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Economics for Management Studies

MGEC38H3

Gordon Cleveland

Fall

Description

Page 1 of 7
ECMA04H
Second Term Test – November 17, 2010 Time: 90 minutes
Prof. Gordon Cleveland
Version A
Instructions: PLEASE READ CAREFULLY
1. On the Scantron answer sheet, you must
→ PRINT your last name and first name
→ enter your student number as the identification number
→ FILL IN THE BUBBLES under your name and student number
→ FILL IN THE BUBBLE ASSOCIATED WITH YOUR TEST VERSION
NOTE - THIS IS VERSION A
2. If you fail to carry out all the tasks indicated in part 1, 4 marks will be deducted
from your final score.
3. This exam consists of 25 multiple choice questions (and a 26 which will
confirm your exam version). For each question, choose the correct answer. If two
multiple choice answers both seem to be approximately correct, choose the best of
the two answers. Enter the answers to the multiple choice questions on the
Scantron sheet provided to you by filling in the appropriate bubble. If
answers are not written on this sheet, there will be no marks given for
answers. Each correct answer is worth 4 marks (except for question 26, where the
correct answer simply confirms your exam version); incorrect answers receive 0
marks.
4. When entering your answers on the Scantron sheet:
→ Use a medium (HB) pencil (do not use a red pen)
→ Fill in the bubble neatly and completely (this is important)
→ Erase any changes as completely as possible
→ Be very careful to place each answer in the correct place
Note: this exam consists of 7 pages, including this cover page. Make sure that all 7
pages are included in your exam, and notify an invigilator immediately if any are
missing. Page 2 of 7
ECMA04 SECOND TERM TEST November 17, 2010
This term test consists of 25 questions. Answer each question by choosing the best alternative
and indicating your choice by filling in the appropriate bubble on the Scantron sheet - it is the
only thing you will turn in at the end of the exam. You may take the rest of the exam away with
you, so you can use the fronts and back of these pages for your rough work. If you wish to keep a
record of your answers, make a note of them on the exam question sheet. The answer sheet
(Scantron) will not be returned to you, but the answers will be posted on the course website and
the Intranet. Each correct answer is worth 4 marks (there is no deduction for wrong answers).
1-3. In the long run, a firm producing skyhooks has the following production function:
q = 10KL/(K+L)
where q is output, K is physical capital, and L is labour. In the short run, the firm has plant and
equipment that in total account for 20 units of physical capital. Questions 1 through 3 concern
this firm.
1. Suppose that the price of labour is $16 per unit and the price of capital is $24 per unit. In the
short run, when L=20, the average cost (also called the average total cost) (computed to the
nearest penny) is:
A) $4.00 B) $4.50 C) $5.00 D) $6.00 E) $7.50 F) $8.00
G) $9.00 H) $10.00 I) $10.50 J) none of the above
2. Suppose that the price of labour is $16 per unit and the price of capital is $24 per unit. In the
short run, when L=20, the marginal cost (computed to the nearest penny) is:
A) $2.50 B) $3.20 C) $4.00 D) $5.60 E) $6.40 F) $7.50
G) $8.40 H) $9.60 I) $10.00 J) none of the above
3. In the short run, when L=20, the marginal product of labour is:
A) 1.6 B) 2.5 C) 2.8 D) 3.0 E) 3.4 F) 3.6
G) 4.2 H) 4.8 I) 5.4 J) none of the above Page 3 of 7
4-10. A firm in a perfectly competitive constant cost industry has total costs in the short run
given by:
TC = 726 + 11q + 6q 2 q ≥ 2
FC = 342
where q is output per day and TC is the total cost per day in dollars. The firm has fixed costs of
$342 (already included in the TC equation above). The TC equation generates minimum average
costs of $143 (per unit) at q = 11. You are also told that this size firm generates minimum long
run average costs (that is, minimum LRAC occurs at q = 11, with min LRAC = $143).
Questions 4 through 10 concern this firm and this industry.
4. You are told that in the short run there are 200 firms, including this one, in the industry, all with
the same cost curves described above. Suppose that the demand curve facing the industry is given
by the equation P = 311 - .04Q where P is the price per unit and Q is the number of units
demanded per day. The equilibrium price in this industry in the short run is:
A) $128 B) $143 C) $156 D) $165 E) $178 F) $183
G) $191 H) $207 I) $211 J) none of the above
5. This profit earned by each firm in this industry in this short run equilibrium is:
A) $0 B) $186 C) $268 D) $496 E) $624 F) $786 G) $864
H) $924 I) $968 J) none of the above
6. Given the demand curve described in question 4, suppose that we are now in the long run. The
total output of the industry per day in the long run is:
A) 0 B) 2000 C) 2500 D) 3000 E) 3500 F) 4000
G) 4200 H) 4500 I) 4800 J) none of the above
7. Given the demand curve described in question 4, suppose that we are still in the long run. The
number of firms in the industry, rounding to the nearest integer, is:
A) 246 B) 273 C) 318 D) 382 E) 436 F) 448
G) 484 H) 496 I) 500 J) none of the above
8. Now, you can ignore the long-run situation. Think again about the short run. This firm’s shut
down price is:
A) $96 B) $107 C) $123 D) $128 E) $135 F) $138
G) $141 H) $143 I) $156 J) none of the above
9. We are now in a new short-run situation with 200 firms in the industry and the same cost curves
described at the beginning of this set of questions. Now, imagine that the industry demand curve
falls to P = 139 - .04Q. When the industry settles down into a new short-run equilibrium, what will
be the new equilibrium price?
A) $87.80 B) $96 C) $107 D) $123.40 E) $128 F) $135.90
G) $138 H) $141 I) $143 J) none of the above Page 4 of 7
10. In the new short run equilibrium described in Question 9, how many firms will have temporarily
shut down?
A) 200 (all) B) 180 C) 150 D) 120 E) 100 F) 80
G) 60 H) 20 I) 0 J) none of the above
11-13. Consumers have a demand curve for tesseracts given by the following function:
P = 120 - .05X
where X is the number of tesseracts purchased each month and P is the price of tesseracts measured
in dollars. Initially, the equilibrium price is $40 and consumers purchase 1600 units per month.
Supply is horizontal (that is, completely elastic). The government is considering placing a $12 per
unit tax on the sellers of tesseracts. Questions 11 through 13 concern this consumer.
11. The excess burden

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