Intermediate Microeconomics Assignment -
Part A - Midterm Exam I
Q1. Market Demand and Elasticities: Consider the demand for a Cadillac Escalade. Suppose that the demand is Qd = 500 - 3P + 3PKIA - 2PRW, where P is the price of an Escalade (in thousands of dollars), PKIA is the price of a Kia Sorrento (in thousands of dollars), and PRW is the price of the platinum-plated wheel rims people put on Escalades. Assume that supply is given by Qs = 100 + 7P. Assume PKIA = 40 and PRW = 10.
a) What is the equilibrium price and quantity for the Escalade?
b) What are the coefficients for the price elasticity of demand and supply the Escalade?
c) What are the cross-price elasticities on the demand for big SUVs with: 1) the price of the Kia Sorrento and 2) platinum-plated wheel rims? How do you know for sure if they are complements or substitutes?
d) What if the government wants to impose a tax on big SUVs like an Escalade because they get low miles per gallon but not on small SUVs like the Kia Sorrento? How much will the price increase if a tax of 10 (in thousands of dollars) is placed on the production of each Escalade?
Q2. Price Floor: What are the effects in the market for sugar when the government agrees to pay U.S. sugar farmers the difference between $5 per pound of sugar and the price U.S. consumers are willing to pay for a pound of sugar? This is known as a deficiency payment system. Using the letters depicted in the graph below, determine social welfare with a market outcome and a price floor outcome. Identify the deadweight loss resulting from the government's policy.
Mathematical Calculations:
a) Calculate total Social Welfare under market conditions.
b) Calculate producer surplus with the price floor.
c) Calculate the deadweight loss.
Q3. Indifference Curves
a) Explain why indifference curves cannot intersect.
b) (True or False) Indifference curves will be more convex for combinations of t-shirts and hamburgers than combinations of hot-dogs and hamburgers. Explain.
Q4. Consumer Choice Optimum:
a) Marco consumes only bananas and t-shirts. At his current consumption bundle, he is spending all his income and his marginal utility from the last banana he consumed is 5 utils and from his last t-shirt is 20 utils. Each banana costs $2 and each t-shirt costs $10. Is Marco maximizing his utility? Explain. Draw a graph of the consumer choice model for Marco showing his current utility level and whether he can improve his situation. (Place Bananas on the x-axis)
b) Using the budget constraint and optimum as the graph in part a, now using the graph below show what happens when the price of bananas falls to $1 and assume that Bananas are inferior goods for Marco. Show the substitution and income effects.
Q5. Consumer Choice Theory: Mason likes yogurt and kale. The price of yogurt $1each and the price of kale $2 each. Mason has a budget equal to $100 and a utility function equal to U = 100Y - 0.5Y2 + 120K - 0.5K2 - YK.
a) Does Mason consider yogurt and kale to be complements or substitutes? How can you tell from the utility function?
b) Use a Lagrangian multiplier (calculus) to solve Mason's constrained optimization problem to find Y* and K*, his optimal consumption of both goods.
c) Illustrate your answer on a graph with indifference curves, labeling your graph with Y*, K*, and Mason's optimal utility U* on the indifference curve.
d) Mathematically prove that the Utility Maximizing Rule (i.e., tangency) holds for Mason at Y* and K*.
Q7. Uncertainty and Insurance: Assume that you own an office building in the Bay Area. Your utility is given by U = V½, where V is the value of the office building. Suppose all of your wealth is invested in the value of the office building. The probability of a strong earthquake occurring this year is 1%. If it does occur the value of the building will fall from $9,000,000 to $1,000,000.
a) Given the chances of an earthquake, what is the expected value of the building?
a) If you buy enough insurance to guarantee yourself wealth equal to the expected value. How much insurance coverage will you buy and what will be the "fair insurance" premium for such coverage?
b) What is your expected utility without insurance?
c) What is the reservation price (a.k.a., highest premium you will pay) for the insurance coverage you would have bought in response to (b) above?
Q8. Uncertainty and Investing:
The graph above represents Jed's utility function for different levels of wealth. Sup-pose Jed starts with $40,000 of wealth and corresponding utility of 150. Jed is presented with an investment opportunity that will either make his wealth go up to $80,000 or go down to $30,000. In other words, the investment will either make him $40,000 in profit or he will lose $10,000. Suppose there is a 25% chance that investment will go bad and 75% it will go well.
a) Based upon the above diagram how does Jed view risk?
b) What does the point on the chord represent? Explain.
c) Will Jed make the investment? Explain.
d) If you offered Jed $14,000 in cash or the investment opportunity, which one would he take and why?
Q9. Departures from Rationality: Identify these behavioral anomalies, describe why they violate the basic assumptions of the standard economics model, and give a real-world example the effect.
a) Halo Effect:
b) Sunk Cost Fallacy:
Q10. Multiple Choice:
1. Before satiation, the principle of diminishing marginal utility will cause, any increase in consumption of a good to
a) lowers total utility.
b) produces negative marginal utility.
c) reduce marginal utility and, therefore, total utility.
d) reduce marginal utility, but increase total utility.
