ECN 100 - Intermediate Microeconomic Theory

ECN 100 A: Midterm 2: Version A

SECTION I: MULTIPLE CHOICE (36 points)

1. The Du   Brewing Company recently bought land from Montgomery Burns for its new brewery for $100,000. After they completed their purchase, an environmental assessment of the land showed that it was contaminated with nuclear waste and could only be used for o伍ces for economics professors.  The land could be sold to Springfield University for $25,000.  The opportunity cost of the land is

(a) $100,000.

(b) $25,000.

(c) $75,000.

(d) None of the above.

2. Suppose that each worker must use only one shovel to dig a hole, and that shovels are useless by themselves. In the long run, the cost function for holes, where q is the number of holes, w is wage, and r is the price of shovels, is

(a) TC(q) = (w + r) * q.

(b) TC(q) = (w/r) * q.

(c) TC(q) = (w + r)/q.

(d) TC(q) = (w + r).

3. Every extra worker a firm uses increases output by five units no matter how many workers the firm is already using.  On a graph with output on the vertical axis and workers on the horizontal axis, output as a function of the number of workers will be:

(a) A straight line with a positive slope.

(b) An upward sloping curve that gets 丑atter as the number of workers increases.

(c) A horizontal line.

(d) An upward sloping curve that gets steeper as the number of workers increases.

4. For Yongji, Sushi and Soy Sauce are perfect complements. These are the only two goods he consumes. Which of the following can NOT be true?

(a) Sushi is an Inferior good.

(b) Sushi is consumed in equal proportions with soy sauce.

(c) Sushi is a normal good.

(d) Sushi has a lower price than soy sauce.

5. Rene has a preference for consuming beer only with shots of whisky. The above figure illus- trates 3 Indiference curves representing diferent levels of utility for the consumption of beer and whisky. The budget line B2 re丑ects a change in prices from the budget line B1. Which of the following can be concluded from this figure?

(a) The income efect of the price change is zero.

(b) The substitution efect of the price change is zero.

(c) Beer and Whisky are perfect substitutes.

(d) Beer is a Gifen good.

6. From the above picture we can conclude that

(a) The income elasticity of beer is zero.

(b) The income elasticity of wine is zero.

(c) Beer is a luxury good.

(d) Beer is an inferior good.

7. Suppose that the short-run production function for wool gloves is Q = 10 * L2  and current output Q = 250. The Marginal Product of Labor equals

(a) 2Q/L.

(b) 20L.

(c) 100.

(d) all of the above.

8. The above figure shows 3 diferent Isoquants for a production process. Which of the following can be concluded from this figure?

(a) Capital and Labor are perfect substitutes.

(b) The process exhibits decreasing returns to scale.

(c) At any given output level, the marginal product of capital is twice the marginal product of labor (MPK  = 2MPL).

(d) All of the above.

9. Suppose we use electricity (E) and typists (T) to produce books. In the short run, electricity is fixed but the number of typists is variable. Which of the following prices would afect the optimal number of typists? (You can assume that we never reach the point where it is optimal to shut down, so the optimal number of typists will be positive.)

(a) The price of books and the price of electricity.

(b) The price of electricity and the price of typists

(c) The price of books and the price of typists.

(d) The price of books, the price of electricity and the price of typists.

10. Suppose we produce output with two inputs, A and B. The production function is f(A, B) = A2 + B. This technology exhibits:

(a) Constant returns to scale.

(b) Increasing returns to scale.

(c) Decreasing returns to scale.

(d) Not enough information.

11. At Apex Cycles, the cost function for producing fixed-frame. bicycles is C(q) = 200 + 2q2 . The price of these bikes is $260, and Apex is part of a perfectly competitive market. What is the quantity that would minimize the average cost of bicycle production?

(a) Zero.

(b) 10.

(c) 4.

(d) 8.

Consider a market for high-speed broadband services illustrated in the above figure.  The Long-run Average Cost and Marginal Cost for a single firm are represented by solid lines, and the Demand for these services is represented by the dotted line q = 40 - p .

12. In the Long-run, what will be the quantity supplied in this market?

(a) 30.

(b) 100.

(c) 0.

(d) None of the above.

1. (16 points) Assume that “clean” electricity can be made from one of two inputs: solar power and wind power. The production function for clean electricity is q(s; w) = 2w 2   + 2s 2  , where quantity is measured in Mega-Watt Hours, MWh.

(a) On the grid below draw the isoquants for 4 and 8 MWh.  Identify 3 points on your Isoquants.

(b) Assume that the price of wind capacity (w) is $80 and of the price of solar capacity (s) is also $80, what is the optimal mix of inputs to produce 8 MWh? What is the average cost of clean energy production at this quantity?

(c) Your state is considering is a regulation mandating that all clean electricity come exclu- sively from solar sources. In other words, all electricity production must use only solar capacity as an input.  Would this mandate change the average cost of producing 8 MWh? If so, what would the average cost be?

(d) If you are currently producing 8 MWh, what is the marginal cost of a MW of clean electricity under the all Solar regulatory policy?

2. (16 points) Assume that the cost function for producing small (dorm size) refrigerators is q = 200 + 2q2 . Also assume that the market for these refrigerators is perfectly competitive.

(a) Assume that you are already operating your business and all fixed costs are sunk.  If the market price for refrigerators is currently $48, how many refrigerators would you produce?

(b) If this market were perfectly competitive, and there were no restrictions on entry and exit, what would the long-run equilibrium price be? You can assume that there would be su伍cient demand at this price.

(c) Assume that the US demand for refrigerators can be described by the function D(p) = 1000 - 20p. How many refrigerator companies will serve this this market in the long run if it is perfectly competitive?

(d) Now assume that the US places a sales tax of $5 on every refrigerator.  Would your answer to the above question change? How? Explain.