Midterm 1 (with answers)

Midterm 1 (with answers) - Name Student ID Number Section...

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Name:_____________________________________ Student ID Number:__________________________ Section Number:_____________________________ University of Michigan School of Business Administration Practice Midterm Exam 2 WITH ANSWERS Instructions: You will have two hours to complete the exam. The first section is short answer. Do whatever work you want on scratch paper or on the back of pages, but give the complete answer including the process of getting to that answer in the space provided below the question. Make sure the answers you enter in the space provided are as clear and concise as possible. Do not ramble on; but DO SHOW HOW YOU ARRIVED AT YOUR ANSWER where asked to. Even if your answer is correct, if you are asked to show your work and do not, you will receive no credit . Points are indicated by each question and partial credit will be awarded where appropriate -- allocate your time efficiently. In the second section you are asked to evaluate a number of statements.
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Section I 1. MARKET STRUCTURE: Bruce has just decided to leave his job at a bank and start his own injection molded plastics company. To start the company, Bruce first had to buy $500,000 worth of equipment. If he wasn’t producing, he could lease the equipment out for a total of $50,000 per year. In addition, he had to hire 17 employees. One employee was used for advertising, one for managing production and one for managing the office. Their annual salaries totaled $104,350. The remaining employees were needed to run the machines. These employees were needed because of the amount of business he started out with. The employees hours could vary (and therefore their costs) and he could add more or let some go as his business required. He needed one employee for one hour to produce 100 plastic parts. The hourly wage of all of these employees was $8 (above the minimum wage). As he increases his number of employees they start talking to each other, getting in each others way and generally decreasing their productivity; he estimated this cost to be the following function of his output: 3.5q 2 where q is hundreds of plastic parts. Finally, he had to buy the raw material to make the parts. The cost of the raw material was $5 per 100 parts. a. (7 points) If this was a competitive industry, and the price was $139 per hundred plastic parts, what would Bruce’s output be? Show your work. b. (12 points) If the current price is $139, what would you expect to happen to the price, market quantity, number of firms and output per firm in the long run? Assume this is a constant-cost industry. Be as specific as possible (i.e. give a number if possible). Show your work. c. (3 points) Now suppose there was a shift out in demand and the new entrants had to buy the same equipment Bruce had. Due to an increase in labor costs in Cincinnati (where the equipment was made), the cost of that equipment had gone up by 10%. Has Bruce’s total cost function changed? If so, explain why and write out Bruce’s new total cost equation. 2. MARKET STRUCTURE:
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Midterm 1 (with answers) - Name Student ID Number Section...

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