Econ 100A MT2 Ans - Department of Economics University of...

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Department of Economics Spring 2007 University of California Prof. Woroch Economics 100A : MIDTERM #2 EXAM ANSWER SHEET GENERAL INSTRUCTIONS : Write your name and your GSI’s name on the front cover of two blue books. Mark them as #1 and #2. The exam has 3 parts: put Parts I and II in blue book #1, and Part III in #2. There is a total of 100 points with point assignments given in the instructions for each part. A point translates approximately into 1 minute of time. I. DEFINE and RELATE : Choose 2 of the following 3 pairs of terms. For each one, (a) give a precise but concise definition of both terms and (b) describe the relationship between the two. Each is worth 8 points for a total of 16 points. 1. An “English auction” and a “Vickrey auction” An English auction is a first price ascending open cry auction. Bidders make sequential bids until bids cease, at which point the highest bidder pays his bid and claims the item. A Vickrey auction is a second price sealed bid auction. Everybody simultaneously makes a bid. Bids are revealed, and the highest bidder wins the item, but pays the second highest bid. This leads to the property that all bids are truth-telling: it’s optimal to bid your valuation. The differences—English is open cry while Vikrey is sealed, English is first price while Vikery is second price—affects the bid strategy in that bidders submit their willingness to pay under Vickery, but shade their bids under English by not raising bid after second highest bid. In the end, both have the bidder with the highest willingness to pay wining the auction and paying an amount equal to the next highest bidder. The seller can expect the same revenue either way. 2. A monopolist’s “Lerner Index” and the “Inverse Elasticity Pricing Rule” The Lerner Index is given by p MC p . It is a measure of market power, since it expresses the markup as a percentage of the price. Note that it can only take values between zero and one; zero occurs if price is equal to marginal cost, one only if marginal cost if zero. The closer to zero the Lerner index is, the more competitive the pricing of the firm; the closer to one, the less competitive. The Inverse Elasticity Pricing Rule says that we can find the optimal price for a firm through the equality D p MC p ε 1 = . This is equivalent to MC MR = . Since the Lerner Index takes values between zero and one, this means that a firm that is maximizing revenue will only produce in the elastic part of demand. The two are clearly related. 3. “Marginal expenditure on labor curve” and the “labor supply curve” The labor supply curve gives the amount of labor all workers will supply at each posted wage rate: L(w). Let the inverse labor supply be given by: w(L). Typically the labor supply curve is upward sloping, but it can also bend backwards as well.
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Economics 100A Page 2 Midterm #2 Exam Answers The marginal expenditure on labor curve gives the expenditure that must be made to hire an additional unit of labor.
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Econ 100A MT2 Ans - Department of Economics University of...

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