2. The phenomenon of the backward-bending market supply curve for labor
a) indicates an increasing desire for leisure as income rises.
b) reflects the scarcity of high-priced, highly skilled labor.
c) results from workers' general preference for leisure over work.
d) results from the effect of the decrease in the cost of leisure as wage rates rise.
3. If the income consumption curve is positively sloped. The Engle's curve will be:
a) Positively sloped for both goods.
b) Negatively sloped for both goods.
c) Positively sloped for the good on the y-axis and negatively sloped for the good on the x-axis
d) Positively sloped for the good on the x-axis and negatively sloped for the good on the y-axis
4. Which is true: When a country goes from free trade to imposing a tariff a por-tion of the deadweight loss is the result of:
a) How the government spends the tax revenues.
b) The loss of consumer surplus that would have been enjoyed by consumers who now choose to not purchase the product at the higher price.
c) The loss of consumer surplus by consumers who purchase the product at the higher price.
d) The transfer of welfare from consumers to producers.
5. Suppose the demand curve is more inelastic than the supply curve. A tax im-posed on suppliers will cause:
a) a larger loss of consumer surplus than producer surplus.
b) an equal loss of producer surplus and consumer surplus.
c) a larger loss of producer surplus than consumer surplus.
d) price to increase by less than 50% of the tax.
6. Moving down a negatively sloped linear demand curve:
a) the price elasticity of demand remains constant.
b) the price elasticity of demand becomes more inelastic.
c) the price elasticity of demand becomes more elastic.
d) the price elasticity of demand remains unit elastic.
7. Mia initially consumes 10 tacos per month. Then the price of tacos de-creases by 10 percent. The substitution effect is +5 and the total effect is +2, such that after the price decrease Mia consumes 12 tacos. Which two of the following are true for Mia?
a) Tacos are Giffen goods.
b) For tacos the income elasticity of demand is greater than 0.
c) Price elasticity of demand for tacos is inelastic.
d) Price elasticity of demand for tacos is elastic.
e) Tacos are inferior goods with respect to a price decrease.
f) Tacos are normal goods with respect to a price decrease.
8. Assume that Bruno's utility is given by U = Y½. Calculate Bruno's expected utility from a gamble in which Bruno will get $100 with probability 0.9 and $0 with probability 0.1? Would is the certainty ("guaranteed money") equivalent of this gamble?
a) $90
b) $81
c) $84
d) $75
9. In the above, problem how much is Bruno's risk premium?
a) $10
b) $9
c) $8
d) $7
Part B - Questions
Q1. Short-run Production and Costs:
|
Labor
|
Output
|
AP
|
MP
|
FC
|
VC
|
TC
|
AFC
|
AVC
|
ATC
|
MC
|
|
1
|
4
|
4
|
4
|
120
|
60
|
180
|
30
|
15
|
45
|
15
|
|
2
|
10
|
5
|
6
|
120
|
120
|
240
|
12
|
12
|
24
|
10
|
|
3
|
18
|
6
|
8
|
120
|
180
|
300
|
6.67
|
10
|
16.67
|
7.5
|
|
4
|
28
|
7
|
10
|
120
|
240
|
360
|
4.29
|
8.58
|
12.87
|
6
|
|
5
|
35
|
7
|
7
|
120
|
300
|
420
|
3.43
|
8.58
|
12.01
|
8.58
|
|
6
|
40
|
6.5
|
5
|
120
|
360
|
480
|
3
|
9
|
12
|
12
|
|
7
|
45
|
6.43
|
5
|
120
|
420
|
540
|
2.67
|
9.34
|
12.01
|
12
|
|
8
|
48
|
6
|
3
|
120
|
480
|
600
|
2.5
|
10
|
12.5
|
20
|
|
9
|
50
|
5.56
|
2
|
120
|
540
|
660
|
2.4
|
10.8
|
13.2
|
30
|
|
10
|
50
|
5
|
0
|
120
|
600
|
720
|
2.4
|
12
|
14.4
|
-----
|
a) Fill-in the missing amounts in the above table.
b) Using graph paper, draw a total product graph with Output on the y-axis and Labor on the Y-axis. Describe and indicate the various stages of production.
c) Using the total product curve, show graphically where the AP is equal to the MP.
d) Using graph paper, draw a total cost curve with Total Cost on the y-axis and output on the x-axis on the same graph draw a variable cost curve. Explain the shape of the Total Cost curve and the Variable Cost curve. What separates the two curves?
e) Using the total cost and variable cost curves show graphically where the ATC is equal to the MC and where the AVC is equal to the MC.
