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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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View Full DocumentSection 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 constantcost
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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 Winter '07
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