Economics I

2nd Midterm Exam - MAKEUP

Fall 1997

Instructions:

1. Answer all sections of this test. This is a 60 minutes exam, including 10 minutes for review.

2. Graphs are necessary where noted. They are always helpful. Carefully label all graphs.

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 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 Minimum Wage Rates, Milton Friedman argues that minimum wage legislation causes a shortage of labor.

2) For a perfectly competitive firm, marginal revenue is equal to price.

3) In a perfectly competitive industry that is in long run equilibrium, all firms produce at their "minimum efficient scale".

4) An efficient allocation of resources requires that price is equal to marginal cost

5) A perfectly competitive firm will always supply a quantity of output that equates price and marginal cost.

6) A perfectly price-discriminating monopolist will (other things being equal) enjoy higher profits than a monopolist that cannot price-discriminate.

7) In a perfectly competitive labor market, the supply curve for labor is always upward sloping.

A monopolist has a total cost function given by TC(Q) = Q. The monopolist's Average and Marginal Cost functions are therefore seven by MC = AC = 1.

The market demand curve is given by P = 11 - Q. Therefore, the monopolist's Marginal Revenue is given by MR(Q) = 11 - 2Q.

(i) Find the quantity that the monopolist will produce and the corresponding market price.

(ii) Compute the monopolist's profits.

(iii) Compute Consumer Surplus when the price is the one you found in (i) above.

(iv) Compute the price and quantity that would ensure that price is equal to Marginal

Cost in this market.

(v) Compute the monopolist's profit and Consumer Surplus at this new price and

quantity.

Suppose now that the monopolist described above is able to exercise perfect price discrimination.

(vi) Compute the quantity that the price-discriminating monopolist will produce. (vii) Compute the profits of the price-discriminating monopolist. (viii) Compute Consumer Surplus when the monopolist price-discriminates perfectly.

In order to answer the questions given below consider the following data for a perfectly

competitive firm.

(a) What is the profit maximizing level of output, Q* ?

(b) What is the amount of total profits at the Q* that you have determined in (a)?

(c) Is the fimn in long run equilibrium at Q* ?

(d) What would be the firm's short run equilibrium output level if price was $ 0.50 ?

(Note: give reasons for all your responses)