Practice3 - University of Wisconsin Economics 301...

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University of Wisconsin Economics 301: Intermediate Microeconomic Theory Korinna K. Hansen Practice Problems (Part 3) 1). Use graphs where necessary and EXPLAIN whether the following statements are true or false: a). The area under the marginal cost curve measures total variable costs. b). A profit-maximizing competitive firm continues to operate even though it is losing money. It sells its product at a price of $100. Then the firm’s average variable cost must be higher than $100. c). A firm has the long run cost function C(y) = 3y 2 + 27. Therefore this firm will supply a positive amount of output as long as the price is greater than $18. d). In a competitive market, if both demand and supply curves are linear, then a per-unit tax of $10 will generate exactly the same deadweight loss as a per-unit subsidy of $10. e). A profit maximizing monopolist faces the demand curve q = 100 – 3P. It produces at a constant marginal cost of $20 per unit. If the government were to impose a $10 per unit tax on the monopolist product, the price of the product would rise by $8 in the market. f). The major inefficiency associated with monopoly is that under monopoly outcomes profits are greater than zero. g). In a monopolistically competitive industry with zero profits, each firm will produce less than the amount that minimizes average costs. h) A major difference between monopolistic and pure competition is that brand preference is a significant barrier to entry. i) If all production processes were subject to CRTS throughout their entire ranges, monopolistic competition would not lead to excess capacity and variety would never be considered “costly”. j). A monopolist is able to practice successful third-degree price discrimination between two markets. The demand function in the first market is Q = 500 – 2P and the demand function in the second market is Q = 1,500 – 6P. To maximize profits this monopolist should charge the same price in both markets. k). A duopoly in which two identical firms are engaged in Bertrand competition will not distort prices from their competitive levels. l). From Walras’s law if follows that in a market with two goods, if demand equals supply in one market, then demand must equal supply in the other market.
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m). If an allocation is Pareto optimal and if indifference curves between the two goods have no kinks, then two consumers who consume both goods must have the same MRS between them, but consumers may consume the goods in different ratios. n). Tamara and Bill consume only bread and wine. They trade only with each other and there is no production. They both have strictly convex preferences. Tamara’s initial endowment of bread and wine is the same as Bill’s. If they also have identical utility functions, then the initial allocation is Pareto optimal. 2). A profit-maximizing dairy farm is currently producing 10,000 gallons of milk per day.
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Practice3 - University of Wisconsin Economics 301...

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