Q2. Isoquants: Draw a set of isoquants for...
a) a software firm with technology such that each software program produced is created by exactly two employees and one computer.
b) a home security firm with technology such that either a night watchman or a security camera can prevent thefts equally well.
c) a gardening service with technology such that either a bigger lawnmower or more gardeners could allow for a greater amount of property to be cared for--at a given level of quality-but with diminishing returns to both gardeners and power equipment.
d) Which one of the above examples will have a corner solution? Briefly explain why.
Q3. Cobb-Douglas: You are the production manager for A-1 Baseball Hats, a top-end producer of the finest major league hats from all the favorite big-league teams. Suppose the production function for baseball hats is q = L0.5K0.5.
a) What type of production function is this? What are the returns to scale?
b) Find the expressions for average product of capital and marginal product of capital (using calculus) and average product of labor and marginal product of labor.
c) Using some graph paper, carefully graph a series of isoquants for the production function for q = 10, 15, and 20 baseball hats. Plot at least 5 points for each isoquant. (Hint: Rearrange the production function so that K is on the left and everything else on the right. Then use the given value for q and create a value for L. Solve for K.)
d) Suppose the firm has available only $200 to produce hats and that the price of labor is $5 per unit and the price of capital is $10 per unit. Using the Lagrangian Multiplier method, find the optimal combination of labor and capital to maximize q. Approximately how many hats will be produced?
Q4. Perfect Competition: Domenic grows almonds. The market supply for almonds is Qs = -4 +3P and demand is Qd = 60 - 5P. Domenic's cost function is 40 - 2q + 0.1q2, where q is his output of almonds in pounds.
a) Derive the average cost function, the marginal cost function, and the average fixed cost function, and graph them on graph paper.
b) What is the market price of almonds?
c) What is Bill's profit-maximizing output of almonds? (Use calculus.) What are profits? Use Π = (P - AC)q and show in a diagram.
d) The market for almonds is perfectly competitive, and thus the market price must fall to the minimum of average cost for each firm in the long run. Since it is assumed that all firms have the same cost structure, what will be the long-run price of oats? What will be Domenic's profits in the long run?
Q5. Perfect Competition: You are an olive oil maker. Your prod. function is q = 120K - ¼K2 + 100L - ¼L2 and the price of your olive oil is $10. Capital equipment costs $100 and labor costs $200.
a) Create a profit function for your olive oil business. If you are unconstrained in your production budget, what is your profit-maximizing use of capital, K* and labor, L* in the long run? (When all inputs are variable.) What are your profits?
b) Now assume that your production budget is constrained to $10,000, which you must allocate between capital and labor. Set up a constrained Lagrangian profit maximization problem. What are your new optimal levels of K and L? (K* and L*) What are your profits?
Part C - Quiz
Q1. Introduction: You are walking down the street and overhear people talking about economics. As you get closer you hear them say something that almost offends you. Please respond in one sentence or two to the following ill-informed statement: "Economics is not a real science because they use models with unrealistic assumptions and as we know a science is only as good as its assumptions."
Q2. Supply and Demand: You own a corn chips factory. The demand for corn chips is Qd = 30,000 - 6000P + 5000Ppc, where P is the price of corn chips and Ppc is the price of potato chips. The supply of corn chips is QS = 4,000P - 1,000Pc, where Pc is the price of corn. Suppose: Ppc = $3, and Pc = $5.
a) What is the equilibrium price and quantity P* and Q*? Graph the equilibrium with accurate intercepts and realistic slopes.
b) Calculate the price elasticity of demand for corn chips and the price elasticity of supply.
c) (True or False) If a tax of $1 was imposed on each bag of corn chips you produced, then consumers would see the price of corn chips increase by more than $0.50. (Show your calculations)
Q3. Price Floor: Suppose the government imposes a price floor and agrees to buy an excess supply not sold to consumers. Using the letter in the graph calculate the welfare effect for consumers, producers, and government with the market outcome and the price floor outcome. Be sure to identify the deadweight loss.
Q4. Indifference Curves:
a) What is an indifference curve?
b) Briefly state why indifference curves are negatively sloped?
Q5. Engle's Curve Using the table below determine if this good is a normal (necessity or luxury) good or an inferior good from points A to B, D to E and G to H. (show your math)
|
Point
|
A
|
B
|
C
|
D
|
E
|
F
|
G
|
H
|
|
Income
|
4000
|
6000
|
8000
|
10,000
|
12000
|
14000
|
16000
|
18000
|
|
Quantity
|
100
|
200
|
300
|
350
|
380
|
390
|
350
|
250
|
Q6. Consumer Choice: Al consumes only pizza and video games. His budget is $400. At his current consumption bundle, he is spending all his income and his marginal utility from consuming his last video game was 20 utils and from his last pizza was 10 utils. Each video game costs him $40 and each pizza costs $10. Is he maximizing his utility? Explain. Draw a graph of the consumer choice model for Al showing his current utility level and whether he can improve his situation. Place units video games on the y-axis and units of pizza on the x-axis.
Part D - Review Questions
Part 1 -
Q1) Which of the following statements best describes a production function?
