Part I: Short Answer/Problem Solving 1) Suppose Gavin decided to celebrate his 21st birthday at the bar. Here is the value he places on a bottle of beer: Value of the first bottle $9 Value of the second bottle 6 Value of the third bottle 4 Value of the fourth bottle 2 Value of the fifth bottle 1 a) Draw Gavin’s staircase demand curve for beer on the grid given below

b) If the price of a bottle of beer is $3, how many bottles will Gavin purchase? What will be his consumer surplus? Shade the area that corresponds to his CS.

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2) A local bakery operating in downtown Delaware wants your economic advise. The owner of the bakery wants to know how each of the following changes would affect the average total cost (ATC), average variable cost (AVC), average fixed cost (AFC), and marginal cost (MC)? ATC AVC AFC MC An increase in the cost of the lease of the firm’s building

A reduction in wages of the workers

For each cell choose one of the following: Increases, Decreases, Not affected.

3) After taking Econ110 you are inspired to open up your own business on campus. After consultations with WCSA, suppose you obtained a license to operate a 10-minute chair massage service on campus, called Relax-On-the-Go, to give students back massages between their classes. For your firm, you had to obtain a license and pay a monthly fee of $100. You also leased 2 massage chairs, each costing $200 per month. Moreover you use workers to provide your massage service. Each hired worker has a monthly salary of $600. In the table below the relationship between the number of workers you hire and the quantity of massages your firm provides in a month is presented.

RELAX-ON-THE-GO

(All figures are measured in a month) Number of workers (L)

Quantity of Massages (Q)

Marginal Product of Labor

Fixed Costs (FC)

Variable Costs (VC)

Total Cost (TC)

0 0 1 60 2 130 3 170 4 200 5 220

a) Fill in the missing entries in the above table.

b) Is your firm experiencing diminishing returns? If yes, please specify when the diminishing returns kick in.

4) Suppose you are the owner of the firm ShinyWheels which operates in a competitive market and competes with many other firms in car wash services. The price of a basic wash is determined in the market and is $10 per car. In the table below, the number of workers and the total number of cars they can wash (total output) is given for your firm ShinyWheels. The workers are basically unskilled labor and are hired from a competitive labor market.

Shiny Wheels Production Data (Per Week) Quantity of

Labor Total

Output Value of Marginal

Product (VMP) 1 40 2 70 3 95 4 115 5 130 6 140

a) Calculate the value of marginal product for each unit of labor and fill in the above table b) For the wage rates given in the table below, calculate the number of workers that you would hire to work at ShinyWheels

Wage Rate ($) Number of workers hired

100

200

300

400

c) Assume that there are 20 firms which provide car wash service in the market. Each of these 20 car wash businesses is identical to Shiny Wheels. The labor supply curve for workers in car wash business is given below. Construct the market demand curve for carwash-workers by filling in the table below:

Wage Rate ($) Number of workers hired

100

200

300

400

Draw the market demand curve for carwash workers below and find the equilibrium wage in this market.

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Part 2: Multiple Choice 1) Suppose you opened up a business on campus where you produce and sell bagels to students. During the summer semester, your sales have dropped tremendously and therefore you are considering to shut down temporarily until demand for your bagels picks up again. At the profit maximizing output of 80 bagels per day, your total revenue is $90. Your variable costs are $100 and your fixed costs are $20. Which decision do you make regarding production? a) Produce bagels and earn zero profit b) Not enough information provided to answer the question. c) Produce bagels and earn a profit. d) Produce bagels, but suffer a loss. e) Shut down, produce nothing, and suffer a loss equal to fixed costs. 2) Sergei owns a small farm on where he produces grade A eggs and sells them at the perfectly competitive market. Which of the following is the demand curve faced by egg farmer Sergei operating in a perfectly competitive market?

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Q

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3) Suppose equilibrium price in a perfectly competitive industry is $10 and a firm in the industry charges $12. Which of the following would happen?

a) The firm's profits will increase b) The firm will not sell any output c) The firm will sell more output than its competitors d) The firm's revenue will increase e) The firm will gradually take over the entire industry

4) Which of the following best describes the relationship between marginal cost (MC) and average total cost (ATC)?

a) When MC decreases, ATC decreases and when MC increases, ATC increases. b) When MC increases, ATC decreases and when MC decreases, ATC increases. c) When MC is less than ATC, ATC decreases and when MC is larger than ATC,

ATC increases. d) When MC is constant ATC decreases at a constant rate e) ATC intersects MC at MC’s minimum point

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ATC3

ATC2ATC1

ATC ($)

Output (no. of bicyles)

ATC4

5) The above figure displays the ATC of producing different quantities of bicycles. Specifically, ATC1 is the average total cost curve of the firm if only 1 machine is used in production, ATC2 is the average total cost curve of the firm if only 2 machines are used in production, and etc. Which of the following statements is true?

a) The firm experiences diseconomies of scale up to 10 units of output b) The minimum efficient scale for this firm is 20 c) The firm experiences economies of scale up to 14 units of output d) The minimum efficient scale for this firm is 6 e) The firm experiences diseconomies of scale after 10 units of output

