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Fall 2006
Professor R. Schuler
CEE 594/Econs. 494
Final Exam
Please answer any 3 of the first 4 questions, plus you must answer question 5, at 25 points each.
Please explain your reasoning, even if you get hung up on the numerical calculations, in order to
maximize the credit you can earn.
Think before you write or calculate. Closed book, closed
notes.
You have 2.5 hours total to complete four questions for 100 points total.
Choose any three of the first four questions
:
1.
The current demand function for high speed computer chips, as estimated by your marketing
chief’s statistician is:
Q = 4
4P + 5Y
where Q = number of chips per year sold.
P = price per chip
Y = US gross national product in trillions of dollars (currently $8 trillion)
a.
(5 pts.) Estimate the current price elasticity of demand for chips at the current
market price of $10 per chip, and indicate if you would like to see prices rise or
fall.
Explain why (assuming your production cost per chip is way below the
price).
b.
(10 pts.)
Your R&D chief announces that after having spend $1 million over the
past several years, your scientists have finally developed a “biological” chip that
can be produced for a mere $1 per chip, but that will require $400,000 per year in
fixed costs to support the new plant and equipment.
The really good news is that
since this chip is 100 times faster than that for any of your competitors with their
oldfashioned silicon chips, you can dominate the market, no matter what price
you charge, and so you estimate you will have the entire market demand to
yourself.
Perform the anlaysis to decide whether or not you will go into production
with this biological chip.
Assume your exclusive position will last for two years
before your competitors can copy your technology.
Be sure to calculate:
1.
Your price
2.
Your expected quantity sold
3.
Your expected profits
  and explain why or why not you would go into production.
c.
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 Fall '07
 SCHULER

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