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1 16 points) Many high schools sell "pouring rights" for soft drinks to finns like Pepsi and /1,1
Coca-Cola. For a certain fee paid by the company, they are gjven the rigbt,!QJ?ethe only / -l t>;Jul""~
seller of soft-drinks at a sc 001. (Ever wonder why the scoreboard at your schOOls~
epsI. Supposethat Springfield High School sells exclusive pouring rights to Krusty ~ a
r, ~t'&/ .for $2. ,The cost to Krusty for eac~ b~ttle ofpop (soda i~you are from the East Coast) i $1. /'1C.:- 'I
(" '1.1- The Demand for the Krusty Kola IS given below. We wIll assume that partial bottles o
Krusty Kola cannot be sold. "IA
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If Price f'J-~
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$2.50 O o
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$2.25
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$1.75 3
$1.50 4 t.", .7)...

a) Fill in all of the columns in the table below.

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Fixed
Marginal Variable Total Total
Marginal
Quantity Cost Cost Cost Cost Revenue Revenue Profit
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the profit maximizing quantity for Krusty Kola?

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c) What is the profit maximizing price for Krusty Kola?

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 2. (4 points) I went on Yahoo and discovered there are 39 hair salons/beauty parlors in
Delaware. (Honestly, I did.) What kind of market structure is this: Perfect :Competition,
Monopoly, Homogenous Oligopoly or Monopolistic Competition? How can you tell?
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3. (12 points) I was surfing the net and discovered that in the 1960s in Europe there was a
zinc ~. Let us suppose, for simplicity , that there were ten identical firms selling zinc and
(G4I'J.eI. zinc iS1iO"'mogenous. The graph to the right is for the industry as a whole and the one to the
;4,,).- I JI ,. left for a typical firm.
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a) What is the price for zinc?

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b) How much profit will our typical firm make? ($ amount please.) Show your work
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c) Even without government intervention, cartels tend to break up. Explain why

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d) If the cartel were to collapse, what would be the price of zinc? ~

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4. Suppose that labor is the only input used by a perfectly competitive firm., The firm's
production function is as follows: " i .

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»8'!3- of tabor Units of Output Marginal Product Value of Marginal
Product
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0 0 -

1 7 I f: 7()
2 13 ( f
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3 19 t: {
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4 25 'c (
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5 28 ? )v

6 29 I
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a) Calculate the marginal product for each additional worker .

b) Each unit of output sells for $10. Calculate the value of the marginal product of each worker.
--

, Compute the demand schedule showing the number of workers hired for all wages from zero
to $100 a day. Lv~ L .(,':
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d) Graph the firm's demand curve.
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Carefully number and label the axes. Y--' ~
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 5. (16 points) The price of corn was approximately $3.00 a bushel in 2066. The graph to the
, ,

right shows the national market for corn and the one to the left shows the market for Farmer
John.

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a) What type ofmarket is the market for corn? Explain how you can tell.

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b) What is Farmer John's marginal revenue? (Number please.)

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c) Was he making a profit? How can you tell?

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d) The demand for corn has increased and the current price is about $3.50. In the graph to the
left above, show the change in the ~e very carefully.
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e) Show how much corn Fanner John will now bring to market.

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f) What will happen in the (industry) market for corn in the long run? Why does this occur?

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4. Supposethat labor is the only input usedby a perfectly competitivefim1:' The firm's
production function is as follows: " i ,

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~ of tabor U nits of Output Marginal Product Vatue of Marginal
Product
0 0

1 7 ~
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2 13 (
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3 19 ({
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4 25 'c {
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5 28 ? )'-~
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a) Calculate the marginal product for each additional worker.

b) Each unit of output sells for $10. -Calculate the value of the marginal product of each worker .

-Compute the demand schedule showing the number of workers hired for all wages from zero
to $100 a day. ~ ~ ~ :-<;>L.
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d) Graph the firm's demand curve.
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Carefully number and label the axes. ./J
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 a) Fill in all of the blank columns and the blank spacesin the Fixed Cost and Total Cost
Column..

b) What is the efficient level of production for the fim1?

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C?;) c) In space to the right, draw the firm

A verage Fixed Cost curve. Carefully label
and number both axes.

d) Does the shape you drew conform to the \j

real world? Explain
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,
Multiple Choice. (3 points each)

Tony is a wheat fanner, but he also spendspart of the day teaching guitar lessons. Due to the
popularity of his local country western band, Fanner Tony has more students requesting lessons
that he has time for ifhe is to also maintain his fanning business. Fanner Tony charges $25 an
hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth
of seedson his fann. He expects that the seedshe planted will yield $300 worth ofwheat.
7. Tony's economic profit equals TIl ..."1.."
,,~ $-130. I':~I , -/~;)
(J?,) $-80. )eo.., sj.
c. $130. P.~..e (~G,""" J ~ -~ 1-"l1
d. $170. I,,~ ;)\ --
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8. The efficient scale of the finn is the quantity of output that
a. maximizes marginal product.

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b. maximizes profit.
minimizes average total cost.
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d. minimizes average variable cost.

9. In a competitive market,
a. each seller can sell all he wants to sell at the going price.
b. buyers and sellers are price takers.
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c. the goods offered by the different sellers are largely the same-
@ All of the above are correct.

10. A natural monopoly occurs when

a. the product is sold in its natural state (such as water or diamonds). j)(1 ~
(b) there are economies of scale over the relevant range of output.
c. the firm is characterized by a rising marginal cost curve-
d. production requires the use of free natural resources, such as water or air.

1 The legislation passed by Congress in 1890 to reduce the market power of large and
powerful "trusts" is called the
a. Morgan Act. ( J -),
(§) Sherman Act. j e e 1""t'"'f
c. Clayton Act.
d. 14th Amendment.

12. If Levi Strauss & Co. were to require every store that carried their clothing to charge
customers 20 percent more than the store's cost for each item of clothing, Levi Strauss &
Co. would be practicing
('aJ resale price maintenance. (
~ fixed retail pricing. J1"'e C ..("-I". J t
c. tying.
d. cost plus pricing.
The figure below depicts the demand, marginal revenue and marginal cost curves of a profit-
maximizing monopolist. Used the figure to answer question 13. ", f

Quantity

13. Which of the following areas represents the deadweight loss due to monopoly pricing?
a. triangle bde D
(:3> triangle bge I (:>i)p/p wii""sI "' jJA i

c. rectangle acdb 11.1\

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d. rectangle cfgd

Use the following information to answer question 14.

Rocchetta Industries manufactures and supplies bottled water in Mexico. As a result of a
contamination of water supplies at many of Mexico's resort communities, the demand for bottled
water has increased. D1' PW47~/I r S'\;) Vl'1fJL 71' +~jl"
14. We would expect that, as a result of the contamination, the value of the marginal product for
Rocchetta Industries workers would
a. be offset by a decreasein wages.
b. be unaffected by a rise in demand for bottled water .
(9 rise.
a. fall.

15 In the long run, a monopolistically competitive firm produces a quantity that is

a. equal to the efficient scale.
(§) less than the efficient scale.
c. greater than the efficient scale.
d. consistent with diseconomies of scale.
'I !

16. (2 points. Extra credit if no more than one absence and answered corr$,rtly. )

The Brown Jug has decided to cut the price of chicken wings from 30 cents to 20 cents. Sales
increased from 50 up to 80. What is the value of the price effect and of the output effect?

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Price effect = Output effect = t( oJ