A) the maximum profit generated from given levels of inputs
B) the maximum level of output generated from given levels of inputs
C) all levels of output that can be generated from given levels of inputs
D) all levels of inputs that could produce a given level of output
Q2) With respect to production, the short run is best de?ned as a time period
A) lasting about six months.
B) lasting about two years.
C) in which all inputs are fixed.
D) in which at least one input is fixed.
Q3) (True or False) The length of the short-run is the same for all firms. (Explain)
Q4) Homer's Donut Shoppe has the production function q = 10L + 20L2 - 5L3. The marginal product of labor is
A) MP = 10 + 40L -15L2
B) MP = 10 + 20L -5L2
C) MP = 10L
D) MP = 10 + 20L
Q5) Homer's Donut Shoppe has the production function q = 10L +20L2 - 5L3. The average product of labor is
A) AP = 10 + 20L - 5L2
B) AP = 10 + 40L - 15L2
C) AP = 10L
D) AP = 10 + 20L
Q6) If the average productivity of labor equals the marginal productivity of labor, then
A) the average productivity of labor is at a maximum.
B) the marginal productivity of labor is at a maximum.
C) Both A and B above.
D) Neither A nor B above.
Q7) Total product is maximized where
A) average product is maximized.
B) marginal product is maximized.
C) average product is equal to 0.
D) marginal product is equal to 0.
Q8) At any given point on the curve, the slope of the total product curve always equals
A) the ratio of the marginal product and the average product.
B) the change in input divided by the change in output.
C) the average product of the input.
D) the marginal product of the input.
Q9) The slope of the line from the origin to a given point on the curve equals
A) the increase in output.
B) the change in input divided by the change in output.
C) the average product of the input.
D) the marginal product of the input.
Q10) Which of the following statements best summarizes the law of diminishing marginal returns?
A) In the short run, as more labor is hired, output diminishes.
B) In the short run, as more labor is hired, output increases at a diminishing rate.
C) In the short run, the amount of labor a ?rm will hire diminishes as output increases.
D) As more labor is hired, the length of time that de?nes the short run diminishes.
Q11) If marginal productivity is decreasing as more labor is hired, then average productivity must be decreasing as well.
Q12) Consider the following short-run production function: q = 5L2 - 1/3 L3. At what level of L do diminishing marginal returns begin? At what level of L do diminishing returns begin?
Q13) Ed's building company has the following production function q = 20L - L2, where q is the number of houses built and L is the quantity of labor Ed employs.
a. Derive the MP and AP.
b. For what values of L is the MP > 0? For what values of L is the MP diminishing?
Q14) An isoquant represents levels of capital and labor that
A) have constant marginal productivity.
B) yield the same level of output.
C) incur the same total cost.
D) All of the above.
Q15) To say that isoquants are convex is to say that
A) the marginal rate of technical substitution falls as labor increases.
B) capital and labor are perfect substitutes.
C) labor, but not capital, is subject to the law of diminishing marginal returns.
D) there are constant returns to scale.
Q16) One way to explain the convexity of isoquants is to say that
A) as labor increases and capital decreases, MPL rises while MPK falls.
B) as labor increases and capital decreases, MPL falls while MPK rises.
C) as labor increases and capital decreases, MPL and MPK both fall.
D) as labor increases and capital decreases, MPL and MPK both rise.
Q17) L-shaped isoquants imply that production requires that the inputs
A) are perfect substitutes.
B) are imperfect substitutes.
C) cannot be used together.
D) must be used together in a certain proportion.
Q18) Isoquants that are downward-sloping straight lines exhibit
A) an increasing marginal rate of technical substitution.
B) a decreasing marginal rate of technical substitution.
C) a constant marginal rate of technical substitution.
D) a marginal rate of technical substitution that cannot be determined.
Q19) The slope of an isoquant tells us
A) how much output increases when both inputs are increased.
B) the increase in MPL when capital increases.
C) the decrease in capital necessary to keep output constant when labor increases by one unit.
D) the decrease in capital necessary to keep MPL constant when labor increases by one unit.
Q20) The marginal rate of technical substitution always equals
A) the slope of the total product curve.
B) the ratio of the marginal products of inputs.
C) the change in output due to a change in the amount of one input.
D) the distance between two isoquants.
Q21) Unlike indifference curves, isoquants can intersect.
Part 2 -
Q1) Economic costs of an input include
A) only implicit costs.
B) only explicit costs.
C) both implicit and explicit costs.
D) whatever management wishes to report to the shareholders.
Q2) Sarah earns $40,000 per year working for a large corporation. She is thinking of quitting this job to work full time in her own business. She will invest her savings of $50,000 (which currently has an annual 10% rate of return) into the business. Her annual opportunity cost of this new business is
A) $0.
B) $40,000.
C) $45,000.
D) $90,000.
Q3) Economists proclaim that competitive firms make zero economic profit in the long run. This shows how
A) detached economists are from the real world.