Figure 1: Demand and Supply for Soybeans in United States 6) In Figure 1, if the government establishes a maximum price control of $60,

a) Consumer surplus will be $450, producer surplus will be $900 b) Consumer surplus will be $1,250, producer surplus will be $2,500 c) Consumer surplus will be $450, producer surplus will be $2,700 d) Consumer surplus will be $2,250, producer surplus will be $2,500 e) Consumer surplus will be $2,250, producer surplus will be $900

7) Suppose your factory manager reported that marginal cost is twice as much as your marginal revenue at the current output level. In order to maximize your profits, you should

a) Slightly Increase the output level b) Double the output level c) Decrease the output level d) Stay at the current output level e) The answer depends on the market structure

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FIGURE 2: Chi Phi Haunted House Monopoly

For questions 8-10 please refer to Figure 2. 8) During the month of October, Chi Phi Fraternity was a monopoly since it operated the only haunted house in Delaware. Chi Phi’s demand and cost data is given in figure 1. Which of the following is the profit-maximizing price that will be charged by Chi Phi?

a) $8 b) $5 c) $4 d) $7 e) $6

9) Which of the following is the profit that Chi Phi will make?

a) $600 b) $900 c) $2,000 d) $300 e) $1,000

10) Which of the following is the deadweight loss (forgone benefit) that results from the monopolist’s output decision in Figure 1?

a) $600 b) $300 c) $900 d) $1,200 e) $0

Figure 3: Market for Wheat in United States Supply represents the supply of Wheat of US producers, Demand represents the demand for Wheat by US consumers 11) In Figure 3, calculate the consumer surplus and producer surplus in free market equilibrium a) Consumer surplus $1,200, producer surplus $400 b) Consumer surplus $1,400, producer surplus $200 c) Consumer surplus $1,600, producer surplus $800 d) Consumer surplus $1,400, producer surplus $600 e) Consumer surplus $1,600, producer surplus $600 12) In Figure 3 if US government allows imports of wheat at a world price of $40 Total US surplus = US consumer surplus + US producer surplus will be a) $2,700 b) $2,400 c) $1,800 d) $4,500 e) $1,600

13) Lawrence’s Lawn Company is a lawn-mowing business in a perfectly competitive market for lawn-mowing services. The table below displays Lawrence’s costs. (Fixed Costs are $30).

Output (Q)

Lawns per day

Total Cost (TC)

(dollars per day) 0 30 1 40 2 55 3 75 4 100 5 130 6 165

If the market price is $30 per lawn, Lawrance’s Lawn Company should:

a) shut down and make a profit of 0 b) shut down and make a profit of -$30 c) produce 3 units and make a profit of -$15 d) produce 5 units and make a profit of $20 e) produce 6 units and make a profit of $25

14) In the long run, a profit-maximizing firm will choose to exit a market when

a) average fixed cost is falling. b) variable costs exceed sunk costs. c) marginal cost exceeds marginal revenue at the current level of production. d) total revenue is less than total cost. e) average fixed cost is zero.

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ATC

AVC

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Figure 4: Short Run Cost Curves for a firm operating in a perfectly competitive market

15) In Figure 4, if the market price is $14, in the short run

a) the firm will shut down and make a loss of $80 b) the firm will shut down and make a loss of $100 c) the firm will shut down and make zero profits d) the firm will produce Q=20 and make a loss of $100 e) the firm will produce Q=20 and make a loss of $40

16) The demand and supply schedules for rental apartments in Victorian Village are given below.

Monthly rent

Quantity demanded (in millions)

Quantity supplied (in millions)

1,200 1.8 2.2 1,100 1.9 2.1 1,000 2.0 2.0 900 2.1 1.9 800 2.2 1.8 700 2.3 1.7 600 2.4 1.6

Suppose government imposes a price ceiling on rents at $800. Which of the following would be correct?

a) The price ceiling will have no effect on the market as it is introduced below the equilibrium price.

b) There would be an excess demand of 2.2 million apartments. c) There would be an excess supply of 0.4 million apartments. d) The shortage of apartments would be 0.4 million

17) Alexis used to work as a high school teacher for $40,000 per year but quit her job in order to start her own catering business. To lease the necessary equipment, she withdrew $20,000 from her savings, (which paid 3 percent interest) and borrowed $30,000 from her uncle, whom she pays 3 percent interest per year. Last year she paid $25,000 for ingredients and had revenue of $110,000. She asked Don the accountant and Bob the economist to calculate her profit for her.

a) Don says her profit is $34,100 and Bob says her profit is $6500. b) Don says her profit is $34,100 and Bob says she lost $6500. c) Don says her profit is $35,000 and Bob says she lost $5000. d) Don says her profit is $33,500 and Bob says she lost $6500.

18) Greg’s demand for ballroom dancing lessons is given in the figure below. Calculate the total value he places on 3 hours of ballroom dancing lessons.

a) $45 b) $20 c) $50 d) $70 e) $105

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