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 = $65, ATC = $75 and AVC = $70, will the perfectly competitive firm shutdown in the short run? Explain why or why not.
d. Explain why profits are maximized at Q*.
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.
3. a. Draw a graph of the marginal product of labor curve and the wage rate. Mark the profit-maximizing quantity of labor L*.
b. Explain why adding labor up to L* adds to profits, and why adding labor beyond L* reduces profit.
c. Explain why Marginal Product of labor declines as more labor is hired.
d. Explain two reasons for why wages are different between countries or industries.
4. a. What is the Optimal Consumption Rule? Explain why this rule must be satisfied for utility to be maximized.
b. If the MU of the last unit of good A = 45utils and the price of good A = $15, while the MU of the last unit of good B = 150 utils and the price of good B = $25, is the consumer maximizing utility? If not, how should the consumer change their consumption?
5. a. Explain either the theory of Rational Ignorance or the Median Voter Theorem.
b. Explain the theory of Rational Ignorance.