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MT 2 Old - DRAFT Mortimer ECON 100A ECONOMIC ANALYSIS MICRO...

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DRAFT Mortimer 1 ECON 100A: ECONOMIC ANALYSIS - MICRO Department of Economics University of California, Berkeley Spring 2009 Midterm Exam 2 4/14/09 GENERAL INSTRUCTIONS: Write your name, student ID, and your official GSI’s name below. Write down all your answers in the space provided on the exam and make sure to label your graphs for full credit. No calculators are allowed. You have 80 minutes (11:10-12:30) to complete the exam. Make sure to allocate your time efficiently. There are two parts: Part I (three T/F questions) and Part II (three multipart questions). I suggest you spend approximately 25 minutes on Part I, 20 minutes on II.1, 15 minutes on II.2, and 20 minutes on II.3. There is a total of 100 points. Name: Student ID: Official GSI:
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DRAFT Mortimer 2 PART I: TRUE OR FALSE AND EXPLAIN Answer 3 of the following 4 questions. For each, decide whether it is true or false, and explain the reasoning behind your answer in a few sentences. If the question does not require a diagram, you can still use one if it helps clarify your points. No credit will be given if you omit an explanation or your explanation is wrong. [33 pts] 1. If demand is perfectly elastic, a monopsonist does not result in deadweight loss. (A diagram is required.) [11 pts ] FALSE. The marginal expenditure curve lies above an upward sloping supply curve for a monopsonist. He/she purchases up to the point at which ME=MV (or D), so the quantity (Q’) purchased by the monopsonist is less than the quantity purchased by a competitive buyer (Q*), as shown in the diagram below. The DWL is equal to the shaded area (a reduction in producer surplus). 2. If every consumer has identical demand, then a monopolist could achieve the same profit by engaging in first-degree price discrimination or by setting a two-part tariff. [11 pts] TRUE. By setting the unit price of the two-part tariff equal to the marginal cost of production, the monopolist generates the maximum social surplus because it eliminates any deadweight loss. The monopolist is then able to get maximum profit by setting the fixed fee of the two-part tariff equal to (or just a bit less than) the consumer surplus generated under this unit price for each individual consumer. Under perfect price discrimination, the monopolist arrives at the same outcome by charging each consumer a price equal to (or just a bit less than) his/her reservation price. In both cases, the marginal sale is made at a price equal to marginal cost and the monopolist extracts all consumer surplus.
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