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answers-f03 - Department of Economics University of...

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Econ 121 Fall 2003 Page 1 Midterm Answers Department of Economics Fall 2003 University of California Woroch/Albouy/Tovar Economics 121 MIDTERM ANSWERS Note that some of the answers given below delve more deeply than what would be expected on any exam. This portion is separated out and highlighted. GENERAL INSTRUCTIONS : Write your name and your TA’s name on the front cover of each of TWO BLUE BOOKS. The exam has 3 parts. Put Part I and Question II.1 in one blue book, and Questions II.2 and Part III in a second. The exam is worth a maximum of 100 points. Point assignments are given in the instructions for each part. You are encouraged to check your calculations on scratch paper but be certain to put all of your answers in the bluebooks . I. TRUE or FALSE or UNCERTAIN and EXPLAIN : Choose just 4 of the following 7 statements, decide whether each is true or false or uncertain, and then explain the reasoning behind your answer in a few sentences; provide any assumptions you may think necessary to draw your conclusion. Each question is worth 7 points for a total of 28 points. Only the first 5 that appear in your bluebook will be graded. 1. For output greater than 1, the total cost function C(Q) = ½ + Q + ½ Q 2 has the property that s > 1 . FALSE, the exact opposite is true: ( 29 Q Q Q Q Q Q Q Q Q Q MC AC s + + + + + + = = 1 1 2 2 1 1 2 1 2 1 1 1 1 2 1 2 2 1 2. If production of a good exhibits learning by doing , then a scope economy arises between the product produced at different points in time. TRUE. Assume there are two periods and define 1 q and 2 q as output in the first and second periods, respectively. The cost of producing either output alone without the other would be the same, but when some of 1 q has been produced in the first period, then the cost of producing 2 q in the second period is lower than when 2 q is produced stand alone. To be formal, the cost of producing a positive amount 2 q in the second period compared to none at all is smaller if some of 1 q is produced, i.e., ( 29 ( 29 ( 29 ( 29 0 , , 0 , 0 , 0 1 2 1 2 q C q q C C q C - - . Rearranging gives ( 29 ( 29 ( 29 2 1 2 1 , , 0 0 , q q C q C q C + which is the definition of scope economies. Note that the source of the scope economy here is not a shared input since production in the second period does not affect cost in the first, but rather a cost complementarity: more produced in the first period, the less the cost in the second. 3. A potential entrant may find it profitable to enter a Cournot oligopoly even when it has higher cost than all of the incumbent firms at every output level. TRUE: In a Cournot equilibrium, oligopolists produce so that price is above marginal cost and also above average cost resulting in economic profits. This markup can be so large that price will be above the cost of an inefficient firm who has higher costs than all other firms. Recalling the result on duopoly with different costs that
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Econ 121 Fall 2003 Page 2 Midterm Answers
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answers-f03 - Department of Economics University of...

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