Temple University
Department of Economics
Economics 52
Fall 2006
2nd  Exam

Directions: You have 50 minutes to complete this exam. You must do all of the questions. Your work is to be your own; you may neither give nor receive help.  This is a closed book exam.  You may not use your cell phone as a calculator.

Name___________________________________
 
MULTIPLE CHOICE (32 points).  Choose the one alternative that best completes the statement or answers the question. 
1) 

The deadweight loss that is due to a tax 

1) 

_______ 
A) 

is caused by an inefficient tax code. 
B) 

is the sum of the gains in consumer and producer surpluses. 
C) 

is the sum of the losses in consumer and producer surpluses. 
D) 

helps restore allocative efficiency. 
E) 

does not impair the efficiency of the market. 

 
2) 

The incidence of a particular tax on a producer or consumer depends upon 

2) 

_______ 
A) 

the elasticities of the supply and demand curves. 
B) 

the price levels in the market. 
C) 

whether the tax is levied by the federal, state, or local government. 
D) 

the size of the market. 
E) 

the quantities exchange in the market. 

 
3) 

A tax that adds a fixed-dollar amount to each unit of a good sold is called a(n) ________ tax. 

3) 

_______ 
A) 

value added 
B) 

income 
C) 

per-unit 
D) 

fixed-fee 
E) 

sales 

 

Use the figure for the question(s) below.

 
4) 

In the figure above, what is the total consumer surplus if market price were $20? 

4) 

_______ 
A) 

$0 

B) 

$40 

C) 

$30 

D) 

$10 

E) 

$20 

 
5) 

Average variable cost is defined as 

5) 

_______ 
A) 

ATC + AFC. 
B) 

VC / Q. 
C) 

ΔTC / ΔQ. 
D) 

TC / Q. 
E) 

FC / Q. 

 
Use the figure for the question(s) below.

 
6) 

The figure above shows the total product of labor for a firm in the short run, with capital fixed. At what number of workers is the marginal product of labor equal to zero? 

6) 

_______ 
A) 

8 

B) 

2 

C) 

10 

D) 

4 

E) 

6 

 
7) 

If a firm's long-run average cost curve is decreasing, the firm has 

7) 

_______ 
A) 

decreasing returns to scale. 
B) 

economies of scale. 
C) 

increasing returns to labor. 
D) 

constant returns to scale. 
E) 

diminishing returns to labor. 

 
Use the table for the question(s) below.

 
8) 

The table above gives marginal cost data for a perfectly competitive firm. The current equilibrium price of the product is $25. What is average total cost at the profit-maximizing point? 

8) 

_______ 
A) 

6 
B) 

0 
C) 

2 
D) 

5 
E) 

There is insufficient information to determine average total cost. 

 
9) 

A perfectly competitive firm is selling 500 units at a price of $20 each. On the last unit, marginal cost was $28. Which of the following statements is true? 

9) 

_______ 
A) 

This firm should increase output to maximize profit. 
B) 

This firm is making a profit of less than zero. 
C) 

This firm should reduce output to maximize profit. 
D) 

This firm is making a positive economic profit. 
E) 

This firm is producing the profit-maximizing quantity. 

 
10) 

Consider the following statements about monopolies and revenue.

	I.	A monopolist will never select an output in the inelastic part of a linear
	demand curve.
	II.	To maximize revenue, the monopolist should produce at the midpoint
	of a linear demand curve.
	III.	For a monopolist, marginal revenue is greater than price.

10) 

______ 
A) 

I and II are true; III is false. 
B) 

All three statements are false. 
C) 

I is false; II and III are true. 
D) 

All three statements are true. 
E) 

I and III are true; II is false. 

 
11) 

A price ceiling is a 

11) 

______ 
A) 

price that is so high that is might "fall from the sky." 
B) 

legal maximum price imposed by government. 
C) 

maximum price imposed by the competitive market. 
D) 

price that is so high that it "goes through the roof." 
E) 

legal minimum price imposed by government. 

