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Unformatted text preview: Page 14 of 23 6. LABOUR SUPPLY AND INTERTEMPORAL CHOICE
6.1 (14) Labour Supply with Substitution Effect (SE) and Income Effect (IE) Myriam has a total of 24 available hours per day to devote to work or leisure. She is a
doctor who is free to work as many hours as she likes per day at a wage of $50 per hour.
Her indifference curves are convex and do not change throughout this question. a) (3) Use a fully labelled indifference curve diagram to show her equilibrium
assuming she chooses to work 8 hours. Label it as point “A”. Myriam has recently given birth to a cute baby girl and somebody needs to take care of
the baby. Myriam has two options:
0 Option One: She could hire a babysitter for $20 per hour and keep working.2
0 Option Two: She could stop working, take a maternity leave and receive
compensation of $200 per day. b) (3) Is it possible that Myriam would stop working and take the maternity leave?
(Yes / No). In the diagram below, illustrate your answer. 2 Myriam would need to hire the babysitter for a number of hours equal to the number of hours she is at
work at the hospital (i.e., if Myriam works for 8 hours, she will hire the baby—sitter for 8 hours). C) d) Page 15 0f 23 (4) Quickly redraw the original equilibrium “A”. Suppose now that Myriam
chooses to work for 10 hours per day (and hires the baby—sitter). Show her new
equilibrium in the diagram below and label it as point “B”. Between A and B, I
conclude that (the SE dominates the IE / the IE dominates the SE / the SE and IE work in the same direction) for Myriam. (Do NOT show SE and IE,
but recall that leisure is assumed to be a “normal good”). Explanation (4) Quickly redraw Myriam's equilibrium “B” (when she is working 10 hours per
day and employs the babystitter) on the diagram below. Myriam’s parents
decide to help her out by giving her $100 per day. Show her new equilibrium on
the diagram below, labelled as point “C”. I conclude she will now work (same / more / fewer) hours per day than at point B. Page 16 0f23 6.2 (6) Intertemporal Choice Assuming that current consumption and future consumption are normal goods and that
there is no inﬂation, demonstrate in the diagram below that a saver may save less if the
rate of interest increases. Show the Substitution Effect and the Income Effect in your
answer. Use the Hicks Method. Provide a brief explanation of your diagram. Explanation: Phge17Qf23 7. PRICE INDEXES AND PERFECT COMPETITION
7.1 (10) Price Indexes Enrique spends his whole income on X and Y. In 2000, he bought 25 units of X at $8 each and 25 units of Y at $8 each.
In 2006, he bought 40 units of X at $10 each and 10 units of Y at $20 each. a) (2) Compute the Laspeyres Price Index (LPI) for Enrique. LPI = b) (2) Compute the Paasche Price Index (PPI) for Enrique. PPI = c) (2) Using just the information above, and assuming no changes in preferences,
what can we say about Enrique's situation in 2006 compared to 2000? He is
(better off / worse off / equally well off / cannot determine). My conclusion is
based on this statement about the change in prices and income: (1) (4) Use an indifference curve diagram to support your conclusion. (You need not show
the intercepts for the budget lines, but you do need to show the position of each one, label as BLOO and BL06,
and show the consumption points in 00 and 06). Page 18 on3 7.2 (10) Perfect Competition Cabbages are produced in a perfectly competitive industry. Assume ﬁrms have Ushaped
cost curves. a) (4) In the diagram below for a representative ﬁrm, show an initial long run equilibrium. Provide both short run and long run average and marginal cost
curves. Label the equilibrium as P;, Q. b) (4) Now consider a government intervention designed to assist cabbage growers
to earn proﬁts through an effective quota scheme. The scheme requires each firm
to produce only 70% of the initial equilibrium amount. In the diagram above,
show the new short run equilibrium. Assume no cheating on the quota amount. Be
sure to show the proﬁts area clearly. Label as P2, Q2. c) (2) [Instruction: Do NOT alter your diagram in any way to answer this question;
just provide an explanation below.) Consider now the long run. Assume entry of
new ﬁrms is not permitted and that there continues to be no cheating on the quota
amount. Will there be any further adjustments in how the ﬁrm produces cabbages? (Yes / No). Explain brieﬂy. Page 19 0f 23 8. MONOPOLY AND DUOPOLY The market demand schedule for good X is P = 58  Q. Initially, a monopoly ﬁrm is the
sole supplier of good X. The ﬁrm has a Total Cost function given by TC = $IOQ. a) (2) Calculate the following values for the proﬁtmaximizing equilibrium. Quantit ——
Consumer Surplus Monool Proﬁts — b) (3) Suppose that the monopoly ﬁrm is able to practice perfect price discrimination
(i.e., it is able to sell every unit for the highest price it could command). Calculate
the following proﬁtmaximizing values in these circumstances. Quantity Monopoly Proﬁts —
Consumer Surplus __ c) (3) Now assume the monOpoly ﬁrm is prohibited by law from price
discrimination. Furthermore, it ﬁnds that a second ﬁrm has entered the market.
