FINAL EXAMINATION A

Intermediate Microeconomics
(ECON 520)

December 13, 2005 Professor D. Weisman

There are two parts to this examination weighted 50 points each. Please write legibly and
think carefully about your answers. You may find that graphical and/or mathematical
analysis will assist you in answering some of these questions. Good Luck!

Part I. Multiple Choice (50 points). Indicate your choice for the best answer to each
question on the standardized answer sheet provided.

1. A technological advance in automobile production will likely result in

a. a decrease in the equilibrium price of automobiles.
b. an increase in the equilibrium price of automobiles.
c. no change in the equilibrium quantity of automobiles.
d. an increase in the equilibrium quantity of automobiles.
e.* a and d.

2. Government regulations that mandate the use of child safety seats on commercial
airplanes would more likely to cost more lives than it saves if
a. airline travel is an inferior good.
b. the own price elasticity of demand for automobile travel is equal to -1.
c. the cross-elasticity of automobile travel with respect to the price of airline
fares is relatively small.
d.* the cross-elasticity of automobile travel with respect to the price of airline
fares is relatively large.
e. none of the above.

3. Suppose that the price elasticity of demand for electricity is -1.5 at the market
clearing price and that supply is perfectly inelastic. What will result from a price
ceiling that is 10 percent below the market clearing price?
a. Consumers will be better off.
b. Consumers may be better or worse off.
c. A shortage equal 15 percent of the market clearing quantity.
d.* a and c.
e. b and c.

4. If the price of gasoline were to increase ceteris paribus, this would be expected to
result in:
a. an increase in the equilibrium price of automobiles.
b.* a decrease in the equilibrium price of automobiles.
c. no change in the equilibrium price of automobiles.
d. an increase in the consumers’ surplus in the market for gasoline.
 e. none of the above.

5. The price elasticity of long-distance telephone service is –0.7 and the cross
elasticity of long-distance and local telephone service is –0.25. Price changes are
implemented that result in an increase in the quantity demanded of long-distance
telephone service of 10 percent. If the price of long-distance telephone service is
reduced by 20 percent, what is the implied change in the price of local telephone
service?
a. a 10 percent increase.
b. a 10 percent decrease.
c.* a 16 percent increase.
d. a 5 percent increase.
e. a 5 percent decrease.

6. Mikey has a utility function given by U = 10 min {2C, M} where C is cereal and
M is milk. Cereal costs 4 cents per unit and milk costs 6 cents per unit. If Mikey
has income of $8 then to maximize utility Mikey purchases
a. 40 units of cereal and 80 units of milk.
b. 80 units each of cereal and milk.
c.* 50 units of cereal and 100 units of milk.
d. 100 units each of cereal and milk.
e. none of the above.

7. If Jill’s MRSP-B = 2, Jill would willingly give up:

a. 2, but no more than 2, units of pizza for 1 additional unit of beer.
b. 2, but no more than 2, units of beer for 1 additional unit of pizza.
c. 1, but no more than 1, unit of beer for an additional 2 units of pizza.
d. 1/2, but no more than 1/2, units of pizza for 1 additional beer.
e.* b. and d.

8. Which of the following is least likely to represent an actual demand curve.

a. Q = 100/[2P+ I].
b. Q = 120 - 3P + 2I.
c.* Q = 100 + 3P + 2I.
d. Q = 200I/P.
e. a. and d.

9. John’s demand for pizza decreases when the price of beer increases. In addition,
John always consumes 2 beers with each slice of pizza. Which of the following
represents John’s utility function.
a. U = 2BP.
b.* U = 10 min{B, 2P}.
c. U = 2B + 1P.
d. U = 5 min {2B, P}
e. none of the above.

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10. Suppose that Beer (B) and Pizza (P) are complements and that pizza is an inferior
good. Following standard notation, let Pp and PB denote the price of pizza and
beer, respectively and let I denote income. Which of the following demand
functions reflect these properties.
a. P = I/[2Pp].
b.* P = 10/I[Pp + 4PB].
c. P = 10I/[Pp + 4PB].
d. a. and c.
e. none of the above.

11. Suppose a firm’s production function is given by Q = 4KL, where K is capital and
L is labor. What is the marginal product of capital when 4 units of labor are
employed?
a. 2.
b. 4.
c. 6.
d.* 16.
e. None of the above.

