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ECMA04H
Second Term Test November 16, 2011 Time: 90 minutes
Profs. Gordon Cleveland and Jack Parkinson

Version A


Instructions: PLEASE READ CAREFULLY

1. On the Scantron answer sheet, you must
! PRINT your last name and first name
! enter your student number as the identification number
! FILL IN THE BUBBLES under your name and student number
! FILL IN THE BUBBLE ASSOCIATED WITH YOUR TEST VERSION
NOTE - THIS IS VERSION A

2. If you fail to carry out all the tasks indicated in part 1, 4 marks will be deducted
from your final score.

3. This exam consists of 25 multiple choice questions (and a 26
th
which will
confirm your exam version). For each question, choose the correct answer. If two
multiple choice answers both seem to be approximately correct, choose the better
of the two answers. Enter the answers to the multiple choice questions on the
Scantron sheet provided to you by filling in the appropriate bubble. If
answers are not written on this sheet, there will be no marks given for
answers. Each correct answer is worth 4 marks (except for question 26, where the
correct answer simply confirms your exam version); incorrect answers receive 0
marks.

4. When entering your answers on the Scantron sheet:
! Use a medium (HB) pencil (do not use a red pen)
! Fill in the bubble neatly and completely (this is important)
! Erase any changes as completely as possible
! Be very careful to place each answer in the correct place

Note: this exam consists of 9 pages, including this cover page. Make sure that all 9
pages are included in your exam, and notify an invigilator immediately if any are
missing.


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ECMA04 SECOND TERM TEST November 16, 2011

This term test consists of 25 questions. Answer each question by choosing the best alternative
and indicating your choice by filling in the appropriate bubble on the Scantron sheet - it is the
only thing you will turn in at the end of the exam. You may take the rest of the exam away with
you, so you can use the fronts and back of these pages for your rough work. If you wish to keep a
record of your answers, make a note of them on the exam question sheets. The answer sheet
(Scantron) will NOT be returned to you, but the correct answers will be posted on the
Blackboard site for this course. Each correct answer is worth 4 marks (there is no deduction for
wrong answers).


1-7. A (typical) firm in a perfectly competitive constant cost industry has total costs in the short
run given by:
TC = 507 + 11q + 3q
2
, q " 2
FC = 360
where q is output per day and TC is the total cost per day in dollars. The firm has fixed costs of
$360 (already included in the TC equation above). The TC equation generates minimum average
costs of $89 (per unit) at q = 13. You are also told that this size firm generates minimum long
run average costs (that is, minimum LRAC occurs at q = 13, with min LRAC = $89). Questions
1 through 7 concern this firm and this industry.

1. You are told that in the short run there are 400 firms, including this one, in the industry, all
with the same cost curves described above. Suppose that the demand curve facing the industry is
given by the equation P = 211 - .035Q where P is the price per unit and Q is the number of
units demanded per day. The equilibrium price in this industry in the short run is:
A) $59 B) $71 C) $77 D) $85 E) $89 F) $93
G) $97 H) $101 I) $111 J) none of the above

2. This profit earned by each firm in this industry in this short run equilibrium is:
A) $0 B) -$360 C) -$234 D) -$207 E) -$124 F) -$86 G) $64
H) $124 I) $168 J) none of the above

3. Given the demand curve described in question 1, suppose that we are now in the long run.
The total output of the industry per day in the long run, rounding to the nearest integer, is:
A) 0 B) 2476 C) 2874 D) 3196 E) 3268 F) 3486
G) 3684 H) 3896 I) 4246 J) none of the above



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4. Given the demand curve described in question 1, suppose that we are still in the long run.
The number of firms in the industry, rounding to the nearest integer, is:
A) 146 B) 173 C) 218 D) 232 E) 268 F) 286
G) 324 H) 346 I) 400 J) none of the above

5. Now, you can ignore the long-run situation. Think again about the short run. This firms shut
down price is:
A) $34 B) $47 C) $53 D) $57 E) $65 F) $68
G) $71 H) $83 I) $89 J) none of the above

6. We are now in a new short-run situation with 400 firms in the industry and the same cost
curves described at the beginning of this set of questions. Now, imagine that the industry
demand curve falls to P = 83 - .015Q. When the industry settles down into a new short-run
equilibrium, what will be the new equilibrium price?
A) $34 B) $47 C) $53 D) $57 E) $65 F) $68
G) $71 H) $83 I) $89 J) none of the above

7. Rounding to the nearest integer, in the new short run equilibrium described in Question 6, how
many firms will have temporarily shut down (compared to the 400 firms originally in this
industry)?
A) 400 (all) B) 368 C) 360 D) 352 E) 348 F) 332
G) 286 H) 114 I) 0 (none) J) none of the above



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8 11. The following information applies to questions 8 through 11. Suppose a typical firm has
a total cost function given by: TC = AQ
2
+ BQ + (C+D), where A, B, C & D are all positive
constants and D represents the firms fixed costs.

