Temple University
Department of Economics

Economics 52
Principles of Microeconomics
Fall 2005

Name _________________________________________

Directions: You have 50 minutes to complete this exam.  You must do all questions.  You may NOT use your cell phone as a calculator.  This is a closed book exam.  Your answers must be your own work; you may neither give nor receive help.

Multiple Choice (32points) Answers at the end.

Use the following to answer question 1:

	1.	If the output price for this good is 50 cents, the firm should produce 
	A)	between 0 and 45 units. 
	B)	more than 180 units but less than 225. 
	C)	more than 225 units. 
	D)	more than 135 units but less than 180 units. 
	E)	between 90 and 45 units. 

	2.	Which of the following factors of production is likely to be variable in the short run? 
	A)	The size of the firm's plant or office. 
	B)	The location of the firm. 
	C)	The number of employee-hours. 
	D)	The number of features in a custom designed software application the firm uses. 
	E)	The amount of specialized machinery. 

	3.	Congestion of the space and fixed factors of production at the firm explains 
	A)	increased self employment. 
	B)	decreased employee morale. 
	C)	increased workplace violence. 
	D)	the law of diminishing marginal returns. 
	E)	high employee turnover. 
	4.	Total revenue minus total explicit and implicit costs defines 
	A)	retained earnings. 
	B)	gross earnings. 
	C)	net earnings. 
	D)	net worth. 
	E)	profit. 

Use the following to answer question 5:
Figure 7.6

	5.	The extent of total economic surplus with supply and demand curves S and D is represented by the points 
	A)	AKC. 
	B)	IJC. 
	C)	MKC. 
	D)	MLI. 
	E)	MAC. 

	6.	The resulting reduction in the total economic surplus due to any price blocking policy is 
	A)	conspicuous consumption. 
	B)	deadweight loss. 
	C)	total economic surplus. 
	D)	consumer surplus. 
	E)	producer surplus. 

	7.	Total economic surplus is 
	A)	the sum of consumer and producer surpluses. 
	B)	the difference between tax revenues and government expenditures. 
	C)	minimized at the point of market equilibrium. 
	D)	the difference between consumer surplus and producer surplus. 
	E)	the ratio of consumer surplus to producer surplus. 
Use the following to answer question 8:

	8.	The cost to producers of producing the 12th unit through the 20th unit is 
	A)	$18.64. 
	B)	$48. 
	C)	$8. 
	D)	$56. 
	E)	$10.64. 

	9.	Suppose the government grants grain subsidies to poor farmers to raise farm family incomes.  Over time, 
	A)	poor farm families are made permanently better off. 
	B)	the quality of grains will rise. 
	C)	as farm profits increase, new farmers will enter and drive down the  profits to zero. 
	D)	the quality of grains will fall. 
	E)	as new farmers enter, government will lessen the size of the subsidy. 

	10.	The reason economic profit is driven to zero by competition but economic rent is not stems from 
	A)	an inability to produce more of the input earning the rent. 
	B)	barriers to entry. 
	C)	inefficient allocation of inputs. 
	D)	a failure of the invisible hand. 
	E)	lack of antitrust legislation for input markets. 

	11.	Economic profits are 
	A)	the same as accounting profits. 
	B)	equal to total revenue minus both explicit and implicit costs. 
	C)	only important to economists. 
	D)	equal to total revenue minus the sum of fixed and variable costs. 
	E)	greater than accounting profits. 

	12.	If all firms in a perfectly competitive industry are earning a normal profit, then 
	A)	firms are doing better than their next best alternative. 
	B)	firms will be exiting the industry. 
	C)	firms are doing worse than their next best alternative. 
	D)	the number of firms is stable. 
	E)	firms will be entering the industry. 

	13.	When a monopolist sells additional units, 
	A)	total revenues always rise. 
	B)	total revenues may rise, fall, or remain unchanged. 
	C)	total revenues always fall. 
	D)	marginal revenues are constant. 
	E)	marginal revenues rise. 

	14.	The monopolist will maximize profits if she produces where 
	A)	elasticity of demand is zero. 
	B)	price equals marginal costs. 
	C)	marginal revenue equals average total cost. 
	D)	marginal revenue equals marginal cost. 
	E)	price equals the minimum average total cost. 

	15.	Given the total cost function, TC=100+7*Q, fixed costs are 
	A)	$7/Q. 
	B)	$100. 
	C)	$7. 
	D)	$107. 
	E)	$100/Q. 

	16.	If a firm collects $100 in revenues when it sells 5 units and $120 when it sells 6 units, one can infer the firm is 
	A)	a perfect competitor. 
	B)	probably a monopolist. 
	C)	either a perfect competitor or a monopolist. 
	D)	a monopolist. 
	E)	an oligopolist. 

