ECON 002 - Principles of Microeconomics
Drake University, Spring 2013
William M. Boal

Course page: www.cbpa.drake.edu/econ/boal/002
Blackboard: bb.drake.edu
william.boal@drake.edu

EXAM 3 ANSWER KEY

Version A

I. Multiple choice

(1)c. (2)c. (3)c. (4)b. (5)b. (6)c. (7)c. (8)b. (9)d. (10)b. (11)a. (12)d.

II. Problems

(1) [Budget line: 14 pts]

  1. Not affordable.
  2. Affordable with money left over.
  3. Exactly affordable.
  4. 1/2 units of clothing.
  5. 1/2.
  6. $5.
  7. $10.

(2) [Consumer choice and demand: 16 pts]

  1. 6 units of food and 6 units of other goods.
  2. 7 units of food and 7 units of other goods.
  3. Budget line A has an intercept on the "other goods" axis at 10, and an intercept on the "food" axis at 15.
  4. 6 units of food.
  5. Budget line B has an intercept on the "other goods" axis at 10, and an intercept on the "food" axis at 5.
  6. 3 units of food.
  7. (Q,P) = (6,$2), (3,$6).

(3) [Basic definitions, cost and revenue: 6 pts]

  1. Marginal cost.
  2. Marginal cost.
  3. Total cost.
  4. Marginal revenue.
  5. Marginal revenue.
  6. Average cost.

(4) [Discounting: 4 pts]

  1. $367.
  2. $300 million.

(5) [Short-run cost curves and supply: 24 pts]

  1. $9 thousand (= 1300 × SATC, rounded).
  2. $5 thousand (= 1300 × SAVC, rounded).
  3. $4 thousand (= STC - SVC).
  4. $4 (= SMC).
  5. $7 (= minimum SATC).
  6. $4 (= minimum SAVC).
  7. 1300 parts, using the rule P=MC.
  8. loss, because price is less than breakeven price.
  9. 1600 parts, using the rule P=MC.
  10. profit, because price is greater than breakeven price.
  11. zero parts, because price is less than shutdown price.
  12. loss, equal to short-run fixed cost.

(6) [Long-run competitive equilibrium: 24 pts]

  1. $5.
  2. 4 million.
  3. $5, because price = average cost in long-run equilibrium.
  4. $11.
  5. 10 million.
  6. profits, because market is above long-run supply curve.
  7. enter, in search of profits.
  8. $5.
  9. 13 million.
  10. $5, because price = average cost in long-run equilibrium.
  11. increased, due to entry of new firms.
  12. constant-cost industry, because long-run supply curve is horizontal.

Version B

I. Multiple choice

(1)a. (2)f. (3)b. (4)a. (5)a. (6)b. (7)d. (8)a. (9)a. (10)d. (11)b. (12)b.

II. Problems

(1) [Budget line: 14 pts]

  1. Affordable with money left over.
  2. Exactly affordable.
  3. Not affordable.
  4. 1/3 units of clothing.
  5. 1/3.
  6. $5.
  7. $15.

(2) [Consumer choice and demand: 16 pts]

  1. 7 units of food and 5 units of other goods.
  2. 6 units of food and 6 units of other goods.
  3. Budget line A has an intercept on the "other goods" axis at 15, and an intercept on the "food" axis at 6.
  4. 4 units of food.
  5. Budget line B has an intercept on the "other goods" axis at 15, and an intercept on the "food" axis at 10.
  6. 6 units of food.
  7. (Q,P) = (4,$5), (6,$3).

(3) [Basic definitions, cost and revenue: 6 pts]

  1. Marginal revenue.
  2. Average cost.
  3. Marginal cost.
  4. Marginal cost.
  5. Total cost.
  6. Marginal revenue.

(4) [Discounting: 4 pts]

  1. $336.
  2. $240 million.

(5) [Short-run cost curves and supply: 24 pts]

  1. $17 thousand (= 1400 × SATC, rounded).
  2. $11 thousand (= 1400 × SAVC, rounded).
  3. $6 thousand (= STC - SVC).
  4. $7 (= SMC).
  5. $10 (= minimum SATC).
  6. $3 (= minimum SAVC).
  7. zero parts, because price is less than shutdown price.
  8. loss, equal to short-run fixed cost.
  9. 800 parts, using the rule P=MC.
  10. loss, because price is less than breakeven price.
  11. 1100 parts, using the rule P=MC.
  12. profit, because price is greater than breakeven price.

(6) [Long-run competitive equilibrium: 24 pts]

  1. $6.
  2. 12 million.
  3. $6, because price = average cost in long-run equilibrium.
  4. $2.
  5. 7 million.
  6. losses, because market is below long-run supply curve.
  7. exit, to escape losses.
  8. $4.
  9. 6 million.
  10. $4, because price = average cost in long-run equilibrium.
  11. decreased, due to exit of firms.
  12. increasing-cost industry, because long-run supply curve slopes upward.

Version C

I. Multiple choice

(1)d. (2)a. (3)c. (4)d. (5)c. (6)b. (7)a. (8)c. (9)c. (10)a. (11)c. (12)a.

II. Problems

(1) [Budget line: 14 pts]

  1. Affordable with money left over.
  2. Not affordable.
  3. Exactly affordable.
  4. 1/4 units of clothing.
  5. 1/4.
  6. $2.
  7. $8.

(2) [Consumer choice and demand: 16 pts]

  1. 8 units of food and 6 units of other goods.
  2. 4 units of food and 5 units of other goods.
  3. Budget line A has an intercept on the "other goods" axis at 12, and an intercept on the "food" axis at 6.
  4. 3 units of food.
  5. Budget line B has an intercept on the "other goods" axis at 12, and an intercept on the "food" axis at 12.
  6. 5 units of food.
  7. (Q,P) = (3,$10), (5,$5).

(3) [Basic definitions, cost and revenue: 6 pts]

  1. Total cost.
  2. Marginal revenue.
  3. Marginal revenue.
  4. Average cost.
  5. Marginal cost.
  6. Marginal cost.

(4) [Discounting: 4 pts]

  1. $305.
  2. $200 million.

(5) [Short-run cost curves and supply: 24 pts]

  1. $11 thousand (= 1200 × SATC, rounded).
  2. $6 thousand (= 1200 × SAVC, rounded).
  3. $5 thousand (= STC - SVC).
  4. $7 (= SMC).
  5. $8 (= minimum SATC).
  6. $5 (= minimum SAVC).
  7. 1800 parts, using the rule P=MC.
  8. profit, because price is greater than breakeven price.
  9. 1600 parts, using the rule P=MC.
  10. loss, because price is less than breakeven price.
  11. zero parts, because price is less than shutdown price.
  12. loss, equal to short-run fixed cost.

(6) [Long-run competitive equilibrium: 24 pts]

  1. $3.
  2. 4 million.
  3. $3, because price = average cost in long-run equilibrium.
  4. $11.
  5. 9 million.
  6. profits, because market is above long-run supply curve.
  7. enter, in search of profits.
  8. $5.
  9. 12 million.
  10. $5, because price = average cost in long-run equilibrium.
  11. increased, due to entry of new firms.
  12. increasing-cost industry, because long-run supply curve slopes upward.

[end of answer key]