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TEST2ANS.versionA.2006

# TEST2ANS.versionA.2006 - ECMA04H VERSION A Sketchy...

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ECMA04H - VERSION A Sketchy Solutions to Second Term Test, written on November 17, 2006 These are the answers to VERSION A. Q1: D The shut down price = minAVC; AVC = TVC/q = .1q+6+14.4/q, which will reach its minimum when dAVC/dq=0; dAVC/dq = .1 - 14.4q -2 = 0, so q = 12, and min AVC = 1.2 + 6 + 14.4/12 = 8.4 or \$8.40. The correct answer is (D). Q2: A The supply curve of the firm is given by its marginal cost curve, above AVC, which is P = .2q + 6, for all P >= \$8.40; since 500q = Q, industry supply is given by P = .2(Q/500) + 6, or .0004Q + 6. Set this equal to the industry demand to find the SR equilibrium price, so .0004Q + 6 = 36 - .0008Q; Q = 30/.0012 = 25,000; P = 16. The correct answer is (A). Q3: E The individual firm’s output is q = 25,000/500 = 50; TC = 250 + 300 + 90 = 640; TR = Pq = 800. Therefore, profit = TR - TC = \$160. The correct answer is (E). Q4: G Since this is a constant cost industry, its long run supply curve is horizontal at long run min AC. Min LRAC = \$12, so the long run industry supply curve is P = 12. Therefore, we can find the long run equilibrium quantity where \$12 = 36 - .0008Q; Q = 24/.0008 = 30,000. The correct answer is (G). Q5: A In the long run equilibrium, each firm must be at the most cost-efficient size, which is 30 units of output. We can find the number of firms in long run equilibrium as N = Q/q = 30,000/30 = 1000 (q is at minimum LAC). The correct answer is (A).

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TEST2ANS.versionA.2006 - ECMA04H VERSION A Sketchy...

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