Econ 2106Dr. J. KingSpring 2011Practice Exam 3Due at the beginning of class on Tuesday April 12th. Use Scantron form 2052 or20052.1.2.3.4.5.For a good to be considered an economic necessity what must be true?a. the good is inferiorb. the good is needed for survivalc. the income elasticity of demand is negatived. the income elasticity of demand is greater than onee. the income elasticity is between zero and oneIf the (inverse) demand for hotdogs at a baseball game is given by P = 10 – 0.1Q what price willmaximize the vendor’s revenues?a. $1.00b. $2.50c. $5.00d. $10.00e. none of the abovePerfectly elastic demand impliesa. consumers are infinitely sensitive to price changes.b. the demand curve is horizontal.c. an increase in price will decrease total revenue.d. consumers will buy any amount but only at the market price.e. all of the above.Jim operates in a perfectly competitive increasing cost industry with MC = 5q and a marketprice of $15. How much profit do you expect Jim to earn in the long-run?a. $0b. $3c. $15d. $30e. $45Compared to perfect competition a typical monopolya. charges a lower price and produces more output.b. charges a higher price and produces more output.c. charges a lower price and produces less output.d. charges a higher price and produces less output.e. charges a higher price and produces the same output. 6.7.8.9.10.A natural monopoly hasa. a long-run average cost curve that is everywhere upward sloping.b. a lower average cost of producing the market demand than two or more firms would have.c. diseconomies of scale.d. control of natural resources used in production.e. less market power than a created monopoly.If a firm is forced to lower its price to sell more output the firma. has marginal revenue that is less than priceb. faces a downward sloping demand curvec. is not a price takerd. produces a product that is at least somewhat uniquee. all of the aboveThe market supply and demand for jerky are given by the following equations:P = 5 – 0.001QDP = 1 0.004QSThere are no barriers to entry in this industry and at the optimal scale of 4 units each firm’saverage cost of production is $4.20 per pound. How many firms will operate in this industry inthe long-run?a. 1 since it is a natural monopolyb. exactly 200c. manyd. an infinite numbere. it is not possible to tell from the information provided.When John opened John’s Dogs Hotdog Stand he offered a special introductory price of $0.50per hotdog and sold 200 hotdogs in the first week. During the second week John raised theprice by 30% and he sold 50% fewer hotdogs. Assuming that demand is linear what should Johndo in the third week if he wants to increase his revenues?a. increase price since demand is elastic.b. decrease price since demand is elasticc. increase price since demand is inelasticd. decrease price since demand is inelastice. find something else to sellIf the price elasticity of demand is -0.75 the what change in price would cause quantitydemanded to rise by 20%?a. 15% decline in priceb. 15% increase in pricec. 26.67% decline in priced. 26.67% increase in pricee. 19.25% decline in price 11.12.13.14.15.16.When the price of umbrellas increased from $10 to $12 the weekly quantity demanded fellfrom 200 to 180. What is (the absolute value of) the price elasticity of demand for umbrellas?a. 0.05b. 0.10c. 0.58d. 1.73e. 10A good is considered to be inferior ifa. the price elasticity of demand is negative.b. the income elasticity of demand is negative.c. the cross-price elasticity of demand is greater than one.d. the price elasticity of demand is between zero and one.e. a cheaper good serves as a perfect substitute.When John earned $5 per hour he bought 5 Diet Cokes per day and when John’s wageincreased to $7 per hour he bought 6 Diet Cokes per day. What can you say about John’sdemand for Diet Coke?a. Diet Coke is a normal good for Johnb. Diet Coke is an economic necessity for Johnc. John’s income elasticity of demand for Diet Coke is positive.d. John’s income elasticity of demand for Diet Coke is between zero and one.e. all of the above.Which of the following lists the correct sequence of events that will take place when a perfectlycompetitive firm earns a positive profit?a. price falls firms exit profits fallb. firms enter demand shifts in price falls profits reach zeroc. supply shifts out firms exit price rises profits stabilized. firms enter supply shifts out price falls profits reach zeroe. none of the above.If a monopolist is earning zero profit in the short-run then we know that:a. the demand curve is tangent to the average total cost curveb. the price is equal to the average total cost of producing the profit maximizing output levelc. the marginal revenue of the last unit sold is less than the price of the last unit sold.d. all of the above.e. none of the aboveFor a perfectly competitive firm marginal revenue is alwaysa. equal to price.b. less than price.c. equal to average total cost.d. less than average variable cost.e. greater than price. Use the following information to answer questions 17 through 20:Billy is one of many weazil salesmen in the city of Watziton and is able to sell as much as he likes at themarket price of $100. Phil’s total and marginal cost functions are given byTC = 500 q2MC = 2q.17.Billy’s profit maximizing output level isa. 5 weazilsb. 