Final Exam May 15, 2006 - Elements of Microeconomics Final...

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Elements of Microeconomics Final Exam May 15, 2006 1. [6] a. Using appropriate tools, show how to find one point on a consumer’s labor supply curve. [10] b. Wal-Mart’s employees do not belong to unions. They get paid $10 per hour. A union tries to organize Wal-Mart workers. The union will force the wage up to $15 per hour. Union dues will be $30 (per day). You are asked to advise a worker whether to vote for unionization. Analyze the problem.
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[Continuation of Question 1] [9] c. There are two different firms, Starbucks and Microsoft. Each firm has been paying a wage of $w per hour, and each firm was (just) able to hire all the workers it wanted. But now, because of an increase in the demand for their products, both firms need to employ more labor. Starbucks does not care how many different workers it employs to get the work done; all it cares about is the number of person-hours of work. It is costly for Microsoft to train new workers, so if possible the firm would like to get the extra work done with its current work force. You are a consultant to both Starbucks and Microsoft. Each is considering two alternative plans -- to simply boost the wage rate it offers its employees, or to leave the base wage unchanged and offer overtime. State which plan each firm should adopt and explain why.
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2. The production of hairspray requires two inputs, labor and capital. [5] a. Define the Law of Diminishing Returns. Is it possible for hairspray production to be subject to both constant returns to scale and the Law of Diminishing Returns? Explain. [5] b. Draw a short-run average-cost curve and a corresponding marginal-cost curve for a hairspray producer. Explain their shapes and the relationship between them. Be sure to state how the short run is important to your answer. [4] c. For a given price of hairspray, show the profit-maximizing level of output. (Pick a price that allows the firm to make a positive profit.)Explain how you know it is the profit- maximizing level of output and show what profit is.
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[Continuation of Question 2] [5] d. How will the hairspray firm you depicted in i. and ii. Change its behavior in the long run? (Draw the relevant graph.) Be sure to show how constant returns to scale enters into your analysis. [6] e. What will happen to the price of hairspray in the long run? Explain.
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3. Until recently, melons were produced in a perfectly competitive industry. Then, because of a law that was passed, the melon industry became a monopoly. Melons are produced subject to constant returns to scale.
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