Econ 103 Sample Midterm 2

Alexander College

Econ 103

Fall 2010

Midterm 2

Instructor: Alfred Kong

Time allowed: 80 minutes

Total marks: 45

Name:

This exam has 30 multiple choice questions in Part A and 3 short questions in Part B. Complete all the questions. Good luck.

Part A.

Multiple choice questions. Each question is worth 1 point.

Please put your answers in the space below:

1._____ 6._____ 11._____ 16._____ 21._____ 26._____

2._____ 7._____ 12._____ 17._____ 22._____ 27._____

3._____ 8._____ 13._____ 18._____ 23._____ 28._____

4._____ 9._____ 14._____ 19._____ 24._____ 29._____

5._____ 10._____ 15._____ 20._____ 25._____ 30._____

1) Suppose the demand for gasoline is inelastic, but not perfectly inelastic, and the supply is elastic, but not perfectly elastic. A tax on gasoline is paid

A) mostly by buyers.

B) mostly by sellers.

C) equally by buyers and sellers.

D) totally by buyers.

E) totally by sellers.

2) Suppose the demand for CDs is elastic, but not perfectly elastic, and the supply is inelastic, but not perfectly inelastic. A tax on CDs is paid

A) equally by buyers and sellers.

B) mostly by sellers.

C) mostly by buyers.

D) by neither buyers nor sellers.

E) totally by sellers.

Use the figure below to answer questions 3 to 5.

Figure 6.3.1

3) Refer to Figure 6.3.1 showing the market for frisbees before and after a tax is imposed. The tax on each frisbee is

A) $0.40.

B) $0.60.

C) $1.00.

D) $5.60.

E) $6.60.

4) Refer to Figure 6.3.1 showing the market for frisbees before and after a tax is imposed. On each frisbee, the sellers' share of the tax is

A) $0.40.

B) $0.60.

C) $1.00.

D) $5.60.

E) $6.60.

5) Refer to Figure 6.3.1 showing the market for frisbees before and after a tax is imposed. Government revenue from the tax is

A) $4,000.

B) $5,000.

C) $22,400.

D) $26,400.

E) $30,000.

6) Several retail store owners are talking about the initial effects of the GST. Which one of the following statements illustrates the case of perfectly elastic demand?

the extra 7 percent."

B) "When the GST of 7 percent was introduced, I had to lower my prices by 5 percent to avoid losing too many sales."

C) "When the GST of 7 percent was introduced, I sold just as many goods as before the tax."

D) "When the GST of 7 percent was introduced, I had to lower my prices by 1 percent to avoid losing too many sales."

E) "When the GST of 7 percent was introduced, I had to advertise that I would pay it, to avoid going out of business."

7) The buyer pays most of a tax if demand is relatively inelastic because

A) the buyer cannot easily substitute to other markets.

B) the buyer can easily substitute to other markets.

C) the government forces the seller to bear the burden of the tax.

D) there is a black market for this good.

E) the seller cannot easily substitute to other goods.

Use the information below to answer questions 8 to 9.

Fact 11.1.1

January 31, 2008: Starbucks will open 75 more stores abroad than originally predicted, for a total of 975.

February 25, 2008: For three hours on Tuesday, Starbucks will shut down every single one of its 7,100 stores so that baristas can receive a refresher course.

June 2, 2008: Starbucks replaces baristas with vending machines.

July 18, 2008: Starbucks is closing 616 stores by the end of March.

8) Refer to Fact 11.1.1. The decisions made on ________ are short-run decisions because they

________.

A) January 31 and July 18; change the number of stores but not necessarily the number of employees

B) February 25 and June 2; change a variable factor of production but not a fixed factor of production

C) February 25, June 2, and July 18; deal with stores located in the United States

D) June 2 and July 18; are the more recent decisions

E) None of the above.

9) Refer to Fact 11.1.1. The decisions made on ________ are long-run decisions because they

________.

A) June 2; are changes to labour which affect people for the long term

B) January 31 and July 18; change Starbucks' plant

C) February 25, June 2, and July 18; all deal with stores located in the United States

D) January 31 and February 25; are the earliest decisions

E) None of the above.

