Economy, Industry, and Competitive Analysis
T
ime and Procedures for Final Exams:
CRN 12730:
Exam:
Friday, December 8
th
, 2006 at 8:00 A.M.
Final exam is on Friday, December 8, 2006 at 8:00 a.m.
in LiL room 162.
The final exam is closed book and notes.
The formula sheet will be provided along with your exam.
Office hours for final week
:
•
Tuesday, December 5
th
, 2006 (12/5/06)
: 10:00 a.m.1:00 p.m.
•
Wednesday, December 6
th
, 2006 (12/6/06):
10:00 a.m.1:00 p.m.
•
Thursday, December 7
th
, 2006 (12/7/06):
10:00 a.m.12:30 p.m.
Chapters Included in Final Exam:
Schiller book: chapters 18, 10, 12, 13, and 14
Thompson and Strickland: the first 3 chapters: Chapters 3, 4, 5
Examples:
The following questions are provided as a guide for your preparations for final exam.
Part A:
Demand and Supply
1
Suppose that the demand and supply functions for good
X
are
Q
d
= 80  2
P
Q
s
=  20 + 3
P
a.
Equilibrium price is $_
20_
____ and equilibrium quantity is _
40
_______ units.
Calculations:___
80 2
20 3
100
5
20
d
s
Q
Q
P
P
P
P
=
⇒

= 
+
⇒
=
⇒
=
,
40
d
s
Q
Q
=
=
b.
The price elasticity (point elasticity) at equilibrium values of price and quantity you calculated in (a) is
____
1
______________.
(Show calculations)
calculations:__
20
2
1
40
d
d
P
Q
P
E
P Q
∆
=
=  ×
= 
∆
________________________________
c.
If you raise the price by 2%, given the demand price elasticity calculated in (b), the total revenue will
change by ___
0_
___%.
(Show calculations): Calculations:______
%
1
%
%
%
%
%
%
%
%
0
Q
Q
P
P
TR
P
Q
P
P
∆
 =
⇒
∆
=  ∆
∆
∆
=
∆ +
∆
=  ∆ +
∆ =
______
2.
Suppose the demand price elasticity for your product is 20.
What this implies for a price hike of 5%?
Would
you recommend increasing price by 5%?
Why?
3.
Assume that when Price for gas is $1.50 per gallon you demanded 20 gallons a week.
When price increased to $3.50 you
demanded 10 gallon per week.
What is the price elasticity of your demand for gas in the above price ranges?
Part B:
Economic Profit, Normal profit
1.
Consider a firm that employs some resources that are owned by the owner of the firm.
When accounting profit is zero, economic
profit
a.
must also equal zero.
b.
is sure to be positive.
c.
must be negative.
d.
cannot be computed accurately, but the firm is breaking even nonetheless.
(Show your reasoning):
0
.
0
econ
acc
implicit
TR TC
TC
acc
π
+
=


⇒<
=
1 42 43
142 43
2.
11
Kate recently invested $250,000 in a new scooter rental company.
At the end of the year, the company's income
statement reported revenues of $180,000 and costs of $135,000.
As long as the normal rate of return is less than _____, the
company's economic profit was greater than zero.
1