Final Exam I

Intermediate Microeconomics
Fall 2005
I. True-False (2 points each)
1. Mr. Surly consumes only two goods and hates them both. His utility function is
( ) ( ) y x y x U , max , =
. Mr. Surly has (weakly) convex references.
!. "onald#s utility function is $(x, y) % x&
! 1
y . 'urrently he is buying some of both
goods. (f his income rises and rices don#t change, he will buy more of both goods.
). (f a good is an inferior good, then an increase in its rice will increase the demand for
it.
*. (f the demand function is q % )m/p+ where m is income and p is rice, then the absolute
value of the rice elasticity of demand decreases as rice increases.
,. Suly and demand theory shows us that the burden of a sales tax is shared e-ually by
suliers and demanders whether the tax is collected from the sellers or collected
from the buyers.
.. (f a rofit/maximi0ing cometitive firm has constant returns to scale, then its long run
rofits must be 0ero.
1. (n the 'ournot model, each firm chooses its actions on the assumtion that its rivals
will react by changing their -uantities in such a way as to maximi0e their own rofits.
2. (f allocation x is a cometitive e-uilibrium at rices p and if everybody likes his
bundle in allocation y better than his bundle in allocation x+ then the total value of
allocation y at rices p exceeds the total value of allocation x at rices p.
3. (f a ure ublic good is rovided by voluntary contributions, economic theory redicts
that in general too little will be sulied.
145 life insurance comany must be concerned about the ossibility that the eole
who buy life insurance may tend to be less healthy than those who do not. 6his is an
examle of adverse selection.
II. Multiple Choice (2.5 points each)
1. 5mbrose has indifference curves with the e-uation
!
x % constant / *
! 1
1
x where larger
constants corresond to higher indifference curves. (f good 1 is drawn on the hori0ontal
axis and good ! on the vertical axis, what is the sloe of 5mbrose#s indifference curve
when his consumtion bundle is (3, 1*)7
(a) /381* (b) /1*83
1
(c) /4..1 (d) /11
(e) /)
!. (n 9ustbucket, Mi there are !44 used cars for sale, half of them are good and half of
them are lemons. :wners of lemons are willing to sell them for ;)44. :wners of good
used cars are willing to sell them for rices above ;344 but will kee them if the rice is
lower than ;344. 6here is a large number of otential buyers who are willing to ay ;,44
for a lemon and ;1,,44 for a good car. <uyers can#t tell good cars from bad, but original
owners know.
(a) 6here will be an e-uilibrium in which all used cars sell for ; 1,444.
(b) 6he only e-uilibrium is one in which all used cars on the market are lemons and they
sell for ,44.
(c) 6here will be an e-uilibrium in which lemons sell for )44 and good used cars sell for
344.
(d) 6here will be an e-uilibrium in which all used cars sell for .44.
(e) 6here will be an e-uilibrium in which lemons sell for ,44 and good used cars sell for
1,,44.
). Suose that =aul and "avid have utility functions U % !A
P
&O
P
and U % A
D
& )O
D
+
resectively, where A
P
and O
P
are =aul#s consumtions of ales and oranges and A
D
and
O
D
are "avid#s consumtions of ales and oranges. 6he total suly of ales and
oranges to be divided between them is 12 ales and !4 oranges. 6he >fair> allocations
consist of all allocations satisfying the following conditions.
(a) A
D
% A
P
and O
D
= O
P
.
(b) *A
P
& !O
P
is at least ,. and !A
D
+ .O
D
is at least 12.
(c) !A
P
+ O
P
is at least ,. and !A
D
+ )O
D
is at least 12
(d) A
p
+.O
p
is at least 13 and A
D
+ O
D
is at least 13.
(e) !A
p
+ O
p
is at least A
D
+ )O
D
and A
D
+ )O
D
is at least !A
p
+ O
p
.
*. ?hen the rice of bananas is ,4 cents a ound, the total demand is 144 ounds. (f the
rice elasticity of demand for bananas is /!+ what -uantity would be demanded if the
rice rose to .4 cents a ound7
(a) ,4 (b) 34
(c) .4 (d) 24
(e) 14
,. (f the marginal cost of making a hotocoy is ! cents and the elasticity of demand is
!.44, the rofit maximi0ing rice is
(a) ) cents. (b) ).)) cents.
(c) * cents. (d) , cents.
(e) . cents.
.. 6he demand function for corn is - % !44 / and the suly function is - % ,4&4.,.
6he government sets the rice of corn at 1,4 and agrees to urchase and destroy any
excess suly of corn at that rice. How much money does it cost the government to buy
this corn7
!
