Instructions: Answer all of the questions below.  You may have a writing utensil(s) and a calculator, but all other items should be stored away and off of your table.  If you have a question, raise your hand or come to the front.  Once the exam has begun there are no bathroom breaks.

1. a. Draw a graph for the competitive market (Pe, MR, MC, ATC) that is earning a negative economic profit.  Mark the profit-maximizing output Q*.

b. Explain how the market should adjust in the long run.  Use a market supply and demand graph in your explanation.

c. If the equilibrium price = $50, ATC = $65 and AVC = $40, will the perfectly competitive firm shutdown in the short run?  Explain why or why not.

d. Explain why profits are maximized at Q*.  Use a graph with MR and MC as part of your answer.

2. a. Draw a graph of a monopoly (demand, MR, MC, ATC).  Mark the profit-maximizing output Qm and the profit-maximizing price Pm.  Shade the area representing profit.

b. Explain thoroughly why the monopoly output and price is inefficient.

c. Give an example of a barrier to entry that allows a monopoly to exist.  Explain how this barrier limits competition.

d. Given the following demand information, calculate marginal revenue for each change in output (show your work):

Quantity                 Price

100                       $30

150                       $25

200                       $19

250                       $11

e. Explain the difference between the perfectly competitive firm's MR and the monopolist's MR.  What explains why they are different?

3. a Define utility and marginal utility.

b. Explain the concept of diminishing marginal utility.

4. a. Describe a firm's variable costs of production.  What kinds of costs would be included in variable costs?

b. Describe a firm's fixed costs of production.  What kinds of costs would be included in fixed costs?

c. Define marginal cost of production.  Using the following data, calculate the marginal cost for each change in output (show your work):

Output                 Total Cost

1000                      $2,500

2000                       $5,000

3000                       $7,000

4000                       $10,000

5. This is a free response question.  It is your opportunity to talk about any topic or concept covered in the class.  Your goal is to show that you actively engaged in some aspect of the course material.  You may have thought particular assumptions regarding a model were farfetched.  Discuss your thoughts.  You may have been particularly interested in learning about how to maximize profits because you have an interest in owning your own business.  You may discuss any topic from the entire semester.  Your grade will be solely based on the degree to which you thought critically about the topic.