Econ 201 Midterm 2

Dr. Barry Haworth
  1. Econ 201 Study Guide
  2. Econ 201 Exam 1 Quizlet
  3. Econ 201 Exam 1
  4. Econ 201 Midterm 2

Econ 201 final 2014-12-10; economics 201 2014-07-14; micro final 2019-05-19; midterm review 2016-04-27; economics 201 chapter 1 2014-12-09; econ 201 study guide (2013-14 nelson) 2014-06-12; equations for econ 201 exam 1 (chpts 1-4) 2014-10-20; microecon 2014-06-12; econ 201 study guide (2012-13 hellman) 2013-06-30; final 2014-06-12; econ 2001. Economics 201 Sample Midterm. Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. When a society cannot produce all the goods and services people wish to have it is said that the economy is experiencing a.

Econ 201 Midterm 2
University of Louisville
Department of Economics
Economics 201

Midterm #2

(Questions and Solutions)

Exam Solutions: The solutions to the multiple choice questions are given below in boldfaced print and the short answer solutions in Part 2 are given beneath each (italicized) question.


Part 1. Multiple Choice Questions (2 points each question)

1. One advantage of forming a corporation is:
a. corporations do not have to be formed by selling stock (equity)to prospective investors
b. the owners of a corporation have limited liability
c. corporations are (usually) directly operated by the owners,rather than paid managers
d. all of the above


2. Which of the following firm types is organized byselling equity in the firm (e.g. stock):
a. sole proprietorship
b. partnership
c. corporation
d. all of the above


3. When Ford commits to purchasing 'specialized resources',what happens?
a. there is a switching cost that results directly from makingthis decision
b. the opportunity cost of purchasing this equipment is too high
c. the firm will increase its marginal cost
d. Ford will increase the price of cars


4. When writing out a contract, is it possible to plan forevery contingency?
a. No, because high production costs prevent firms from planning
b. Yes, because contracts can be long or short
c. No, because gathering that kind of information is too costly
d. Yes, because firms are typically very efficient at monitoringtheir contracts


5. What is the best explanation, advanced in lecture, for whyfirms exist?
a. creating a firm minimizes labor costs
b. creating a firm minimizes the cost of capital
c. creating a firm minimizes the cost of land
d. creating a firm minimizes transactions costs
e. creating a firm minimizes input costs


6. Which of the following is an example of a transactions cost(mentioned in lecture):
a. labor cost
b. monitoring cost
c. the cost of capital
d. overhead


7. If a firm doubles in size (scale) but needs less than twiceas many workers, then:
a. the firm experiences decreasing returns to scale
b. the firm experiences increasing long run average costs
c. the firm experiences increasing returns to scale
d. the firm experiences constant returns to scale
e. none of the above is possible


8. The Law of Diminishing Returns states that as increasingamounts of a variable factor are combined with a fixed factor:
a. output will begin to decrease
b. the changes in output - attributable to the fixed factor -will be smaller
c. the changes in output - attributable to increasing thevariable factor - will be smaller
d. all of the above


9. What occurs once a firm produces at minimum efficient scale?
a. the firm is producing where its long run average cost isat a minimum
b. the firm is producing where its short run marginal cost isat a minimum
c. the firm is producing where its short run average cost isat a minimum
d. all of the above


10. Over the long run, an increasing cost industry experiences
a. economies of scale
b. diseconomies of scale
c. constant returns to scale
d. none of the above


11. When comparing product and cost curves, which statementis correct:
a. when a product curve is rising, it's related cost curve isrising
b. product curves give us information about diminishing returns,cost curves do not
c. if marginal product and average product intersect at the pointwhere marginal product is at a maximum, then so do marginal costand average cost
d. the product curves are (essentially) inverse mirror imagesof the cost curves


Questions #12-20 correspond with the following information fora perfectly competitive firm. Assume that this firm alwaysoperates as a profit maximizing firm (i.e. produces where itsprofits are the highest).

