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# MT 2 - Mortimer ECON 100A ECONOMIC ANALYSIS MICRO...

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Mortimer 1 ECON 100A: ECONOMIC ANALYSIS - MICRO Department of Economics University of California, Berkeley Fall 2009 Midterm Exam 2 11/17/09 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 (five T/F questions) and Part II (two multipart questions). I suggest you spend approximately 45 minutes on Part I and 35 minutes on II. There is a total of 100 points (plus 5 bonus points). Name: Student ID: Official GSI:

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Mortimer 2 PART I: TRUE OR FALSE AND EXPLAIN (a total of 55 pts) Choose 5 of the following 6 questions. You need to mark clearly which five you are choosing. For each, decide whether it is true or false, and explain the reasoning behind your answer in a few sentences. You can use a diagram to clarify your points. No credit will be given if you omit an explanation or your explanation is wrong. [55 pts] 1. A monopolist faces a downward sloping demand curve. If the monopolist’s marginal cost increases, its profit-maximizing price will increase, and the price increase will raise its total revenue. [11 pts] FALSE: When the monopolist’s marginal cost increases, its profit -maximizing price will increase but its total revenue will decrease. The diagram below shows that the profit-maximizing price will increase when the MC curve shifts up. (Alternatively, you can state that the profit-maximizing condition is MR=MC and when MC increases, MR also has to increase. Because MR is downward sloping, MR will be higher if price is raised.) When t he monopolist’s price increases, however, its total revenue will not go up. Since it operates on the elastic portion of the demand curve, the price increase will cause a relatively large reduction in the quantity purchased. As a result, the total revenue will fall. (MR is the slope of the total revenue function, therefore, when it is positive, the total revenue will decrease as the quantity decreases.) 2. A monopsonist faces an upward sloping supply curve. The monopsonist ’s price and quantity are less than the equilibrium price and quantity in a perfectly competitive market. (Draw a diagram for full credit) [11 pts] TRUE: See the diagram. The monopsonist ME (marginal expenditure) curve is upward sloping and is steeper than the supply curve. It buys the quantity at which ME equals MV (marginal value). The monopsonist’s price and quantity (P monop and Q monop ) are both less than those of a competitive buyer (P comp and Q comp ).
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MT 2 - Mortimer ECON 100A ECONOMIC ANALYSIS MICRO...

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