Temple University
Department of Economics
Economics 52
Principles of Microeconomics
Exam 2
Spring 2005
Key:  The multiple choice question 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.	If the firm produces an output level where price is greater than marginal costs, then the firm should 
	A)	pay more to its variable factors of production. 
	B)	contract output to earn greater profits or smaller losses. 
	C)	leave its output decision unchanged. 
	D)	expand output to earn greater profits or smaller losses. 
	E)	pay more to its fixed factors of production. 

	2.	The reason for the existence of the law of diminishing marginal returns is 
	A)	workers become fatigued as they are required to produce more. 
	B)	the production facility becomes congested. 
	C)	firms become less efficient as they produce more. 
	D)	equipment breaks down more frequently as production expands. 
	E)	as production expands, the firm is forced to hire low quality workers. 

	3.	The firm's output price is $7 and the firm is producing 1,000 units with a marginal cost of $7. The firm should 
	A)	increase production to increase profits. 
	B)	leave production unchanged because it is profit maximizing. 
	C)	decrease production to increase profits. 
	D)	decrease production to lower losses. 
	E)	increase production to lower losses. 

	4.	The firm's output price is $8 and the firm is producing 77 units with a marginal cost of $11. The firm should 
	A)	raise its price. 
	B)	decrease production. 
	C)	hire more workers. 
	D)	increase production. 
	E)	lower its price. 
	5.	Suppose a perfectly competitive industry has an external cost (e.g., noise pollution).  The market outcome will be ______ because the equilibrium price is ______. 
	A)	inefficient; too high 
	B)	efficient; too low 
	C)	efficient; correct 
	D)	inefficient; less than the true cost 
	E)	inefficient; greater than the true cost 

	6.	A price floor exists when price is set 
	A)	too low. 
	B)	too high. 
	C)	at the equilibrium value. 
	D)	above the equilibrium value. 
	E)	below the equilibrium value. 

Use the following to answer question 7:

Figure 7.1

	7.	In the diagram, producer surplus is represented by the points 
	A)	BAF. 
	B)	0AFE. 
	C)	AFC. 
	D)	0CFE. 
	E)	BCF. 

Use the following to answer question 8:

Figure 7.3

	8.	When the market is unregulated, producer surplus equals 
	A)	(DB)*(BC). 
	B)	½*(DG)*(GF). 
	C)	½*(DB)*(BC). 
	D)	½*(FH)*(HC). 
	E)	GBHF. 

	9.	Cost saving developments, e.g., a new production procedure that saves two steps, in a perfectly competitive industry lead to 
	A)	entry by new firms. 
	B)	economic profits by new firms. 
	C)	economic profits for a few firms for a short time. 
	D)	higher consumer prices in the long run. 
	E)	a leftward shift of the supply curve. 

	10.	Economic losses are 
	A)	a signal that reallocation of resources out of the industry needs to occur. 
	B)	less important than accounting losses. 
	C)	very common. 
	D)	present if firms just earn a normal profit. 
	E)	encountered when total revenues minus explicit costs is negative. 

	11.	Which of the following is not an example of implicit costs? 
	A)	The interest the owners could have earned on their personal monies invested in the firm. 
	B)	The return stockholders could have earned with another company. 
	C)	The salary of the CEO. 
	D)	The fees the firm could have earned from leasing its computers. 
	E)	The revenue the firm could collect from selling its furniture. 

Use the following to answer question 12:

Suppose e-mu, an Internet company, will post accounting profits of $750,000 one year from today and $1.5 million two years hence.  The interest rate is 8 percent, inflation will be zero for the next two years and 50,000 shares have been issued.  Tim and Joe are trying to calculate the price of a share of e-mu stock. Joe argues that since inflation is zero and e-mu's profits are certain, the time value of money concept is irrelevant. Tim argues that the time value of money concept is still relevant because consumption today is always preferred to consumption tomorrow. 

	12.	Joe calculates the share price of e-mu to be 
	A)	$45. 
	B)	$42. 
	C)	$187.50. 
	D)	$562.50. 
	E)	$375. 

Use the following to answer question 13:

	13.	The monopoly price, quantity combination in this market is __________ while the perfectly competitive price, quantity combination would have been _________. 
	A)	$6 & 5; $8 & 3 
	B)	$8 & 3; $6 & 5 
	C)	$6 & 5; $6 & 5 
	D)	$8 & 3; $8 & 3 
	E)	$7 & 4; $6 & 5 
	14.	Given the total cost function, TC=531+14*Q, marginal costs are 
	A)	$531. 
	B)	$14. 
	C)	$531/Q. 
	D)	impossible to calculate with information provided. 
	E)	$14/Q. 

Use the following to answer question 15:

	15.	At the point of profit maximization, a perfectly price discriminating monopolist would collect total revenues of 
	A)	$33. 
	B)	$55. 
	C)	$57. 
	D)	$42. 
	E)	$17. 

	16.	When a firm with constant returns to scale uses 30% more of all inputs and input prices remain unchanged, then 
	A)	total costs rise by more than 30%. 
	B)	average costs remain unchanged. 
	C)	total costs rice by less than 30%. 
	D)	average costs rise by 30%. 
	E)	average costs fall by 30%. 

Problem (32 points)

Anita Hart has a monopoly on the production and sale of pomegranate juice, known for its salutary cardiac effects. Her marketing department has determined that the demand for her juice is given by P = 90 – (3/8)Q.  The accounting department reports that the marginal cost for the production of pomegranate juice is given by MC = 10 + (1/4)Q.

a.	What is the algebraic expression, equation, for the marginal revenue curve for Anita Hart’s juice?

MR = 90 – (6/8)Q

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

c. What quantity of tonic should Anita produce?

MR = MC
90-(6/8)Q = 10 + (1/4)Q
Q = 80

d. What price should Anita charge for her tonic?

P = 90 – (3/8)(80) = 60

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

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

CS = .5(80)(90-60) = 1200

h. Suppose fixed costs are $1200.  What profit will Anita earn from the profit maximizing price and quantity you found in your previous answers?

Profit = TR – TC
  TR = 80(60) = 4800

  TC = FC + VC
     VC = 10(80) + .5(80)(30-10) = 1600

Profit = 4800 – 1200 – 1600 = 2000

i. What is the deadweight loss associated with Anita’s monopoly in the pomegranate juice market?

First find where MC crosses demand.

MC = D
10 + (2/8)Q = 90 + (3/8)Q
Q = 128

DWL = .5(128-80)(60-30)

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.

Anita Hart has hired you as a business consultant to help her make her business more profitable.  You have advised her to consider a method by which she would be able to capture more consumer surplus through the expediency of requiring club membership before consumers can buy her product.  In the space below write the details of your proposal. 

1. Determine market demand curve.
2. Determine number of customers.
3. From the profit maximizing price and quantity determine consumer surplus.
4. Fix the membership charge at (consumer supluse)/(number of customers), assuming customers are identical.
5. Anita will still sell the same quantity at her profit maximizing price, but now she will also get all of the consumer surplus.
Answer Key

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