This is a "closed-books" exam. You may use a calculator. Explain your answers and show your work. In parts B and C, more credit is allocated to the explanation than to marking or reaching the correct answer.

Part A--multiple choice. Answer all 5. 8 points each, 40 points altogether.

You are allowed to put a short explanation if you don't like any of the answers I provide or if like more than one answer. If you don't explain anything and just circle what I consider to be the right answer, you will get full credit.

1. To calculate the present value of a future amount you divide it by (1+r)^t, where t represents:

1. The interest rate.
2. The rate of inflation.
3. The amount of the t^th payment.
4. The number of years in the future when the money will be paid.
5. None of the above.

Answer is D.

2. Ed is a freelance writer who could work for a newspaper at 50,000 dollars per year. Instead he works for himself for 100,000 dollars per year. When he works for himself he has to spend 5,000 dollars per year on a personal computer, software, printer, and other writing materials. On top of that he has to spend an extra 15,000 dollars per year on rent. If his earnings drop below the following level, Ed will stop working for himself and start working for a newspaper:

1. 70,000 dollars.
2. 60,000 dollars.
3. 50,000 dollars.
4. 90,000 dollars.
5. 40,000 dollars.

Answer is A. At that point there are no economic profits.

3. To calculate the marginal productivity of labor you got to divide the increase in output by:

1. Two.
2. The increase in labor input, holding all other inputs constant
3. The increase in labor input, allowing the quantity of capital to vary by the same proportion.
4. Wage of labor, holding the price of capital constant.
5. Wage of labor, allowing the price of capital to vary by the same proportion.

Answer is B.

4. The reason MC eventually goes up is that

1. Eventually it is above AVC.
2. What comes down must, eventually, come up.
3. MC is above AVC.
4. AVC goes up.
5. That marginal productivity of the variable input eventually diminishes.

Answer is E.

5. Assume labor and outputs vary continuously. Then:

1. The marginal productivity of labor is below the average productivity of labor
2. The marginal productivity of labor is above the average productivity of labor.
3. The marginal productivity of labor equals the average productivity of labor.
4. The marginal productivity of labor is sometimes below and sometime above the average productivity of labor.
5. None of the above.

Answer is D.

Part B--Conceptual. Answer 2 out of three. 15 points each, 30 point altogether.

1. A competitive firm employs 3 workers, who produce 18 units. Each unit sells at 5. The going wage for workers is 20 dollars. This implies each worker generates 10 dollars in profits. Therefore, the firm should hire a fourth worker. True / False or Uncertain. Explain.

False or uncertain. It depends on MP of 4^th worker, not on AP of first three workers.

1. A firm's average variable cost is $60 per unit. The output of the firm is 600 units. The fixed cost is $3,000. The firm's average total cost is:

$65. The $60 plus $3000 divided by 600.

2. The reason a Pizza parlor gives quantity discounts is that their potential clientele base consists of a large number of low-income families who cannot afford to pay high prices for a meal, and of a small number of high-income families who can afford a more expensive meal, but who consider pizza to be an absolute delicacy. Hence by giving quantity discounts the pizza parlor is focusing on the large segment of their potential clientele base (the low-income clientele), and sacrificing the profit from the small segment. True / False, or Uncertain. Explain.

False. They gain from quantity discount no matter which segment of the market is bigger.

Part C--Computational (30 points)

1. A Monopoly faces the following demand curve:

The monopolist's MC is 2, while the fixed cost 10.

1. If the monopolist can avoid the fixed cost by producing 0, how much will he produce?

As per class notes price is 6 and quantity is 4. This gives gross profit of 16, and net profit of 6. So answer is 4.

2. Assume instead a fixed cost of 20. How much does the monopoly produce now?

This gives net profit of -6. So fixed cost is avoidable, you produce zero.