Draw and label a graph to depict a perfectly competitive firm in long run equilibrium.

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Practice Midterm 2 Econ 160, Fall 2015
(100 points)
Multiple Choice Questions (4 points each): Choose the best answer given.
1) The table shows the benefits and costs per hour of Tom’s bicycle delivery service in New
York City.
Quantity Marginal
Benefit
Marginal
Cost
0
$9 $2
1
7 1
2
5 2
3
3 2
4
1 5
5
The optimal quantity of hours for Tom to work is:
A) 1
B) 3
C) 4
D) 5
2) The relationship between the quantity of inputs a firm uses and the quantity of output it
produces is the:
A) production function.
B) utility function.
C) demand function.
D) supply curve.
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3) The marginal utility per dollar spent on a good is the:
A) total utility of the good divided by its price
B) the total utility of the good times its price
C) additional utility gained by spending one more dollar on that good or service
D) the price of the good divided by its marginal utility
4) Economic profit for a business is:
A) the firm’s revenue minus the opportunity cost of all resources used
B) the firm’s revenue minus its capital assets
C) always greater than its accounting profit
D) the firm’s revenue minus its explicit costs
5) Utility is measured in hypothetical units called:
A) utils.
B) surplus cells.
C) bundles.
D) marginals.
6) The change in total cost when one more unit is produced is:
A) marginal cost.
B) average total cost..
C) average variable cost.
D) total cost.
7) A firm’s profit is equal to:
A) marginal revenue minus marginal cost.
B) total revenue minus total cost.
C) price minus marginal cost.
D) price minus variable cost.
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8) The discipline that combines economic modeling with insights from human psychology is
known as:
A) irrational economics
B) rational economics
C) status quo economics
D) behavioral economics.
9) A perfectly competitive firm will shut down when:
A) price < marginal revenue.
B) price < average variable cost.
C) price < average total cost.
D) price < demand.
10) When marginal utility is zero, total utility is::
A) at a maximum.
B) at a minimum.
C) zero.
D) negative
11) Marginal cost is:
A) total cost divided by output..
B) fixed cost divided by output.
C) the change in total cost divided by the change in output.
D) variable cost divided by output.
12) The marginal utility per dollar spent on a good is the:
A) the total utility of the good times its price.
B) additional utility gained by spending one more dollar on that good or service.
C) the price of the good divided by its marginal utility.
D) total utility of the good divided by its price.
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13) The curve showing the relationship between the price of a good and the total output of the
industry as a whole is known as the:
A) marginal revenue curve.
B) industry supply curve.
C) production function.
D) production possibilities frontier.
14) The short run is a time period:
A) of a few days.
B) of more than 1 year.
C) at least 1 month but less than 1 year.
D) in which the quantity of at least one input is fixed.
15) Jack owns a bicycle shop where he sells and repairs bicycles. His revenue is $400,000 per
year. His shop is in a building that he owns and could rent for $20,000 per year. He has an
assistant to whom he pays a $30,000 salary each year. He paid $100,000 to purchase the
inventory of bicycles he sells. He pays a total of $50,000 in taxes, insurance, and utilities each
year. In order to operate his shop, Jack gave up his job as a CPA, where he earned $100,000 per
year. Jack’s accounting profit is:
A) $220,000
B) $280,000
C) $300,000
D) $500,000
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Short Answer Questions (40 points)
1) (10 points) Draw and label a graph to depict a perfectly competitive firm in long run
equilibrium. What is the amount of economic profits? Where is the profit maximizing
output? Label the marginal revenue, the price charged and the average total cost (ATC) of the
output. Show and indicate everything clearly in your graph.
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2. (10 points) You own and operate a bike store. Each year, you receive revenue of $200,000
from your bike sales, and it costs you $100,000 to obtain the bikes. In addition, you pay $20,000
for electricity, taxes, and other expenses per year. Instead of running the bike store, you could
become an accountant and receive a yearly salary of $40,000. A large clothing retail chain wants
to expand and offers to rent the store from you for $50,000 per year. How do you explain to your
friends that despite making a profit, it is too costly for you to continue running your store?
a. (1 point) Define accounting profit
b. (3 points) What is your accounting profit?
c. (1 point) Define economic profit
d. (4 points) What is your economic profit?
e. (1 point) Should you continue running your shop?
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3. (10 points) Draw a total product curve and show the marginal product of labor on the curve.
Define the marginal product of labor. Why does the total product curve flatten out as more labor is
employed?
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4. (10 points) Using a graph with indifference curves and a budget line, show how a rational
consumer makes her choice for a bundle of goods (good x and good y) to maximize her total utility.
If the consumer’s income is I, the price of x is Px and the price of y is Py label the intercepts using
this information. Also, label a point on another indifference curve that is preferred to the optimal
point but is not affordable
Point B is the most preferred and affordable consumption bundle. It is tangent to the budget line and
lies on the highest possible indifference curve. Point A is preferred to consumption bundle B but it
lies outside of the budget constraint.