Economics 1
Spring 1996
	2nd Midterm Exam


Instructions:
1.	Answer all sections of this test. This is a 60 minute exam.  
2.	Graphs are helpful. Carefully label all graphs that you use.
3.	Write all answers in the blue books provided. Show all work.
4.	Write your name and your instructors name in every blue book that
you use.
5.	This exam is given under the rules of Penn's Honor System.
6.	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 I: True/False (24 minutes)

Please give reasons for your answer to receive any credit at all. Support
your answers with appropriate and clearly labeled diagrams wherever possible.

1. The marginal cost curve intersects the average cost curve at the
minimum point of the average cost curve.

2. In a competitive equilibrium, the marginal cost for producing an extra
unit of output must be the same for all firms in the industry.

3. Cartels are stable because no individual firm has any incentive to
violate the agreed upon quota.

4. If a technology exhibits increasing returns to scale then it can  not
also exhibit decreasing returns to labor.

5. Monopolies are inefficient and hence they fail to minimize costs.

6. The textile industry has recently benefitted from cost reducing
technological innovations. Hence, in the new equilibrium both the output
of textiles and price will be higher.

Part II: (21 minutes)

1. (17 minutes) Suppose a perfectly competitive industry faces the
following demand curve:

				Q = 100 - 20P

SHORT RUN 
a. Suppose all firms in the industry are identical and that each firm in
the industry has a marginal cost curve given by MC = 2Q.  What is the
equation for the supply curve for each firm?

b. If there are 60 firms in this market in the short run what is the
equation of the industry supply curve?

c. What price will be set in the industry in the short run?

d. How much will each firm produce?

LONG RUN
e. Suppose that for every firm in the long run the minimum point on the
average cost curve corresponds to 10 units and the average cost of these
10 units is $1. How many firms will there be in equilibrium in the long run?



2. (4 minutes)
 Suppose a firm sells its output in the domestic market and the
international market and is a monopolist in both markets. Suppose it faces
the following demand conditions in each of the markets:
		Domestic:	Qd = 20 - 2P
		International:	Qi  = 20 - 3P

Suppose the marginal cost of producing the good is constant at $5.
If the monopolist finds it useful to price discriminate in the two markets
in which market will he charge a higher price? Give reasons for your
answer. (Hint: Use demand elasticities).