Final Exam, EC 213 winter 201211/4/2018
Created by Eric R. DodgeNAME:______
INTERMEDIATE MICRO: FINAL EXAM
If there is a question that is unclear to you, simply ask. Show all work for partial credit opportunities. Use the space provided to answer the following questions. There is additional space on the back.
1. The demand curve for weekly cases of bacon is given by the equation:
Qd = 12 – P + .10I + .5Psaus – 2Peggs, where P is the price of a case of bacon, I is the weekly level of consumer income, Psaus is the price of a pound of sausage, Peggs is the price of a dozen eggs, and Qd is the weekly quantity of bacon cases demanded.
The supply curve for bacon is given by the equation Qs = -10 + P – Pfeed where P is the price of a case of bacon, Pfeed is the price of a pound of hog feed, and Qs is the weekly quantity of bacon cases supplied when the price is P.
a. Explain the difference between an exogenous and an endogenous variable. Using the market for bacon above, identify the endogenous and exogenous variables.(8 points)
b. You have been told that I=$500, Psaus=$4, Peggs=$1, and Pfeed=$8. Plot the supply and demand curves on a graph, being sure to label everything. (8 points)
c. Using algebra, determine the market equilibrium price and quantity of bacon. Show these values in the graph above.(6 points)
d. Examine the demand equation above. Can you determine whether sausage is a complement to bacon or a substitute? Are eggs a complement or a substitute to bacon? Explain how you know. (6 points)
2. You are an economist for a large consulting firm. Your summer intern has done some research and computed a few elasticity measures for you, so that you can include them in a report at a conference on consumer behavior. Naturally, you think it is wise to check your intern’s work. Your intern’s work is in “”. You must do two things for each part. (4 points each)
- Interpret the elasticity measure as if you were explaining it at the conference.
- Does this value make sense, is it realistic? Do you trust the intern’s work? Explain.
a. “The short-run price elasticity of supply for corn is Es = 2.5 and the long-runprice elasticity of supply for corn is Es = .5.”
b. “The income elasticity for airplane tickets to Hawaii is EI = .15”
c. “The cross-price elasticity of demand for breadsticks with respect to a change in the price of pizza is Eb,p = -.75”
3. In Guadalajara Mexico, the price of a trip on local mass transit (such as the subway or city buses) has been 10 pesos for many years. Suppose that the market for trips is characterized by the following demand curves. In the long run: QLRd = 45 – 3P. In the short run: QSRd = 15 – P/2.
a. In a well-labeled graph, draw both the long-run and short-run demand curves. (6 points)
b. At the price of 10 pesos, calculate the price elasticity of demand in both the short run and long run. Does your result make sense? Explain. (5 points)
c. The mayor of Guadalajara needs to increase revenue from mass transit and wants to increase the fare above 10 pesos. Given your knowledge of the price elasticity of short-run and long-run demand, is this a good idea? Explain. (5 points)
4. A consumer purchases only two goods, X and Yand the utility function is: U = X.5Y
a. Holding Y constant, does the marginal utility of X increase, decrease, or remain constant as the consumer buys more X? Does this make sense? Explain why or why not. (4 points)
b. Derive the MRSX,Y. Is the MRSX,Y increasing, decreasing, or constant as the consumer consumesmore X and less Y? (4 points)
c. Illustrate one indifference curve (for U=6) that accurately reflects the MRSX,Y and indicate whether the indifference curve will intersect either or both axes. Clearly and carefully label everything. (5 points)
5. Eli has daily income of $80; he buys baby food (F) at a cost of $2 per unit and diapers (D) at a cost of $4 per unit.
a. Provide the equation for his budget constraint and graph his budget constraint below, placing baby food on the x-axis and diapers on the y-axis. Clearly and carefully label everything. (4 points)
b. Explain what the slope of Eli’s budget constraint tells us. (4 points)
c. Eli’s utility function is U= .5FD. Solve for the utility maximizing combination of food and diapers and compute the utility he will receive. Show this in your graph above. (5 points)
6. Assume that a production function is “classically” shaped with regions of increasing and decreasing marginal returns. Are the following statements correct or incorrect? Use intuition to explain your responses. (6 point each)
a. If TPL is increasing, MPL must be greater than zero.
b. If MPL is positive, APL must be rising.
7. A firm has a production function Q = (2L + 9L2 - .5L3)*Kwhere K = 4 in the short run.
a. Find the amount of labor that maximizes total product. At this level of labor, how much output is being produced? (4 points)
b. At what amount of labor would average product be the greatest? (4 points)
c. At what amount of labor does the range of diminishing marginal returns begin? (4 points)
8. A consulting firm has just finished a study for a manufacturer of wine. It has determined that an additional man-hour of labor would increase wine output by 1000 gallons per day. The price of a man-hour of labor is $10 per hour. An additional machine-hour of fermentation capacity would increase output by 200 gallons per day. The price of a machine-hour of fermentation capacity is $.25 per hour. Is there a way for the wine manufacturer to lower its total costs of production and yet keep its output constant? If so, how can they do it? Explain your reasoning. (6 points)
9. A market contains a group of identical price-taking firms. Each firm has a marginal cost curve SRMC=2q, where q is the annual output of each firm. A study reveals that each firm will produce if the price exceeds $20 per unit and will shut down if the price falls below $20 per unit. The market demand curve for the industry is Qd = 240-P/2, where P is the market price. At the equilibrium market price, each firm produces 20 units. What is the equilibrium market price and how many firms are in this industry? (6 points)
10. Suppose that Intel has a monopoly in the market for microprocessors in Brazil. During the year 2005, it faces a market demand curve given by P = 9 – Q, where Q is millions of microprocessors sold per year. Suppose you know nothing about Intel’s costs of production. Assuming that Intel acts as a profit-maximizing monopolist, would it ever sell 7 million microprocessors in Brazil in 2005? Explain your answer. Include a graph of the demand and marginal revenue curves for Intel. (8 points)
11. Assume that a monopolist sells a product with a total cost function TC = 1200 + .5Q2. The market demand curve is given by the equation P = 300 – Q. (Hint: a graph is not required but may assist in your calculations.) (3 points each)
a. Find the profit maximizing output and price for this firm.
b. Calculate profit or loss for the firm. Is this a short-run or long-run outcome? Explain.
c. How much consumer surplus exists at the monopoly output and price?
d. Now calculate the price and quantity that would exist if the market were perfectly competitive.
e. How much deadweight loss is created by the monopoly?
12. Two firms are competing in an oligopolistic industry. Each firm can choose to increase capacity (aggressive) or not at all (passive). The table below shows the profits associated with each outcome. Profits are Firm 1, Firm 2.
Firm 2Aggressive / Passive
Firm 1 / Aggressive / 25, 15 / 33, 10
Passive / 30, 13 / 36, 12
a. If they exist, identify any dominant strategies. (4 points)
b. If both firms decide strategies simultaneously, what is the Nash equilibrium? Explain how you came to this outcome. (5 points)
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