Use the figure below to answer question 10.

Figure 11.2.1

10) Refer to Figure 11.2.1 which illustrates Tania's total product curve. Marginal product of labour reaches its maximum when the number of workers increases from

A) zero to 1.

B) 1 to 2 .

C) 2 to 3.

D) 3 to 4.

E) 4 to 5.

11) Which one of the following statements is true?

A) The highest value of average product occurs where average product is greater than marginal product.

B) When the average product curve is rising, marginal product is less than average product.

C) When the average product curve is falling, marginal product is greater than average product.

D) The maximum total product occurs at minimum marginal product.

E) The highest value of average product occurs where average product equals marginal product.

12) The law of diminishing marginal returns states:

A) As the size of a plant increases, marginal product eventually decreases.

B) As the size of a firm's plant increases, average cost eventually decreases.

C) As a firm uses more of a variable factor of production, with a given quantity of the fixed factor of production, the marginal product of the variable factor eventually diminishes.

D) As a firm uses more of a variable factor of production, its average cost eventually decreases.

E) As a firm uses more of a variable factor or production, total product eventually decreases.

13) When the marginal product of labour is less than the average product of labour,

A) the average product of labour is increasing.

B) the marginal product of labour is increasing.

C) the total product curve is negatively sloped.

D) the firm is experiencing diminishing marginal returns.

E) None of the above.

14) Which of the following quotes best illustrates the idea of marginal product?

A) "If I have 10 workers on my assembly line, I can produce 13 tables a day."

B) "If I add an 11th worker, I can produce 1 extra table a day."

C) "Each worker produces 2 tables a day."

D) "I find if I add an extra shift at night, table production only rises by 80 percent because I need more maintenance time on the assembly line."

E) "If I double workers and double the assembly line, I can make 120 percent more tables."

15) Which one of the following statements is false?

A) Total variable cost plus total fixed cost equals total cost.

B) Marginal cost equals the change in total cost divided by the change in output.

C) Average total cost is calculated by dividing total cost by the level of output.

D) The average cost curve is U-shaped.

E) The total cost curve is U-shaped.

Use the figure below to answer questions 16 to 17.

Figure 11.3.2

16) Refer to Figure 11.3.2, which illustrates short-run average and marginal cost curves. Which one of the following statements is false?

A) Average fixed cost decreases with output.

B) The vertical gap between curves B and C is equal to average variable cost.

C) Line B comes closer to line C as output increases because of a decrease in average fixed cost.

D) Curve D is the marginal cost curve.

E) The vertical gap between curves B and C is equal to average fixed cost.

17) Refer to Figure 11.3.2, which illustrates the short-run average and marginal cost curves. The average variable cost curve is curve

A) A.

B) B.

C) C.

D) D.

E) none of the above.

18) As soon as diminishing returns set in, a firm's

A) marginal product increases.

B) average fixed cost decreases.

C) marginal cost decreases.

D) marginal cost increases.

E) total cost decreases.

19) Average variable cost is at a minimum at the same output at which

A) average product is at a maximum.

B) average product is at a minimum.

C) marginal product is at a maximum.

D) marginal product is at a minimum.

E) marginal cost is at a minimum.

20) The range over which average variable cost is decreasing is the same as the range over which

A) marginal cost is increasing.

B) average fixed cost is decreasing.

C) marginal product is decreasing.

D) average product is decreasing.

E) average product is increasing.

21) A rise in the price of a fixed input shifts a firm's

A) average variable cost curve upward.

B) average total cost curve upward.

C) average total cost curve downward.

D) marginal cost curve upward.

E) marginal cost curve downward.

22) If ATC is falling, then MC must be

A) rising.

B) falling.

C) equal to ATC.

D) above ATC.

E) below ATC.

23) Which of the following quotes best illustrates the idea of fixed cost?

A) "As we increase output, per-unit costs fall."