(a) 11,!,4 (b) 12,1,4
(c) 1,,44 (d) 14,1,4
(e) 1*,,44
1. 6he roduction function is
! 1
!
! 1
1 ! 1
) , ( x x x x f = . (f the rice of factor 1 is 2 and the
rice of factor ! is *, in what roortions should the firm use factors 1 and ! if it wants to
maximi0e rofits7
(a)
! 1
x x = (b)
! 1
!x x =
(c)
! 1
, . 4 x x = (d) ?e can#t tell without knowing the rice of outut.
(e)
! 1
*x x =
2. (f the short run marginal cost of roducing a good is ;!4 for the first !44 units and ;)4
for each additional unit beyond !44, then in the short run, if the market rice of outut is
!3, a rofit maximi0ing firm will@
(a) roduce a level of outut where marginal revenue e-uals marginal cost.
(b) roduce as much outut as ossible since there are constant returns to scale.
(c) roduce u to the oint where average cost e-uals !3.
(d) not roduce at all, since marginal cost is increasing.
(e) roduce exactly !44 units.
3. Mr. "ent 'arr#s total costs are !
!
s & 1,s & 144. (f he reairs !, cars, his average
variable costs will be@
(a) 1!,. (b) 1!3.
(c) 11,. (d) !,4.
(e) 21.,4.
14. 5 cometitive firm is choosing an outut level to maximi0e its rofits in the short run.
?hich of the following is not necessarily true7 (5ssume that marginal cost is not constant
and is well/defined at all levels of outut.)
(a) Marginal cost is at least as large as average variable cost.
(b) 6otal revenues are at least as large as total costs.
(c) =rice is at least as large as average variable cost.
(d) =rice e-uals marginal cost.
(e) 6he marginal cost curve is rising.
11. 5 firm has the long run cost function '(-) % 1
!
q & 11!. (n the long run, it will
suly a ositive amount of outut, so long as the rice is greater than@
(a) 11! (b) 1!4
(c) !2 (d) ,.
(e) .1
1!. 6he bicycle industry is made u of 144 firms with the long run cost curve
c(y) % !&(
!
y 8!) and 24 firms with the long run cost curve c(y) %
!
y 8.. Ao new firms
can enter the industry. ?hat is the long run industry suly curve at rices greater than !7
(a) y % ).4 (b) y % )*4
)
(c) y % 114 (d) y % !*4
(e) y % )1,
1). 6he cheese business in Bake Con/du/lac, ?isconsin is a cometitive industry. 5ll
cheese manufacturers have the cost function ' %
!
Q & 3+ while demand for cheese in the
town is given by d
Q
% 1!4 / =. 6he long run e-uilibrium number of firms in this industry
is
(a) 13 (b) )2
(c) )* (d) 1!4
(e) )3
1*. 5 monoolist faces the inverse demand function described by % )! / ,- where - is
outut. 6he monoolist has no fixed cost and his marginal cost is 1 at all levels of outut.
?hich of the following exresses the monoolist#s rofits as a function of his outut7
(a) )! / ,- / 1 (b) )! / 14-
(c) !,- / ,
!
q (d) )!- / ,
!
q / 1
(e) Aone of the above.
1,. 5 rice/discriminating monoolist sells in two searate markets such that goods sold
in one market are never resold in the other. (t charges
1
p % ) in one market and
!
p % 1
in the other market. 5t these rices, the rice elasticity in the first market is /!.,4 and the
rice elasticity in the second market is /4.24. ?hich of the following actions is sure to
raise the monoolists rofits7
(a) Bower
!
p . (b) 9aise
!
p .
(c) 9aise
1
p and lower
!
p . (d) 9aise both
1
p and
!
p .
(e) 9aise
!
p and lower
1
p .
1.. 6he labor suly curve faced by a large firm in a small city is given by w % *4&4.4,B
where B is the number of units of labor er week hired by the large firm and w is the
weekly wage rate that it ays. (f the firm is currently hiring 1444 units of labor er week,
then the marginal cost of a unit of labor to the firm is@
(a) e-ual to the wage rate.
(b) is twice the wage rate.
(c) e-uals the wage rate lus 144.
(d) e-uals the wage rate lus ,4.
(e) e-uals the wage rate lus 1,4.
11. 5n industry has two firms. 6he inverse demand function for this industry is
% 3! / !
q
. <oth firms roduce at a constant unit cost of ;)! er unit. ?hat is the
'ournot e-uilibrium rice for this industry7
(a) )! (b) )*
(c) ,! (d) !.
(e) Aone of the above.