8. Suppose that the term D in the total cost function changes to a new figure that is $10 higher.
Thinking about the cost curves drawn on a graph, we would expect the following to happen
(choose the best answer):

A) The average variable cost curve shifts up.
B) The level of quantity where average variable cost is minimized changes.
C) The marginal cost curve shifts up.
D) The average cost curve shifts up.
E) The level of quantity where average cost is minimized changes.
F) All of the above statements are true.
G) Statements A & B are true.
H) Statements D & E are true.
I) Statements A, C & D are true.
J) None of the above statements are true.

9. Use the information about the total cost function supplied above. Now, suppose the term A in
the total cost function changes to a new figure that is $12 lower. Thinking about the cost curves
drawn on a graph, we would expect the following to happen (choose the best answer):

A) The average variable cost curve shifts down.
B) The level of quantity where average variable cost is minimized changes.
C) The marginal cost curve shifts down.
D) The average cost curve shifts down.
E) The level of quantity where average cost is minimized changes.
F) All of the above statements are true.
G) Statements A & B are true.
H) Statements D & E are true.
I) Statements A, C & D are true.
J) None of the above statements are true.

10. Use the information about the total cost function supplied above. The marginal cost curve
will shift whenever:

A) The A term changes.
B) The B term changes.
C) The C term changes.
D) The D term changes.
E) All of the above statements are true.
F) Statements A & B are true
G) Statements B & C are true.
H) Statements C & D are true.
I) Statements A, B & C are true.
J) Statements B, C & D are true.



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11. Use the information about the total cost function supplied above. The quantity of output
where the average variable cost curve is at a minimum will change whenever:

A) The A term changes.
B) The B term changes.
C) The C term changes.
D) The D term changes.
E) All of the statements are true.
F) Statements A & B are true.
G) Statements A & C are true.
H) Statements A & D are true.
I) Statements A, B & C are true.
J) Statements A, C & D are true.

12. Here are several statements about the equilibrium in a perfectly competitive industry:
I. This equilibrium maximizes the amount of consumer surplus that consumers receive
II. In perfectly competitive equilibrium, the value to consumers of the marginal unit of
the good purchased is higher than the marginal cost of producing that unit, creating
consumer surplus
III. In long run equilibrium, all firms that want to enter the industry have entered and all
firms that want to exit the industry have exited
Which of the above statements are true?
A) I only B) II only C) III only D) I and II E) I and III
F) II and III G) I and II and III H) none of the statements are true

13. Here are several statements about producer surplus:
I. In the short run, producer surplus measures the surplus of revenue received by the
producers above their variable costs of production.
II. In the short run, producer surplus is equivalent to profit if there are no fixed costs.
III. If a supply curve is perfectly elastic, there is no producer surplus
Which of the above statements are true?
A) I only B) II only C) III only D) I and II E) I and III
F) II and III G) I and II and III H) none of the statements are true



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14. Here are several statements about the demand and output of a monopoly producer:
I. For a monopolist, the change in total revenue brought about by producing an extra unit of
output is always less than the current price of that output.
II. A monopolist will maximize profit at the output where marginal revenue is as high as
possible above marginal cost
III. A monopoly firm will maximize profit by producing where demand is inelastic
Which of the above statements are true?
A) I only B) II only C) III only D) I and II E) I and III
F) II and III G) I and II and III H) none of the statements are true

15. Which of the following statements are correct about the effect of different types of shocks
on the long-run equilibrium in a perfectly competitive market in a constant cost industry?
I. A decrease in industry demand for the product will lead to losses in the long run for each firm
in the industry.
II. An excise tax will generally result in higher prices for consumers and lower revenues received
by sellers.
III. An increase in industry demand for the product will lead to increased numbers of firms in the
industry.
A) none B) only I C) only II D) only III E) only I and II F) only I and III
G) only II and III H) I and II and III

16. At the current level of output, a firm faces the following situation: P > AC > MC > MR. On
the basis of this information, we can conclude that:
(A) This is a monopoly firm that is currently producing too much output to maximize profit. It
should shut down in the long run.
(B) This is a perfectly competitive firm that is currently producing too much output to maximize
profit. It should shut down in the long run.
(C) This is a monopoly firm that is currently producing too little output to maximize profit. It
should shut down in the long run.
(D) This is a perfectly competitive firm that is currently producing too little output to maximize
profit. It should shut down in the long run.
(E) This is a monopoly firm that is producing the profit-maximizing output. It should continue
to do what it is doing.
(F) This is a perfectly competitive firm that is producing the profit-maximizing output. It should
continue to do what it is doing.
(G) This is a monopoly firm that is currently producing too much output to maximize profit. It
should not shut down in the long run.
(H) This is a perfectly competitive firm that is currently producing too much output to maximize
profit. It should not shut down in the long run.
(I) This is a monopoly firm that is currently producing too little output to maximize profit. It
should not shut down in the long run.
(J) This is a perfectly competitive firm that is currently producing too little output to maximize
profit. It should not shut down in the long run.