TC = $170if q = 0
TC = 200 + 10q + q2if q > 0
MC = 10 + 2qif q > 0

12. What is the value of average cost, when q = 100?
a. $11,200
b. $112
c. $110
d. $2
e. none of the above


13. What is the value of average variable cost, when q = 100?
a. $11,200
b. $112
c. $110
d. $2
e. none of the above


14. What is the value of average fixed cost, when q = 100?
a. $11,200
b. $112
c. $110
d. $2
e. none of the above


15. What are the sunk costs?
a. $200
b. $170
c. $30
d. $1.70
e. none of the above


16. What are the recoverable fixed costs?
a. $200
b. $170
c. $30
d. $3
e. none of the above


17. What is the value of total variable cost, if the priceis $50?
a. $600
b. $200
c. $50
d. $0
e. none of the above


18. How much output should this firm produce if the priceis $100?
a. 100
b. 80
c. 25
d. 0
e. none of the above


19. What are the profits when the output is 25 units?
a. $425
b. $170
c. $60
d. $0


20. What are the profits when the firm produces where MC equalsAC?
a. - $1500
b. $0
c. $23.33
d. $1510

Econ 201 Midterm 2


Question #21 corresponds with the following information:

(where Q = output, L =labor, K = capital)

K is fixed (constant) at 100.


21. When L increases from 100 to 200.
a. the marginal product of labor decreases
b. the average product of labor is less than zero
c. the average product of labor decreases
d. the average product of labor increases


22. When marginal cost (MC) equals average cost (AC)
a. AC is at its minimum point
b. MC is at its minimum point
c. AC is at its maximum point
d. MC is at its maximum point


23. Which of a perfectly competitive industry's characteristicsrelate to the short run?
a. economic profits end up being equal to zero
b. free entry and exit
c. firms exit if the price remains below average cost
d. homogeneous products


24. Which statement about economic profit is true:
a. economic profit is smaller than accounting profit
b. economic profits are always zero
c. economic profits do not include opportunity costs
d. economic profit is calculated by subtracting total cost fromthe price, then multiply by output


25. Falling marginal costs correspond with
a. falling average product
b. rising average costs
c. rising average variable costs
d. increasing marginal product


26. If a firm is minimizing its costs, then:
a. the firm is making profits that are equal to zero
b. the firm is not producing enough
c. the firm is producing too much
d. the firm is making profits that are greater than zero
e. the firm is producing output that maximizes its profits


27. What statement about average fixed cost is always true
a. it increases as output increases
b. it decreases as output increases
c. it is less than average variable cost
d. it is less than marginal cost


28. If a perfectly competitive firm makes greater than zeroeconomic profits in the short run:
a. other firms will exit the market over the long run
b. other firms will enter the market over the long run
c. the firm's profits will increase over the long run
d. the firm will make losses over the long run


29. Assuming that existing firms do not change their scaleof operations, what happens in the long run when P > AC foreach firm:
a. market supply will increase
b. market supply will decrease
c. each firm's demand will increase
d. each firm's demand will decrease
e. both a and d are correct


30. Which of the following equations is always true:
a. Average Fixed Costs = Total Costs - Variable Costs (AFC =TC - VC)
b. Fixed Costs = Total Revenue - Total Costs (FC = TR - TC)
c. Variable Costs = Total Costs + Fixed Costs (VC = TC + FC)
d. Average Costs = Average Fixed Costs + Average VariableCosts (AC = AFC + AVC)


31. What purpose do MC and AC serve when we study perfectlycompetitive firms?
a. MC helps us find the profit maximizing level of output,AC the level of profits
b. MC helps us find out if profits are positive or negative,AC the level of output
c. both MC and AC help us find out if profits are positive ornegative
d. MC tells us if the firm has any sunk costs, and AC tells usthe level of output


32. Suppose a perfectly competitive firm has no recoverablefixed costs. What happens in the short run if the firm makesa loss that is larger than its total fixed cost?
a. the firm will (permanently) exit the industry
b. the firm will (temporarily) cease production and wait forprices to rise
c. produce and take a loss
d. all of the above


33. If a perfectly competitive firm produces where averagecost is at a minimum:
a. the firm makes positive (greater than zero) economic profit
b. marginal cost is also at its minimum level
c. average variable cost is at its minimum level
d. marginal costs are rising
e. all of the above


34. A perfectly competitive firm's demand curve __________.
a. is negatively sloped
b. is positively sloped
c. is a horizontal line at the market price
d. always intersects the AC curve
e. both c and d are true


35. If a perfectly competitive firm is producing at its profitmaximizing level of output but is making a loss, then:
a. the firm should raise price, to increase profits
b. the firm should raise output, which increases price and, asa result, profits
c. the firm should shut down if its sunk costs are smallerthan the loss
d. the firm should lower its price, to increase profits
e. all of the above


