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Unformatted text preview: ST1 answers Multiple Choice Section 1. ANS: A 2. ANS: C 3. ANS: B 4. ANS: C 5. ANS: B 6. ANS: C 7. ANS: A 8. ANS: D 9. ANS: C 10. ANS: D 11. ANS: A 12. ANS: A 13. ANS: C 14. ANS: C 15. ANS: C 16. ANS: B 17. ANS: C 18. ANS: A 19. ANS: B 20. ANS: B 21. ANS: C 22. ANS: B 23. ANS: A 24. ANS: D 25. ANS: B 26. ANS: D 27. ANS: A 28. ANS: A 29. ANS: A 30. ANS: B 31. ANS: C 32. ANS: C 33. ANS: A 34. ANS: B 35. ANS: C 1 Short Answer Section Question 1 a. Profit is maximized where MC = MR. Here MR is \$100. Setting MC = \$100 yields a profit- maximizing Q of 25. b. Profit = (TR-TC). TR = P*Q. So, profit = PQ – 200 – 2Q^2. At P = 100 and Q = 25, profit = \$1050. c. The firm produces in the short run if its revenues are greater than its variable costs. The firm’s short run supply curve is its MC curve above minimum AVC. Here AVC = VC/Q. VC = 2Q^2/Q = 2Q. Also, MC = 4Q. So, MC is greater than AVC for any Q greater than 0. This means that the firm produces in the short run as long as price is positive. Question 2 The marginal tax rate is 0.2 between \$10,000 and \$25,000, a proportional tax. If one assumes a marginal tax rate of 0.1 between \$0 and \$10,000 in income, one could say the tax is progressive between \$10,000 and \$15,000. The average tax rate starts at 0.1 and increases with each income increase. For example, at \$20,000 income, the average tax rate is 0.15. Question 3 a. The optimal strategy for each is to charge a low price. If either charges a high price, the other can do better by charging a low price. (This would put the firms in the upper right or lower left cells.) But the firm which has the high price can improve its profits by switching to a low price. The result is that firms are in the lower right cell, each earning a profit of 11. b. The firms end up with total profit of 22 by charging low prices. If they are able to collude, they can earn total profit of 30. If collusion is possible, they have incentive to do it. One obvious pitfall is cheating-total profit of 30....
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