Economics 1
2nd Midterm Exam
Fall 1997

Instructions:

	1.	Answer all sections of this test. This is a 60 minutes
exam, including 10 minutes for review.
	2.	You should allot 38 minutes to the Common Exam and 12
minutes to the Instructor Specific Exam.
	3.	Graphs are necessary where noted. They are always helpful.
Carefully label all graphs.
	4.	Write all answers in the blue books provided. Show all work.
	5.	Write your name and your instructor's name in every blue
book that you use.
	6.	This exam is given under the rules of Penn's HonorSystem
	7.	All blue books, blank or filled, must be handed in at the
end of this exam. No blue books may be taken from this room.


Part 1(24 minutes, 24 points, 4 points each question). Please answer
question 1, and 5 out of the 6 remaining questions.

Explain whether each statement is True, False, or partially True. Your
grade will be based on the quality of the explanation.

1) In his article on Income Disparity, Steven Holmes argues that income
inequality in the U.S. has grown because of the tax cuts of the 1980s.

2) When a monopolist charges a price which is such that the price
elasticity of demand is one, its total revenue is at a maximum.

3) In order to maximize profit a firm should always set marginal revenue
equal to marginal cost, independently of the structure of the market for
its product.

4) Monopolies cause allocative inefficiencies because they do not minimize
costs.

5) Marginal revenue is always less than price.

6) A perfectly price-discriminating monopolist does not cause any
allocative inefficiency.. Therefore perfect price-discrimination makes
consumers better off.

7) An increase in the wage rate will always increase an individual's
supply of labor.

PART II OF COMMON EXAM ON NEXT PAGE >>>>>>>>>>>>>> 

Part 2 (14 minutes, 14 points).

The market for chocolate bars is perfectly competitive. All producers in
this market are identical, and they maximize profit.

Each producer incurs a fixed cost of F = 50 to produce any quantity. The
fixed cost is unavoidable in the short run. To produce a quantity q, each
producer also has to pay a variable cost given by

TYC=(1/2)*q2


Notice that therefore, each producer has a marginal cost given by
MC = q


The market demand for chocolate bars is given by

P=100-Q

where Q is the total quantity of chocolate bars demanded in the market.
There are nine firms in the market for chocolate bars.

	(i)Represent in a graph the Marginal and Average Total Cost curves
for each producer of chocolate bars.
	(ii)Derive each firm's short run supply curve for chocolate bars.
Derive the short run market supply curve.
(iii) Compute the short run equilibrium price and quantity of chocolate bars.
(iv) In the short run, how many chocolate bars will each firm produce?
	(v)Compute the short run total profits for each firm.
(vi) In the lone run. how many firms will operate in the market for
chocolate bars?