Temple University
Department of Economics
Economics 52
Fall 2006
2nd  Exam

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

Name___________________________________
 
MULTIPLE CHOICE (32 points).  Choose the one alternative that best completes the statement or answers the question. 
Use the figure for the question(s) below.

 
1) 

In the figure above, producer surplus when price is $3 is 

1) 

_______ 
A) 

$1.00. 

B) 

$9.00. 

C) 

$4.50. 

D) 

$3.00. 

E) 

$0. 

 
2) 

Planting a bed of flowers for passersby to enjoy is an example of what economists would call a(n) 

2) 

_______ 
A) 

economically free service. 
B) 

negative externality. 
C) 

neutral externality. 
D) 

economically useful good. 
E) 

positive externality. 

 
Use the figure for the question(s) below.

 
3) 

In the figure above, a price floor of $5 would result in a(n) 

3) 

_______ 
A) 

gain in producer surplus of $40. 
B) 

excess supply of 40 units. 
C) 

net loss of consumer and producer surplus of $40. 
D) 

excess demand of 40 units. 
E) 

loss of consumer surplus of $40. 

 
Use the figure for the question(s) below.

 
4) 

The sum of the consumer and producer surplus after the tax is imposed is indicated by areas 

4) 

_______ 
A) 

a - d. 
B) 

d - a. 
C) 

a + b + c. 
D) 

a + b + c +d. 
E) 

b + c. 

 
5) 

As output rises, average fixed cost falls because 

5) 

_______ 
A) 

variable costs are spread over more units. 
B) 

total costs are increasing at a decreasing rate. 
C) 

marginal costs are increasing. 
D) 

fixed costs are decreasing. 
E) 

fixed costs can be spread over more units. 

 
6) 

Which of the following cannot be an example of an opportunity cost for a firm? 

6) 

_______ 
A) 

The value of the firm's inputs in their next best use. 
B) 

The rent that the firm could earn by leasing its plant to someone else. 
C) 

The cost of purchasing plant and equipment. 
D) 

The return that the firm could earn on its next best investment. 
E) 

The salary that the owner of the firm could earn in alternative employment. 

 
7) 

The key advantage of producing as a firm is 

7) 

_______ 
A) 

producing goods and services. 
B) 

making a profit. 
C) 

opportunity costs. 
D) 

reducing transactions costs. 
E) 

issuing stock. 

 
8) 

In the long run, a profit-maximizing firm will exit the industry when 

8) 

_______ 
A) 

total revenue is less than total cost. 
B) 

there are too many firms in the industry. 
C) 

marginal revenue is less than marginal cost. 
D) 

marginal cost is greater than marginal revenue. 
E) 

it cannot cover fixed costs. 

 
9) 

In the short run, if the firm is producing an output such that marginal revenue is equal to marginal cost, but price is less than average variable cost, the firm should 

9) 

_______ 
A) 

produce more. 
B) 

exit the industry. 
C) 

produce less. 
D) 

shut down. 
E) 

do nothing; the firm is producing the optimal output. 

 
10) 

Along a linear demand curve, if marginal revenue is greater than zero, demand is 

10) 

______ 
A) 

elastic. 
B) 

unit elastic. 
C) 

inelastic. 
D) 

perfectly elastic. 
E) 

perfectly inelastic. 

 
Use the figure for the question(s) below.

 
11) 

The tax collected is indicated by area 

11) 

______ 
A) 

A. 

B) 

B. 

C) 

C. 

D) 

D. 

E) 

D - A. 

 
12) 

An increase in the cost of rental on the building in which a store operates will increase 

12) 

______ 
A) 

both average fixed cost and average total cost. 
B) 

only average variable cost. 
C) 

only average total cost. 
D) 

only average fixed cost. 
E) 

only marginal cost. 

 
13) 

Consider the following statements about long-run supply curves.

	I.	At every point along a given long-run supply curve, there is
	 a different number of firms in the industry.
	II.	At every point along a given long-run supply curve, every firm
	makes an economic profit of zero.
	III.	Long-run supply curves must be upward sloping.

13) 

______ 
A) 

I is true; II and III are false. 
B) 

All three statements are true. 
C) 

I and II are true; III is false. 
D) 

All three statements are false. 
E) 

I and III are true; II is false. 

 
14) 

It is less costly to have a single television cable provider in most towns, due to the high setup cost of running cables. What type of barrier to entry is this? 

14) 

______ 
A) 

Legal restrictions created by government 
B) 

Antitrust laws 
C) 

Ownership of an essential resource 
D) 

Large economies of scale 
E) 

Predatory competition from other firms 

 
15) 

The reason taxes impose a burden on demanders is that taxes 

15) 

______ 
A) 

lower the price paid and increase quantity demanded, causing a loss in consumer surplus. 
B) 

lower the price paid and decrease quantity demanded, causing a loss in producer surplus. 
C) 

raise the price paid and decrease quantity demanded, causing a loss in consumer surplus. 
D) 

raise the price paid and decrease quantity demanded, causing a gain in consumer surplus. 
E) 

raise the price paid and increase quantity demanded, causing a gain in consumer surplus. 

 
16) 

Which of the following is an example of an explicit cost? 

16) 

______ 
A) 

The rent that the firm could earn if it leased its buildings to another company 
B) 

The interest you could earn if you put your savings in the bank instead of purchasing stocks 
C) 

The salary that a business owner could earn in alternative employment 
D) 

The salary paid to an employee 
E) 

All of the above are explicit costs. 

Essay (20 points): You will be graded on spelling, grammar and syntax as well as content. Be concise and to the point.

For what reasons do governments impose taxes?  It is a given that imposing a tax raises revenue for the government.  Setting aside the amount of revenue raised, how might we retrospectively determine whether the tax was worthwhile?

You would include the following in essay form:

Reasons to impose taxes
1. Fund public works/goods.
2. Change behavior
3. Reallocate income/wealth

There must be some economic benefit that results from the imposition of the tax: The public good has some value to society, smoking cessation improves health, reallocation of income makes the lives of the poor better.  The tax is worthwhile if the value of the gains exceeds the deadweight loss associated with the tax. 

Problem (48 points)

Frank N. Stein has the only Halloween costume franchise in the Lake District.  The demand curve for his costumes is P = 50 – ½ Q.  His marginal cost for producing costumes is MC = 5 + 2Q and his average cost is AC = 45/Q + 5 + Q. To keep things straight you might draw a graph on the next page.  You will not be graded on your graph; it is for your use alone.

a.	What quantity should Frank produce if he is to maximize profit?

MR = 50 – Q

50 – Q = 5 + 2Q

45 = 3 Q

Q = 15

b.	What price should he charge?

P = 50 – ½ (15) = 42.5

c.	At the price and quantity you found above, what profit does Frank earn?

TR = 15(42.5) = 637.5

TC = 45 + 5 (15) + 152

Profit = 637.5 – 345 = 292.5

d.	If the government of the Lake District were to regulate Frank’s enterprise what price would they set for him in order to maximize economic surplus?

5 + 2 Q = 50 – ½ Q

45 = 5/2 Q 
Q = 18 and Price = 41

e.	What quantity would Frank produce at the price you found in the previous part?

See above.

f.	What is the deadweight loss incurred as a result of Frank’s costume monopoly?

DWL = 7.5(18 – 15) ½ = 11.25

1) 

C 

2) 

E 

3) 

B 

4) 

E 

5) 

E 

6) 

C 

7) 

D 

8) 

A 

9) 

D 

10) 

A 

11) 

B 

12) 

A 

13) 

C 

14) 

D 

15) 

C 

16) 

D