Final Exam Spring 2009 - Elements of Microeconomics Final...

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Elements of Microeconomics First AND Last Name__________________ Final Exam Spring 2009 1. A firm produces good X using labor and capital. There are many identical firms that produce the same good, using the same technology. a. [6] Somebody tries to tell the boss that the firm’s technology is subject to BOTH the Law of Diminishing Returns AND Constant Returns to Scale. Does it make any sense that both of these can happen to the same firm? Explain. [HINT: I don’t see how you can answer this without defining your terms.] b. The firm has an average cost curve shown below.
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i. [2] Is this a long-run or a short-run curve? Explain. Draw in the marginal cost curve and explain its shape and relationship to the average cost curve. c. [6] On the graph above, depict a situation in which the firm makes positive profit. Show what level of output maximizes profit and show the level of profit that the firm makes. d. [6] In class we argued that long-run equilibrium for a competitive industry was characterized by P=MC=AC. Why is P = MC? (Explain.) Why is P = AC? (Explain.)
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2. One person owns the only mineral-water spring in the nation. The cost of producing mineral water is $C per gallon. The demand curve for mineral water is shown in the graph below: a. [6] Show the profit-maximizing price, quantity and profit. Explain. In the process, be sure to use and explain the concept of Marginal Revenue. b. [10] There is one other good in the economy (carrots, which are produced competitively). Is the allocation of resources efficient? Explain. [HINT: Your answer should make explicit use of the definition of efficiency.] c. Now it turns out that the demand curve drawn above is only for water drunk of Saturdays. It is redrawn below, labeled D(Sat). There is a different demand curve for water drunk on Sundays (drawn on the same graph as D(Sun). (There is no demand for spring water on other days of the week.) i. [4] First, assume that customers can buy their water for both Saturday and Sunday consumption on Friday. Find (and explain) the monopolist’s profit- maximizing price, quantity and profit.
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ii.
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