Firm 2 has the same cost schedule as Firm 1, and it assumes that the ﬁrst ﬁrm will
continue to produce the quantity in part a) above. Calculate the following values
when Firm 2 follows a proﬁtmaximizing strategy. Price Firm 2
Quantity Firm 2
Proﬁts Firm 2 Page 20 0f 23 d) (2) Firm 1 will respond to the entry of Firm 2. What is Firm’s 1’s Reaction
Schedule if it always assumes that Firm 2 will keep its output constant? (Provide
an equation, or illustrate in a diagram). Reaction Schedule: (equation, or diagram above) 6) (3) If both ﬁrms behave as simple Coumot duopolists, what is the equilibrium?
Fill in the Table of Values below. Output of each Firm
Price of X
Proﬁts of each Firm f) (4) Suppose now that Firm 2 realizes that Finn 1 will always react to whatever
output Firm 2 produces. In other words, Firm 2 becomes a “smart” player while
Firm 1 remains as a simple Coumot ﬁrm, as in the Stackelberg Model. Now ﬁll
in the Table of Values below when Firm 2 maximizes proﬁts on this basis. i Price Firm 1 Price Firm 2
Quantity Firm 1 QuantitLF inn 2
Proﬁts Firm 1 Proﬁts Firm 2 g) Page 21 0f 23 (3) Firm 1 wakes up and its managers say, “surely it would be better for us if we
could get Firm 2 to collaborate with us”. Indeed, the two ﬁrms reach an
agreement to maximize aggregate proﬁts and share output and proﬁts equally.
Fill in the Table of Values below describing this equilibrium. Outut of each Firm Price of X
Proﬁts of each Firm THE REST OF THIS PAGE IS BLANK Page 22 0f23 9. INPUT MARKETS 9.1 (10) Assume there is only one buyer of labour in a remote northern community in
Ontario. Labour is the only variable input utilized by the ﬁrm, which sells in a
competitive world market. For each case below, taken separately, use the diagram
provided to demonstrate the impact on the quantity of labour employed and the
wage rate per hour received by workers. Assume a positively sloped supply curve Of labour. [Since equations have not been provided, you are not expected to give precise answers;
just label as L1, L2, etc] a) (5) A subsidy of $10 for each hour of labour employed. b) (5) An effective minimum wage, at a level higher than the nonregulated
equilibrium. Will the ﬁrm always be able to obtain all the labour it wants, irrespective of the level of the minimum wage? (Yes / No) [Your diagram needs to demonstrate your answer,
but no explanation is required]. Page 23 0f23 9.2 A ﬁrm has a production function of Q = ZKL. For this function, the MPL = 2K and a) b) MPK = 2L. The price of K is $20 per unit and the price of L is $10 per unit. (7) This production function exhibits (constant / increasing / decreasing) returns to scale. Returns to scale is a concept that applies in the (short run / long run /
both short and long run). This production function (does / does not) exhibits the “law of diminishing returns”
to labour (L). Diminishing returns is a concept that applies in the (short run /
long run / both short and long run). In the long run, how many units of labour will the ﬁrm use per unit of capital, in
order to maximize output for a given input budget? Number of units of labour (L) per unit of capital (K) = (3) One point on a (different) ﬁrm’s linear expansion path is K=l, L=1 at Q=10. In
the diagram below, create an expansion path (EP) to demonstrate a production
function that exhibits decreasing returns to scale. Show at least 3 points on the EP. ...
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 Fall '10
 LeeBailey
 Microeconomics

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