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final2011spring - PADP 6950 Fertig Name Final Exam Spring...

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Unformatted text preview: PADP 6950 Fertig Name ______________________________________________________ Final Exam Spring 2011 UGA 1. (20 points) Use supply and demand analysis to show what happens to the equilibrium price and quantity of doughnuts in each of the following cases: a. Consumer income increases (assume doughnuts are normal goods) b. The price of coffee decreases (assume coffee and doughnuts are complements) c. The minimum wage increases (assume many or most workers in doughnut shops earn the minimum wage) d. A new study indicates that doughnuts are less unhealthy than was previously believed; at the same time, the price of sugar increases dramatically (assume sugar is an input in doughnut production) (a) (b) (c) 1 (d) 2. (15 points) To raise revenue, we decide to tax one of two goods; in each case, the price of the good is $3 and the quantity sold is 2,000. The market demand and supply curves for the goods are shown below (the supply curves are identical). Circle the best answer for parts a, b, and c below; answer part d. P P S S $3 D D 2,000 Q 2,000 Q Good A Good B a. Which tax will raise more revenue? Good A Good B No difference b. Which tax will create more deadweight loss? Good A Good B No difference c. Which tax will consumers pay more of? Good A Good B No difference d. Now assume that the production of both goods results in external social costs associated with pollution such that the optimal level of production in both industries is 1000 units. Can the government impose a single tax rate (t) on both goods to achieve the optimal level of production? Explain your reasoning. 2 3. (15 points) Explain why public goods are not usually produced privately, and when they are, they are produced at a lower level than the socially optimal amount. In your answer, clearly define a public good and the socially optimal amount of the public good. 3 4. (20 points) Assume that a pharmaceutical firm has decided to expand their sales to Mexico where they will offer a lower price for their blockbuster drug than the price in the U.S. The firm currently sells 7000 prescriptions per month at a per unit price of $200. The marginal cost of each prescription is $30. The demand curve and the marginal revenue curve in Mexico are given by the following equations: P = 200 - 1/10 Q MR = 200 - 1/5 Q a. Determine the profit maximizing price and quantity the firm will choose to charge in Mexico. Show graphically and compute exact numbers. b. What will the profit from Mexico sales be? Compute the number and shade an area on the graph. 4 c. What does economic theory predict will happen to the firm's overall profit (from sales in Mexico and the U.S.) and consumer surplus in Mexico and the U.S. if, bowing to pressure from voters, the U.S. permits its citizens to legally purchase this drug from Mexico? 5 5. (20 points) Consider the market for solar power. Assume the market is perfectly competitive and initially in long-run equilibrium; solar power sells for $.25 per kwh (kilowatt hour, a unit of power). a. Draw graphs to represent the market as well as a single firm. Market Firm b. Next, to encourage conservation, Congress taxes all forms of energy EXCEPT solar power. Show what happens to the market and the firm in the short run; indicate clearly what happens to price, quantity, and profit. c. What happens to the market and the firm in the long run? Indicate clearly what happens to price, quantity, and profit. 6 6. (10 points) Suppose that the Justice Department is considering whether to permit two large firms in an industry to merge into one firm. The industry currently is made up of 10 firms with the following share sizes: Firm Share of market A 30 B 20 C 15 D 5 E 5 F 5 G 5 H 5 I 5 J 5 Firms B and C are the firms who want to merge. Using the initial value and the change in the Herfindahl-Hirschman index (formula for this case below) as evidence, make a recommendation about whether the two firms should be allowed to merge. HHI = si2 10 i=1 7 ...
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