B) unrealistic economic theory is.
C) firms cover all their cost, both monetary and non-monetary.
D) firms cover only monetary cost when economic profits are zero.
Q4) A firm's marginal cost can always be thought of as the change in total cost if
A) the firm produces one more unit of output.
B) the firm buys one more unit of capital.
C) the firm's average cost increases by $1.
D) the firm moves to the next highest isoquant.
Q5) Fixed costs are
A) a production expense that does not vary with output.
B) a production expense that changes with the quantity of output produced.
C) equal to total cost divided by the units of output produced.
D) the amount by which a ?rm's cost changes if the ?rm produces one more unit of output.
6) Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q. The marginal cost of the 5th T-shirt is
A) 2.
B) 10.
C) 12.
D) 60.
Q7) If average cost is decreasing,
A) marginal cost equals average cost.
B) marginal cost exceeds average cost.
C) marginal cost is less than average cost.
D) Not enough information is provided.
Q8) When diminishing marginal returns set in,
A) average product is increasing.
B) average variable cost is decreasing.
C) average cost is decreasing.
D) None of above.
Q9) In the short run, the point at which diminishing marginal returns to labor begin is the point at which the marginal cost curve
A) peaks.
B) bottoms out.
C) is upward sloping.
D) is downward sloping.
Q10) In the short run, the point at which average cost is minimized, the line from the origin to the point on the
A) total cost curve is tangent to the curve.
B) total cost curve has the largest slope.
C) total variable cost curve has the largest slope.
D) total variable cost curve has the smallest slope.
Q11) If the marginal cost of producing a good is increasing as a firm produces more of the good, then which of the following must be TRUE?
A) AFC is rising.
B) AVC is rising.
C) MC > AVC.
D) MPL is falling.
Q12) (True or False) The "Law of Diminishing Marginal Returns" could also be termed the "Law of Increasing Marginal Costs." (Explain)
Q13) (True or False) The marginal cost curve intersects the average fixed cost curve at its minimum. (Explain)
Q14) Evren wants to go into the donut business. For $500 per month he can rent a bakery complete with all the equipment he needs to make a dozen different kinds of donuts (K = 1, r = 500). He must pay unionized donut bakers a monthly salary of $400 each. He projects his monthly production function to be
Q = 5KL
where Q is tons of donuts.
a. With the current level of capital, what is the marginal product of labor? Is the marginal product diminishing? Explain.
b. If Evren wishes to make 25 tons of donuts, how many bakers are required given the current level of capital? How much will it cost to produce this (total cost)?
c. Derive Evren's short-run cost function with K=1.
d. Derive the marginal cost curve from your answer to c. and show the relationship between the marginal cost and marginal product of labor.
Q15) The slope of the isocost line tells the firm how much
A) capital must be reduced to keep total cost constant when hiring one more unit of labor.
B) capital must be increased to keep total cost constant when hiring one more unit of labor.
C) more expensive a unit of capital costs relative a unit of labor.
D) the isocost curve will shift outward if the firm wishes to produce more.
Q16) Which of the following does NOT represent a possible shape of the long-run average cost curve?
A) downward-sloping
B) upward sloping
C) U-shaped
D) vertical
Q17) The slope of the isoquant tells the firm how much
A) output increases when labor increases by one unit.
B) output increases when capital and labor are doubled.
C) capital must decrease to keep output constant when labor increases by one unit.
D) a unit of capital costs relative to the cost of labor.
Q18) When the isocost line is tangent to the isoquant, then
A) MRTS = w/r.
B) the ?rm is producing that level of output at minimum cost.
C) the last dollar spent on capital yields as much extra output as the last dollar spent on labor.
D) All of the above.
Q19) At the XYZ Co., a unit of capital costs three times as much as a unit of labor. If MPK = 10, MPL = 5, then this firm
A) is minimizing its cost at current output level.
B) should use more capital and less labor to raise output at current cost.
C) should use less capital and more labor to raise output at current cost.
D) None of above.
Q20) The long run average cost curve may initially slope downward due to
A) decreasing average fixed costs.
B) increasing marginal returns.
C) economies of scale.
D) All of the above.
Q21) If a production function is represented as q = LαKβ, the long-run average cost curve will be horizontal as long as
A) α + β = 0.
B) α + β = 1.
C) q > 0.
D) L = K.
Part E - Review Questions
Part 1 -
Q1) If consumers view the output of any firm in a market to be identical to the output of any other firm in the market, the demand curve for the output of any given firm
A) will be identical to the market demand curve.
B) will be horizontal.
C) will be vertical.
D) cannot be determined from the information given.
Q2) If a firm operates in a perfectly competitive market, then
A) all firms will advertise.
B) no firms will advertise.
C) the market leader will advertise.
D) new firms will advertise.
Q3) Gift shops in a small town sell identical mugs to tourists. However, tourists don't have enough time to check out the prices one by one and don't have brochures listing prices of mugs. We can conclude
A) the market for mugs is perfectly competitive.
