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Date Created: 09/23/15
Study Guide Midterm 2 List of De nitions The following are the de nitions that you should know for your second exam Even though I do not expect you to reproduce these de nitions word for word on the exam I will expect you to be as precise as possible The list consists of all the possible de nitions that may appear under the section De nitions on your test Utility is a scienti c concept used in Economics to eccplain how rational consumers divide their resources among the commodities and services that give them satisfaction By Cardinal utility economist mean measurable utility The util ity that consumers derive by consuming goods and services The concept of Ordinal utility is the better respected approach among economists and used so that consumers can rank their op tions Total Utility is the total satisfaction that we derive from con suming goods and services Marginal Utility is the satisfaction that we derive from consuming an additional unit of a good or a service Law of Diminishing Marginal Utility states At least after some point successive additional units of any good bring less and less additional satisfaction By Consumer Surplus economists mean the eptra value that con sumers receive above what they have paid for the good The Production Function speci es the maximum amount of output that a rm can produce with a given quantity of inputs and for a given state of technology The Law of Diminishing Returns states that if we vary one of the inputs keeping all other inputs as well as the technological level constant then at least after some point successive additional units of the variable input will add less and less to the Total out put That is the Marginal Product of each additional unit of the variable input will decrease as the amount of that input increases all else equal Short Run is de ned as a period of time in which only the variable inputs such as labor and materials could be adjusted Long Run is de ned as a period of time in which all inputs in cluding cced factors such as capital could be adjusted Assuming that rms produce e ciently the Total Cost TC rep resents the total amount of money spent in all the inputs required for the a business rm on order to produce a given level of output Ficced Costs FC are the costs that the rm has to pay even is it does not produce anything Ficced costs do no depend on the level of output produced Variable Costs VC are the costs that vary and are directly related to output Economists de ne Marginal Cost MC as the additional eppen diture that a rm has to incur in order to produce one more unit of output We de ne Average Cost as the ratio between the Total cost and the quantity produced 7 TC Q Auerage Ficced Cost AFC is de ned as the ratio between ped costs and quantity of output produced FC AFC 7 Q and the Average Variable Cost AVC is de ned as the ratio be tween uariable costs and quantity of output produced VC AVC 7 Q The opportunity cost is the value of the most valuable alternatiue forgone AC Perfect Competition is de ned as a market setting inuoluing large number of pro t maccimizing rms that sell a homogeneous prod uct and cannot individually affect the market price Furthermore free entry and edit are assumed in a perfectly competitive market structure A perfectly competitive rm will maximize its pro ts when it pro duces at the level where Marginal Cost equals the Market Price MOP In the long run the economic pro t realized by each of the large number ofidentical rms operating in a perfectly competitive mar het setting with free entry and epit will be zero In the long run the market price will be equal to both the marginal cost and the long run minimum average cost PMCminAC List of Key Graphs Do not get intimidated and discouraged by the size of this list It is very detailed and many of the graphs overlap and repeat each other 0 Production theory 7 The Law of Diminishing Returns 7 Total and Marginal Product 0 Costs 7 Fixed Cost 7 Variable Cost 7 Total Cost Marginal Cost 7 Average Cost 7 Average Fixed Cost 7 Average Variable Cost 7 Relationship MC MP Relationship MC TC Relationship MC VC Relationship MC AC Relationship MC AVC Long Run Costs 0 Perfect Competition 7 Demand Curve amp Marginal Revenue 7 Pro t Maximization TC TR analysis Short Run Pro t Maximizing Position PMC Pro ts7 Losses7 Costs7 Shut Down Point7 Break Even Point 7 Supply Curve for a Perfectly Competitive Firm Long Run Zero Pro t Position PMCrninAC Study Guide for Final Exam List of De nitions The following are the de nitions that you should know for your nal exam I do not expect you to reproduce these de nitions word by word on the exam however as usual I will expect you to be as precise and as thorough as possible The list consists of all the possible de nitions that may appear under the section De nitions on your test Even though I am not going to ask you to de ne any of the terms andor concepts from the previous exarns it may prove helpful