Problem Set # 2 Micro Economics NAME: ____________________

1. (8 pts.) Maria is a college sophomore who is working five hours per week at a local retail establishment. Maria has $ 22 per week of disposal income. With her $ 22, Maria buys only three goods ( J, K, and L ). The price of good J is $ 1 per unit, the price of good K is $ 3 per unit, and the price of good L is $ 2 per unit. The table below presents Maria's utility function for the three goods. Total utility is in the columns labeled "TU."

Units of Product	Good J	Good K	Good L
0	0			0			0
1	7			15			18
2	13			27			34
3	18			36			48
4	22			42			60
5	25			45			70
6	27			45			78
7	28			42			84
8	28			36			88
9	27			27			90

a. In the above table, fill in the columns showing Marginal Utility (MU) and Marginal Utility per dollar ("bang per buck" ratios) for all three goods.

b. As Maria consumes more and more units of a good, the marginal utility of each additional unit ____________ (increases / decreases / remains unchanged ), and this reflect the "law of _______________________."

c. Given $22 of disposable income, Maria will purchase ____ units of good J, ____ units of good K, and ____ units of good L in order to maximize her total utility.

d. At Maria's utility-maximizing choice from part c. above, her Total Utility from the consumption of the three goods is ______ utils.

e. If Maria gets a raise and her disposable income increases to $34 per week, Maria's utility-maximizing combination will be ____ units of good J, ____ units of good K and ____ units of good L.

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2. (6 pts.) The table below shows a perfectly competitive firm's cost structure, including Total Cost (TC), Total Fixed Cost (TFC), Total Variable Cost (TVC), Average Variable Cost (AVC), Average Total Cost (ATC), Average Fixed Cost (AFC), and Marginal Cost (MC).

Quantity of Output	TC	TFC	TVC	ATC	AFC	AVC	MC
0	$50	$50	0
1	100	$50	50
2	140	$50	90
3	170	$50	120
4	210	$50	160
5	260	$50	210
6	320	$50	270
7	390	$50	340
8	470	$50	420
9	560	$50	510
10	660	$50	610

a. Complete the table above by filling in all the blanks.

b. Is this a Short-Run or a Long-Run profit-maximization problem? ___________ How do you know?________________________________________________

c. If the market price for this perfectly competitive firm's product is $ 50 per unit. how many units of OUTPUT will this profit-maximizing firm produce in the short run? ____ units. What PRICE will they charge?$____ per unit. Total PROFITS will equal $ __________.

d. If, alternatively, the market price for this firm's product is $ 70 per unit, how many units of OUTPUT will this firm produce in the short run? _______ units. What PRICE will they charge? $_____ per unit. Total PROFITS will equal $ ______.

e. Finally, suppose the market price for this firm's product is $ 30. How much will the firm produce in the short run? ______ units.Total profits will equal $ ______. (Hint: When profits are negative, you have to ask the 4^th Question:Would the firm be better off producing where MR=MC or by Shutting Down and producing 0 units?) (NEXT PAGE)

3. (26 pts.)Please answer each of the following multiple choice questions by HIGHLIGHTING OR BOLDINGthe response that best answers the question.

1. Of the following, the private action most likely to result in a positive externality is:

A. your purchase of cigarettes at the local Shop-N-Stop.

B. your decision to throw litter out the window of your car.

C. your decision to crank your heavy metal music on the radio while driving past the local senior retirement home.

D. your decision to attend college to broaden your horizons and better understand your world.

2. Consider two goods - one that generates external benefits (i.e. positive externalities) and another that generates external costs (i.e. negative externalities). Relative to the socially-best outcome, the free market (i.e. no governmental intervention) would tend to produce:

A. too much of the good that generates external benefits and too little of the good that generates external costs.

B. too little of the good that generates external benefits and too much of the good that generates external costs.

C. too little of both goods.

D. too much of both goods.

3. In the absence of government action, the private market would probably not provide as much commercial-free, educational television programming (e.g. on a public station such as PBS) as is socially desirable because:

