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Unformatted text preview: 7. lfprofit if negative (it < 0) and production is positive (y > 0), it must be that... (Please circle one
response.) a. AC>MC>AVC
d. AVC>AC>MC 8. Alexa’s cost function is C(y) = y1 + 25 . (10 points) a. At what price does proﬁt equal zero? b. At or below what price does Alexa choose not to produce? 9. Consider the CRS technology y = 2X . The output price is P, and the input price is w. How big does the output price have to be (relative to the input price) for a competitive ﬁrm to make inﬁnite proﬁts in the
PMP‘? 10. Based on the Utility Possibility Set, clearly label the points corresponding to the Farm; Se! (all PO
allocations). “a 11. Bert and Ernie are competitive consumers in a pure exchange economy. Their endowments of good I
and 2 are 33m = (10,10) and egm : (10,15). The prices ofgoods 1 and 2 are P1 and P2. Bert’s demand 3
m3“ . Ernie’s demand function for good I is X 15m = mm” . (10 points) function for good 1 is X13” =
4P1 2P: a. What is the aggregate amount ofgood 1? b. What are m Ben and m Em (as a function of prices and endowments)? c. Normalize Pi : 1. What are the equilibrium prices, i.e. what is P2 ? 12. Suppose that the social planner wants to implement a competitive equilibrium in which Bert consumes
exactly 5 units of good 2. To do so, the social planner transfers good one from Bert to Ernie. Bert’s demand function for good 2 is X?” = :32” .Norrnalize P1 =1, as above. 115 pointst 2 a. Denote the transfer from Bert to Ernie as T. What are mayf and Int-m now? (Hint: take your
answer to 11b, subtract T from Bert’s income, and add Tto Ernie’s income.) b. The social planner wants Bert to consume exactly 5 units of good 2. Write the equation that sets
Bert’s demand for good 2 equal to 5. (Hint: it should only be a function of P2 and T.) c. Write the equation that determines the equilibrium prices, i.e. that determines P2 , since P, = 1.
(Hint: it should only be a function of P2 and T.) d. Use the equations in b and c to solve for T (get a number). This is the transﬁr that implements
the social planner’s desired equilibrium. ...
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- Fall '08