to review them as a background for the other parts of the nal given that the exam will be comprehensive Imperfect competition prevails in an industry where individual sellers have some control over the price of their output Barriers to entry are the factors that prevent new rms from entering an industry Monopoly epists when a single rm is the sole producer of a prod uct for which there are no close substitutes and entry in the in dustry is blocked Monopolistic competition is a market structure in which a rela tively large number of sellers offer similar but not identical prod ucts and entry in their industry is easy Oligopoly epists where afew large rms producing a homogeneous or di erentiated product dominate a market These producers are interdependent in their pro t mapimizing decisions and it is hard to enter their industry Cartel is a group ofproducers that creates aformal written agree ment specifying how much each member will produce and charge Income refers to the flow of wages interest payments dividends and other frows of money during a period of time The aggregate of all incomes is the National Income Transfer payments are payments made by the government to in dividuals that are not made in return for goods and services The government uses transfer payments to distribute income in the economy more equally Wealth is the net dollar value of all assets owned at a given point in time Labor Supply is de ned as the number of hours that the population is willing to spend working in gainful activities Investment in Human Capital is the eccpenditure on education and training that improves the skills and therefore the productivity of the workers Economic Discrimination occurs when female or minority work ers who have the same abilities education training and eccperi ence as white male workers are accorded inferior treatment with respect to hiring occupational access promotion or wage rate List of Names You Have to Remember You should be able to associate each ofthe following names With a prominent theory or idea You may encounter such type of question in the Multiple Choice77 andor TrueFalse7 parts of your exam Adam Smith John Maynard Keynes F A Hayek Samuel Gompers List of Key Graphs o Imperfect Competition 7 Demand Curves Marginal Revenue Kc Total Revenue 7 Pro t Maximization TC TR analysis Pro t Maximizing Position MRMC O Monopoly Short run Monopoly with pro ts Short run Monopoly with losses Monopoly in the long run o Monopolistic Competition Short Run with pro ts Short Run with losses Long Run Zero Economic Pro ts 0 Oligopoly The Kinked Demand Model 0 Factor Markets 7 Demand for Factors of Production 7 Labor Markets Labor Supply Cross country wage comparisons Unions and Wages A Demand enhanced7 Exclusive Discrimination Collective bargaining77 E ects of Minimum Wages ECON 201 November 4 2010 Principles of Microeconomics Yoto V Yotov Drexel University NAME YOTO SAMPLE MIDTERM 2 100 points INSTRUCTIONS There are four parts in this exam Multiple Choice TrueFalse Definitions and Graphs with Explanations Make sure you have all the six pages of the exam and that you put your name on the first page Do not detach the exam Answer all questions No calculators are allowed GOOD LUCK Multiple Choice Questions 30 points Circle the correct answer You can circle only one of the choices provided for each question 1 The authors of our textbook are FA Hayek and John Maynard Keynes Paul Samuelson and Steven Nordhaus Steven Samuelson and Paul Nordhaus Paul Samuelson and William Nordhaus Adam Smith and John Maynard Keynes 5999gt 2 If prices fall in a perfectly competitive industry then the firms in that industry will in the short run A not decrease in number unless price falls below ATC for some firms 9try to reduce production or shutdown keep output at the same level but make losses produce more shut down and go out of business ITIUOUJ 3 The following statements describe a perfectly competitive firm at its maximumprofit equilibrium 1 Marginal revenue equals marginal cost 2 The slope of the total profit curve is zero 3 The slopes ofthe total revenue and total cost are identical Ofthese three statements which are true A 1 only B 2 only C 3 only D Just 1 and 3 are true and 2 is incorrect E All three statements are true 4 Zero economic profit for a firm in the longrun indicates that that firm could be A Monopoly B Perfectly Competitive C Small IGNORE FOR NOW D Large E lt All of the above 5 The profit maximizing monopolist who has positive average and marginal costs will produce a level of output that is A greater than the revenue maximizing output B equal to the revenue maximizing output C less than the revenue maximizing output IGNORE FOR NOW D equal to the costminimizing level of output E such that the price charged by the monopolist is equal to its average cost 6 If a purely competitive firm is maximizing economic profit it is necessarily maximizing perunit profit 9 it may or may not be maximizing per unit profit then perunit profit will be minimized