Exam1a - Industrial Organization Fall 2011, Karl Storchmann...

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Industrial Organization Fall 2011, Karl Storchmann Exam #1 Instructions: Please read all the questions carefully. You have 75 minutes to complete the exam. Answer all questions. The value of each question is indicated in parenthesis. Answer each question as clearly and concisely as possible. Show your work but be brief! Calculators are allowed. Question 1: (4 pts) A firm has a budget of $50. MP L is equal to 2, MP K is equal to 4. The cost of labor is equal to 5.At the const-minimizing level, what is the user cost of capital? (4 pts) Answer: MPK/MPL=2 à r/w=2 à r=10 and w=5 Question 2: (4 pts) Assume a firm’s marginal cost curve is below the average cost curve and is increasing. (a) What do we know about the average cost curve (if anything)? (b) What do we know about the cost elasticity (if anything)? (a) AC falls. (b) Cost elasticity is lower than one. Question 3: (8 pts) Suppose a competitive winery has a cost curve given by C(q)=3+3q+q 2 . Assume that the market price of the firm’s product is $12. (a) What level of output will the firm produce? (2 pts)12=3+2q
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Exam1a - Industrial Organization Fall 2011, Karl Storchmann...

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