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a03-part2 - Page 11 of 17 pages Do 5 of 7 Questions 5 Both...

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Unformatted text preview: Page 11 of 17 pages. Do 5 of 7 Questions. 5. Both Consumer Theory and Perfect Competition 5.1 (10) A consumer is not spending'all of her income today (period 1) in order to be able to consume in excess of her income tomorrow (period 2). Consumption‘in both periods is known to be of normal goods. Prices are constant (i.e., no inflation). 21) Using the standard indifference theory, illustrate the consumer’s initial position on a well labelled diagram. b) In the face of a reduction in the interest rate, will this consumer save more, less, or the same amount as before? Demonstrate your answer through the use of the Substitution Effect (SE) and Income Effect (IE) in the diagram below. (Wolfson students, use Slutsky Method). Recopy the diagram from above, and proceed from there, assuming SE is larger than IE. I conclude the consumer will save (more / less / the same) at the new interest rate, compared to the old one. Page 12 of 17 pages. Do 5 of 7 Questions. 5.2 (10) You have the following partial information about two firms in two different perfectly competitive markets. a. Fill in the missing data that can be derived from the information that is given. Fir Pric Quantit m e y e (TC) (TFC (P) (Q) (TR) ) A $3 .0 $6000 $800 0 0 $9000 $900 $300 _ 0 0 b. ) $3.50 $3.50 $1.50 MC=AT C You are asked for a recommendation to each firm about what it should do in the short run. You can recommend one of the following courses of action: The firm is currently in the correct position and therefore should not change; The firm should increase output; The firm should decrease output; or The firm should shut down. Be sure to explain your recommendation. Recommendation for firm A: Recommendation for firm B: Page 13 of 17 pages. Do 5 of 7 Questions. 6. Markets Other Than Competitive Ones 6.1 (6) A monopolist knows that the demand schedule for each of its consumers is P = 100 — Q. It has a total cost schedule of TC = 10Q. a) The monopolist is able to engage in perfect price discrimination (1St degree price discrimination). Calculate the following values in the profit-maximizing equilibrium, related to each consumer: Consumer Surplus ——— Quantity Sou — ‘ b) The monopolist can no longer engage in perfect price discrimination. Instead, the monopolist selects a profit-maximizing, two-part tariff system whereby profits are maximized through a combination of a fixed fee for the right to buy and a price per unit purchased. Once again, calculate the following values in the profit-maximizing equilibrium, related to each consumer: Quantity Sold Profits ——_ Consumer Surplus _ Page 14 of 17 pages. Do 5 of 7 Questions. 6.2 (8) The market demand for product X is Q = 160 — 2P. There are only two firms in the X industry and they behave as Coumot duopolists. Each of them can produce X at a cost of $20 per unit of output. a) Derive the equations of the Reaction Schedules OR show them in a fully labeled diagram. b) What are the following values in the Coumot equilibrium? Output of each firm _ Price of Good X _ Profits of each firm — c) Now suppose the two firms stop behaving as Coumot duopolists and instead collude to maximize their joint profits. They agree to share the market equally. What are the following values? Outut of each firm Price of Good X Profits of each firm Page 15 of 17 pages. Do 5 of 7 Questions. 6.3 (6) A monopolistically competitive industry is in long run equilibrium with each a) b) firm producing 2,000 units of output per year. Show the equilibrium of one of the firms in a fully labelled diagram below. Quickly redraw your answer to part a) on the diagram below. It turns out that the costs of each firm include a sales tax of $1 per unit of output. If the sales tax is abolished and replaced with a fixed annual license fee of $2,000 that each firm must pay regardless of its level of output, what happens in the long run? Show your answer on the diagram below, using subscript 2 for the new long run equilibrium (e-g. p2, q2)- Page 16 of 17 pages. Do 5 of 7 Questions. 7. Input Markets 7.1 (16) Assume there is only one buyer of unskilled labour in a remote northern community. Labour is the only variable input utilized by the firm, which sells in a competitive world market. The government is considering 4 ways to aid the unskilled workers. For each case below, taken separately, use a diagram to demonstrate the impact on the quantity of labour employed and the wage rate received by unskilled workers. Assume a positively sloped Supply curve of labour. Be sure to label clearly, and show what has changed in each case. a) An effective minimum wage law, at a level higher than the current equilibrium. b) A payment to the monopsonist of $1 for each hour of unskilled labour employed. Page 17 of 17 pages. Do 5 of 7 Questions. c) a payment to the monopsonist of 25 cents for each dollar that the firm spends on unskilled labour. (1) a payment to the monopsonist of $2 for each unit of output sold. 7.2 (4) One point on a firm’s linear expansion path is K=1, L=1 at Q=100. In the diagram below, label three points on the expansion path to demonstrate a production function that exhibits increasing returns to scale. ...
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