Economics 1
	2nd Midterm
Spring 1997

Instructions:
1.	Answer all sections of this test. This is a 60 minute exam
(including 10 minutes for review).  
	Common exam: 40 minutes.   Instructor specific: 10 minutes.
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:  ( 24 minutes)
Answer the first question and 5 out of the remaining 6 questions.  For
questions 2) through 7), explain whether the statement is true, false or
partially true.  Support your answers with appropriate and clearly labeled
diagrams wherever possible.

1. According to Barbara Bergman, how much of the gender gap in salaries
can be explained by human capital?

2. A perfectly competitive firm is operating where price is equal to ATC
and MC is equal to AVC. In order to maximize profits the firm should
reduce output.

3. If a monopoly is maximizing profits, the price elasticity of demand for
its product must be less than one.

4. The greater the price elasticity of demand for the product of the firm
the smaller the elasticity of demand for labor by this firm.

5.  A perfectly price discriminating monopolist does not cause allocative
inefficiency in the economy but does affect the distribution of consumer
and producer surplus.

6. The supply of labor can be negatively sloped if the substitution effect
of a wage change exceeds the income effect.

7. A workers union should not expect to do well if the firm is a profit
maximizing monopsony since the firm can punish a demand for higher wages
by large cuts in employment.


Part II: (16 minutes)

Suppose that in both the short run and the long run the demand curve for
oranges is given by:

	Q = 300-20P

where Q is the quantity of oranges and P is the price per unit of the oranges.
The orange suppliers operate under conditions of perfect competition. 


1. Short Run:
Consider the short run in which there are 60 firms. Each supplier has an
identical short run average cost structure in which MC=2q where q is the
output of each individual firm. 
(i)What is the supply function for each firm?
(ii) If the market supply function is Q =30P, what will be the equilibrium
price and quantity of oranges in this market?
(iii) How much will each firm produce?


2. Long Run:
Now consider the long run equilibrium in this market. Each supplier has an
identical long run average cost structure in which the minimum long run
average cost of $1 is reached at an output level of 20 oranges. How many
firms will exist in this market in the long run?