Economics 1
	2nd Midterm - MAKEUP
Fall 1996
Instructions:
1.	Answer all sections of this test. This is a 60 minute exam; 50
minutes have been directly allocated to questions; you have 10 minutes for
review.  
2.	Illustrate your answers with carefully labeled diagrams, wherever
appropriate.
3.	Write all answers in the blue books provided. Show all work.
4.	Write your name and your instructor's 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: (20 minutes total: 4 minutes each question)
True/False.  State whether the statement is TRUE, FALSE or PARTLY TRUE. 
Be sure to EXPLAIN your answer.

1.	In a perfectly competitive industry, as firms are price-takers,
market demand is horizontal.

2.	If the industry is perfectly competitive, economic profit is zero
in the long run, but might be positive in the short run.

3.	While for a perfectly competitive firm Marginal Revenue is always
equal to the market price, for a Monopolist Marginal Revenue is always
above the market price.

4.	The difference between Perfect Competition and Monopolistic
Competition is that while in the former entry and exit of firms from the
market is free, in the latter there exists entry barriers.

5.	In a Duopoly there is a strong incentive for the two firms to
collude and share equally the Monopolistic profit.



Part II: (30 minutes total)
1. [20 minutes]
	You are a self-employed profit-maximization consultant,
specialized in perfectly competitive markets and in monopolies.  Five
firms are currently seeking your advice and they provided you with the
information below.  Firms A, B and C operate in a perfectly competitive
market, while firms D and E operate in a monopoly.
a)	For each firm, complete the following tables:

Firm	P	MR	TR	Q	TC	TFC	TVC	MC	ATC	AVC
   A	3.2			100				3.2	2.7	2.6
   B	3.7			100				3.7	4.2	3.1
   C	3.5			100				3.5	7	6


	Firm	P	MR	TR	Q	TC	TFC	TVC	MC	ATC	AVC
D	7	5.2		100				5.2	2.7	2.6
E	12	8.0		100				7.1	5.5	4.8




b) For each firm choose one of the following short run recommendations:

	1.  Keep output at the current level.
	2.  Increase output.
	3.  Decrease output.
	4.  Shut down.

c)	You receive a phone call from firm D: their total fixed cost has
increased to 15, but their variable costs are still the same.  Would you
recommend firm D to pass the cost on to consumers, by increasing the price
to 12?  If so, why?  If not, why not?