ECON 002  Principles of Microeconomics
Drake University, Fall 2017
William M. Boal


EXAM 3 ANSWER KEY
Version A
I. Multiple choice
(1)a. (2)e. (3)a. (4)c. (5)c. (6)b. (7)c. (8)b. (9)b. (10)c. (11)a. (12)b. (13)d.
II. Problems
(1) [Consumer choice and demand: 16 pts]
 6 hamburgers and 5 cookies.
 7 hamburgers and 3 cookies.
 Budget line A is a straight line with intercepts at 10 cookies and at 5 hamburgers.
 4 hamburgers.
 Budget line B is a straight line with intercepts at 10 cookies and at 10 hamburgers.
 7 sandwiches.
 (P,Q) = ($6,4), ($3,7).
(2) [Rational choice: 10 pts]
 MC = Δ TC / Δ lanes
= $10 million, $6 million, $4 million, $4 million.
 MB = Δ TB / Δ lanes
= $20 million, $10 million, $6 million, $2 million.
 6 lanes, where MB = MC.
(3) [Basic definitions, cost and revenue: 3 pts]
 marginal cost.
 total cost.
 marginal revenue.
(4) [Discounting: 4 pts]
 $621.
 $75 million.
(5) [Shortrun cost: 26 pts] Note that SVC = cost of labor, energy and materials.
 SAVC = SVC / output = $8, $6, $8, $12.
 SAFC = 120 / output = $24, $12, $8, $6.
 SATC = SAVC + SAFC = $32, $18, $16, $18.
 SMC = Δ SVC / Δ output = $8, $4, $12, $24.
 Shutdown price = min SAVC = $6.
 Breakeven price = min SATC = $16.
 Produce 15 units, where $18 = SMC.
 Enjoys profit because price > breakeven price.
 Profit = TR  SFC  SVC = ($18 × 15)  120  120 = $30.
(6) [Longrun competitive equilibrium: 24 pts]
 $2.
 4 million.
 $2, because price = AC in longrun equilibrium.
 $8.
 10 million.
 profits, because above longrun supply curve.
 new firms enter, seeking profits.
 $4.
 12 million.
 $4, because price = AC in longrun equilibrium.
 increased, because of entry of firms seeking profits.
 increasingcost industry, because longrun supply curve slopes up.
III. Critical thinking [4 pts]
(1) Marginal revenue is given as $1000 and marginal cost is given as $1200. Since marginal revenue is less than marginal cost, you should downsize (paint fewer houses). By painting one less house, your profit will increase by $1200$1000=$200.
(2) The $500 expense for the nonrefundable airline ticket is a sunk cost because it cannot be avoided. Therefore it should not enter the decision. Instead, you should compare the remaining $300 costs with the $400 benefit. Since the benefit exceeds the remaining costs, you should take this vacation. You should not cancel it.
Version B
I. Multiple choice
(1)b. (2)a. (3)b. (4)b. (5)c. (6)d. (7)a. (8)c. (9)c. (10)d. (11)b. (12)c. (13)b.
II. Problems
(1) [Consumer choice and demand: 16 pts]
 4 hamburgers and 4 cookies.
 8 hamburgers and 6 cookies.
 Budget line A is a straight line with intercepts at 10 cookies and at 10 hamburgers.
 3 cookies.
 Budget line B is a straight line with intercepts at 6 cookies and at 10 hamburgers.
 4 cookies.
 (P,Q) = ($5,3), ($3,4).
(2) [Rational choice: 10 pts]
 MC = Δ TC / Δ lanes
= $8 million, $7 million, $6 million, $6 million.
 MB = Δ TB / Δ lanes
= $20 million, $10 million, $5 million, $4 million.
 4 lanes, where MB = MC.
(3) [Basic definitions, cost and revenue: 3 pts]
 marginal revenue.
 total revenue.
 marginal cost.
(4) [Discounting: 4 pts]
 $447.
 $50 million.
(5) [Shortrun cost: 26 pts] Note that SVC = cost of labor, energy and materials.
 SAVC = SVC / output = $10, $15, $20, $30.
 SAFC = 48 / output = $24, $12, $8, $6.
 SATC = SAVC + SAFC = $34, $27, $28, $36.
 SMC = Δ SVC / Δ output = $10, $20, $30, $60.
 Shutdown price = min SAVC = $10.
 Breakeven price = min SATC = $27.
 Produce 4 units, where $25 = SMC.
 Suffers loss because price < breakeven price.
 Profit = TR  SFC  SVC = ($25 × 4)  48  60 = $8 (that is, a loss of $8).
(6) [Longrun competitive equilibrium: 24 pts]
 $8.
 12 million.
 $8, because price = AC in longrun equilibrium.
 $2.
 9 million.
 losses, because below longrun supply curve.
 existing firms exit, avoiding losses.
 $8.
 6 million.
 $8, because price = AC in longrun equilibrium.
 decreased, because of exit of firms avoiding losses.
 constantcost industry, because longrun supply curve is horizontal.
III. Critical thinking [4 pts]
(Same as version A.)
[end of answer key]