it is necessarily maximizing total revenues its price exceeds its marginal revenue ITIUOUJZD 7 If a purely competitive firm is producing at some level less than the profitmaximizing output then price is necessarily greater than average total cost price exceeds marginal revenue 9 price exceeds average variable cost marginal revenue equals marginal cost it should shutdown ITIUOUJZD 8 If marginal cost is increasing then average variable cost must be increasing average variable cost must be declining average total cost must be declining average total cost must be increasing lt average fixed cost is declining ITIUOUJZD 9 If 25 units of a good are produced at a fixed cost of 50 and a total cost of 550 then the average variable cost of producing the good is A 15 B 20 C 25 D 30 E 50 10 Which of the following statements is incorrect AC below MC implies rising AC B MC below AC implies falling AC C MC falling implies AC falling D MC rising implies AVC rising E AVC falling implies MC below AC True or False 12 points State whether each of the following statements is True or False 1 FALSE A perfectly competitive firm will choose the price that it will charge for its products so that the rule PMC is satisfied 2 FALSE A perfectly competitive firm always wants to produce at the point where average cost is lowest 3 IGNORE lf MC for a monopolist is zero then maximizing profits is equivalent to maximizing total revenues 4 IGNORE For a monopolist MR MC for maximum profits regardless of whether MC is rising or falling lll Define the following 12 points Be as precise as possible in defining each of the following Law of Diminishing Marginal Utility Law of Diminishing Marginal Utility states At least after some point successive additional units of any good bring less and less additional satisfaction IV Graphs with Explanations 46 points 1 Use the appropriate curves eg Supply and Demand Curves Cost Curves etc to represent each of the following remember to label each axis as well as the curves and all the relevant points eg profitmaximizing quantity and price market equilibrium quantity and price shutdown point etc 2 In each case show the appropriate shifts in or along the curves 3 When asked provide an explicit statement for the changes in profits prices outputs etc Please use big and clear graphs A Perfect Competition 31 points a Use two parallel graphs to represent the long run equilibrium in a perfectly competitive constantcost industry One graph should show the market equilibrium for the industry and demonstrate how the equilibrium price in the market is determined The other graph should show the longrun position of a perfectly competitive firm in this industry Use this graph to indicate the profit maximizing quantity and price for the firm What are the economic profits that this firm makes in the longrun P Pc MC AC 0v Qi Q 039 Industry Single Firm b Now assume that consumer preferences change and as result the demand for the good produced in the perfectly competitive industry rises Show the effects of such a change in consumer tastes using both graphs Hint now you should use the graphs representing the shortrun equilibrium for the firm and for the industry What will happen to the marketclearing price What will happen to the profits ofthe perfectly competitive firm Shade the area representing the profitloss of the representative firm P Pc MC F Pquot d Ac 2 b c D D 7 Q Qquot Q Industry Single Firm The increase in the demand for the product will result in a higher marketclearing price This will lead to pro ts for the representative rm in the industry represented by the area dcba c What will happen to the equilibrium price and profits in the long run Why Briefly explain Attracted by pro ts new rms will enter the industry in the long run and this will lead to an increase in the industry supply This will result in a decrease in the marketclearing price Since this is a constantcost industry the supply will increase exactly to bring the prices back to their original level which will make the economic pro ts for the representative rm in the industry again zero in the longrun d Now use graphical analysis to present your story from part c P n P c k MC AC W3 P P D D 39Q Q Qquot 6 Industry Single Firm B 15 points Use the following figure to fill in the blanks and answer the multiple choice questions Pc MC P39MR d c Ac VC f on O Q39 Single Firm a The figure represents the shortlongshortrun in a perfectimperfect perfectcompetition b If Q39 is the profitmaximizing level of output then the average fixed costs for the firm at this output level are represented bythe be or af c The segment quotcbquot represents the profit per unit at output Q39 d MC on the figure is upward sloping because A average cost is rising B marginal product is rising C average cost is above marginal cost D average variable cost is below marginal cost E marginal product is falling e The segment quot0aquot represents the average cost at output Q39
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