F22 Exam 2 MICRO

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Feb 20, 2024

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ECON 111 – Exam 2 Please answer ALL questions. Show your work. The exam is out of 60 points. Do your best. Don’t Panic. Good luck! Section 1 – Multiple Choice [20 points] 1. In the short run, which of the following costs must continually decrease as output produced increases? a. Total variable cost b. Total fixed cost c. Average fixed cost d. Average variable cost 2. A per-unit tax on pollution produced by a firm will affect the firm’s output and pollution in which of the following ways? a. Output will increase and pollution will increase b. Output will increase and pollution will decrease c. Output will decrease and pollution will increase d. Output will decrease and pollution will decrease 3. Which of the following would NOT represent diminishing marginal utility? a. The utility received from purchasing a right shoe after purchasing a left shoe b. The utility received from eating your 5 th slice of pizza relative to your 1 st slice c. The utility received from purchasing a 2 nd car d. The utility received from drinking your 4 th cup of coffee versus your 3 rd for the day 4. A farmer grows wheat using 2 inputs: labor and land whose prices are constant. If she doubles her inputs, she finds that the quantity of wheat produced more than doubles. Therefore, it must be true that in this output range , her long-run average total cost curve is a. Upward sloping b. Downward sloping c. Horizontal d. U-shaped 5. If the average variable cost of producing 5 units of a good is $100 and the average variable cost of producing 6 units is $150, then the marginal cost of increasing output from 5 to 6 units is a. $50 b. $250 c. $300 d. $400

6. Instead of being employed at a printing company at a salary of $25,000 per year, Sally starts her own printing firm. Rather than renting a building that she owns to someone else for $10,000 per year, she uses it as the location for her company. Her costs for workers, materials, advertising, and energy during her first year are $125,000. If the total revenue from her printing company is $155,000, her total economic profit is a. -$5,000 b. $5,000 c. $20,000 d. $30,000 7. If the production of a good generates a positive externality, the government can increase allocative efficiency by a. Taxing the producer of the good b. Subsidizing the producer of the good c. Setting a price ceiling to encourage production of the good d. Setting a price floor to discourage production of the good 8. Which of the following is the best example of a pure public good? a. Electricity from a public utility b. Mail delivery service by the post office c. National defense d. Social security payments 9. Which of the following is the best example of a common? a. A congested toll road b. An uncongested toll road c. A congested non-toll road d. An uncongested non-toll road 10. Refer to the diagram above. The socially optimal quantity and the per-unit tax that will achieve the optimal quantity are which of the following: a. Q2 ; P3 – P2 b. Q3 ; P4 – P2 c. Q2 ; P3 – P1 d. Q3 ; P3 – P2

11. Refer to the diagram above. Given the position of the marginal social cost curve, one can conclude that a. Production of good X creates a negative externality b. Production of good X occurs in an imperfectly competitive market c. Price P2 is the price at the socially optimal level of production d. The free market will produce too little of good X 12. A town with a community lake knows that they can only handle 10 fishers to achieve the most efficient outcome, but they don’t have any regulations. If an 11 th fisherman starts to fish in the lake, the resulting loss of efficiency is a result of a concept called a. Tragedy of the commons b. Public goods c. Deadweight loss d. Externalities 13. Which of the following would NOT help prevent the tragedy of the commons from occurring on a large scale? a. Imposing a corrective tax b. Auctioning off permits allowing use of the resource c. Imposing private property rights d. Allowing the market to self-correct 14. Joey can spend his income on two different goods: packs of bagels and cartons of orange juice. Which of the following scenarios gives a consumption bundle that lies on Bruno’s budget line? a. Packs of bagels cost $10 each and orange juice costs $2. Bruno has an income of $60. He is considering a consumption bundle containing 3 packs of bagels and 15 cartons of OJ. b. Packs of bagels cost $10 each and orange juice costs $5. Bruno has an income of $110. He is considering a consumption bundle containing 3 packs of bagels and 10 cartons of OJ. c. Packs of bagels cost $20 each and orange juice costs $10. Bruno has an income of $50. He is considering a consumption bundle containing 2 packs of bagels and 2 cartons of OJ. d. Packs of bagels cost $10 each and orange juice costs $2. Bruno has an income of $40. He is considering a consumption bundle containing 3 packs of bagels and 10 cartons of OJ. 15. A consumer is in equilibrium and is spending income in such a way that the marginal utility of xylophones is 40 units and yoyos is 16 units. The unit price of each xylophone is $5. The price of yoyos is a. $1 per yoyo b. $2 per yoyo c. $3 per yoyo d. $4 per yoyo 16. If you know that the marginal utility per dollar spent on apples is less than the marginal utility per dollar spent on bananas, consumers who spend all their income on these two products can a. Maximize total utility but not marginal utility b. Maximize marginal utility but not total utility c. Increase total utility by buying more bananas and less apples d. Increase total utility by buying more apples and less bananas

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17. Marshall consumes pizza and guitars. Both are normal goods. Suppose the price of pizza increases. Joey’s consumption of guitars will: a. Relatively increase due to the income effect b. Relatively increase due to the substitution effect c. Relatively decrease due to a negative income elasticity d. Remain unchanged, since the income elasticity of pizza is greater than 0. 18. Which of the following is true regarding solutions to the tragedy of the commons? a. There can be no solution to the tragedy of the commons without government intervention b. If everyone had their own private resource to go along with the common resource, the tragedy of the commons would not occur c. People in small communities that are tied to the land and trust each other can avoid the tragedy of the commons d. None of the above 19. Free-riding can occur if a good is a. Excludable b. Non-excludable c. Rival d. Non-rival 20. If a firm’s revenues just cover all its opportunity costs, then: a. Accounting profit is zero b. Economic profit is zero c. Implicit costs are zero d. Explicit costs are zero Section 2 – Free Response [40 points – 20 points each] 21. Elizabeth Bennet loves ribbons and books. The accompanying table shows Elizabeth’s utilities from both books and ribbons. Quantity of Books Utility from Books Quantity of Ribbons Utility from Ribbons 0 0 0 0 2 70 1 80 4 130 2 150 6 180 3 210 8 220 4 260 10 150 5 300 Assume the price of each book is $5, the price of ribbons is $10 each, and Elizabeth has $50 of income to spend. a. Which consumption bundles could Elizabeth afford if she were to spend all her income? [3 points]

b. Illustrate Elizabeth’s budget line in a diagram, putting books on the horizonal axes. [3 points] c. Draw a diagram illustrating Elizabeth’s marginal utilities per dollar of both books and ribbons in the same diagram. [6 points] d. Which consumption bundle will Elizabeth choose that maximizes her utility? Please explain your reasoning. [5 points] e. Assume that Elizabeth’s income has now risen to $75. In your graph from part (b), please show her new budget line [3 points]

22. Modern-day word processing software gives consumers the ability to create and save documents in a different file format that can then be accessed by multiple consumer operating systems. Assume this is a positive externality of the processing system. The marginal private cost and marginal private benefit equations are given by the below equations, with Q representing the quantity consumed: MPB = -1/4 Q + 10 MPC = 1/4 Q + 2 Each unit consumed gives an external benefit of $4 to society. a. Please illustrate in a graph the marginal private cost, marginal social cost, marginal private benefit, and marginal social benefit. [4 points] b. Calculate the market equilibrium price and quantity. [3 points] c. Calculate the socially optimal price and quantity. [5 points]

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d. How much would a government subsidy have to be to correct for this externality. [3 points] e. Instead of giving a subsidy, the government decides to impose a price floor at $8. Would this price floor correct the externality? Explain using a graph of the price floor. [5 points]

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