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17-21. The short run total cost function for a monopoly firm is given by:
TC = 0.1q
2
+ 6q + 40 q " 2

where q is output per day and TC is the total cost per day in dollars. The firm has fixed costs of
$30 (already included in the TC equation above). The TC equation generates minimum average
costs of $10 (per unit) at q = 20. This monopoly firm faces an industry demand curve given by
the equation:
P = 62 - 0.1Q

Questions 17 through 21 concern this firm.

17. What is the number of units of output produced by this firm in the short run?
A) 110 B) 120 C) 130 D) 140 E) 150 F) 160
G) 170 H) 180 I) 190 J) none of the above

18. The price charged by the firm in the short run is:
A) $24 B) $27 C) $33 D) $39 E) $45 F) $48
G) $51 H) $53 I) $59 J) none of the above

Now imagine a tax of $12 per unit is levied on the monopolist. This information will be useful
in answering questions 19 through 21.

19. Netting out the tax, what amount of revenue per unit (i.e., P
S
) will the monopolist receive
after this excise tax is levied?
A) $24 B) $27 C) $33 D) $39 E) $45 F) $48
G) $51 H) $55 I) $59 J) none of the above

20. What amount of excess burden will this tax have caused?
A) $240 B) $270 C) $335 D) $390 E) $455 F) $485
G) $510 H) $555 I) $825 J) none of the above

21. What is the total amount of tax revenue raised by the tax?
A) $0 B) $486 C) $668 D) $928 E) $1232 F) $1320
G) $1460 H) $1560 I) $1680 J) none of the above














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22. What is the short-run effect on a perfectly competitive constant-cost industry of a $1 per
unit government tax (presuming normally-shaped cost curves)?
(A) rise in price by $1, decrease in firm output and industry output, and no change in
profit
(B) rise in price by $1, decrease in industry output, but no change in firm output or
profit
(C) rise in price by $1, decrease in firm output, but no change in industry output or
profit
(D) rise in price by $1 but no change in firm output, industry output, or profit
(E) rise in price by less than $1 and decrease in firm output, industry output and profit
(F) rise in price by less than $1, decrease in firm and industry output and no change in
profit
(G) rise in price by $1 and decrease in firm output, industry output, and profit
(H) none of the above

23. What is the long-run effect on a perfectly competitive constant-cost industry of a $1 per
unit government tax?
(A) rise in price by $1, decrease in firm output and industry output, and no change in
profit
(B) rise in price by $1, decrease in industry output, but no change in firm output or
profit
(C) rise in price by $1, decrease in firm output, but no change in industry output or
profit
(D) rise in price by $1 but no change in firm output, industry output, or profit
(E) rise in price by less than $1 and decrease in firm output, industry output and profit
(F) rise in price by less than $1, decrease in firm and industry output and no change in
profit
(G) rise in price by $1 and decrease in firm output, industry output, and profit
(H) none of the above

24. Suppose that Variable Costs = 20q + 0.2q
2
and Fixed Costs = 720 for a typical firm in a
perfectly competitive constant cost industry. Total costs in the short run and long run are the
same. All firms in the industry are identical. The typical firm is currently in both long run
and short run equilibrium. What is the equilibrium price and output of this typical firm?
(A) it is not possible to tell without additional information
(B) output is 40 and price is $24
(C) output is 60 and price is $32
(D) output is 80 and price is $44
(E) output is 100 and price is $72
(F) output is 50 and price is $26
(G) output is 60 and price is $44
(H) none of the above






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25. At the current level of output, a firm faces the following situation:
AC = P = MR > MC > AVC. On the basis of this information, we can conclude that:
(A) This is a monopoly firm that is currently producing too much output to maximize profit. It
should shut down in the long run.
(B) This is a perfectly competitive firm that is currently producing too much output to maximize
profit. It should shut down in the long run.
(C) This is a monopoly firm that is currently producing too little output to maximize profit. It
should shut down in the long run.
(D) This is a perfectly competitive firm that is currently producing too little output to maximize
profit. It should shut down in the long run.
(E) This is a monopoly firm that is producing the profit-maximizing output. It should continue
to do what it is doing.
(F) This is a perfectly competitive firm that is producing the profit-maximizing output. It should
continue to do what it is doing.
(G) This is a monopoly firm that is currently producing too much output to maximize profit. It
should not shut down in the long run.
(H) This is a perfectly competitive firm that is currently producing too much output to maximize
profit. It should not shut down in the long run.
(I) This is a monopoly firm that is currently producing too little output to maximize profit. It
should not shut down in the long run.
(J) This is a perfectly competitive firm that is currently producing too little output to maximize
profit. It should not shut down in the long run.


26. What is the version of the exam which you have just written? Hint - your correct answer is A

A) Version A B) Version B C) Version C D) Version D