MICROECONOMICS - EXAM III

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1 MICROECONOMICS - EXAM III Spring 2004 G. Garesché 1. a. On the axes below, graph a production function. Indicate the three stages of the production function and label each with the returns expected. b. In which stage would a firm prefer to function? Explain thoroughly why a firm would choose not to function in the other two stages. c. Define diminishing or, as your book calls it, decreasing returns. Describe exactly what is happening when a firm is experiencing diminishing or decreasing returns.

2 2. a. Define AVC, ATC and MC. (And I don't mean what the letters stand for). (You may define them symbolically). b. Define average revenue and marginal revenue. (You may use symbols).

3 3. a. Graph a LRAC curve on the axes below. b. Where do the points on the LRAC come from? c. Identify the three regions of the LRAC curve. d. Where are firms going to choose to function along the LRAC? Explain thoroughly why a firm wouldn t produce elsewhere on the curve. e. Identify minimum efficient scale on the LRAC below.

4 4. a. What are the characteristics that are necessary for an industry to be perfectly competitive? Give an example of a perfectly competitive industry. b. Graph a perfectly competitive firm experiencing an economic loss on the axes below using the marginal and average curves. c. Use the four or five steps to identify the firm's economic loss. (You don't need to write out the list of steps). d. Will this firm continue to produce in the short run? How did you decide? e. Will this firm continue to produce in the long run? How did you decide? f. Identify the firm s short run supply curve.

5 5. a. On the first two pair of axes below, graph the market and a typical firm in long run equilibrium in a perfectly competitive industry. What conditions must be met for a perfectly competitive industry to be in long run equilibrium? On the market graph show the long run supply curve of a constant cost, an increasing cost and a decreasing cost industry. b. What are the characteristics of monopoly? c. On the third pair of axes below, graph the demand, marginal revenue and average and marginal cost curves of a monopoly experiencing an economic profit. Carry out the steps necessary to show the firm's profit. d. Is this economic profit sustainable in the long run? Why or why not?

6 6. a. Give two reasons economists think that perfectly competitive markets give consumers a good deal and are efficient compared to a monopoly. b. Circle the symbol that best replaces the "?" or answers the question in the long run: Perfect competition Monopoly Firm functions at minimum ATC? Yes No Yes No P? MC at Q* < = > < = > P? ATC at Q* < = > < = > c. Define economic efficiency. Are perfectly competitive firms economically efficient? Why or why not? Are monopolies economically efficient? Why or why not? d. Give an example of the excess capacity theorem in an actual industry.

7 7. a. Define a natural monopoly. What feature characterizes a natural monopoly? Give an example of a product priced using marginal cost pricing. What agency in Arizona regulates the prices of private sector natural monopolies? What pricing regime does it use? Why? b. On the graph below, identify the price and quantity that a natural monopoly would choose to produce with an "A". Explain why the intersection of marginal cost and marginal revenue identifies the profit maximizing quantity of output for the firm to produce. c. Identify the price and quantity that would be produced under average cost pricing with a "B" and the price and quantity under marginal cost pricing with a "C".

8 8. a. On the first axes below, identify the equilibrium price and quantity of a perfectly competitive market, and identify the consumer and producer surpluses. Suppose this perfectly competitive market suddenly becomes a monopoly. Identify the monopoly price and quantity and show what becomes of the consumer and producer surpluses that existed when the market was perfectly competitive. b. What is antitrust legislation intended to do? When was the first piece of antitrust legislation passed?

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that