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. 
Use the figure for the question(s) below.

 
1) 

In the figure above, a price floor of $5 would result in a(n) 

1) 

_______ 
A) 

excess supply of 40 units. 
B) 

loss of consumer surplus of $40. 
C) 

excess demand of 40 units. 
D) 

net loss of consumer and producer surplus of $40. 
E) 

gain in producer surplus of $40. 

 
2) 

Another name for the demand curve can be the 

2) 

_______ 
A) 

inverse supply curve. 
B) 

reverse supply curve. 
C) 

buyer curve. 
D) 

marginal benefit curve. 
E) 

maximum pricing curve. 

 
Use the figure for the question(s) below.

 
3) 

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

3) 

_______ 
A) 

$10 

B) 

$20 

C) 

$21 

D) 

$0 

E) 

$1 

 
4) 

An effective minimum wage is an example of a(n) 

4) 

_______ 
A) 

price ceiling. 
B) 

equilibrium price. 
C) 

jobless price. 
D) 

price floor. 
E) 

conceptual price. 

 
Use the figure for the question(s) below.

5) 

Which shows long- and short-run average costs for a firm. If this firm expects to produce 200 units, in the long run, it should build a factory that corresponds with 

5) 

_______ 
A) 

. 

B) 

. 

C) 

. 

D) 

. 

E) 

LRAC. 

 
6) 

A sunk cost is best described as 

6) 

_______ 
A) 

a transactions cost. 
B) 

a marginal cost. 
C) 

a cost that is not recoverable. 
D) 

an average cost. 
E) 

a cost that varies with output. 

 
Use the figure for the question(s) below.

 
7) 

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

7) 

_______ 
A) 

1 

B) 

2 

C) 

3 

D) 

4 

E) 

5 

 
8) 

In the long run, perfectly competitive firms must be productively efficient because 

8) 

_______ 
A) 

It is possible that there could be inefficient firms in the long run. 
B) 

inefficient firms will always become more efficient. 
C) 

inefficient firms will learn by doing and make long-run profits. 
D) 

inefficient firms will make a profit less than zero, and exit the industry. 
E) 

inefficient firms will be bought out by other firms. 

 
9) 

Suppose that a constant-cost industry is currently in long-run equilibrium. The market price is $50, and there are 100 firms in the industry. Which of the following is a correct description of the effects of a demand increase in this industry? 

9) 

_______ 
A) 

In the short run, firms in the industry will lose money, but in the long run, they will break even. 
B) 

In the short run, the number of firms will exceed 100, but in the long run, the number of firms will equal 100. 
C) 

In the short run, market price will exceed $50, but in the long run, the price will return to $50. 
D) 

The long-run supply curve in this industry is upward sloping. 
E) 

All of the above are correct statements. 

 
Use the figure for the question(s) below.

 
10) 

The figure above shows the demand curve and marginal revenue for a monopolist. What is the maximum revenue that this firm can earn, given this demand curve? 

10) 

______ 
A) 

$2,500 

B) 

$1,875 

C) 

$1,924 

D) 

$2,499 

E) 

$10,000 

 
11) 

The marginal consumer 

11) 

______ 
A) 

tends to have low income. 
B) 

is unprofitable for firms to sell to. 
C) 

is of little concern to sellers. 
D) 

matters little to achieving market equilibrium. 
E) 

receives no surplus from buying the good or service. 

 
Use the table for the question(s) below.

 
12) 

The table above shows the total cost and quantity produced for a small firm. What is the average variable cost of producing 4 units? 

12) 

______ 
A) 

170 

B) 

10 

C) 

70 

D) 

17.5 

E) 

25 

 
Use the figure for the question(s) below.

 
13) 

The figure above shows total revenue and total cost curves for a perfectly competitive firm. What is the profit-maximizing quantity for this firm? 

13) 

______ 
A) 

 and  are both profit-maximizing quantities. 
B) 

C) 

D) 

E) 

 
14) 

Products sold in a monopoly market 

14) 

______ 
A) 

are homogeneous. 
B) 

must have no close substitutes. 
C) 

are unique. 
D) 

are all consumer goods. 
E) 

are high priced. 

 
Use the figure for the question(s) below.

 
15) 

In the figure above, consumer surplus when price is $40 is 

15) 

______ 
A) 

$20. 

B) 

$15. 

C) 

$5. 

D) 

$10. 

E) 

$0. 

 
16) 

An increase in the cost of raw materials will increase 

16) 

______ 
A) 

total cost. 
B) 

marginal cost. 
C) 

average total cost. 
D) 

average variable cost. 
E) 

All of the above. 

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 principle use for pumpkins in Oz is to carve them residential decorative purposes. The Wizard has determined that something must be done to make it possible for low income households to acquire pumpkins for the holiday. Toward this end he is considering a price ceiling of Pceiling = 30.

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

50 – ½ Q = 5 + 2 Q
45 = 5/2 Q
Q = 18

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

P = 5 + 2(18) = 41

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

30 = 5 + 2 Q

25 = 2 Q

Q = 12.5

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

30 = 50 – ½ Q

-20 = - ½ Q 

Q = 40

e.	What is consumer surplus before the price ceiling?

CS = ½ (50-41)(18) = 81

f.	What is consumer surplus after the price ceiling?

Reservation price of the marginal customer = 50 – ½ (12.5) = 43.75

CS = ½ (12.5)(50-43.75) + (43.75-30)(12.5)
CS = 210.9375

g.	Are all pumpkin buyers better off? Explain.

No. The first 12.5 are better off, but those from 12.5 to 18 are worse off since they are unable to buy.

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

DWL = ½ (43.75 – 30) (18 – 12.5 ) = 37.8125

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

Enumerate and explain the differences between perfect competition and monopoly.  Which do we prefer and why?

You would include the following information in essay form.

Monopoly
One firm
No close substitutes
P > MC
Output less than that under competition
P not equal to min(ATC)

Competition 
Many firms
Many buyers
Homogeneous product
Easy entry and exit
P = MC = min(ATC)

DWL is loss in economic surplus that we attribute to the monopoly.
 
1) 

A 

2) 

D 

3) 

A 

4) 

D 

5) 

A 

6) 

C 

7) 

C 

8) 

D 

9) 

C 

10) 

A 

11) 

E 

12) 

D 

13) 

C 

14) 

B 

15) 

E 

16) 

E