ECO101H1S L101, L201: Principles of Microeconomics Midterm 2, Winter 2022
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ECO101H1S L101, L201: Principles of Microeconomics
Midterm 2, Winter 2022
Multiple Choice: Put your answers into the Bubble Sheet in the other booklet
1. [2 points] Consider a perfectly competitive market with downward-sloping Market Demand and Upward- sloping Market Supply. The government imposes a binding price floor. With this change, Consumer Surplus ____ and Producer Surplus ____
A decreases; could increase or decrease
B increases; could increase or decrease
C could increase or decrease; increases
D could increase or decrease; decreases
E could increase or decrease; could increase or decrease
Solution: A. Price rises for the consumer and quantity decreases so CS decreases. Producer surplus decreases because quantity decreases, but price on the units still sold increases so the change is uncertain.
2. [2 points] Ace’s costs of producing chickens is given in the table below. His Variable Cost of producing
3 chickens is
Quantity of chicken |
0 |
1 |
2 |
3 |
4 |
Total Cost |
$10 |
$28 |
$41 |
$58 |
$86 |
A $10
B $17
C $48
D $58
E Need more information.
Solution: C. VC=TC-F and F is identified from Q=0.
Q |
TC |
F |
VC |
0 |
10 |
10 |
|
1 |
28 |
10 |
18 |
2 |
41 |
10 |
31 |
3 |
58 |
10 |
48 |
4 |
86 |
10 |
76 |
3. [2 points] Amy is a single-price monopolist in the chicken market. Market demand is given in the table below. Amy’s Marginal Cost is $12. What quantity will Amy produce?
Price |
22 |
19 |
16 |
13 |
10 |
Quantity |
1 |
2 |
3 |
4 |
5 |
A 1
B 2
C 3
D 4
E 5
Solution: B. The Quantity where MR > MC is 2.
Q |
P |
MR |
1 |
22 |
22 |
2 |
19 |
16 |
3 |
16 |
10 |
4 |
13 |
4 |
5 |
10 |
-2 |
4. [2 points] Xin and Yang choose their actions at the same time and their payoffs are given in the matrix below. The Nash Equilibrium of this game is when Yang chooses ____ and Xin chooses ___
Xin
Left Right
5,6 |
4,9 |
3,8 |
7,5 |
Solution: E. There are no mutual best responses
Yang
Up Down
Xin
Left Right
|
5,6 |
4, |
|
3,8 |
7,5 |
5. [3 points] Consider a perfectly competitive market. Market Supply is perfectly inelastic and Market Demand is downward-sloping. The government imposes a binding price ceiling. With this change, Total Surplus ____ and Consumer Surplus ____.
A decreases; increases.
B remains unchanged; increases.
C decreases; could increase or decrease.
D remains unchanged; decreases.
E decreases; decreases.
Solution: B. As Supply is perfectly inelastic, a binding price ceiling will not change quantity and hence total surplus will remain the same. The only change is that surplus will move from the
consumer to the producer which increases CS.
6. [3 points] The market for mangoes is perfectly competitive with downward-sloping Market Demand and upward-sloping Market Supply. The government imposes a $2 tax per mango sold. Because of this tax, market price of mangoes ____ and market quantity of mangoes ____.
A remains unchanged; increases.
B remains unchanged; decreases.
C decreases; decreases
D increases; decreases
E could increase or decrease; decreases
Solution: E Market price depends on statutory incidence. Because we are not told who pays the
tax we don’t know if PSor PD is market price so it could increase or decrease. With a tax however, market quantity will decrease.
7. [3 points] The market for mangoes is perfectly competitive market with downward-sloping Market Demand and Upward-sloping Market Supply and a binding quota of 5000 kilos. The price of fertilizer used on mango trees increases. With this the market quantity of mangoes _____ and Total Surplus____.
A could decrease or remain the same; decreases.
B could decrease or remain the same; remains the same.
C could increase or remain the same; could increase or decrease.
D remains the same; decreases.
E remains the same; increases.
Solution: A. An increase in MC decreases Supply. If the quota continues to bind market quantity will remain the same, however if supply decreases enough, the quota may no longer be binding and quantity decreases. However TS will decrease either way as the distance between MWTP
and MC decreases.
8. [3 points] The market for sneakers is perfectly competitive with identical firms. Market demand is downward-sloping. Firms have the usual shaped cost curves. The market is currently in long-run and short-run equilibrium with market price of $20.
Suppose Market Demand for sneakers increases. Consider the quantity each firm produces in the short-run when demand increases. At this quantity, in the short-run...
A the new market price (p) equals minimum firm Average Variable Cost.
B Marginal Cost > $20 and firm Average Total Cost > $20
C p = minimum firm Average Total Cost
D p < firm Average Total Cost
E Marginal Cost = firm Average Variable Cost
Solution: B. With the increase in demand, market price increases. Each firm moves along their ATC so a higher MC. As $20 is at min ATC=MC a higher price is when both MC and ATC are increasing.
9. [3 points] Consider a perfectly competitive chicken market with identical firms. Market demand is downward-sloping. Firms have the usual shaped cost curves. The firm’s fixed cost is the rental price of land. The market is currently in long-run and short-run equilibrium with market price = $13.
The rental price of land decreases. Consider the quantity each firm produces in the short-run. At this quantity, in the short run, each firm’s Marginal Cost (MC) is ____ and Average Total Cost (ATC) is ____.
A equal to min ATC; lower than $13.
B lower than $13; equal to $13.
C lower than $13; lower than $13.
