ECON 0100SECOND MIDTERM EXAMFALL 2081
Problems (25 points) – To get full credit be sure to label relevant parts of your graphs.
1.
Suppose there are 1000 hot pretzel stands operating in NYC.
Each stand has the usual Ushaped average total
cost curve.
The market for pretzels, depicted in the graph below, is in long run competitive equilibrium.
a.
On the other graph draw and label the marginal revenue (
MR
), marginal cost (
MC
), and average total cost
(
ATC
) curves for the representative firm (or typical stand) in this market.
Also identify with
q*
the
quantity of pretzels sold by the firm and with P* the market price.
(7)
on graph
b.
What is economic profit for the typical pretzel stand?
(1)
economic profit is zero
c.
The city decides to restrict the number of pretzel stand licenses, reducing the number of stands to 800.
What effect will this action have on the market
price
and
quantity
and on the remaining individual stands’
profit
and
quantity sold
?
State in words and show on the two graphs the impact of the restriction.
(6)
Market supply shifts to S’, price rises to P2 and quantity falls to Q2.
MR increases to MR’ for the typical
stand, output increases to q2 and profit is now positive, shown by the shaded area on the graph.
Market
Typical Stand
2.
The Placebo Drug Company holds a patent on one
of
its discoveries.
The graph shows Placebo’s
demand and ATC.
a.
Using the graph draw and label Placebo’s
marginal revenue (MR) and marginal cost (MC)
curves.
Then identify the profitmaximizing
quantity
(
Q1
) and
price
(
P1
).
Also identify
Placebo’s
profits
.
(5)
b.
Suppose that the government imposes a tax on
each bottle of the drug produced.
Show using the
graph Placebo’s new price (
P2
) and quantity (
Q2
)
resulting from the tax.
How does each compare to
your answer in part a?
(3)
The tax causes MC to
increase to MC’, therefore the new profit
maximizing output is Q2, where MC=MR.
Price
is P2.
c.
Instead of the tax per bottle, suppose that the
government imposes a tax on Placebo of $10,000
regardless of how many bottles are produced.
How does this tax affect Placebo’s price, quantity
and profits compared to your answer in part a?
(3)
The flat tax only affects fixed costs, so MC is as in
part a. Price and quantity are P1 and Q1, but profit falls by $10,000 since an increase in fixed costs will
increase ATC.
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 Spring '08
 Kenkel
 Economics, average total cost, monopolistically competitive firm

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