Page 1 of 6

Last Name: ____________________

First Name: ____________________
Student Number: ________________


Economics 100
Professor James E. Pesando


Term Test 2 December 3, 2010

Length: 1 hour, 5 minutes


Answer ALL questions in the space provided

Aids: Pen/ Pencil and non-programmable calculator
________________________________________________

Please enter the multiple choice answers in the box below:
1 2 3 4
5 6 7 8
________________________________________________

Examiners report:
question points
1
2
3
4
5

total




Please check the Tutorial you ATTEND (Your exam will be handed back to you in the
indicated tutorial):

Tuesday, 5-6pm -- UC 85 -- TA: Ryan
Tuesday, 6-7pm -- UC 85 -- TA: Ryan
Wednesday, 1-2pm -- SS 1083 -- TA: Eli
Wednesday, 2-3pm -- UC 244 -- TA: Eli
Wednesday, 4-5pm -- UC A101 -- TA: Florence
Wednesday, 4-5pm -- SS 2127 -- TA: Lisa
Wednesday, 5-6pm -- UC A101 -- TA: Florence
Wednesday, 5-6pm -- SS 2108 -- TA: Lisa








Page 2 of 6
Question 1 (20 points)

The market for widgets is perfectly competitive and in long run equilibrium. There
are 1,000 identical firms. Each firm sells 10 widgets, and each firm has a fixed cost
of $100. The market price of a widget is $12.

(a) Illustrate, with appropriate diagrams, the equilibrium in the market and for a
representative firm. Clearly label:
i) market price
ii) market output
iii) the firms marginal revenue curve
iv) the firms average total cost curve

















(b) At the profit-maximizing level of output, the representative firms:
i) marginal cost =
ii) average total cost =
iii) average variable cost =


(c) If all of the fixed cost is the opportunity cost of the owners invested capital, what
is the accounting level of profit? Explain your answer.








(d) The government imposes a registration fee of $100 to be paid by each firm,
regardless of the firms level of output. Explain:
i) What happens, in the short run, to market price and output.
ii) Whether any firms, in the short run, will quit producing widgets.

















Page 3 of 6
Question 2 (10 points)


Assume that there are only two oil companies in Canada: Shell and Esso. If both
firms raise the price of gas, Shell will earn a profit of $15 million, while Esso will earn
a profit of $5 million. If both firms lower the price of gas, Shell will earn $10 million,
while Esso will earn $6 million. If Shell raises the price of gas but Esso lowers the
price of gas, Shell will earn $13 million, while Esso will earn $9 million. If Esso
raises the price of gas but Shell lowers the price of gas, Esso will earn $4 million,
while Shell will earn $14 million. Assume that prices are set simultaneously and that
this is a one-shot game.

(a) What will be Shells profit? Essos profit?




(b) Explain your answer.


















Question 3 (20 points)

A pharmaceutical company holds a patent for the flu vaccine, and, thus, has a
monopoly. The marginal cost to produce each unit of the vaccine is constant and
small. The demand curve is downward sloping.

(a) In an appropriate diagram, show the equilibrium price and output in this market.




















Page 4 of 6

(b) Where does the marginal revenue curve lie in relation to the demand curve?
Why? Explain your answer.












(c) Is the number of people who will be vaccinated allocatively efficient? Explain
your answer.










(d) Suppose that, due to a flu epidemic, the government buys the patent from the
pharmaceutical company and distributes the flu vaccine for free. In a new
diagram, show the number of people who will be vaccinated. Is this number
allocatively efficient? Explain your answer and, if appropriate, show the
deadweight (welfare) loss.
















Question 4 (18 points)

Explain whether the following statements are True, False, or Uncertain. (All marks
are for the explanation).

(a) If a monopolist practices perfect price discrimination, every consumer will pay a
different price.











Page 5 of 6

(b) The market for coffee is perfectly competitive and in long run equilibrium. If there
is an increase in the price of tea, a substitute for coffee, coffee makers will earn
economic profits in the short run, but not in the long run.
















(c) If a monopolist chooses to maximize revenue rather than profits, the market price
will be lower and output will be higher.
















5. Multiple Choice. Circle the correct answer. (32 points, 4 each)

For Questions 1) and 2)

A monopolist is currently producing a level of output where Price = $110;
Marginal Revenue = $10; Quantity = 100; Total Cost = $15,000; Marginal
Cost = $10; Total Fixed Cost = $4,000.


1. To maximize profits in the short-run, the monopolist should:

(a) Increase output
(b) Decrease output
(c) Produce the same output
(d) Shut down
(e) None of the above


2. To maximize profits in the long-run, the monopolist should:

(a) Increase output and remain open
(b) Decrease output and remain open
(c) Produce the same output and remain open
(d) Shut down
(e) None of the above



Page 6 of 6

3. If average variable cost falls by $2 for each unit of output, we know that:

(a) Marginal cost has fallen, by $2 per unit
(b) Average fixed costs have fallen, by $2 per unit
(c) Total variable costs are unchanged
(d) Average total costs are unchanged
(e) None of the above


4. There are two firms in an industry. If the two firms form a successful cartel, then:

(a) Market price will be the same as in perfect competition
(b) Market price will exceed the monopoly price
(c) Market output will be less than in perfect competition
(d) Economic profits will be less than in perfect competition
(e) None of the above


5. A perfectly competitive industry is initially at long-run equilibrium. It is a constant
cost industry. What is the long-run impact of a decrease in demand?

(a) A decrease in price, firm output, and industry output
(b) A decrease in price and industry output but no change in firm output
(c) No change in price, no change in firm output, and decrease in industry
output
(d) No change in price and decrease in firm output and industry output
(e) None of the above


6. A monopolist will never operate on which portion of the demand curve?

(a) The elastic portion
(b) The unit elastic portion
(c) The inelastic portion
(d) The portion where Marginal Revenue is less than Average Revenue
(e) None of the above


7. Existing firms in a monopolistically competitive market are earning economic
profits. If new firms enter, which of the following will occur?

(a) The industry supply curve will shift right
(b) The industry supply curve will become more elastic
(c) Existing firms demand curves will shift right
(d) Marginal costs of existing firms will fall
(e) None of the above


8. Under which of these conditions can a perfectly competitive firm engage in price
discrimination?

(a) There are no fixed costs
(b) Marginal costs are increasing
(c) Average total costs are increasing
(d) The market demand curve is inelastic
(e) None of the above