10 weazilsc. 25 weazilsd. 50 weazilse. none of the above18.How much profit will Billy earn by producing the profit maximizing output?a. none since the market is perfectly competitiveb. $2 000c. $6 250d. $74 750e. none of the above.19.Billy operates in thea. short-run since he has fixed costs of $500b. short-run since he earns positive profitc. long-run since he earns zero profitd. long-run since he has no fixed coste. none of the above.20.The weazil industry is operating in thea. short-run since Billy has fixed costs of $500b. short-run since Billy earns positive profitc. long-run since Billy earns zero profitd. long-run since Billy has no fixed coste. none of the above.21.The cross-price elasticity of demand between widgets and weazils has been shown to be equalto 3.5. Which of the following must be true?a. Widgets are 3.5 times as valuable to consumers as weazils.b. Widgets and weazils are both normal goods.c. If the price of widgets doubles the quantity demanded for weazils will increase by a factor of3.5.d. Widgets and weazils are complements.e. Widgets and weazils are substitutes. 22.23.24.25.26.Monosoft enjoys a monopoly in the production of a specific software package. The (inverse)market demand for this software is given by P(Q) = 260 – 2.5Q Monosoft’s total cost is given byTC(Q) = 500 10Q and their marginal cost is given by MC(Q) = 10. What is Monosoft’s profitmaximizing output level?a. 10b. 50c. 100d. 135e. none of the above.Monosoft enjoys a monopoly in the production of a specific software package. The (inverse)market demand for this software is given by P(Q) = 260 – 2.5Q Monosoft’s total cost is given byTC(Q) = 500 10Q and their marginal cost is given by MC(Q) = 10. What is Monosoft’s profitmaximizing price?a. $10b. $50c. $135d. $260e. none of the above.Monosoft enjoys a monopoly in the production of a specific software package. The (inverse)market demand for this software is given by P(Q) = 260 – 2.5Q Monosoft’s total cost is given byTC(Q) = 500 10Q and their marginal cost is given by MC(Q) = 10. How much deadweight lossis caused by this monopoly?a. 50 unitsb. 3 125 unitsc. $3 125d. $5 750e. none of the above.Monosoft enjoys a monopoly in the production of a specific software package. The (inverse)market demand for this software is given by P(Q) = 260 – 2.5Q Monosoft’s total cost is given byTC(Q) = 500 10Q and their marginal cost is given by MC(Q) = 10. What is Monosoft’s profit?a. $5 750b. $6 250c. $6 750d. $7 750e. none of the above.If a firm is operating on the upper half of its demand curve thena. it should definitely raise its price since this would increase revenues and decrease costs.b. it should definitely lower its price since the resulting increase in quantity demanded wouldmore than offset the lower price.c. it should definitely raise its price since doing so will increase revenues and lower costs thusraising profit.d. we cannot say whether or not the firm should lower price since doing so would increase bothrevenues and costs thus changing profit in an unpredictable manner.e. none of the above. 27.28.29.30.Which of the following would most likely raise the price elasticity of demand for gasoline?a. incomes increase while the price of gas remains constantb. we consider a shorter time frame when measuring the demand for gasc. alternative fuel vehicles become widely availabled. a technological advance makes producing gas less costlye. all of the aboveTo find the long-run number of firms in a competitive market a. multiply the price by quantity.b. divide the industry output (Q*) by the optimal scale (q*).c. multiply the industry output (Q*) by the optimal scale (q*).d. divide the average total cost by the marginal cost.e. add the industry output (Q*) to the marginal cost.If a monopolist’s demand function is given by Q = 10 – 2P then the associated marginal revenuefunction will bea. MR = 10b. MR = 2Pc. MR = 10 – 4Pd. MR = 5 – Qe. none of the above.Demand being elastic implies thata. a given percentage change in price will result in a larger percentage in demand.b. a given percentage change in price will result in a smaller percentage change in quantitydemanded.c. a given percentage change in price will result in a larger percentage change in quantitydemanded.d. people will not change their buying behavior much in response to changes in the price of thegood.e. the product in question can be stretched without breaking.