A. the private benefits are greater than the private costs of providing such television services.

B. it is difficult to prevent free riders from benefiting from such television services.

C. individuals are too poorly informed about the value of these television services.

D. the use of such television services by one person will significantly reduce their availability to others.

4. From highest to lowest, order the below groups in terms of their official U.S. poverty rate last year.

A. children; Blacks; Southerners; female-headed households with no husband present

B. female-headed households with no husband present; Blacks; Southerners; children

C. female-headed households with no husband present; Blacks; children; Southerners

D. Blacks; female-headed households with no husband present; children; Southerners

5. Suppose that Smoky Joe has allocated his entire budget to the purchase of ribs and beer. The Marginal Utility of the last order of ribs purchased is 80 utils and each order of ribs costs $2. The Marginal Utility of the last beer purchased is 50 utils and each beer costs $1 each. Is this the utility-maximizing combination for Joe?

A. No. Joe would be made happier if he purchased more ribs and fewer beers because he likes ribs more than beer.

B. No. Joe would be made happier if he purchased more beer and fewer ribs because beer is cheaper than ribs.

C. No. Joe would be made happier if he purchased more beer and fewer ribs because he gets more marginal utility per dollar ("bang per buck") from beer.

D. Yes. Joe should not change his consumption choice, as he is already maximizing his total utility. (NEXT PAGE)

Units of Labor	Total Output (Q)	Marginal Product (MP)
0	0
1	20	20
2	52	32
3	76	24
4	96	20
5	104	8

6. Based on the table above, the Marginal Product of the fifth unit of labor is ______ units, and Diminishing Marginal Productivity first sets in with the addition of the _____ worker. When the Marginal Product of Labor begins to fall, the Marginal Cost of production begins to ______.

A. 8; third;rise

B. 8; fourth; fall

C. 104; third; fall

D. 104; fifth;rise

7. (Hint: Look at your Productivity Graph from your note set!) The Average Product (AP) of a variable input (e.g. labor) reaches its maximum level:

A. when total product is at its maximum

B. when marginal product is at its maximum

C. at a smaller level of the variable input than where marginal product reaches its maximum

D. at a greater level of the variable input than where marginal product reaches its maximum

8. Which of the following is most likely to be a fixed cost for a business in the Short Run?

A. payment for supplies used in manufacturing goods

B. income taxes for the business

C. property taxes for the business

D. wages paid to workers hired on an hourly basis

9. The portion of a Long-Run Average Cost (LRAC) curve where average costs are rising as a firm expands reflects

1. lower wages
2. economies of scale
3. diseconomies of scale
4. none of the above

10. Dr. Kent C. Strait recently began running an optometric clinic. Last month he took in $40,000 in revenue and paid $35,000 in explicit/accounting costs. Did Dr. Strait make an economic profit (as opposed to an accounting profit) last month?

A. Definitely yes. Dr. Strait's economic profit equaled $5,000.

B. Yes. If Dr. Strait also considers his implicit costs, it is clear that his economic profit will exceed $5,000.

C. Without knowing the magnitude of implicit costs, it is impossible to state whether the clinic earned an economic profit last month.

D. Definitely not.

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11. Jack Pott runs the Odds R Not in Your Favor casino. His weekly total revenue equals $50,000. His weekly total economic cost of running the company equals $60,000, consisting of $40,000 of variable costs and $20,00 of fixed costs. An economist would likely advise Mr. Pott in the short run to:

A. keep the business open for a while longer because his revenues are greater than his fixed costs.

B. keep the business open for a while longer because his revenues are covering all of his variable costs and some of his fixed costs.

C. keep the business open because it is generating an economic profit.

D. shut down as quickly as possible in order to minimize his losses.

12. If a firm is producing a quantity of output such thatMarginal Revenue is less than Marginal Cost (i.e. MR < MC), then the firm's profit:

A. is maximized

B. can be increased by increasing production

C. can be increased by decreasing production

D. can't be improved upon - no way, no how!!!!

13. A firm with an economic profit (P ) of $0 should:

A. shut down in the Long Run but might choose to produce in the Short Run

B. shut down in the Short Run in order to only lose their Total Fixed Costs

C. produce output below the level where MR=MC in order to cut their costs of production

D. produce where MR=MC