12. Suose that the market demand curve for bean srouts is given by = % ), ,24/,D+
*
where = is the rice and D is total industry outut. Suose that the industry has two
firms, a Stackleberg leader and a follower. Each firm has a constant marginal cost of ;24
er unit of outut. (n e-uilibrium, total outut by the two firms will be@
(a) ),4. (b) 11,.
(c) ,!,. (d) 144.
(e) 21.,4.
13. 5ccording to the Cirst 6heorem of ?elfare Economics@
(a) Every cometitive e-uilibrium is fair.
(b) (f the economy is in a cometitive e-uilibrium, there is no way to make anyone better
off.
(c) 5 cometitive e-uilibrium always exists.
(d) 5t a =areto otimum, all consumers must be e-ually wealthy.
(e) Aone of the above.
!4. 5 clothing store and a Feweler are located side by side in a shoing mall. (f the
clothing store send ' dollars on advertising and the Feweler sends G dollars on
advertising, then the rofits of the clothing store will be ()4& G)' / !
!
C and the rofits of
the Feweler will be ( 1! & ')G / !
!
J . 6he clothing store gets to choose his amount of
advertising first, knowing that the Feweler will find out how much the clothing store
advertised before deciding how much to send. 6he amount sent by the clothing store
will be@
(a) !!. (b) **.
(c) ... (d) 11.
(e) )).
III. Essay
1(14 oints). 5 cometitive firm has a roduction function described as follows. >?eekly
outut is the s-uare root of the minimum of the number of units of caital and the number
of units of labor emloyed er week.> Suose that in the short run this firm must use 1.
units of caital but can vary its amount of labor freely.
a)?rite down a formula that describes the marginal roduct of labor in the short run as a
function of the amount of labor used. (<e careful at the boundaries.)
b) (f the wage is w % 1 and the rice of outut is % *+ how much labor will the firm
demand in the short run7
c) ?hat if w % 1 and % 147
d) ?rite down an e-uation for the firm#s short run demand for labor as function of w and
.
! (14 oints). 6wo firms roduce a homogenous roduct. Bet denote the roductHs rice.
6he outut level of firm 1 is denoted by -
1
+ and the outut level of firm ! by -
!
@ 6he
aggregate industry outut is denoted by D+ D % -
1
&-
!
@ 6he aggregate industry (inverse)
demand is given by % a / bD@ 6he cost functions of the two firms are c
1
(-
1
) % -
1
!
and
c
!
(-
!
) % -
!
!
@
(a) Suose that firm 1 is a Stackelberg leader in choosing its -uantity (i.e., firm 1
,
chooses itHs -uantity first, knowing that firm ! will observe firm 1Hs -uantity when it
chooses its own outut.) How much outut will each firm roduce in e-uilibrium7
(b) Aow assume that the firms choose their outut levels simultaneously (i.e., we have
'ournot cometition). ?hat are the e-uilibrium outut levels in this case7
(c) Aow suose the firms collude and agree to share total rofits e-ually. ?hat is the
otimal total industry outut7
) (14 oints). 6wo firms in a grimy :hio town roduce the same roduct in a cometitive
industry. Each has an old factory using an old technology. (t still ays to oerate these
factories but it would not ay to exand them. 6he only variable factor used by either
firm is labor. Each firm ollutes the other and thus reduces the outut of the other firm.
6he roduction functions of firms 5 and < resectively are
b a a
Q L Q ) ) ! (
! 8 1
= and
a b b
Q L Q ) ) 1 (
! 8 1
= where
! 8 1
a
L and
! 8 1
b
L are the s-uare roots resectively of the
amount of labor used by firms 5 and <. 6he wage rate of labor is 1 and the rice of the
firms# outut is 1!.
a) (f the two firms each maximi0e rofits indeendently, what is their total outut and
how much are their rofits7
b) (f someone buys them both and maximi0es Foint rofits, what are the oututs and
rofit7
.True-False ns!er1. 6rue !. Calse ). Calse *. Calse ,. Calse
.. 6rue 1. Calse 2. 6rue 3. 6rue 14. 6rue
.Multiple Choice ns!er1.' !.5 ).< *.' ,.' ..5 1.' 2.E 3.5 14.<
11." 1!.< 1).< 1*.' 1,.< 1.." 11.' 12.' 13.E !4.5
.Essay
1. 5nswer@ a) M= % 18(!
! 1
L
) if B I 1.+ M= % 4 if B J 1.. b) * +c) 1.+ d) B %
!
) ! ( w p .
!. 5nswer@ a)
,
b)
c) and
). 5nswer@ a) Each roduces *2 and -uasi/rents are 1! for each.
b) Each roduces ). and -uasi/rents total *4.
.