Midterm 1 Information and Sample Questions The midterm exam will cover the material through our discussion

of basic monopoly (but with nothing on natural monopoly). As such, you are responsible for the related reading and practice problems for the first three topics (where I am including the math section in my count1); see the course syllabus (reading is that from just Sessions 1 and 2 on the syllabus). Below are some sample questions. These are not intended to cover all the material, but to provide a sample of the types of questions to expect. I am only providing answers to the numerical questions most of the questions below were covered in class and perhaps Ill use a few of these questions on the exam. I expect to ask about five to six questions like those below on your exam. As you know, youll take the exam at the beginning of our Dec. 7 class (first 75 minutes) and you can bring: (i) a one-page (8 x 11), one-sided formula sheet;2 and a (ii) calculator. I suggest also bringing pencils and a straight-edge (for drawing graphs). Sample Exam Questions: 1. Assume the standard two-input model of production is applicable. In the short run, MC = w/MPL. Explain why the latter relationship holds. (Alternatively, you can prove it.) 2. Let MTR denote the marginal income tax rate in an economy. Let ATR denote the average income tax in the economy. In each case below, given the shape of the MTR, graph the implied ATR. (Note to students: We did not cover this application in class, but this is an application of the standard relation between marginals and averages. So I take you slightly away from what we specifically covered in class in this question.) (i)

Tax Rate

MTR

Income

I will not ask any pure math questions, but some of the math stuff is used in the economics problems. You can put whatever you want on your formula sheet; it can be typed, no font restrictions, whatever.

(ii)

Tax Rate

MTR

Income
3. (i) If a firm will optimally use two plants to produce, what condition characterizes the costminimizing split of the aggregate output between the two plants? Explain why this condition must hold.
2 2 and 2Q 2 , where Q1 denotes output (ii) A firm has two plants with respective total costs of 4Q1 used at plant 1 and Q2 denotes output produced at plant 2. If the firm will produce 120 units of output in total, then how much should produced at each plant?

4. (i) A price taking producer of good q operating in the short run has total cost (including all costs) given by: C(Q) = (.02)Q2 + 300,000. (Make the standard assumptions about the short run.) Find the producers profit maximum assuming market price of Q is $100. Indicate price, output, and profits and explain/show how you get your answer. (ii) Now suppose the same firm has another plant, with cost function exactly the same as the first plant. Continuing to assume a short run environment, find the profit maximum. (Explain of course.) 5. All of a concert promoters costs are fixed. The demand for tickets to the concert is downward sloping and all tickets must be sold at the same price. Let Q denote the number of tickets (or seats) sold. Suppose that the venue has limited seating capacity; let Qc denote the number of seats that can feasibly be sold. Will it always be optimal to sell out? If not, clarify when and when not selling out will be optimal. 6. In the standard two-input model with production function Q = F(K,L), what condition(s) must be satisfied for the firm to minimize total cost in the long run? Explain why this (these) condition(s) must hold. 7. If the criterion for pursuing an economic activity is that the associated profits are positive (or non-negative), then where do opportunity costs fit in? What about sunk costs? Explain, of course.

1 8. One can write marginal revenue as: MR = P [1 + ], where E denotes the price elasticity of E the demand curve. What does this tell us about marginal revenue when demand is elastic of inelastic, and what is the implication for what would need to be done to increase (total) revenues?

9. In the standard case of a monopolist, explain why the monopolist will not choose an output where demand is inelastic. (Alternatively, you can prove this.)

Answers to 3 & 4 (just the numerical answers): 3. (ii) Q1 = 40 and Q2 = 80. 4. (i) The firm adopts the market price ($100), produces Q = 2500, and earns economic profits equal to $125,000 (where I have thrown out the $300,000 in fixed costs, which are sunk costs in the short run). A perfectly acceptable answer would be to indicate that the firm loses $175,000 by producing while it would lose $300,000 if it shut down; so it does want to produce. That is, reporting the accounting costs from the alternative decisions is fine. Generally, there are different ways to provide a correct answer. (ii) The firm adopts the market price, produces 2500 at each plant, and earns a total economic profit of $250,000. Again, Ive thrown out the sunk costs in my profit calculation. (As in part (i), you could alternatively report the accounting profits from producing versus shutting down; and state the obvious that the firm prefers to produce.)