36. Which of the following industries is closest to perfectcompetition:
a. where there are many, small firms producing identical products
b. where there are several firms, producing identical products
c. where there are many firms, each of which can set its ownprice
d. where there are several small firms, and the price of theirproducts is the same


37. Which of the following situations will lead directly tozero economic profit in the long run
a. each firm produces homogeneous (identical) products
b. when there are no entry or exit barriers associated withthe industry
c. each firm charges the same price as its competitors
d. when there are many firms in the industry


201Questions #38 and 39 correspond with this table:
Output
Total Costs
Marginal Cost
Average Variable Cost
0
90.0
5.0
-
1
94.8
4.6
4.8
2
99.3
4.3
4.6
3
103.5
4.1
4.5

38. What are the sunk costs for this firm:
a. $0
b. $5
c. $80
d. $90
e. not enough information is given

Econ 201 Study Guide


39. What will most likely happen to the numbers in the marginalcost column if we extend the table to higher output levels?
a. they will continue to decrease as output increases
b. they will increase as soon as they are equal to average variablecost
c. they will increase as soon as there are diminishing marginalreturns
d. they will continue to decrease until marginal cost equalsaverage cost



40. What will most likely happen to the numbers in the marginalcost and average variable cost columns if we extend the table to higher output levels?
a. average variable cost will always be greater than marginal cost
b. average variable cost and marginal cost will eventually be equal
c. average variable cost and marginal cost will continually decrease
d. average variable cost will always decrease, but marginal cost will eventually increase

Online jitsi.


Part 2. Short Answer Section (5 points per question)
Credit for these problems will come from not only showing youknow the correct answer but also that you know how to get thatanswer or why it's correct.

Use the table (next page) to answer questions #1-4.


1. If the price is $10, then what should be this firm's profits?

The firm's profits should be a loss of $75. This is the bestthey can do.

If the firm produces when P = $10, then they produce 4 units ofoutput. You find this by looking in the row where P = MC = 10. In this row, the AC is $31.

Profits are: p = ($10 - $31)4 = -$84

However, if the firm shuts down, then they only pay their sunkcosts of $75. A loss of $75 is better than a loss of $84, sothe firm will end up shutting down and not producing.


When producing 1 unit of output, the firm's average variablecost is $3
2. Does this firm have any recoverable fixed costs?

Yes, there are recoverable fixed costs of $25.

When the firm produces 1 unit, it has AVC of $3 and AC of $103. Since AC = AFC + AVC, AFC must be $100.

To convert AFC to (total) Fixed Cost, we multiply AFC by output(which is one in this case). Therefore, (total) Fixed Costs arealso $100.

Since (total) Fixed Cost = Sunk Cost + Recoverable Fixed Cost,and since Sunk Cost is given as $75, Recoverable Fixed Costs are$25.


3. If this firm produced 15 units of output, what would betheir profits?

Econ 201 exam 1 quizlet

The firm's profits should be $124.50.

In order to produce 15 units of output, the firm must be producingin the row where P = MC. Therefore, the Price must be $32 and(in that row) the AC is $23.7.

The firm's profit is then calculated as: p= ($32 - $23.7)15 = $124.50


Econ 201 Exam 1 Quizlet

4. What happens in the long run if the price is currently$24?

Firms will enter this market. The market supply curve will increaseand the firm's demand (price) will fall until the market reachesa 'long run equilibrium'.

If the price is $24, then P > AC in the row where P = MC. Whenever there are profits greater than zero, there is an incentivefor firms who are outside the market to enter this market andtake some of these 'above-normal' profits for themselves.



This table goes with questions #1-4. Ignore values that wouldhave gone in either of the two rows that are left blank (e.g.when output is equal to 13 or 14 units).

As you use these numbers, assume that this firm will alwayschoose an output level that makes its profits as high as possible(i.e. the firm maximizes its profits).

Econ 201 Midterm 2

Output
Average
Cost
Marginal
Cost
Sunk
Cost
1
103
4
75
2
54
6
75
3
38.3
8
75
4
31
10
75
5
27
12
75
6
24.67
14
75
7
23.29
16
75
8
22.5
18
75
9
22.1
20
75
10
22
22
75
11
22.1
24
75
12
22.3
26
75
..
..
..
..
15
23.7
32
75
..
..
..
..
20
27
42
75

Econ 201 Exam 1


Econ 201 Midterm 2