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Mid2 Ec1 Stein S13.pdf
Mid2_Ec1_Stein_S13.pdf
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Mid2 Ec1 Stein S13.pdf-Econ 001: Midterm 2 (Dr. St...
Mid2_Ec1_Stein_S13.pdf-Econ 001: Midterm 2 (Dr. Stein)
Mid2 Ec1 Stein S13.pdf-Econ 001: Mi...
Mid2_Ec1_Stein_S13.pdf-Econ 001: Midterm 2 (Dr. Stein)
Page 3
6.
Jose sells corn in a competitive industry. Recently, he hired a financial analyst to analyze his
firm’s performance. The analyst recommends that Jose continues to operate, but warns him that
he will be operating at a loss. The analyst must have concluded that the firm’s
a.
Total Revenues exceed Total Costs.
b.
Total Revenues exceed Total Variable Costs.
c.
Marginal Cost equals Average Total Cost.
d.
Average Variable Cost is greater than Marginal Revenue.
7.
Which of the following statements are true?
I.
If a monopolist wants to maximize profit/minimize loss, he will choose to produce
where P=MC.
II.
If a monopolist wants to maximize revenue, he will choose to produce where demand
is unit elastic.
III.
If there is no fixed cost, then maximizing profit is equivalent to maximizing revenue.
a.
I
b.
II
c.
III
d.
I and II
e.
I and III
f.
II and III
g.
I, II and III
h.
None is true
8.
Suppose Exxon can distinguish between two types of drivers and that the marginal cost of
selling gasoline is constant:
Drivers who live in the suburbs, who must drive everyday and thus have a very inelastic demand
for gas.
Drivers who live in the city, who may choose to take the bus or walk to work and thus have a
very elastic demand for gas.
Which of the following is true?
a.
Exxon receives a higher marginal revenue from suburban drivers than city drivers.
b.
Because of this price discrimination, the market for gas is efficient.
c.
Exxon will certainly sell a higher quantity of gas in the suburbs than in the city.
d.
Exxon will charge more per gallon of gas to suburban drivers than city drivers.
Page 4
Answers:
1. a
2. h
3. a
4. c
5. d
6. b
7. b
8. d
Q1.
(
35 points)
Please use bluebook #1 for this question
.
You must use graphs to answer every part of the following question. Do not write more
than sentence for each part. Instead, show your answer on the graph.
Guar gum, a natural thickener used in ice cream, is grown by farmers in a perfectly competitive
industry. For many years the market was in a long run equilibrium but recently the use of the
product in hydraulic fracturing has shaken the industry up. This question asks you to analyze this
case from the perspective of Pukhraj Parihar, one of many farmers in India's northwestern
Rajasthan state.
a.
Start by drawing two graphs, side by side, one of the industry and the other of the costs
and the demand faced by Parihar, both in a long run equilibrium. Mark the equilibrium
price P
LR
, the quantity Parihar grows, q
0
and the quantity produced in the industry as a
whole, Q
0
.
b.
How will the new use of guar gum in hydraulic fracturing affect the demand in the
industry as a whole and the demand Parihar faces? In the short run, will he change the
amount of guar gum he produces? Will he be making profits? Show any profits
graphically.
c.
In our standard model, how would we expect the market to move to a long run
equilibrium? What will happen to the long run price, the amount Parihar produces and the
quantity produced in the industry as a whole?
d.
Parihar complains that the strong market for guar gum has resulted in higher demand for
land and thus the rent he must pay per acre has tripled. If that is correct will the long run
price be as you suggested in part c? If the long run price is not the one you suggested in
part c, show the correct long run price and equilibrium quantities.
e.
Sangeeta owns her own plot of land on which she grows guar gum. She says: “the
increased demand for my product is wonderful, the price is up and, given that I do not
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