final 2000 - Elements of Microeconomics Final Exam Spring...

This preview shows page 1 - 6 out of 6 pages.

Image of page 1

Subscribe to view the full document.

Image of page 2
Image of page 3

Subscribe to view the full document.

Image of page 4
Image of page 5

Subscribe to view the full document.

Image of page 6

Unformatted text preview: Elements of Microeconomics Final Exam Spring 2000 1. a. [6 pts] You are promised $100 one year from today. What is the present value of that promise? Explain. b. [6 pts]Draw the budget constraint for a consumer who has income Y0 this year, Y1 next year, and faces an interest rate r. Explain. c, [6 pts] How does the budget constraint in Part b change if the consumer must pay a higher interest rate when borrowing than he receives on his savings? d. [7 pts] In the market economy that we discussed in class (before monopoly, taxes an the like) is the allocation of resources between producing current and future consumption economically efficient? Explain. e. [8 pts] You own a large amount of genHlik (a potion that keeps you young). You can sell it this year at a given price P0 or next year at a given price PL The cost of marketing and producing genHlik is zero. The interest rate is r. Under what condition(s) would you sell some of your genHlik this year and some next year (as opposed to selling all of it this year or all of it next year)? [6 pts] Define the Law of Diminishing Returns and state why it makes sense. [6 pts] Does the Law of Diminishing Returns hold when there are increasing returns to scale? Explain. [8 pts] Draw a competitive firm’s short-run average and marginal cost curves, and explain the following: i. The general shape of the average cost curve ii. the relationship between the average and marginal cost curves. [6 pts] For a given price of the good, show the firm’s profit-maximizing level of output. Explain why this level of output maximizes profit and show how much profit the firm makes. [7 pts] Describe the long-run equilibrium for an industry made up of many firms like the one you described in parts c and d. 3. There are two goods, x1 and x2. They are produced by competitive industries. a. [7 pts] Show that the equilibrium allocation of goods is economically efficient. b. [10 pts] Now the government levies a tax, t1 on x1. Is the new equilibrium efficient? If so, show that it is. If not, show a mutually beneficial transaction that does not occur. 0. [9 pts]Now suppose that X1 is produced by a monopolist (and X2 is produced by a competitive industry). The government needs to tax one of the goods, to raise revenue for national defense. On the criterion of economic efficiency, should it tax X1 (the monopoly good) or X2? Explain. d. [7 pts] Now return to the assumption at the beginning of the problem: both goods are produced by competitive industries. Is economic efficiency restored by levying equal taxes on both goods? Explain. 4. a. [10 pts] Derive one point on a supply curve for labor. Develop whatever analytical tools you need. b. [12 pts] An employer has hired a group of workers, at wage w, and has observed that they all work 7 hours per day. The employer would like each of his workers to work at least 8 hours per day, but cannot just order them to work at least 8 hours. He considers two options. 1. ii. Raise the wage rate by 50% Offer a special overtime wage rate, equal to 1.5 times the going wage W. Which plan is more likely to induce workers to work at least 8 hours? Explain. c. [11 pts] In Baltimore, housing costs $20,000 per year. In New York housing costs $3 0,000 per year. Except for the housing-cost difference workers are indifferent between living in Baltimore and New York. Furthermore, all workers have identical preferences. 1. ii. Depict the equilibrium wage difference between Baltimore and New York. Explain Can you predict whether people will work more hours in one city or the other? Explain. [6 pts] Define an externality. Explain why externalities give rise to economic inefficiency. [6 pts] Two factories, F1 and F2, each pollute the air. The government wishes to reduce pollution and understands that the factory owners have no incentive to do it on their own. For each factory, draw a marginal-cost—of—pollution—abatement schedule and show what it depicts. [7 pts] Given the schedules you drew in part b, indicate the rule that should be obeyed if the objective is to find the cheapest possible way to reduce pollution by any given amount. [7 pts] State whether this cheapest—possible—way objective will be achieved under each of the following three pollution-abatement programs: [NOTEz you are not asked to comment on the amount of pollution abatement under the three schemes, just whether that amount of pollution abatement rs achieved 1n the cheapest possible way. ] ‘ i. The government allows each factory to do a certain amount of pollution. Any pollution above this amount, by either factory, results 1n prison time for the factory owner. [No side deals allowed] ii. The government allows each factory a certain level of pollution as in above. But now factory owners are free to buy or sell the pollution permits that the government issued. iii. The government charges a fee for each ton of pollution. c" 1” Use the graphs from parts b and c to show that your answers are right. [7 pts] If the government uses plan “ii” fiom part d above, it has one more decision to make: It can allow factory owners to buy and sell pollution rights to any other polluter in the country, or it can restrict them to buying and selling only to other polluters in a small geographic area. Which do you recommend and why? [The next problem is quite hard. Do not do it until you have gotten all the points you can from the first five problems.] 6. Ford Motor Company is the only manufacturer of cars (this is a long time ago). The figure below shows the demand curve in the Baltimore market and Ford’s marginal cost curve. Ford realizes that, whereas it knows a lot about making cars it knows nothing about marketing cars in Baltimore. Therefore it decides to franchise an Exclusive Ford Dealership in Baltimore. It takes no special skills to be a Ford dealer; anybody who lives in Baltimore knows how to be a Baltimore Ford dealer. The terms of the dealership are as i. ii. iii. iv. follows: Ford charges an annual franchise fee F. Ford charges the dealer a price Pd for each car. The dealer is then free to set its own price Pc to customers. The dealership is exclusive; Ford agrees not to license any other dealers in the Baltimore Metro area. a. [11 pts] Suppose Ford sets Pd = MC; it sells cars to the dealer at cost. i. ii. iii. iv. What price Pc will the dealer charge to his customers when selling Fords in Baltimore? What is the maximum franchise fee F that you would be willing to pay in order to acquire a dealership? Explain. How much profit will the dealer earn (be sure to net out the franchise fee)? How much profit will Ford earn? [Remember, Ford has two sources of profit — selling cars and the franchise fee.] b. [11 pts] Now suppose that Ford sets Pd = Pm where Pm is the standard monopoly price (i.e., it is the price that Ford would charge to consumers if it were to simply set a monopoly price and sell cars direct to customers). i. What price Pc will the dealer charge his customers now? ii. What is the maximum he is willing to pay as a franchise fee F? iii. How much profit does Ford earn? c. [11 pts] If Ford wishes to maximize profit [from selling cars plus the fianchise fee] what price Pd should it charge its dealer for cars? [Bear in mind that the franchise fee Ford can collect depends upon the price it charges for cars] ...
View Full Document

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern