Microeconomic Intermediate Analysis (Econ 173) Drake University, Fall 2007 William M. Boal
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MIDTERM EXAMINATION #4 VERSION A "General Equilibrium and Market Power" November 29, 2007
INSTRUCTIONS: This exam is closed-book, closed-notes. Simple calculators are permitted, but not graphing calculators or calculators with alphabetical keyboards. Point values for each question are noted in brackets. As usual in this course, "exp(x)" denotes the exponential function (also written ex ) while "ln(x)" denotes the natural logarithm function (logarithm to base e = 2.7182818...). I. MULTIPLE CHOICE: Circle the one best answer to each question. Feel free to use margins for scratch work. [2 pts each--52 pts total] The next three questions refer to the following Edgeworth box diagram. The solid curves are Jennifer's indifference curves. The dashed curves are Ryan's indifference curves. c. Either (a) or (b). d. No trade can make both people better off.
Ryan Clothing C
B
A Jennifer
Food
(1) From allocation B, both people can be made better off if a. Jennifer gives Ryan some food, and Ryan gives Jennifer some clothing. b. Jennifer gives Ryan some clothing, and Ryan gives Jennifer some food.
Intermediate Microeconomic Analysis (Econ 173) Drake University, Fall 2006
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(2) From allocation C, both people can be made better off if a. Jennifer gives Ryan some food, and Ryan gives Jennifer some clothing. b. Jennifer gives Ryan some clothing, and Ryan gives Jennifer some food. c. Either (a) or (b). d. No trade can make both people better off. (3) Jennifer and Ryan have identical marginal rates of substitution in consumption at a. allocation B only. b. allocation C only. c. both allocations B and C. d. neither allocations B nor C. (4) The contract curve for this Edgeworth box diagram would not pass through a. Allocation A. b. Allocation B. c. Allocation C. d. The contract curve passes through all three allocations. e. The contract curve does not pass through any of these three allocations.
The next three questions refer to the following graph of an economy's production-possibility curve. Assume this economy is in general competitive equilibrium at point A, where the slope of the production-possibility curve is 4 (in absolute value).
on the horizontal axis and other goods on the vertical axis, is a. two. b. three. c. four. d. six. e. twelve. The next question refers to the graph below of alternative average cost curves. Assume that industry output is at least Q*.
Other goods
A A B Average cost Energy Quantity of output Q* C
(5) If this economy were to produce two more units of energy, it would have to reduce production of other goods by about a. one unit. b. two units. c. four units. d. six units. e. eight units. (6) If the price of energy in this economy is $4 per unit, then the price of other goods must be a. $1. b. $2. c. $4. d. $8. e. $16. (7) Throughout the economy, the slope of every consumer's budget line, with energy
(8) Which average cost curve above is typical of a firm that enjoys a natural monopoly? a. Average cost curve A. b. Average cost curve B. c. Average cost curve C. d. None of the above. e. Cannot be determined from information given. (9) If marginal revenue is less than marginal cost at the current level of output, the firm can increase its profit by a. increasing output. b. decreasing output. c. either increasing or decreasing output. d. neither--the firm cannot increase its profit by making small changes in output. e. Cannot be determined from information given.
Intermediate Microeconomic Analysis (Econ 173) Drake University, Fall 2007
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(10) If the firm's demand curve for its product slopes downward, and the firm must charge all customers the same price, then the firm's marginal revenue will be a. equal to price. b. less than price. c. greater than price. d. zero. e. cannot be determined without knowing the elasticity of demand. (11) Suppose a flower vendor with market power is now selling 7 bouquets per hour at a price of $10. If he cuts the price to $9.50, he can sell one more bouquet per hour (that is, a total of 8 bouquets per hour). The vendor's marginal revenue for the eighth bouquet is therefore a. - $0.50 . b. $1.00 . c. $6.00 . d. $9.50 . e. $10.00 . (12) Suppose the demand for a monopolist's product has an elasticity of -3, and the monopolist's marginal cost is $20. Then the profit-maximizing price is a. $3.00 . b. $7.33 . c. $14.67 . d. $20.00 . e. $30.00 . f. $60.00. (13) Monopoly causes economic inefficiency because a. monopolists are usually wealthier than their customers. b. some consumers, willing to pay the marginal cost of the product, are not served. c. monopolists enjoy profits, called monopoly rents, even in the long run. d. monopoly prices are unfair. e. it is unfair for one firm to control the market.
Intermediate Microeconomic Analysis (Econ 173) Drake University, Fall 2007
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(14) Suppose the elasticity of demand for concert tickets is -3 for customer group A, and -8 for customer group B. If the box office can charge a different price to each group, which group should get the higher price, to maximize profit? a. Both groups should get the same price because the marginal cost is the same for each. b. Group A should get the higher price. c. Group B should get the higher price. d. Cannot be determined from information given. (15) Suppose an industry is served by just two firms: Firm A and Firm B. If Firm A decreases its output while Firm B leaves its output unchanged, then Firm B's profit will a. remain unchanged. b. decrease. c. increase. d. Cannot be determined from information given. (16) Firm A and Firm B must together produce a total of 100 units of output. Firm A's marginal cost is given by MCA = 5 + (qA/10) , where qA denotes its own output level. Firm #B's marginal cost is given by MCB = 8 + (qB/4), where qB denotes its own output level. The output allocation that will minimize the total cost of both firms together is a. qA = 0 and qB = 100. b. qA = 20 and qB = 80. c. qA = 40 and qB = 60. d. qA = 50 and qB = 50. e. qA = 60 and qB = 40. f. qA = 80 and qB = 20. g. qA = 100 qnd qB = 0.
(17) If all firms in an industry are colluding to maximize their total profit, then each firm's marginal cost is a. equal to the price. b. less than the price. c. greater than the price. d. Cannot be determined from information given. (18) According to the model of symmetric Cournot oligopoly, the price will be higher, a. the more elastic is demand. b. the fewer firms are in the industry. c. both (a) and (b). d. neither (a) nor (b). The next three questions refer to the following graph of a representative firm under monopolistic competition.
$15 $14 $13 $12 $11 $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 0 10 20 30 40 50 60 70 80 90
Quantity
Demand A Demand C Marginal cost
Demand B Average cost
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(19) Which demand curve shows long-run equilibrium in this market? a. Demand curve A. b. Demand curve B. c. Demand curve C. d. None of the above. e. Cannot be determined from given. information (20) Long-run equilibrium quantity for this firm is a. 25 units. b. 30 units. c. 45 units. d. 50 units. e. 60 units. (21) Long-run equilibrium price for this firm is a. $3.00 . b. $3.20 . c. $5.50 . d. $6.00 . e. $7.00 .
Intermediate Microeconomic Analysis (Econ 173) Drake University, Fall 2007
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The next five questions refer to the following game. Firms A and B produce competing brands. Each firm finds that advertising is costly but helps attract customers away from its rival. Firm B Advertise Do not advertise Adver- A gets $4 A gets $10 tise million. million. B gets $4 B gets $2 Firm A million. million. Do not A gets $2 A gets $8 advermillion. million. tise B gets $10 B gets $8 million. million. (22) How many Pareto-optimal outcomes are there in this game? a. Zero. b. One. c. Two. d. Three e. Four. (23) What is Firm A's dominant strategy? a. Advertise. b. Do not advertise. c. Both (a) and (b). d. Firm A has no dominant strategy.
(24) What is Firm B's best reply if Firm A chooses not to advertise? a. Advertise. b. Do not advertise. c. Both (a) and (b). d. Firm B has no best reply if Firm A chooses not to advertise. (25) What is the dominant-strategy equilibrium of this game? a. Firm A advertises, Firm B does not advertise. b. Firm A does not advertise, Firm B advertises. c. Both firms advertise. d. Neither firm advertises. e. This game has no dominant-strategy equilibrium. (26) What is the Nash equilibrium of this game? a. Firm A advertises, Firm B does not advertise. b. Firm A does not advertise, Firm B advertises. c. Both firms advertise. d. Neither firm advertises. e. This game has no Nash equilibrium in pure strategies.
II. PROBLEMS: Please write your answers in the boxes on this question sheet. Show your work and circle your final answers.
Intermediate Microeconomic Analysis (Econ 173) Drake University, Fall 2007
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(1) [General equilibrium, exchange efficiency: 14 pts] Adam and Brianna like ice cream and cake. Adam's utility function is given by UA = q1A q2A2, where q1A denotes the quantity of ice cream and q2A denotes the quantity of cake he eats. Brianna's utility function is given by UB = q1B q2B, where q1B denotes the quantity of ice cream and q2B denotes the quantity of cake she eats. a. [2 pts] Find a formula for Adam's marginal rate of substitution in consumption of cake for ice cream--that is, the slope of Adam's indifference curve with ice cream on the vertical axis and cake on the horizontal axis. MRSCA = b. [2 pts] Find a formula for Brianna's marginal rate of substitution in consumption of cake for ice cream--that is, the slope of Brianna's indifference curve with ice cream on the vertical axis and cake on the horizontal axis. MRSCB = [6 pts] There are a total of 20 scoops of ice cream and 20 pieces of cake available. Six examples of feasible allocations are given below. State whether each allocation is Pareto efficient or inefficient. Efficient or Adam Brianna inefficient? Allocation Ice cream Cake (q2A) Ice cream Cake (q2B) (q1A) (q1B)
C D E F G H
10 0 20 5 12 5
10 0 20 8 15 6
10 20 0 15 8 10
10 20 0 12 5 6
(i) [4 pts] Plot and label the above efficient allocations in the Edgeworth box below, and sketch the contract curve for Adam and Brianna. Ice cream
20 15 10 5 0
Brianna's origin
Adam's origin
0
5
10
15
20
Cake
Intermediate Microeconomic Analysis (Econ 173) Drake University, Fall 2007
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(2) [Monopoly, price discrimination: 16 pts] Suppose a monopolist faces the following demand curve: P = 15 (Q/100). Further suppose that the monopolist's marginal cost and average cost are constant and equal to $3. Assume initially that the monopolist must charge the same price for all units sold--that is, price discrimination is impossible. Circle your final answers. Use the space on the next page for scratch work. Note: question continues on next page. a. Find the monopolist's marginal revenue function MR(Q).
b. Compute the monopolist's profit-maximizing quantity of output.
c. Compute the monopolist's profit-maximizing price.
d. Compute monopoly profit at this price.
e. Compute social deadweight loss at this price.
Intermediate Microeconomic Analysis (Econ 173) Drake University, Fall 2007
Midterm Examination #4 Version A Page ...