ECON 002 - Principles of Microeconomics
Drake University, Fall 2022
William M. Boal

EXAM 3 ANSWER KEY

Version A

I. Multiple choice

(1)b. (2)a. (3)d. (4)b. (5)b. (6)a. (7)c. (8)d. (9)a. (10)c.
(11)a. (12)b. (13)c. (14)a. (15)b. (16)c. (17)e. (18)d. (19)b. (20)b.
(21)d. (22)b. (23)a. (24)c. (25)b. (26)a. (27)d. (28)c.

II. Problems

(1) [Consumer choice and demand: 14 pts]

  1. 6 pizza slices and 6 milkshakes.
  2. 4 pizza slices and 5 milkshakes.
  3. Budget line A is a straight line with intercepts at 10 pizza slices and at 15 milkshakes.
  4. 6 pizza slices, the tangency point.
  5. Budget line B is a straight line with intercepts at 6 pizza slices and at 15 milkshakes.
  6. 4 pizza slices, the tangency point.
  7. (P,Q) = ($6,6), ($10,4).

(2) [Rational choice: 10 pts]

  1. MC = Δ TC / Δ gates = $4 million, $3 million, $2 million, $2 million.
  2. MB = Δ TB / Δ gates = $7 million, $2 million, $1 million, $0.5 million.
  3. 4 gates, where MC begins to exceed MB.

(3) [Discounting: 4 pts]

  1. $4.07 = -1000 + (900/1.04) + (150/1.042).
  2. $25 million = $1 million / 0.04.

(4) [Short-run cost curves and supply: 20 pts]

  1. $18 thousand (= 1500 × SATC).
  2. $12 thousand (= 1500 × SAVC).
  3. $6 thousand (= STC - SVC).
  4. $2 (= SMC).
  5. $9 (= minimum SATC).
  6. $2 (= minimum SAVC).
  7. 700 parts, using the rule P=MC.
  8. loss, because price is less than breakeven price.
  9. 1100 parts, using the rule P=MC.
  10. profit, because P is greater than breakeven price.

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

  1. $5.
  2. 4 million.
  3. $5, because price = AC in long-run equilibrium.
  4. $11, at intersection of new demand and short-run supply.
  5. 10 million.
  6. profits, because above long-run supply curve.
  7. new firms enter the industry seeking profits.
  8. $7, at intersection of new demand and long-run supply.
  9. 12 million.
  10. $7, because price = AC in long-run equilibrium.
  11. increased, because of entry of firms seeking profits.
  12. increasing-cost industry, because long-run supply curve slopes up.

Version B

I. Multiple choice

(1)a. (2)c. (3)a. (4)a. (5)c. (6)b. (7)b. (8)a. (9)b. (10)c.
(11)b. (12)c. (13)d. (14)e. (15)a. (16)c. (17)b. (18)d. (19)c. (20)c.
(21)e. (22)c. (23)b. (24)d. (25)a. (26)b. (27)b. (28)a.

II. Problems

(1) [Consumer choice and demand: 14 pts]

  1. 7 pizza slices and 5 milkshakes.
  2. 6 pizza slices and 6 milkshakes.
  3. Budget line A is a straight line with intercepts at 10 pizza slices and at 15 milkshakes.
  4. 6 milkshakes, the tangency point.
  5. Budget line B is a straight line with intercepts at 10 pizza slices and at 6 milkshakes.
  6. 3 milkshakes, the tangency point.
  7. (P,Q) = ($4,6), ($10,3).

(2) [Rational choice: 10 pts]

  1. MC = Δ TC / Δ gates = $4 million, $3 million, $3 million, $4 million.
  2. MB = Δ TB / Δ gates = $10 million, $8 million, $2 million, $1 million.
  3. 8 gates, where MC begins to exceed MB.

(3) [Discounting: 4 pts]

  1. -$20.41 = -1000 + (600/1.05) + (450/1.052).
  2. $20 million = $1 million / 0.05.

(4) [Short-run cost curves and supply: 20 pts]

  1. $6 thousand (= 500 × SATC).
  2. $2 thousand (= 500 × SAVC).
  3. $4 thousand (= STC - SVC).
  4. $7 (= SMC).
  5. $5 (= minimum SATC).
  6. $2 (= minimum SAVC).
  7. 1800 parts, using the rule P=MC.
  8. profit, because P is greater than breakeven price.
  9. 0 parts, because price is less than the shutdown price.
  10. loss, because price is less than breakeven price (profit = -SFC).

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

  1. $8.
  2. 12 million.
  3. $8, because price = AC in long-run equilibrium.
  4. $2, at intersection of new demand and short-run supply.
  5. 6 million.
  6. losss, because below long-run supply curve.
  7. exising firms will exit the industry to avoid losses.
  8. $6, at intersection of new demand and long-run supply.
  9. 4 million.
  10. $6, because price = AC in long-run equilibrium.
  11. decreased, because of exit of firms avoiding losses.
  12. increasing-cost industry, because long-run supply curve slopes up.

Version C

I. Multiple choice

(1)d. (2)b. (3)c. (4)c. (5)d. (6)c. (7)b. (8)b. (9)b. (10)c.
(11)c. (12)d. (13)a. (14)c. (15)b. (16)d. (17)e. (18)a. (19)a. (20)b.
(21)a. (22)d. (23)a. (24)d. (25)c. (26)a. (27)d. (28)c.

II. Problems

(1) [Consumer choice and demand: 14 pts]

  1. 10 pizza slices and 3 milkshakes.
  2. 5 pizza slices and 5 milkshakes.
  3. Budget line A is a straight line with intercepts at 10 pizza slices and at 10 milkshakes.
  4. 5 pizza slices, the tangency point.
  5. Budget line B is a straight line with intercepts at 5 pizza slices and at 10 milkshakes.
  6. 3 pizza slices, the tangency point.
  7. (P,Q) = ($3,5), ($6,3).

(2) [Rational choice: 10 pts]

  1. MC = Δ TC / Δ gates = $6 million, $4 million, $2 million, $2 million.
  2. MB = Δ TB / Δ gates = $8 million, $6 million, $4 million, $1 million.
  3. 12 gates, where MC begins to exceed MB.

(3) [Discounting: 4 pts]

  1. -$57.85 = -1000 + (400/1.10) + (700/1.102).
  2. $10 million = $1 million / 0.10.

(4) [Short-run cost curves and supply: 20 pts]

  1. $20 thousand (= 2000 × SATC).
  2. $18 thousand (= 2000 × SAVC).
  3. $2 thousand (= STC - SVC).
  4. $6 (= SMC).
  5. $7 (= minimum SATC).
  6. $5 (= minimum SAVC).
  7. 1200 parts, using the rule P=MC.
  8. profit, because P is greater than breakeven price.
  9. 1000 parts, using the rule P=MC.
  10. loss, because price is less than breakeven price.

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

  1. $4.
  2. 5 million.
  3. $4, because price = AC in long-run equilibrium.
  4. $10, at intersection of new demand and short-run supply.
  5. 11 million.
  6. profits, because above long-run supply curve.
  7. new firms enter the industry seeking profits.
  8. $4, at intersection of new demand and long-run supply.
  9. 14 million.
  10. $4, because price = AC in long-run equilibrium.
  11. increased, because of entry of firms seeking profits.
  12. constant-cost industry, because long-run supply is perfectly elastic (horizontal).

[end of answer key]