B) buyers have full information.
C) sellers are price takers.
D) the market is not perfectly competitive.
Q4) If a firm makes zero economic profit, then the firm
A) has no incentive to stay in the industry.
B) is better of exiting the industry.
C) is indifferent between staying and exiting the industry.
D) will shut down.
Q5) A small business owner earns $50,000 in revenue annually. The explicit annual costs equal $30,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.
A) $20,000, $5,000
B) $20,000, -$5,000
C) $25,000, -$5,000
D) $45,000, -$5,000
Q6) If marginal revenue equals marginal cost, the firm is maximizing profits as long as
A) the resulting profits are positive.
B) marginal cost exceeds marginal revenue for greater levels of output.
C) the average cost curve lies above the demand curve.
D) All of the above are required.
Q7) If a firm is operating at an output level where losses are minimized, the firm
A) has no incentive to stay in the industry.
B) is better of exiting the industry.
C) is maximizing profits.
D) will shut down.
Q8) The above figure shows the cost curves for a competitive firm. If the firm is to earn economic profit, price must exceed
A) $0.
B) $5.
C) $10.
D) $11.
Q9) The above figure shows the cost curves for a competitive firm. If the market price is $15 per unit, the firm will earn profits of
A) $0.
B) $4.
C) $40.
D) $160.
Q10) If a profit-maximizing firm finds that, at its current level of production, MR > MC, it will
A) earn greater profits than if MR = MC.
B) increase output.
C) decrease output.
D) shut down.
Q11) If a firm sets marginal revenue equal to marginal cost, it will make an economic profit. (True or False) explain.
Q12) Suppose a firm has the following total cost function: TC = 100 + 4q2. What is the minimum price necessary for the firm to earn profit? Below what price will the firm shut down in the short run?
Q13) Lelu runs a firm that sells multipasses to intergalactic cruises. Her short-run cost function is given by
C(q) = q2 + 25q + 144
a. If the market price is $75/pass, how many units will Lelu produce?
b. At what price will Lelu earn zero profits?
c. If the price is below the level you found in b., will Lelu shut down? If so, explain. If not, below what price will she shut down?
Q14) If a firm cannot earn profits in the short run, it will shut down. (True or False) explain.
15) Suppose that there are 80 firms in a market, each with the following cost function: C(q) = 100 + 4q2
a. Derive the short-run market supply curve.
b. Suppose the market demand is
QD = 1280 - 30p
Find the equilibrium market quantity and price.
c. How much output will each firm produce? How much profit is each firm making?
Q16) In the long run, profits will equal zero in a competitive market because of
A) constant returns to scale.
B) identical products being produced by all firms.
C) the availability of information.
D) free entry and exit.
Q17) Long-run market supply curves are downward sloping if
A) firms are identical.
B) the number of firms is restricted in the long run.
C) input prices fall as the industry expands.
D) All of the above.
Q18) All firms in a competitive industry have the following long-run total cost curve:C(q) = q3 - 10q2 + 36q, where q is the output of the firm.
a. Compute the long run equilibrium price. What does the long-run supply curve look like if this is a constant cost industry? Explain.
b. Suppose the market demand is given by Q = 111 - p. Determine the long-run equilibrium number of ?rms in the industry.
Part 2 -
Q1) For a monopoly, marginal revenue is less than price because
A) the demand for the firm's output is downward sloping.
B) the firm has no supply curve.
C) the firm can sell all of its output at any price.
D) the demand for the firm's output is perfectly elastic.
Q2) At the current level of output, a firm's marginal cost equals 16 and marginal revenue equals 10. The firm
A) is producing the profit-maximizing amount.
B) should produce more.
C) should produce less.
D) Not enough information.3) If the inverse demand function for a monopoly's product is p = a - bQ, then the firm's marginal revenue function is
A) a.
B) a - (1/2)bQ.
C) a - bQ.
D) a - 2bQ.
Q4) If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then profit maximization
A) is achieved when 21 units are produced.
B) is achieved by setting price equal to 21.
C) is achieved only by shutting down in the short run.
D) cannot be determined solely from the information provided.
Q5) If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then profit maximization is achieved when the monopoly sets price equal to
A) 16.
B) 21.
C) 25.
D) 58.
Q6) A profit-maximizing monopolist will never operate in the portion of the demand curve with price elasticity equal to
A) -3.
B) -1.
C) -1/3.
D) None of the above-the price elasticity does not matter.
Q7) (True or False) If the monopoly's demand curve intersects the AVC curve at minimum AVC, the firm will shut down. Explain.
Q8) (True or False) Since there are no close substitutes for the monopoly's product, the monopoly can charge any price it wishes. (Explain)
Q9) Suppose a monopolist has TC = 100 + 10Q + 2Q2, and the demand curve it faces is p = 90 - 2Q. What will be the price, quantity, and profit for this firm?
