the price is "too low." 

Use the following to answer question 9:

At your local bank, two line are open, One and Two, and four customers are in the bank: A,B,C, and D.  Suppose that all customers take exactly 5 minutes to conduct their business.  The time is 9:59:59 am. Line Three will open up at 10:05 am. Notes: 1) Conducting your business is not waiting time to you and 2) It may prove useful to illustrate the positions of new customers in the table.

Line One

Line Two

Line Three

Howard

Bill

Jane

Dan

	9.	At 10:05 am, Line Three is opened and Jane moves into it while Howard remains in his current line.  As a result, Jane's wait time 
	A)	can't be computed. 
	B)	falls to zero. 
	C)	falls to 5 minutes. 
	D)	remains zero. 
	E)	remains 5 minutes. 

	10.	In practice, the price of a share of stock for a particular company is influenced by 
	A)	current and future accounting profits and the interest rate. 
	B)	only current accounting profits. 
	C)	current and future accounting profits, the interest rate, the state of the economy, and a host of other factors. 
	D)	current accounting profits and future accounting profits. 
	E)	only future accounting profits. 

	11.	When the interest rate rises, the calculated price of a share of company stock 
	A)	remains unchanged. 
	B)	rises or falls, depending on investor confidence. 
	C)	falls. 
	D)	rises. 
	E)	should not change but speculation by investors tends to drive it up. 

	12.	The efficient-market hypothesis indicates the stock price of 
	A)	poorly managed companies will rise more slowly than the average. 
	B)	well managed companies must rise faster than poorly managed companies. 
	C)	poorly managed companies are usually undervalued. 
	D)	well managed companies will not necessarily rise faster than poorly managed companies. 
	E)	well managed companies will rise faster than the average. 

	13.	If a monopolist finds that her marginal revenue exceeds her marginal costs at the current level of output, she should 
	A)	do nothing; she has maximized profits. 
	B)	contract production until the difference between marginal revenues and marginal costs is larger. 
	C)	raise her price. 
	D)	expand output until marginal revenue equals marginal costs. 
	E)	expand output until price equals marginal costs. 

	14.	When a perfect competitor sells additional units, 
	A)	total revenues always rise. 
	B)	total revenues always fall. 
	C)	marginal revenues fall. 
	D)	total revenues may rise or fall. 
	E)	total revenues remain unchanged. 

Use the following to answer question 15:
Figure 9.2

	15.	The distance representing the profit maximizing price to the monopolist is 
	A)	GI. 
	B)	0C. 
	C)	0B. 
	D)	0H. 
	E)	0A. 
	16.	An imperfectly competitive firm is one 
	A)	that possesses some degree of control over its price. 
	B)	that faces perfectly inelastic demand. 
	C)	with the ability to set price at any level it wishes. 
	D)	with complete control over how much it produces. 
	E)	that attempts but fails to compete perfectly. 

Problem (32 points)

A market research firm has determined that the demand curve for Sara Tonin’s health elixir is given by P = 80 - 0.3Q.  She has the monopoly franchise for the distribution of this tonic in Deadwood.   Her accountants inform her that the marginal cost for producing the tonic is given by MC = 5 + 0.15Q.

a. What is the algebraic representation, equation, for the marginal revenue curve for Sara Tonin’s elixir?
MR = 80 – 0.6 Q

b. In the space below draw a diagram showing the demand curve, the marginal revenue curve, and the marginal cost curve for Sara’s product.  Be sure to label the axes and include the relevant intercepts.

c. What quantity of tonic should Sara produce?

MR=MC
80-.6Q = 5 + .15Q
Q = 100

d. What price should Sara charge for her tonic?

P = 80 - .3 (100)
P = 50

f.  Show the profit maximizing price and quantity in the diagram you drew above.

g. What is consumer surplus in the market for Sara’s tonic? 

CS = .5(80-50)(100) = 1500

h. Suppose fixed costs are $750.  What profit will Sara earn from the profit maximizing price and quantity you found in your previous answers?

Profit = TR – TC

TR = 5000

TC = 750 + VC
  VC = 5(100) + .5(20-5)(100) = 1250

Profit = 5000 -750 – 1250

i. What is the deadweight loss associated with Sara’s monopoly in the health elixir market?

First, find the quantity at which demand crosses MC.

MC = D

5 + .15Q = 80 - .3Q

Q = 166

DWL = .5(50 – 20)(166-100)
Essay (20 points)  Brevity and clarity are virtues.  You will be graded on spelling, grammar and syntax as well as the content of your answer.

Sara Tonin has hired you as a marketing consultant to help her expand the size of the market for her health tonic.  You have advised her to consider price discrimination.  In the space below write the details of your proposal. 

1.	 There are m classes of consumers in the market for health elixir.
2.	  Each of the m classes of consumers has its own unique elasticity of demand.
3.	  There is no opportunity for arbitrage between the different groups.
4.	  A hurdle, like a rebate coupon, can be used to identify those with lower reservation prices.

From a public policy perspective price discrimination is desirable since it reduces deadweight loss.

Answer Key -- Description

	1.	E	
	2.	D	
	3.	E	
	4.	A	
	5.	A	
	6.	E	
	7.	A	
	8.	D	
	9.	B	
	10.	C	
	11.	C	
	12.	D	
	13.	D	
	14.	A	
	15.	B	
	16.	A