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Practice Mid-term Solutions

Practice Mid-term Solutions - PRACTICE MID-TERM SOLUTIONS...

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PRACTICE MID-TERM SOLUTIONS MANEC 387 MULTIPLE CHOICE 1. D 2. B 3. C 4. B 5. A 6. D 7. C 8. B 9. A 10. A 11. E 12. D 13. B 14. B 15. D 16. C 17. B 18. C 19. B SHORT ANSWER 1. a. The demand for oranges does not change, but supply shifts left. This implies an increase in price and a decrease in quantity sold in the orange market. b. Since apples are a substitute for oranges, an increase in the price of oranges increases the demand for apples. As the supply of apples does not change, this implies an increase in both price and quantity sold in the apple market. c. Oranges are the main input for the production of orange juice. An increase in the price of oranges decreases the supply curve for orange juice. On the other hand, the demand does not change. This results in an increase in price and a decrease in quantity sold in the orange juice market.
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2. Since the income of your clients is expected to rise, demand is expected to increase. Hence, you should order more cars in the coming year as compared to last year's order. 3. a. Q X = 12 - 3(3) + 4(1.5) = 9, so 3 2 9 5 . 1 4 , = = Y x P Q E . b. They are substitutes. c. . 1 9 3 3 3 , - = - = - = x x P Q Q P E x x d. Q X = 12 - 3(2.5) + 4(1.5) = 10.5, so Cross-price elasticity: 57 . 0 5 . 10 5 . 1 4 , = = Y x P Q E Own-price elasticity: 71 . 0 5 . 10 5 . 2 3 3 , - = - = - = x x P Q Q P E x x 4. a. Q = (1) 1/2 (9) 1/2 = 3. The average product of labor is thus Q/L = 3/9. b. MP L = .5K 1/2 L -1/2 = .5(1) 1/2 (9) -1/2 = 1/6. c. The profit-maximizing level of labor and output is achieved where VMP L = w, where VMP L = .5($100)(L -1/2 ) and w = $10. Solving for L yields L = 25. The corresponding level of output is Q = (25) 1/2 = 5. d. The firm's variable costs are (25)($10) = $250, while its total revenues are 5 x $100 = $500. The maximum price of capital, hence, cannot be greater than $250 per unit.
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