ECON 2106 TEST REVIEW #3 11/11/10

(By the way, this is not a guarantee of everything that could be on the test.)

1. A farm can produce 1,000 bushels of wheat per year with two workers and 1,300 bushels of wheat per year with four workers. The marginal product of the fourth worker is:A) 100 bushels.B) 300 bushels.C) 1,300 bushels.D) 150 bushels.

2. Suppose that the market for candy canes operates under conditions of perfect competition, that it is initially in long-run equilibrium, and that the price of each candy cane is $0.10. Now suppose that the price of sugar rises, increasing the marginal and average total cost of producing candy canes by $0.05; there are no other changes in production costs. Based on the information given, we can conclude that in the long run we will observe:A) firms leaving the industry.B) firms entering the industry.C) some firms entering and some firms leaving.D) neither entry nor exit from the industry.

Use the following to answer question 3:

3. (Table: Production of Cabinets) The table shows how many cabinets your firm can make with a variable quantity of labor hired. After which worker does the firm begin to experience diminishing returns to labor?A) firstB) secondC) thirdD) fourth

Page 1

Use the following to answer questions 4-5:

Figure: Firms in Monopolistic Competition

4. (Figure: Firms in Monopolistic Competition) Long-run equilibrium is illustrated at the profit-maximizing price ________ in panel ________.A) F; AB) G; AC) H; BD) I; C

5. (Figure: Firms in Monopolistic Competition) In panel C, the profit-maximizing quantity of output is generated by the intersection at point:A) U.B) V.C) W.D) X.

Use the following to answer question 6:

6. (Table: Two Rival Gas Stations) There are only two gas stations in a small town, Swifty Gas and Speedy Gas. Each firm can set either a high price or a low price, and customers view these two firms as nearly perfect substitutes. The table shows the payoff matrix of daily profits that each firm would receive from their pricing decision, given the pricing decision of their rival. Profits in each cell of the payoff matrix are given as (Swifty, Speedy). Which of the following choices describes a dominant strategy?A) Swifty will always set a low price, no matter Speedy's choice.B) Swifty will always set a high price, no matter Speedy's choice.C) Swifty will set a low price when Speedy sets a high price, but Swifty will set a high

price when Speedy sets a low price.D) Swifty will set a high price when Speedy sets a high price, but Swifty will set a low

price when Speedy sets a low price.

Page 2

Use the following to answer question 7:

Figure: A Gadget Monopoly

7. (Figure: A Gadget Monopoly) The graph shows a monopoly firm that sells gadgets. If the firm is regulated such that the firm earns zero economic profit, the firm will sell ________ units at a price of ________ per unit.A) Q1; P1

B) Q2; P1

C) Q4; P3

D) Q3; P2

Use the following to answer question 8:

8. (Table: Costs of Producing Bagels) Average total cost reaches its minimum value for the ________ bagel.A) firstB) thirdC) fourthD) fifth

Page 3

9. Suppose Prof. Dumbledorr's magic hat monopoly is broken up and the magic hat industry becomes perfectly competitive. We would expect the ________ to increase from the breakup and ________ to decrease from the breakup.A) producer surplus; consumer surplus and total surplusB) consumer surplus; producer surplus and total surplusC) consumer surplus and total surplus; producer surplusD) producer surplus and total surplus; consumer surplus

10. The largest HHI possible is in the case of ________ and the index is ________ .A) monopoly; 10B) monopoly; 10,000C) monopoly; 100,000D) oligopoly; 100,000

11. In general, oligopolists find it easier to engage in collusive behavior when the industry is characterized by ________ behavior.A) CournotB) BertrandC) noncooperativeD) interdependent

12. If the toothpaste market is monopolistically competitive, product differentiation will take place in which of the following forms?A) different varieties of toothpaste—including whitening agentsB) differentiation in the locations where certain toothpastes are availableC) quality differences among the various brandsD) all of these forms

Use the following to answer question 13:

13. (Table: Soybean Cost) The costs of production of a perfectly competitive soybean farmer are given in the table. If the market price of a bushel of soybeans is $15, how many bushels will the farmer produce to maximize short-run profit?A) 4B) 5C) 3D) 7

Page 4

Use the following to answer question 14:

Figure: A Firm's Cost Curves

14. (Figure: A Firm's Cost Curves) The curve labeled V represents the firm's ________ curve.A) total costB) average total costC) marginal costD) average variable cost

15. Suppose the price elasticity of demand for coffee at the CoffeeBarn equals 1.71 for women and 0.55 for men. A successful price discrimination strategy would lead to:A) lower prices for men and women.B) lower prices for men and higher prices for women.C) lower prices for men and higher prices for women, as long as the CoffeeBarn could

prevent men from reselling drinks to women.D) higher prices for men and lower prices for women, as long as the CoffeeBarn could

prevent women from reselling drinks to men.

16. Toby operates a small deli downtown. The deli industry is monopolistically competitive. Toby tells you that his and every other deli in town is producing the quantity that minimizes their average total cost. Assuming the delis are maximizing profits, you know that the:A) number of delis will soon decrease.B) number of delis will soon increase.C) delis' prices equal their average total costs.D) delis have excess capacity.

Page 5

Use the following to answer question 17:

Figure: Profit Maximizing

17. (Figure: Profit Maximizing) The figure shows cost curves for a firm operating in a perfectly competitive market. Which of the following statements is true?A) AFC is represented in this figure by the vertical distance between Curve M and

Curve N at any level of output.B) AFC is represented in this figure by the vertical distance between Curve N and

Curve O at any level of output.C) This figure illustrates the long run because all costs are variable.D) Quantity q2 is to the left of the shut-down point.

Helpful tools:- Dr Frost’s and Andy’s office hours listed in the syllabus! They make the test! I don’t! - iTunes U episodes- Practice tests, past quizzes and book (Chapters 12-16)- SI worksheets and study guides!

o Wordpress.com/econ2106si- Stuff in “review materials” folder- Dr. Frost’s past exams in “Exams” folder- Past clicker questions from class. Look in “CPS” folder to find out where to look.- Utilize the discussion board on ULearn- SI session with me Tuesday 11/16 for last minute questions in LN 518

o (No session after class on Tuesday)

Next: Chapter 17: Externalities!Thursday 11/18

Page 6

Answer Key

1. D2. A3. B4. C5. D6. A7. C8. C9. C

10. B11. A12. D13. B14. C15. D16. B17. B

Page 7