Q10) The ability of a monopoly to charge a price that exceeds marginal cost depends on
A) the price elasticity of supply.
B) price elasticity of demand.
C) slope of the demand curve.
D) shape of the marginal cost curve.
Q11) The Lerner Index is
A) the ratio of the difference between price and marginal to price.
B) equal to (Price - MC)/Price.
C) a measure of market power.
D) All of the above.
Q12) A monopoly sets a price of $50 per unit for an item that has a marginal cost of $10. Assuming profit maximization, the implicit demand elasticity is
A) -0.2.
B) -0.8.
C) -1.25.
D) -5.0.
Q13) The above figure shows the demand and marginal cost curves for a monopoly. The deadweight loss of this monopoly equals
A) h.
B) c.
C) c + f.
D) c + d + e + f.
Q14) The above figure shows the demand and marginal cost curves for a monopoly. Under monopoly, consumer surplus equals
A) a + b.
B) a + b + c.
C) a + b + c + d + e + f.
D) None of the above.
Q15) If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then the deadweight loss from monopoly equals
A) $21.
B) $441.
C) $882.
D) $1,764.
Q16) Suppose that market demand for a good is Q = 480 - 2p. The marginal cost is MC = 2Q. Calculate the deadweight loss resulting from a monopoly in this market.
Q17) Which of the following total cost functions suggests the presence of a natural monopoly?
A) TC = 2Q
B) TC = 400 + 2Q
C) TC = 100 + 2Q2
D) All of the above.
Q18) An exclusive right to sell a new and useful product, process, substance, or design for a fixed period of time is called a
A) patent.
B) barrier to entry.
C) monopoly.
D) research disincentive.
Q19) If the government wants to regulate a natural monopoly, it will force the firm to set price equal to
A) average cost.
B) marginal cost.
C) marginal revenue.
D) None of the above.
Part 3 -
Q1) Which of the following conditions must be true so that a firm can price discriminate?
A) There are no other firms in the market.
B) The good is a non-durable.
C) The good cannot be easily resold.
D) All of the above.
Q2) When firms price discriminate they turn ________ into ________.
A) producer surplus, revenue
B) consumer surplus, profit
C) total cost, profit
D) producer surplus, consumer surplus
Q3) Charging a higher price for a motel room to customers with dogs or cats than to customers with no pets is most likely an example of
A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) actual cost differences.
Q4) A perfect price discriminator
A) charges each buyer her reservation price.
B) charges different prices to each customer based upon different costs of delivery.
C) generates a deadweight loss to society.
D) charges lower prices to customers who buy greater quantities.
Q5) The deadweight loss generated by a perfect-price-discriminating monopoly
A) equals the deadweight loss of a single-price monopoly.
B) is greater than the deadweight loss of a single-price monopoly.
C) equals zero.
D) equals the sum of all lost consumer surplus.
Q6) Perfect price discrimination is
A) realistic.
B) practiced by many firms.
C) a purely theoretical possibility.
D) very common.
Q7) If a market is controlled by a perfect-price-discriminating monopoly, then
A) a deadweight loss is generated.
B) there is no consumer surplus.
C) consumer surplus is the same as under perfect competition.
D) output is less than that of a single-price monopoly.
Q8) Which of the following is an example of block price discrimination?
A) a BMW selling for more than a VW
B) local residents receiving a discount at the local golf course
C) the fact that a razor is cheap and blades are expensive
D) a hotel charging more for a room if the customers bring pets
Q9) If two identifiable markets differ with respect to their price elasticity of demand and resale is impossible, a firm with market power will
A) set a higher price in the market that is more price elastic.
B) set a lower price in the market that is more price elastic.
C) set price so as to equate the elasticity of demand across markets.
D) set price equal to marginal cost in both markets.
Q10) Coupons represent a form of price discrimination because they offer a low-cost way for firms to
A) identify customers with apparently more elastic demand and offer them a lower price.
B) retain loyal customers who are not price sensitive.
C) offer discounts to consumers who buy larger quantities.
D) perfectly price discriminate.
Q11) (True or False) A firm that practices multimarket price discrimination will set the lower price in the market that has the most elastic demand. Explain.
Q12) A weapons producer sells guns to two countries that are at war with each other. The guns can be produced at a constant marginal cost of $10. The demand for guns from the two countries can be represented as:
QA = 100 - 2p
QB = 80 - 4p
Why is the weapons producer able to price discriminate?
What price will it charge to each country?
Q13) A book publisher sells faces the following demand curve for its latest book: Q = 400 - 4p
If we assume that the marginal cost is 10 and the book publisher can divide the market into two groups how many books will it sell to each group and what will be the price it charges each group?
