Name: ________________________________________________

Practice Midterm

Part A Multiple Choice

1) A
production function…

a) Measures
workers’ productivity.

b) Shows
cost as a function of output.

c) Shows
output as a function of inputs (factors of production).

d) Shows
cost as a function of inputs (factors of production) used.

2) If
marginal cost (MC) is always constant at $10, then we know for certain that…

a) The
product price will be $10.

b) Average
total cost (ATC) will be constant at $10.

c) Total
fixed costs (TFC) are $0.

d) ATC will
be at least $10, depending upon TFC.

3) We know
we are in the short-run if…

a) The
variable “time” (T) is not on the horizontal axis of our cost curve graphs.

b) At least
some costs are fixed.

c) ATC is
increasing.

d) ATC is
minimized.

4) Economists
usually graph “U-shaped” cost curves, but sometimes a flat, constant ATC = MC
curve is drawn. According to Dr. Raymond, this is because…

a) Sometimes
constant ATC = MC is easier to work with.

b) Some
businesses experience increasing returns to scale.

c) Accountant
always assume constant cost when they are budgeting for next year.

d) Constant
ATC = MC is more realistic in almost every situation.

5) Any firm
maximizes profits by producing that quantity where…

a) Price P =
ATC.

b) P =
marginal revenue (MR)

c) MR = MC.

d) P =
quantity (Q).

6) If a
profit-maximizing monopolist is operating in the inelastic portion of its
(linear) demand curve, it should definitely…

a) Lower the
price.

b) Raise the
price.

c) Increase
output.

d) Look for
the police, because it is illegal monopoly behavior.

7) Three of
the following cost curves appear on most microeconomic graphs showing
profit-maximizing solutions. Which one does not?

a) Total
cost (TC).

b) ATC.

c) MC.

d) Average
variable cost (AVC).

8) In
microeconomics, we normally assume diminishing marginal product of labor (i.e.
additional output is positive but falling, as more units of labor are used.).
The reason for this assumption is that

a) The best
workers are hired first, and the worst workers last.

b) Wage
costs increase when more workers are hired.

c) It is a
necessary assumption to prevent exploitation of labor.

d) There is
less capital (K) per unit of labor as more labor is hired.

9) When
economists solve a firm’s profit-maximizing problem, the first thing they must
solve for is…

a) Price P*.

b) Quantity
Q*.

c) Per unit
cost ATC*.

d) Labor
employed L*.

10) Suppose a
monopolist’s demand curve (D) is downward-sloping and linear. In this case, the
marginal revenue (MR) curve will be…

a) Twice as
steep and below D, but with the same vertical intercept.

b) Exactly
equal to D.

c) Half as
steep and above D, but with the same vertical intercept.

d) Flat,
with a height exactly equal to the slope of D.

11) According
to the law of demand, a monopolist’s price elasticity of demand…

a) Is always
negative (though sometimes the negative sign is not written).

b) Is
sometimes positive and sometimes negative, and equal to 0 at the demand curve’s
midpoint.

c) Is
positive only for normal goods, and negative for inferior goods.

d) Is
positive only for substitute goods, and negative for complement goods.

12) Which of
the following statements is true?

a) Monopolists
do not have a demand curve.

b) Monopolists
do not have an MC curve.

c) Monopolists
do not have a supply curve.

d) Monopolists
do not have a TFC curve.

?

13) Which of
the following is not sometimes a source of monopoly power?

a) Economies
of scale.

b) Network
economies.

c) Downward-sloping
industry demand.

d) Government
licenses or franchises.

14) Third
degree price discrimination only works if…

a) Two or
more distinct market segments can be identified.

b) The
markets can be separated, and sales cannot be resold from one market to the
other.

c) The
markets have different elasticities of demand.

d) (All of
the above are necessary for 3rd degree price discriminating to work.)

15) First
degree price discrimination would…

a) In
theory, eliminate all welfare loss due to monopoly, and produce an efficient
level of output.

b) Charge a
price below MC to some customers.

c) Charge a
price equal to MC for every customer.

d) Cause
wages to fall, as workers are discriminated against.

16) The
Stackelberg oligopoly model is different from the Cournot model in that…

a) Products
are differentiated, not identical.

b) There are
three firms in the model, not just two.

c) One firm
gets to choose output before the other firm.

d) One firm
is rational, while the other uses the maximin strategy.

17) A dominant
strategy is one which…

a) Provides
a higher payout than any other strategy, no matter what the other player does.

b) Forces
the other player to choose the action with the lowest possible payout.

c) Is
optimal only if the game is repeated an infinite number of times.

d) All
actions provide a higher payout than is received by the other player.

18) A Nash
equilibrium…

a) Always
maximizes the total payout to the two players.

b) Is always
stable in the sense that, once there, no player wants to change his action.

c) Is always
the cooperate-cooperate solution.

d) Can never
be achieved if one player has a dominant strategy.

?

19) In duopoly
models discussed in class, one business could gain a “first mover” advantage
over new potential entrants into the industry by…

a) Charging
a low price.

b) Hiring a
lot of workers before the new entrant could get them.

c) Building
excess capacity so that it would be cheap to expand output, should the
potential entrant decide to enter the market.

d) Adapting
the latest technology.

20) Which of
the following models of market structure has the solution with the highest
price?

a) Perfect
competition.

b) Bertrand
oligopoly.

c) Cournot
oligopoly.

d) Monopoly.

PART B Calculations

1. A
monopoly faces a demand curve of P = 320 – Q (so that its marginal revenue
curve is MR = 320 – 2Q). Its total cost function is TC = 1,000 + 20Q (so that
it’s marginal cost function is MC = 20, and its average total cost function is
ATC = 1,000/Q + 20),

a. Graph the
MC curve, as well as the MR and demand curves.

b. Solve for
the profit-maximizing price and quantity, as well as the socially optimal
(efficient) price and quantity.

c. Solve
for the monopolist’s profits, but do not graph them.

d. On your
graph, identify and label the profit-maximizing solution, as well as the
efficient solution.

e. Calculate
both the consumer surplus (CS) and the welfare loss due to monopoly (WL), and
identify them on the graph.

?

Part B. Profit Maximization (50 points). Costs and revenues
for this competitive business are shown on the schedules below. Calculate all
the empty cells for costs and revenues, then indicate below, at the
profit-maximizing quantity, all of the following:

The Excel file with these costs has been uploaded
separately.