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Unformatted text preview: TUFTS UNIVERSITY Department of Economics Sample Final Exam Questions 1) The microeconomics textbook industry in the United States is a constant cost competitive industry. All firms in the industry are identical. The typical firm uses K 1 of capital at the minimum of the long run average cost curve. The short-run total cost associated with K 1 of capital is given by SRTC = q 2 +100. The market demand curve was given by Q d = 2000-5P. a) Find the initial long-run equilibrium price and quantity for the industry as a whole. How much does each firm produce and how many firms are in the industry? How much, if any, profits does the typical firm earn? b) Suppose that, because of a decline in the popularity of economics as a major, the demand curve shifts to Q d = 1900-5P. Find the short-run equilibrium price and quantity for the typical firm and for the industry as a whole. Calculate the profits of the typical firm. c) Calculate the new long run equilibrium price, industry quantity, quantity for the individual firm, and the number of firms for the new demand curve. d) Show diagrammatically how the market and the typical firm change in the short run and in the long run. 2) Maryland has decided to impose an excise tax on gasoline to reduce dependence of foreign sources of energy. An excise tax is a tax per unit of the product sold e.g. $2 for each gallon of gasoline. a) Consumer groups argue that the tax should be imposed on gasoline producers since they can afford the tax. Business lobbyists argue that it should be imposed on consumers to have a larger effect on reducing driving. Which, if either, group is correct? When will the effect be large for consumers? When will the effect be large for producers? Use mathematical reasoning or diagrams to explain your answers. b) Suppose that the tax is imposed on consumers. In 2004, consumers in Maryland spent one-fifth of their income on gasoline and a one percent increase in their incomes would increase consumption of other goods by 9/8 percent. In 2005, changes occurred in the market for other goods. Because of these changes, consumers in Maryland spent one-quarter of their income on gasoline and a one percent increase in their incomes would increase consumption of other goods by 6/5 percent. Compare the effects of the excise tax in 2004 to the effects in 2005. Explain thoroughly how you arrived at your answers. i) In the short run, would the amount of gasoline purchased fall by more in 2004 or 2005? ii) Would the consumer price increase by more in 2004 or by more in 2005? iii) What would happen to the total amount that consumers pay for gasoline after the tax is imposed in 2004? Would it increase after the tax is imposed, decrease after the tax is imposed, or does it depend?...
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- Fall '07