Economics 1 
                2nd Midterm MAKEUP Examination 
                    Tuesday, April 11th 1995

PART I  (20 minutes)

Choose 5 of the following 6 questions. Say whether the statement is true, false or partly true.
Explain your answer.

(1) A  price discriminating monopolist produces the same level of output as a monopolist who
cannot discriminate, but sets higher prices.

(2) A firm in a monopolistically competitive market will earn strictly positive (supernormal)
profits in the long run because its demand curve lies above its average cost curve.

(3) The OPEC cartel collapsed because the members violated their production quotas.

(4) Isoquants are downward sloping because of the law of diminishing returns.

(5) Unions can increase employment and wages for their members when they are dealing with
a firm that is a monopoly in the output market.

(6) Monopolists  produce an inferior product than would be produced in perfect competition,
and charge a higher price.

PART II (15 minutes)

The following table pertains to the costs of an individual firm.  Suppose the output Q is
produced in a perfectly competitive market.  Let TC=total cost, MC=Marginal Costs,
ATC=average total costs and AVC=Average variable costs, P=price.

     P    Q    TC   ATC  AVC  MC

     9    0    0
     9    1    8
     9    2    12
     9    3    21
     9    4    32
     9    5    45


(a) Complete the table above.

(b) How much output Q does the firm produce? Why? 

(c) Compute the loss or profits the firm is obtaining.

(d) Now suppose that when Q=0, TC is equal 3.  Will your answer in (b) change?  Will your
answer in (c) change?  Explain your answer.

(e) Is the situation in part (c) a long run equilibrium?  Explain why or why not. If not, what
will happen in the long run?  Use graphs to illustrate your answer.

PART III (15 minutes)

Suppose a firm sells its output in Florida and in Vermont and is monopolistic in both markets.
Suppose it faces the following demand conditions in each of the markets:
       
Florida: Q(F) = 20 - 2P

Vermont: Q(V) = 20 - 3P

Suppose the marginal cost of producing the good is constant at $5.  If the monopolist finds it
useful to discriminate in the two markets, in which market will it charge a higher price?
Explain your answer.