Question 1
Big Steel Corp. is a price leader in the local steel market. The other, smaller manufacturers set their price based on that established by Big Steel. Discuss how Big Steel should use the information on the supply of steel by other, smaller competitors when it determines its profit maximizing price.
Question 2
Assume Nail Mania advertises in the local newspaper. Each day it advertises costs $100. Over the past several months, Nail Mania has conducted market research and developed the following information
Number of days advertised per week Number of customers per week
0 100
1 200
2 290
3 355
4 375
5 390
6 400
7 400
If the net revenue (payments less cost of goods sold) is $5, how many days of advertising should Nail Mania buy each week? Explain your answer.
Question 3
Both SmithCo and Jones Inc. sell widgets. SmithCo's sales last month equaled 1000 units and it charged a price of $2. This month Jones Inc. reduced the price it sells its brand of widgets from $2.10 to $2, and SmithCo saw a reduction in the quantity of widgets is sold, down to 900 units. What is the cross elasticity of demand between the two brands of widgets?
Question 4
Joe's Barber Shop has a daily total cost function of
TC = 100+ 4Q + Q2
and the daily demand for his services is
Q = 50 - 2P
What is the profit maximizing price that Joe should charge for his services?
Question 5
Recent increases in rents have caused the citizens of Elmville to vote for a rent ceiling of $1200. Assuming all rental units in Elmville are identical and the supply and demand for rental units are given by
Qs = -1000 + 20P
Qd = 50000 - 10P
What will be the excess demand for apartments once the price ceiling is implemented?
Question 6
Sydney is interested in starting a new business, but would have to give up a job with a total compensation of $100,000 per year. After researching the new business opportunity, Sydney developed the following estimates.
Annual Revenues: $300,000
Wages and payroll taxes (not including Sydney's): $100,000
Benefits: $25,000
Supplies and materials costs: $75,000
Rent: $60,000
What is Sydney's economic profit?
Question 7
Explain how market structure affects market performance and conduct. Identify three types of government regulation that help to improve market performance and conduct and explain how each regulation achieves its objectives and the economic justification for the regulations.
Question 8
Assume the Widget Industry is composed of the following firms with associated market shares:
Firm Market Share
A 35
B 20
C 10
D 7
E 3
The remaining market is served by about 100 small firms.
What is the HHI for the Widget Industry?
Question 9
Cinema Theater has estimated the following demand functions for its movies:
Daytime demand, QD = 400 - 50 PD
Nighttime demand, QN = 200 - 20 PN
The marginal cost of serving another customer is $5 and its fixed costs are $100.
a. If the theater uses third degree price discrimination, what price will it charge for daytime tickets? How many will be sold?
b. If the theater uses third degree price discrimination, what price will it charge for nighttime tickets? How many will be sold?
c. What is the profit associated with using third degree price discrimination?
d. If the theater does not use price discrimination and charges the same price to all customers, what is that price and how many tickets will be sold?
e. What happens to profit when the theater does not engage in third degree price discrimination? How much does it rise or fall?
Question 10
Discuss ways firms establish barriers to entry and explain how they benefit firms but not consumers. Give an example of a law or regulation that limits the ability of firms to establish barriers to entry and an example of a law or regulation that helps firms establish barriers to entry.
Question 11
A firm uses two variable inputs, labor, L, and raw materials, M, with typically shaped isoquants. It pays $20 per hour for L and $5 per unit for M. At the current mix of L and M, the marginal products of L and M are:
MPL = 20
MPM= 4
Is the firm minimizing costs? If not, what steps should it take to lower costs and still produce the same level of output
Question 12 17 points Save
Assume your research staff used regression analysis to estimate the industry demand curve for Product X.
Qx = 10,000 - 100 Px + 0.5 Y - 1000 r
(3,000) (20) (0.3) (105)
Where Qx is the quantity demanded of Product X, Px is the price of X, Y is income, and r is the prime interest rate (given in decimals, e.g., 0.02 or 0.05) The standard error of each estimated coefficient is given in parentheses below it.
Also, the following information is provided about the regression equation.
Number of observations = 98
R2 = 0.95
F-statistic = 7.5
a. What is the number of degrees of freedom?
b. What percentage of the variation in the dependent variable is explained by the equation?
c. Which of the estimated coefficients are significant at the 5% level using a 2-tailed test; be sure to indicate the t-statistic for each of the coefficients.
d. Perform an F test at the 5% level of the overall explanatory power of the model.
e. If prices remain constant next year but income is expected to increase by 50 and interest rates rise by two percentage points (by 0.02), what is the expected change in the quantity demanded?
Question 13
Which of the following is NOT an example of an externality? Explain why the other examples are externalities and why the one you selected is not.
• government tax imposed on smog
• noise from a barking dog
• the loss of an ocean view because of new construction
• improved property values when a rundown house is remodeled
• groundwater pollution from an industrial facility
Question 14
Assume ZCorp has the following short run production function:
Q = 500X - 2X2
where X is the only variable input used by ZCorp to product its product, Q.
Because ZCorp sells its product in a perfectly competitive market, it can sell all the Q it produces for $25. The current market price for input X is $100. How many units of X will ZCorp buy?
Question 15
Calculate the profit maximizing price if MC = $8.00 and price elasticity for a firm's product equals -2.
Question 16
Monopoly Rinks is the only ice skating facility in Mapleville. The next closest rink is about 100 miles away. It has determined that its demand curve is
Q = 123 - 0.5P - 0.25 Pc + .01 Y
where Q is the quantity of seasonal passes sold, P is the price for seasonal pass, Pc is the average price for concession items, and Y is average per capital income in Mapleville.
The local economists estimate that Y is equal to $12,000 and Monopoly has set Pc at $10. If Monopoly's MC of serving another customer is equal to $1, what is the profit maximizing price for seasonal passes?
Question 17
Assume Firm Y's production function is given by the following Cobb Douglas equation:
Q = 0.5 x L0.6 x K0.5
where L denotes labor and K denotes capital.
a. Does the production function exhibit increasing, decreasing or constant returns to scale? Explain.
b. If labor hours increase by 10%, what is the percentage change in output? Explain.
c. If capital decreases by 10%, what is the percentage change in output? Explain.
d. If the number of labor hours increases by 10% and the number of hours of capital used decreases by 10%, what is the percentage change in output?
Question 18
If XYZ Corp. can undertake the following projects:
Project 1:
Required investment: $10 million
Expected rate of return: 12%
Project 2:
Required investment: $2 million
Expected rate of return: 15%
Project 3:
Required investment: $5 million
Expected rate of return: 10%
Project 4:
Required investment: $8 million
Expected rate of return: 17%
It can raise up to $10 million at a cost of capital of 10%
From $10 to $20 million at a cost of capital of 15%
Over $20 million, its cost of capital is 20%.
What is the amount of money (in millions) that will be raised and invested?