Introduction to Agricultural Economics Agricultural Economics 105 Fall 2009

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1 1 Name Introduction to Agricultural Economics Agricultural Economics 105 Fall 2009 Second Hour Exam Version 3 Section Note, -3 points for wrong section # Fill in the blanks in the following statements using the following word list. Each word is used only once, but not all words may be used. Commodity surplus Elasticity of supply Monopoly Lump-sum tax Set-aside Deficiency payment Producer surplus Monopsony Dead-weight loss Oligopoly Perfect competition Iso-revenue line Marginal cost Consumer surplus Elasticity of demand Marginal rate of product transformation (MRPT) Production possibilities curve (PPC) 1. A fixed tax (e.g., a license fee) irrespective of the level of output used by regulatory agencies to eliminate or reduce profit of a monopoly. 2. The amount of land either left idle or planted to another crop. 3. A market structure that has only one firm buying from sellers. 4. Social costs of imperfect competition. 5. The amount by which the quantity supplied at a given price exceeds the quantity demanded. 6. The technically efficient combination of two products a business can produce in the current period given its existing resources and technology. 7. The change in total cost of production as the output or total product of the business is expanded by one unit of output. 8. The rate at which the business is willing to substitute between two products in the current period. 9. Market structure characterized by large number of producers selling a homogeneous product, each with perfect information, and no barriers to entry or exit

2 2 10. T F Scenic vistas in national parks such as Big Bend National Parks are often used as examples of publics goods in textbooks, because they are provided to the viewing public by a the federal government at a small cost to visitors to the park. 11. The market demand curve for a public good is the vertical summation of individuals in the market place. Circle the correct statement(s) for this situation? a. Indivisibility which leads to the free rider problem is the reason for vertical summation b. All market demands (private and public goods) are summations (vertical or horizontal) of individuals demand curves c. Public goods are indivisible in consumption meaning they are non-rival and nonexcludable in consumption d. The free market will undersupply public goods because of the free rider problem e. All are correct 12. Wildie coyote decides to set up a stand to pay for the acme rocket he needs for his next assassination attempt on the roadrunner. He thinks that this is a smart idea because even though there are a large number of sellers, he believes he can convince people to buy his 'dogs' with some fancy advertising. This hot-dog market is an example of: a. Monopoly b. Oligopoly c. Perfect competition d. Monopolistic competition e. Monopsony 13. Which of the following is the preferred strategy of the monopolistic competitor to achieve market power? a. Size. Expand plant size in order to achieve economies of scale b.. Try to charge the lowest price possible c. Entry. Try to establish barriers to entry such as patents or licenses d. Product differentiation. Try to produce a unique product or establish a good reputation e. None of the above 14. Calculate deficiency payments for a producer producing 5000 bushels of corn for the following prevailing prices and government program provisions: loan rate of $6 / bushel, market price is $5 / bushel, and the target price is $8 per bushel. Show your work.

3 3 15. Which of the following industries comes closest to the oligopoly model? a. Food stores b. Gas Stations c. T-shirt shops d. Tobacco companies 16. In response to the federal government passing a law in the 1970 s that all states must have a 55 mph speed limit to be eligible for federal highway funds, Montana passed the 55 mph speed limit but no fine was originally associated with the law. The Montana Highway Patrol (MHP) had the rights to ticket speeders but drivers did not slow down. This is an example of which characteristic of well defined property rights being violated. a. Exclusivity b. Enforceability c. Specificity d. Transferability e. As the law was passed and the MHP could ticket drivers, all characteristics are well defined. 17. On Wednesday October 21, 2009, the two largest supermarket chains in New Zealand reached an agreement with the New Zealand government they would no longer prevent smaller competitors from setting up in the same shopping center. Reducing the barriers to entry for new and expanding players opens the possibility for a. Increased competition and higher prices b. A change in the market structure from a monopolist competitive structure to an oligopoly c. A change in the market structure from an oligopoly structure toward a monopolistic competition structure d. No change as these two companies control 80% (this percentage is correct) of the New Zealand market e. Change to a monopsony market structure 18. Exotic (nonnative) animals are considered private property. However, the selling of such game animals is restricted by law to only a few select individuals. This is an example of which characteristic of well defined property rights being violated. a. Exclusivity b. Enforceability c. Specificity d. Transferability e. All characteristics are well defined as exotic animals can be bought and sold with restrictions

4 4 19. The prisoner s dilemma and oligopoly are related in that in both cases the following hold a. Both illustrate it is difficult to collaborate but can be rewarding if two parties collude b. The best outcome for the prisoner dilemma and an oligopoly is to not cooperate c. The reason two firms do not cooperate is because the firm that does not cooperate has a competitive advantage over the other firm d. Illustrates only one outcome is possible in an oligopoly e. It is a stretch to compare prisoners and firms in a market place 20. Which property right characteristic is violated when there is an externality associated with production? a. Enforceability b. Transferability c. Specificity d. Exclusivity e. Property rights deal with the rights associated with owning and using land and not with production 21. Assume a negative externality is associated with the production of the good. Clearly identify how the presence of this externality will affect the supply and / or demand curve. Mark society s optimum points given the externality. S P m D Q m Quantity 22. Briefly explain the difference between Coase s approach (Coase Theorem) to this problem and Pigou s approach (tax).

5 5 23. The Canadian wheat board was partially created to enhance wheat exports from Canada to the rest of the world. Given the following graph, provide consumer and producer surplus for the no demand enhancement and the demand enhancement scenarios. S Enhanced foreign demand D Wheat 24. In the following graph, the arrow indicates the change that has occurred. As one moves from P 1 Q 1 to P*Q* what has occurred MC P 1 P* D 2 D 1 Q* Q 1 Quantity a. Decrease in supply and a decrease in quantity demanded b. Decrease in demand and a decrease in quantity supplied c. Decrease in demand and a decrease in quantity supplied d. Decrease both supply and demand e. Decrease in quantity supplied and a decrease in quantity demanded

6 6 Answer questions based on the following figure. Isoquants represent output levels of 200, 160 and 75 bushels of corn per acre, whereas the iso-cost curves represent costs of $100 and $150. Capital Units of Labor 25. Clearly and correctly label the three isoquants and the two isocost curves in the figure. 26. If the firm has $100 to spend a. What is the profit maximizing level of capital b. What is the profit maximizing level of labor c. The profit maximizing level of output is MPP capital MPP 27. If the labor ratio is larger than the ratio, what would you suggest to the wage rate rental rate producer to increase profits? 28. A firm's supply curve corresponds to: a. The marginal cost curve above the minimum average variable cost curve. b. The average variable cost curve c. The average total cost curve d. The marginal cost curve below the average variable cost curve e. The horizontal summation of relevant supply curves 29. T F The U.S. food and fiber system is one of the least regulated industries in the economy.

7 7 30. T F Barriers to entry are more likely to be stronger under monopolistic competition than under an oligopoly. 31. (7 points). For the following monopoly, clearly and correctly label supply, demand, marginal revenue, market equilibrium price and quantity (P*,Q*). Clearly and correctly label total revenue, total costs, and profits. ATC Quantity 32. Forms of government intervention in market place take on many forms. One such form is a price floor. Which of the following is true about price floors? a. To be binding a price floor must be above the market equilibrium b. To be binding a price floor must be below the market equilibrium c. floors have not been used in the U.S. market place because of their unpopularity by consumers d. Imposition of price floors leads to excess demand or a shortage in the market e. floors are often used to correct market failures