B) "My primary source of overhead cost is the cost of running the head office."

C) "If I need to, I can negotiate more overtime with my work force to meet unexpected orders."

D) "If I double the number of workers and trucks, I get only 80 percent more packages delivered."

E) None of the above.

24) The marginal cost curve slopes upward due to

A) diminishing marginal utility.

B) diminishing marginal returns.

C) technological inefficiency.

D) economic inefficiency.

E) none of the above.

25) Economies of scale are present when

A) the LRAC curve slopes downward.

B) average total cost remains constant as input increases.

C) average total cost rises as input increases.

D) the LRAC curve is horizontal.

E) total fixed cost increases.

26) If diseconomies of scale are present

A) average total cost is decreasing.

B) the long-run average cost curve has a negative slope.

C) economies of scale are also present.

D) the long-run average cost curve has a positive slope.

E) None of the above.

Use the figure below to answer questions 27 to 28.

Figure 11.4.2

27) Refer to Figure 11.4.2, which illustrates the short-run average total cost curves for four different plant sizes. Which curve represents the average total cost for the largest of the four plant sizes?

A) ATC A

B) ATC B

C) ATC C

D) ATC D

E) either ATC C or ATC D

28) Refer to Figure 11.4.2, which illustrates the short-run average total cost curves for four different plant sizes. Which plant has the lowest average total cost for an output rate of 5 sweaters a day?

A) Plant A

B) Plant B

C) Plant C

D) Plant D

E) none of the above

29) An increase in the cost of labour shifts the

A) total, average, and marginal product curves upward and total, average, and marginal cost curves upward.

B) total, average, and marginal product curves upward and total, average, and marginal cost curves downward.

C) total, average, and marginal product curves downward and total, average, and marginal cost curves upward.

D) total, average, and marginal product curves downward and total, average, and marginal cost curves downward.

E) none of the above.

30) A price-taking firm faces a

A) perfectly inelastic demand.

B) downward-sloping marginal revenue curve.

C) downward-sloping supply curve.

D) perfectly elastic demand.

E) downward-sloping demand curve.

Part B.

Short questions. Each question is worth 5 points.

Q.1 Jack quit his job at Canadian Tire where he earned $28,000 a year. He cashed in $30,000 in corporate bonds that earned 10% interest annually to buy a mini-bus. Jack has decided to buy the mini-bus and set up a commuter service between Delta and Vancouver. There are 200 people who will pay $800 a year each for the commuter service; $650 from each person goes for gas, maintenance, insurance, depreciation, etc.

(a) What are Jack's total revenues? (1 point)

(b) What are Jack's explicit costs? (1 point)

(c) What is Jack's accounting profit? (1 point)

(d) List two important implicit costs that Jack has not included. (1 point)

(e) What is Jack's pure economic profit (loss)? What actions should Jack take based on his

pure economic profit (loss)? (1 point)

Q 2. Assume the following unit-cost data are for a perfectly competitive producer: Output AFC AVC ATC MC

1 $600 $200 $800 $200

2 300 150 450 100

3 200 140 340 120

4 150 14

5 295 160

5 120 160 280 220

6 100 180 280 280

7 86 206 291 360

8 75 238 313 460

9 67 276 342 580

10 60 320 380 720

a) At a product price of $580, will this firm produce in the short run? Why or why not?

If the firm does produce, what will be the profit maximizing or loss-minimizing output?

What will be the profit or loss for the firm? (2.5 points)

b) Answer the questions in a) assuming product price is $220, not $580. (2.5 points)

Q.3 Consider the market for gasoline. Suppose the market demand and supply curves are as given below. Price is the price per litre (in cents). Quantity refers to millions of litres of

gasoline per month.

Demand: Q d = 60 – P

Supply: Q s = –30 + 2P

a)Compute the equilibrium price and quantity. (1 point)

b)Now suppose the government imposes a tax of 30 cents per litre. What is the new

equilibrium price and quantity? (2 points)

c)Compute the (per litre) tax burden on the consumer and producer. (2 points)