Part F - Questions
Q1) Consumer Choice Model
a) Spano has a monthly income of $1,000 which he spends solely on his two favorite activities eating restaurant meals and drinking beers at bars. Each restaurant meal costs $20 and each beer costs $4. Give the algebraic formula for Spano's budget constraint.
b) With beer on the x-axis and restaurant meals on the y-axis draw Spano's budget constraint and identify his opportunity set.
c) Draw a set of indifference curves (3 or 4) with the budget constraint line. Show the point where Spano optimizes his utility. (Remember to label)
d) Suppose the price of a beer increases to $5. Show what happens to Spano's optimal level of consumption of restaurant meals and beer.
e) Using the graph for problem (d) derive a demand curve.
f) Suppose the bar owner gives Spano a gift certificate for 10 free beers per month. Draw Spano's new budget constraint line, assuming that the price of restaurant meals is still $20 and beers are $5 each.
Q2) Substitution and Income Effects: Using the consumer choice model, start from a consumer optimum position. Label the graph with hamburger on the x-axis and jeans on the y-axis. Show what happens when the price of hamburger is increased.
a) In the first graph, assume that hamburger is a normal good relative to jeans. Indicate the new optimum and show the substitution effect and the income effect of the price increase.
b) In the second graph assume the same price increase, but now assume that hamburger is an inferior good.
c) Observing the difference between the first graph and the second graph, what can you conclude about the slope of the Price Consumption Curve between normal goods and inferior goods.
d) Again observing the difference between the two results what can you conclude about the elasticity of normal goods versus inferior goods?
Q3) Consumer Choice and Free Goods: Suppose poor people spend their money on two goods: booze and food. The government doesn't want low-income welfare recipients to spend the money it gives them on booze, so it gives them food stamps to be used only on food. Using the consumer choice model, illustrate below how, paradoxically, giving people food stamps could lead to an increase in booze-buying. (Hint: First draw the budget constraint without food stamps and then with food stamps.)
Q4) Consumer Choice Model: Suppose you have a budget of $116 to spend of pretzels and beer. Your utility function is U = 30p + 36b+ 2pb - 0.5p2 - 0.5b2. The price of a small bag of pretzels is $2, and the price of a pint of beer is $4.
a) Using calculus, set up a constrained optimization problem using the Lagrangian multiplier that derives the optimal consumption of pretzels and beer. Find the optimal values.
b) At the optimum, what are the marginal utilities of both pretzels and beer? Does the Utility-Maximizing Rule hold? i.e. MUp/Pp = MUB/PB. (Show your work).
c) Does the utility function indicate a relationship between pretzels and beer?
Q5) Time Allocation Sergei is a computer programmer with a utility function equal to U = Y +120l -l2. He contracts with Uber that allows him to set his own work hours; they pay him $50/hour. He has allocated himself a work-hour time budget of a maximum of 250 hours per month, so he may work less than this, depending on how lucrative his work is.
a) Using Lagrangian multiplier techniques, solve for Sergei's optimal level of work hours per month, and optimal level of leisure (out of his 250 possible work hours).
b) Illustrate Sergei's optimal time allocation in a diagram with income per month on the y-axis and leisure hours on the x-axis.
c) Sergei gets a raise. His wage is now $100 per hour. Find Sergei's new optimum mathematically and show the change graphically in your diagram above. Be sure to solve for Sergei's new optimal level of leisure, work hours, and income and illustrate your answer on the graph.
d) Draw and properly label Sergei's labor supply curve for a wage increase from $50 to $100 per hour.
Q6) Uncertainty and Expected Utility: Suppose your current wealth is $160,000. A friend of yours has a start-up company and is looking for "angel" investors. He calls you and asks that you invest $70,000. If things go great, the company will go public and your investment in the company will be worth $160,000. If things go ok, then the company will be bought out by a competitor and your investment in the company will be worth $112,500. Finally, if things go bad, you will lose all that you invested. There is a 20 percent chance that the company will go public, a 40 percent chance that the company will be purchased by a competitor and a 40 percent chance that they will file for bankruptcy. Your other option is to use your $70,000 to buy a risk-free government bond that will guarantee 5% interest for one year. ("W" stands for wealth.)
(a) What is the expected return on the "angel" investment?
(b) Which investment will you choose if your utility function is U = W½.
(c) Which investment will you choose if your utility function is U = W2.
(d) In two separate graphs, plot the utility functions in parts (b) & (c). On each graph draw the chord that represents the expected utility of the investment. Explain the significance when the chord is above the arc and vice versa.
Q7) Uncertainty and Insurance: You own a house and have a utility function equal to U = (1- pf)ln(x1) + pf In(x2) in which x1 represents your total wealth in a state of nature in which your house is still standing, and x2 represents your total wealth in a state of nature in which your house has burned clown. Assume all of your total wealth is related to the value of your house (and its property) in each state of nature. If your house is still standing, it is worth $1,500,000. If it burns down, it is worth $500,000 (land value). The probability of a fire is pf =02.
a) What is your current level of utility without fire insurance?
b) If the insurance company offers "fair insurance" how much coverage will you buy and what will be your insurance premium? (Show work)
c) What is your level of utility with insurance?
d) What is the highest price you would be willing to pay for the insurance policy?