Econ 101 Section 3– Principles of Microeconomics

Instructor: C. Burkart

Exam #9  [40 points total]

October 26, 2005

Questions 1 to 6 are worth 2 points each.  Clearly circle the one best answer to each question.  You will not receive credit if your answer choice is unclear or ambiguous.

1.       The existence of profit in a perfectly competitive industry means that

1. the current price exceeds marginal cost.
2. consumers will switch to substitute goods.
3. new producers will seek to enter the industry.
4. each producer is charging a different price.

2.       Luis operates a cherry orchard in Northern Oregon and sells the cherries in a perfectly competitive market at a price of $1.70 per pound. Last month Luis sold 2,000 pounds of cherries. His fixed cost of production was $800 and his average variable cost was $1.00 per pound. What was his profit?

1. $3,400
2. $2,600
3. $600
4. $800

3.       A firm will choose to shut down in the short run when

1. total revenue is not sufficient to cover total cost.
2. price is below the minimum point of AVC.
3. price is above the minimum point of AVC but below the minimum point of ATC.
4. marginal cost begins to increase.

4.       How does the long run differ from the short run in perfect competition?

1. In the short run, the firm seeks to maximize profit; it the long run it seeks to maximize revenue.
2. In the short run, the firm seeks to maximize profit; it the long run it seeks to minimize cost.
3. The long run is long enough to allow for the entry of new firms into the industry.
4. In the long run, some firms will charge higher prices than others.

5.       The short-run individual supply curve of the perfectly competitive firm is

1. its average total cost curve.
2. the upward-sloping portion of its average variable cost curve.
3. its marginal cost curve above average total cost.
4. its marginal cost curve above average variable cost.

6.       Suppose that firms in the perfectly competitive potato-growing industry are earning economic profits. According to economic theory, what is likely to happen?

1. More firms will enter the market, thereby decreasing the industry supply and raising the market price
2. The costs of the firms will increase, eventually eliminating the profit.
3. More firms will enter the market, thereby increasing the industry supply and lowering the market price.
4. The existence of profits will lead to a drop in the demand for potatoes.

Question 6 [28 pts.] Bob produces DVD movies for sale, which requires only a building and a machine that copies the original move onto a DVD (apparently Bob is a bootlegger).  Bob rents a building for $30,000 a month and rents a machine for $20,000 a month.  Those are his fixed costs.  Some of his costs are given in the table to the right (though you may find it helpful to calculate marginal costs at various output levels).  Use the table to answer the following questions:

a.       There is free entry into the industry: anyone who enters will face the same costs as Bob.  Suppose that the current price of a DVD is $23.  What is Bob’s profit? _$62,000__ Is this a long-run equilibrium? __No___ If not, what will the price of DVDs be in the long-run?__$13.83__

b.      What is Bob’s break-even price? __$13.83__  What is his shut-down price? __$3.00__

c.       Suppose the price of a DVD is $2.  What should Bob do in the short run? _Shut down/Go out of business__

d.      Suppose the price of a DVD is $7.  What is the profit-maximizing quantity of DVDs that Bob should produce? _5,000 DVDs_ What will his total profit be?  _-$35,000_ Will he produce or shut down in the short run?  _produce_ Will he stay in the industry or exit in the long run?___exit___

e.       Suppose the price of a DVD is $20.  Now what is the profit-maximizing quantity of DVDs that Bob should produce?_$7,000 DVDs_  What will his total profit be now?_$41,000_  Will he produce or shut down in the short run?__produce__  Will he stay in the industry or exit in the long run?___stay___