12. A firm’s marginal product of labor is 5 and its marginal product of capital is 10. If
the firm adds one unit of capital, but does not want its output quantity to change,
the firm should
a. reduce its use of labor by 5 units.
b.* reduce its use of labor by 2 units.
c. maintain the same level of labor utilization.
d. also increase capital by 1.5 units.

13. A firm is operating in a range of production where the Law of Diminishing

Returns has set in. The firm’s total product when 6 units of labor is employed is
20. The marginal product of the 6th unit of labor is 4. The firm’s total product
when 7 units of labor is employed is
a. less than 20.
b.* greater than 20 but less than 24
c. greater than 24.
d. 24.
e. none of the above.

14. Assume that a firm’s production process is subject to increasing returns to scale
over a broad range of outputs. Long run average costs over this range of output
will tend to
a. increase.
b.* decrease.
c. remain constant.
d. fall to a minimum and then rise.

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15. The firm’s total cost of producing 10 units of output is 120. At this output level,
average fixed costs are equal to 2. It follows that the firms average variable costs
are equal to
a.* 10.
b. 20.
c. 2.
d. 4.
e. none of the above.

16. In a competitive market, the firm’s demand curve is

a. the same as the market demand curve.
b. downward sloping to the right.
c.* horizontal at all output rates for the firm.
d. upward sloping and then downward sloping as output is increased.
e. none of the above.

17. A firm will shut down in the short run when:

1. price is less than average total costs.
2. price is less than average variable costs.
3. total revenues are less than total variable costs.
Which of the following is correct?
a. 1 only.
b. 1 and 2 only.
c.* 2 and 3 only.
d. 1 and 3 only.
e. 1, 2, and 3.

18. A monopolist is currently operating where the price elasticity is equal to –0.5. In
order to maximize profits, the monopolist should
a. sell more output.
b.* sell less output.
c. sell the same amount of output.
d. a. or c.
e. b. or c.

19. A monopolist operates in two submarkets. In submarket 1, Ed = -2 and in

submarket 2, Ed = -4. Suppose that C(Q) = 3Q in both markets. The profit-
maximizing prices for this monopolist are given by
a. P1 = 2 and P2 = 2
b. P1 = 2 and P2 = 3
c. P1 = 2 and P2 = 5
d.* P1 = 6 and P2 = 4
e. None of the above.

20. Suppose that the Department of Justice (DOJ) vetoes all mergers that are likely to
lead to an increase in price of the product. The market demand function is given

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 by P(Q) = 24 – Q. Pre-merger, the market is competitive and the cost function is
given by C(Q) = 16Q. Post-merger, the market will be controlled by a monopolist
and C(Q) = xQ. For what values of x will the DOJ approve this merger?
a.* values of x less than or equal to 8.
b. values of x less than or equal to 12.
c. values of x greater than 8.
d. values of x less than or equal to 16.
e. The DOJ will not approve this merger for any value of x.

Part II. Problems (50 points). Answer both questions. Each question is worth 25 points.
Show all of your work to receive partial credit. Please write legibly, be precise with your
answers, and remember that economy of presentation is a desirable quality.

1. (25) The competitive firm’s marginal cost function is given by MC(q) = 4 + 2q and its
variable costs are given by AVC(q) = 4 + q.

a) (6) What is the profit-maximizing level of output for the competitive firm if the
market price is equal to 16? If fixed costs were to decrease, how would the firm
alter its profit-maximizing level of output?

b) (6) What is the producer surplus for this firm at the profit-maximizing level of
output?

c) (6) What are the firm’s average fixed costs if profits are equal to 24?

d) (6) How much output should this firm produce if the market price falls to 4?

2. (25) The market demand function is given by Q = 20 - P, where Q is output and P is

price.

a) (10) What price would a profit-maximizing monopolist charge if C(Q) = F + 2Q,

where F > 0 are fixed costs? Determine the monopolist’s profits if its average
fixed costs in equilibrium are equal to 4?

b) (10) How much better/worse off would consumers be if the competitive

outcome prevailed in this market? [Assume the same cost function as in part a)]

c) (5) Suppose now that Q = 1/n2 min{K, L} is the production function for this industry,
where K is capital, L is labor and the positive integer n is the number of firms
participating in this market. In addition, let r = 1 and w = 1. Suppose that the
competitive outcome prevails for all n > 1. If consumers could choose the number
of firms participating in this market, what value of n would they choose? Provide
a clear economic rationale for your answer.