D $13; higher than $13
E $13; lower than $13
Solution: E. The decrease in rental prices will decrease the fixed cost only. This decreases the ATC at every quantity. Short-run supply comes from the firm’s MC curve which is unchanged. As market demand and market supply remain unchanged, market price remains unchanged. Firm supply (MC) and market price stay the same so each firm produces the same quantity making MC = $13 and ATC < $13.
10. [3 points] Consider a perfectly competitive mitten market with identical firms. Market demand is downward-sloping. Firms have the usual shaped cost curves. The market is currently in long-run and short-run equilibrium.
The price of wool used to produce mittens increases, and the fixed cost of each firm decreases.
Because of these changes, the short-run price of mittens ____ and the long-run price of mitten
____.
A remains unchanged; decreases.
B increases; decreases.
C increases; could increase, decrease or stay the same.
D decreases; could increase, decrease or stay the same.
E increases; remains unchanged
Solution: C. The wool price increase, moves the MC curve inwards. An increase in the marginal cost reduces SR supply which increases SR prices. Long-run prices are determined by min
ATC. When MC increases ATC increases. However a decrease in the fixed cost decreases ATC so we don’t know the net effect on min ATC without more information.
11. Ace has chickens on his farms and produces both chicken-meat and eggs from these chickens. Every
chicken produces 10 eggs.
The price of chicken-meat increases. Based on this information, this price increase’s impact on Ace’s
cost of producing eggs is: Marginal Cost at every quantity ____
A remains the same.
B increases.
C decreases
D remains the same, but we move up along the Marginal Cost curve.
E remains the same, but we move down along the Marginal Cost curve.
Solution: B. When Ace produces eggs from chickens he gives up the chance to sell the chicken for meat. The price of chicken-meat is included in the Opportunity Cost of egg production. An increase in the price of chicken-meat increases the OC of egg production. Since extra chickens are needed to produce extra eggs this is an increase in the MC of egg production at every quantity.
12. [3 points] Amy is a single-price monopolist in the cake-pop market. Her Marginal Cost is $5. She is considering a price of $8. When p = $8,the (absolute) elasticity of Demand is 0.4. Based on this information if Amy wants to increase her profits, she should ___ price because at a price of $8
____.
A keep the $8; MR = MC .
B decrease; MR < MC .
C increase; MR < MC .
D decrease; MR > MC .
E increase; MR > MC .
Solution: C. When (absolute) elasticity of Demand is inelastic, MR < 0. Since MC = 5 it means MR < MC and the monopolist should decrease her quantity by increasing her price.
13. [3 points] A single price monopolist has a Marginal Cost= $Q and a recurring Fixed Cost of $1000. Market Demand Q = 50 _ . What is Market Price in the long run?
A 0
B 25
C 50
D 60
E 100
Solution: E. Quantity choice is when MR = 100 _ 4Q = Q = MC = Q = 20, P = 60. At this point profits = (60 _ 20) * 20 _ 1000 < 0 so the monopolist chooses to exit in the long-run
which is equivalent to choosing a price high enough so that demand =0, i.e. P=100.
14. [3 points] Ace is a monopolist in the bubble-tea market with a Marginal Cost of $1. Market demand is P = 100 _ 0.5 * Q. If Ace can do first-degree price discrimination, the Marginal Revenue from the 40th unit is
A $ 1
B $ 40
C $ 60
D $ 80
E $ 120
Solution: D. For first degree PD the MR curve is the demand curve. MR of the 40th unit is MR=100-0.5*40=80
15. [3 points] Ace is a single-price monopolist in the bubble-tea market charging $5 a tea with a Marginal Cost of $1. Their customers can be separated into two groups–teenagers and adults. At $5, teenager market demand is elastic and adult market demand is elastic. If Ace can do group Price- Discrimination, relative to the current $5 price, prices for teenagers _____ and prices for adults
____.
A increase; could increase or decrease
B increase; decrease
C decrease; increase
D could increase or decrease; could increase or decrease
E could increase or decrease; increase
Solution: D. Since MC>0 we know that monopolists will produce on the elastic portion of each
segment’s demand curve. However since the segment demand at $5 is already elastic for both segments we don’t know how it will adjust for each segment. Either segment could get the higher price depending on the details of the demand curve.
16. [3 points] Consider the game below where Xin and Yang make their choices at the same time. For Yang ____ is a strictly dominant strategy while for Xin, ____ is a strictly dominant strategy.
Xin
A B
A
B
C
A A; B
B C; B
C no strategy ; B
D B; no strategy
E no strategy; no strategy
Solution: C. From the table below we can see that Yang has no strictly dominant strategy while B is better for Xin no matter what Yang chooses.
Xin
A B C
8,5 |
3, |
7 |
5,1 |
5,8 |
4,9 |
6,5 |
|
5,6 |
8,9 |
2,6 |
17. [3 points] Consider the game below where Xin and Yang make their choices at the same time. An outcome that is more efficient than the Nash Equilibrium is when Yang chooses ____ and Xin chooses ___
Xin
A B C
1,1 |
1,2 |
5,1 |
9,7 |
5,8 |
3,7 |
7,9 |
4,4 |
10,7 |
A C; C
B C; A
C B; B
D None of the above as there is no Nash Equilibrium.
E None of the above as the Nash Equilibrium is efficient
Solution: B. The NE is based on the best responses given in the table below is (B,B) with payoffs (5,8). Moving to (C,A) makes both better off without making anyone worse off.
Xin
A B
A
B
C
1
2022-11-23