 
Use the figure for the question(s) below.

 
12) 

Which shows the marginal product for a firm. At what number of workers does diminishing marginal returns set in? 

12) 

______ 
A) 

1 

B) 

2 

C) 

3 

D) 

4 

E) 

5 

 
Use the figure for the questions below.

 
13) 

The figure above shows marginal revenue and cost curves for a perfectly competitive firm. At the profit-maximizing point, ATC is ________, and TC is ________. 

13) 

______ 
A) 

$7.50; $562.50 
B) 

$8; $150 
C) 

$10; $750 
D) 

$8; $600 
E) 

None of the above. 

 
14) 

A natural monopoly occurs when there are ________ marginal costs. 

14) 

______ 
A) 

low average costs and high 
B) 

high fixed costs and high 
C) 

low fixed costs and high 
D) 

no startup costs and high 
E) 

high fixed costs and low 

 
Use the figure for the question(s) below.

 
15) 

In the figure above, producer surplus when price is $4 is 

15) 

______ 
A) 

$3. 

B) 

$0. 

C) 

$9. 

D) 

$8. 

E) 

$16. 

 
16) 

Firms may have lower transactions costs than individuals because 

16) 

______ 
A) 

some transactions can be internalized. 
B) 

they can buy inputs in the market. 
C) 

firms produce higher quality goods than individuals. 
D) 

firms can produce outputs that individuals cannot. 
E) 

firms are larger than individuals. 

Problem (48 points)

The market for pumpkins in the Emerald City is described by a demand curve, P = 50 – ½ Q, and a supply curve, P = 5 + 2Q. The Wizard has determined that something must be done to boost the incomes of pumpkin marketers and institutes a price floor of $42.

a.	What is the equilibrium quantity of pumpkins before the price floor?

50 – ½ Q = 5 + 2 Q

45 = 5/2 Q

Q = 18

b.	What is the equilibrium price before the price floor?

P = 50 – ½(18) = 41

c.	After the imposition of the price floor how many pumpkins will be supplied to the market?

42 = 5 + 2Q

Q = 18.5

d.	After the imposition of the price floor how many pumpkins will be demanded?

42 = 50 – ½ Q

Q = 16

e.	What is producer surplus before the price floor?

PS = ½ (18) (41 – 5) = 324

f.	What is producer surplus after the price floor?

Reservation price for last unit sold = 5 + 2(16) = 37

PS = 5(16) + ½ (37 – 5)(16) = 336 

g.	Are all pumpkin marketers better off? Explain.

No. Those who market the first 16 are better off.  Those who would sell the 16th through 18th are worse off since they have no buyers.

h.	What is the deadweight loss associated with the price floor?

DWL = ½ (5)(18-16)
DWL = 5

Essay (20 points): You will be graded on spelling, grammar and syntax as well as content. Be concise and to the point.

Instead of the price floor for pumpkins it is proposed that there be an excise tax on pumpkin sales and that the proceeds be given to pumpkin growers as an income transfer.  Explain why the tax might be more desirable than the price floor.  Drawing a picture of the price floor situation and then a picture for the tax might help you construct your answer. 

With the price floor there is a redistribution of consumer surplus to some producers   there is also some redistribution of producer surplus from those firms no longer able to sell to those who remain in the market.  Also, with the price floor there is excess supply.

A tax could be imposed that would result in the same quantity of pumpkins exchanged in the market, but with no excess supply.  This represents a gain to society. .At the same time the price to consumers is no different from that under the price floor, so consumers are indifferent between the tax and the price floor.

The tax revenue will be large enough to compensate the sellers no longer in the market, due to the tax, and still have some left over to give to the firms remaining; thereby leaving no one worse off in comparison to the price floor.

1) 

C 

2) 

A 

3) 

C 

4) 

C 

5) 

B 

6) 

A 

7) 

B 

8) 

E 

9) 

C 

10) 

A 

11) 

B 

12) 

C 

13) 

D 

14) 

E 

15) 

D 

16) 

A