Essay  (18 points)  In your answer to this question you will be graded not only on content, but also spelling, grammar, syntax and style.  A price floor is imposed on the market for gopher wood in Ararat.  Evaluate this policy.  In your answer consider the following questions:  What will happen to consumer surplus as a result of the price floor?  Are all of the same consumers still consuming gopher wood after the imposition of the price floor?  Do consumers feel universally better off? Do any consumers feel better off? After the imposition of the price floor are there any consumers for whom their marginal utility of gopher wood has increased?  Do any producers feel better off as a result of the imposition of the price floor?  Be brief!

Consumer surplus falls.
Fewer consumers are in the market.
No consumer feels better off; some are much worse off.
Since all consumers behave according to the rational spending rule in order for MU/P to remain constant as P rises, it must be the case that MU goes up as well.
Those firms who win the first Qd customers realize larger producer surplus. 

Problem (50 points)

The market for runcible spoons is characterized by the following equations:

Q = -100 + 10P    _____Supply_____________

Q = 200 – 5P    _____Demand____________

a.  On the lines to the right of the two equations indicate which is the demand curve and which is the supply curve.

b. What are the equilibrium price and quantity in the market for runcible spoons?  Show your work, but put your answers on the appropriate lines.

P (price) =  ____20____________________  Q (quantity) = ___100______________________

- 100 + 10P = 200 – 5P
100 = 5P
P=20

c.  In the space below draw a graph showing the supply curve and the demand curve for runcible spoons.  Be sure to label the axes, show the numerical values of the intercepts, and the equilibrium price and quantity.

d. What is the definition of consumer surplus?

The difference between what people are willing to pay and what they have to pay, aggregated over  all consumers.

e. What is the amount of consumer surplus in the market for runcible spoons?  Put your answer on the indicated line, but also show your work.    

Consumer Surplus = ____________________________

½ (40-20)(100) = 1000

f. What is the definition of producer surplus?

The difference between the seller’s reservation price and what they get, aggregated over all sellers.

g.  What is the amount of producer surplus in the market for runcible spoons? Show your work, but also put your answer on the indicated line.

Producer Surplus = ____________________________

½ (20-10)(100) = 500

h. What is the total value of economic surplus? (Your book characterized this as the size of the pie.) Put your answer on the line.

Economic Surplus = _______1500____________________

It is highly recommended that you draw another picture to aid in answering the following questions. You will find it to add new information to the picture as you proceed through the questions.

i.  A price ceiling of P = 15 is imposed on the market for runcible spoons.  What will be the quantity demanded under the price ceiling?

Quantity demanded = ____________________

Q = 200 – 5(15) = 125

j. With a price ceiling of P = 15 what will be the quantity supplied?

Quantity supplied = ____________________

Q = - 100 +10(15) = 50

k. At the quantity supplied with the price ceiling of P = 15, what is the price that the marginal customer would pay for a runcible spoon?  Put another way, what is the reservation price for the ‘last’ customer purchasing a runcible spoon? 

Reservation price = _____________________

P = 40 – 1/5 (50) = 30

l. What is the amount of producer surplus when there is a price ceiling of P = 15?

Producer Surplus = _____________________

½ (15-10)(50) = 125

m. Has producer surplus increased or decreased?  By how much?

Circle one:  increased     decreased

Amount of change = ______500 - 125 = 375_________________

n. What is the amount of consumer surplus when there is a price ceiling of P = 15?

Consumer Surplus = ____________________

½ (40-30)(50) + (30-15)(50) = 1000

o. Has consumer surplus increased or decreased? By how much?

Circle one:   increased       decreased    no change

Amount of change = _____0_______________

p.  What is the amount of total economic surplus when there is a price ceiling of P = 15?

Economic Surplus = _______1000+125_____________

q. Has total economic surplus increased or decreased? By how much?

Circle one:   increased      decreased

Amount of change = _____375______________

r.  What is the amount of deadweight loss, if any?

Deadweight loss = _____________________

DWL = ½ (30-15)(50) = 375

s.  For any consumer has the size of their ‘slice of the pie’ increased as a result of the imposition of the price ceiling? Explain.  (You may draw a picture to aid in your explanation.)

Yes, those with high reservation prices and still in the market are better off.

t. For any producer has the size of their ‘slice of the pie’ increased as a result of the imposition of the price ceiling? Explain. (You may draw a picture to aid in your explanation.)

No, they are all worse off.
Answer Key

	1.	D	
	2.	C	
	3.	D	
	4.	E	
	5.	C	
	6.	B	
	7.	A	
	8.	D	
	9.	C	
	10.	A	
	11.	B	
	12.	D	
	13.	B	
	14.	D	
	15.	B	
	16.	A