ST2_Solutions

# ST2_Solutions - ST2 Answers Multiple Choice Section 1 2 3 4...

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ST2 Answers Multiple Choice Section 1. D 2. D 3. A 4. D 5. C 6. B 7. B 8. C 9. C 10. D 11. D 12. D 13. D 14. C 15. B 16. A 17. D 18. C 19. D 20. C 21. B 22. C 23. B 24. C 25. C 26. B 27. D 28. A 29. B 30. D 31. D 32. B 33. A 34. D 35. D 1

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SHORT ANSWER SECTION 1. Your graphs should reflect the following - if the demand curve is perfectly inelastic, the buyer bears the entire burden. If the supply curve is perfectly inelastic, the seller bears the entire burden. 2. See class notes for derivation. The productivity effect causes an increase in the demand for labour (a right shift of the derived labour demand curve). 3. The optimal rule for the consumption of two goods is that the MRS should be equal to the price ratio: MRS = Px/Py. In this case, 2xy/x 2 =8/2=1/4, so y=2x. Substituting into the budget constraint, we get 8x+2(2x)=240, so x =20, y=40, U=16,000. 4. a) Costs are zero, so profit = revenue = price*quantity. The maximal profit (\$21,600) occurs when quantity = 1200. b) Each firm will produce 800. This can be checked by assuming that firm 2 will produce 800, calculating the residual demand for firm 1, and verifying that 800 is a profit-maximizing quantity for firm 1. The same is true for firm 2, since the firms are identical. c) Each firm will produce 600, the price will be \$9. The total quantity is 1800, which is greater than the total quantity with two firms (1600). 5. Since MR exceeds MC, recommend an increase in output. Greater sales will require a price reduction. So reduce P below \$10 and increase Q above 100. See Figure 1 below.
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