Microeconomics Exam
Q1) Let the monthly demand for cheese in Chapel Hill be D(p) = 20,000 × (10 - p) pounds and let monthly supply be S(p) = 10,000 × (p - 4) pounds.
a) What is the price of cheese in Chapel Hill? What are consumer and producer surplus?
b) Suppose a tax of $3 per pound of cheese is enacted. What is the price consumers pay after the tax is imposed? What is government surplus?
c) In one sentence, explain why the government surplus in part (b) is less than the pre-tax quantity, multiplied by the $3 tax.
Q2) Sandex Industries produces plastic tubing for US industrial plants. The annual demand for its tubing as a function of the price it charges is D(p) = 1,000 × (100 - p) and its annual cost of production is TC(q) = 400,000 + 40q. Its factory has a capacity of 20,000 units.
a) What is the profit maximizing price for Sandex to charge? How many units will they sell at that price?
b) Suppose Sandex's decides to expand the factory so that it can produce up to 40,000 units. The expansion will cost $3 million dollars. The discount rate is 4%, investment occurs at time 0, and earnings begin at time 1. Assume that demand and Sandex's cost structure will remain fixed in perpetuity. What is the NPV of this project? After the expansion, what is the price Sandex should charge?
Q3) Circle the most appropriate answer:
a) Since July, worldwide oil inventories have been falling. Moreover, recent unemployment numbers suggest that the US and European economies will grow more slowly than expected. What direction are global oil prices likely to go?
HIGHER or LOWER or UNCLEAR
b) ZX Inc. develops a new production method that reduces marginal cost. It has no production constraints. Should it should keep prices the same, raise them, or cut them?
RAISE or CUT or KEEP SAME
c) Taxes are paid mostly by consumers, regardless of whether the consumer or the producer physically sends the check to the government: TRUE or FALSE.
d) Jonesville Steel sells metal products in several markets worldwide. It has price-setting power in each market, and marginal cost that is increasing in the quantity sold. If demand for its products rises in Singapore, should it raise prices in Dubai, cut them, or keep them the same?
RAISE or CUT or KEEP SAME
e) The commons problem can be solved by eliminating private property: TRUE or FALSE
f) Nordansk operates a fleet of 103 tankers that transport oil. Suppose Nordansk intends to keep its current fleet of ships for the forseeable future. The CFO has just refinanced $1 billion in debt and cut the interest rate by two percentage points. Nordansk should pass some of those savings to customers by lowering prices: TRUE or FALSE
g) A hurricane has destroyed a large amount of the Hawaii Pineapple crop. Pineapple prices should increase significantly this year, but should mostly return to normal next year. TRUE or FALSE
i) The elasticity of demand for cars is -1/2 and the elasticity of supply is 4. A subsidy of $500 per car is implemented. What fraction of this subsidy will be received by car buyers in the form of lower prices? (Circle one)
1/9 1/8 1/4 1/2 3/4 7/8 8/9
Q4) Suppose MacGregor owns a farm that can either produce wheat or corn. The farm could produce 10,000 bushels of wheat, which can be sold for $10 per bushel, or it could produce 20,000 ears of corn, which can be sold for $4 per ear. Assume that the cost of labor, energy, etc. for both wheat and corn production is $30,000.
a) Should MacGregor produce wheat or corn on his farm? What is his accounting profit?
b) Suppose these are the only things the farm can be used for. What is the opportunity cost of corn production? What is the opportunity cost of wheat production? What is the economic profit from his choice in (a)?
Q5) Tycal Inc. has just finished developing a new e-reader and would like to begin selling this month. Jevon, Tycal's brand manager in charge of the e-reader's roll-out, has determined that there are two types of potential buyer for the product. Early Adopters (EAs) are willing to pay $600 for the e-reader this month and $200 in three months. Late Adopters (LAs) are willing to pay $300 this month and $100 in three months. Both types of customer will buy at most one e-reader, and will choose the time to purchase based upon the consumer surplus they would receive by purchasing at either date. For example, if a Late Adopter buys an e-reader in three months for $75, then she receives Consumer Surplus = $100 - $75 = $25. Ignore the time value of money.
Jevon has determined that 1/3 of potential customers are Late Adopters and 2/3 are Early Adopters. The e-reader will cost $50 to produce both this month and in three months.
a) Suppose Jevon must set a price for the e-reader and a release date. He can make the reader available either this month or in three months. If he makes the reader available this month, then the price in three months must be the same as the price this month. What is the optimal release date and the optimal price?*
b) Now suppose that Jevon can offer the product this month for one price, and can cut the price in three months. Any price cut must be scheduled and announced today. What is the optimal price to charge this month? And in three months?
Q6) Suppose all individuals who shop at Harris Teeter have weekly demand for apples of D(p) = 5 × (4 - p) .The marginal cost of apples is $2.
a) If Harris Teeter must set a price for apples, what price should it set? What is producer surplus?
b) Suppose now that Harris Teeter can offer apples in fixed quantity (a bag) rather than individually. What quantity should it choose and what price should it charge for that quantity? For example, it could offer a bag of 5 apples at a price of $14 per bag.*
c) Suppose Harris Teeter must offer apples individually at the price you found in (a). What price should it charge for the bag of apples you decided upon in (b)?*
Q7) Let the demand for copper be D(p) = 500,000 × (8 - p) pounds and the supply of copper be S(p) = 100,000 × (p - 2) pounds. Each pound of copper produced creates 1 unit of water pollution, which harms residents downstream from the plant. The harm per unit of pollution is $3.
a) What is the price of copper in this market? What is total surplus (including the harm to downstream residents)?
b) Suppose the government wishes to reduce pollution to an optimal level with a cap-and-trade scheme, and will do so by auctioning off permits to polluters. What is the optimal number of permits to sell? What will be the price of a permit? How much copper will be produced?
c) Now suppose that the government decides not to implement the cap-and-trade scheme because it is harmful to business interests. Instead, it will build a water treatment facility to process the waste. The new facility reduces pollution from copper production by 50%, so one pound of copper is associated with ½ of a unit of water pollution. Is the level of pollution with this plant, and no cap-and-trade scheme, greater, less than, or equal to the pollution you found in part (b)? (Some explanation/calculation is required...a circled answer alone receives no credit).
d) After the plant is built, Doris, an environmentalist, argues that the level of pollution is still inefficient: "This plant reduces pollution, which is nice, but it still does not force polluters to internalize the externality," she argues. "Therefore, there is still an inefficient amount of pollution being produced." Is Doris right? Please answer in NO MORE THAN THREE SENTENCES (and no using semi-colons). I will not accept an answer with more than three sentences.