Midterm 2

Midterm 2 - Economics 55D — Spring 2007 — Midterm 2...

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Unformatted text preview: Economics 55D — Spring 2007 — Midterm 2 Name: Section Number: Ptease answer of! questions in the space provided (including the sheet foliowing each question). Feetfiee to use the back of each sheet if you need to. Use the empty sheets in the back of the exam for scratch paper. Put your name (legibty) on each sheet of the exam in the space provided. There are 100 points on the exam, and you have 1 hour and I 5 minutes to complete the exam. The total number of points for each part is indicated in each question. Before starting the exam, you must sign the foltowing statement: I pledge to obey the Duke University Honor C ode during this exam. Signed: Description of the Technology for Producing Computer Chips for Problems 1 and 2 For the first two problems, consider the following description of a technology: Suppose there are different ways of producing computer chips. If you hire one worker (for the day) for each machine that you rent (for the day), you can produce 10 chips per day with each worker/machine pair for the first 60 machine/worker pairs. For the next 60 worker/machine pairs (assuming still that you hire them as pairs for the day), you are able to produce 20 chips per day with each of the additionat pairs. Once you have 120 worker/ machine pairs, you can only get 5 additional chips per day for each additional pair. But hiring l worker for each machine is not the only way to produce computer chips. Suppose you are starting from a production plan where you are using exactly as many workers as machines to produce a given level of chips. The technology is such that, starting at the production plan where you are using the same number of workers as machines, you can replace 1 or more workers with two machines (for each worker) and get just as many chips produced. Alternatively (and again starting at the production plan where you use exactly as many workers as machines), you can replace 1 or more machines with 2 workers (for each machine) and get just as many chips produced. Throughout the next two problems, assume that the computer chip industry is perfectly competitive. Economics 55D — Spring 2007 - Midterm 2 Economics 55D - Spring 2007 m Midterm 2 Name: 60 120 I90 1H0 39" 360 in“? ' 390 600 w $001,500 moo 2,100 Allan 2300 x (10) 300 600 900 1,190 IFSDD (Igor: flOD .1900 2700 (9) Economics 55D — Spring 2007 — Midterm 2 Name: 2. Suppose the computer chip industry is in long run equilibrium with daily wages and rental rates both equal to $100 and with all firms having cost structures identical to those for the firm described above. Again, answer on the templates provided on the next page (i.e. on page S). and use pencil or scratch paper until you are certain you have arrived at your final answer. a. On template (a), illustrate the short run production function (assuming labor is variable in the short run but capital is not), for each firm. (Him: Before you begin, figure out the level of capital that all firms have in long run equilibrium from what you did in the last problem.) (5 points) b. On template (b), derive the short run cost function. (4 points) c. On template (c), derive the short run marginal and average cost functions. (6 points) d. How low can price fall in the short run before a firm shuts down? Answer (with a brief explanation) in the space labeled ((1). (4 points) e. Is the firm making short run profits in long run equilibrium? If so, how much? Answer in the space labeled (e). (5 points) f. What does the average expenditure — i.e. the curve that includes all short run costs but also expenditures that are not costs in the short run — look like? Illustrate this in template (c) and explain how this curve relates to the long run average cost curve you graphed in (f) of the previous question. (There is additional Space to answer this on page 6 of the exam.) (6 points) g. We said in class that long run supply responses to output price changes are larger than short run supply responses. In what sense is this true for the firm you have analyzed here? (There is additional space to answer this on page 6 of the exam.) (5 points) Economics SSD — Spring 2007 -— Midterm 2 (a) Name: 27.00" 100 (it-u (oo 900 mm 1.200wi {600 {so Mag 0 205” .2290 2an Economics 550 — Spring 2007 — Midterm 2 Name: 3. Suppose gasoline stations operate with identical costs in a perfectly competitive industry. In each of the following cases, explain what happens to an individual gasoline station and what happens to the overall quantity of gasoline sold in the short and long run. Assume that labor is the only variable input in the short run. a. Tax returns for 2006 from gasoline station owners show unusually high income for these owners because of the upward trend in prices this past year. So Nancy Pelosi convinces Congress to pass a one-time “profits tax” based on these unusually high incomes last year. (7 points) b. Continue with part (a). After the imposition of the “profits tax” from part (a), Congress has to decide what to do with the revenues. The Texas Congressional delegation persuades the government that running a gasoline station is patriotic but difficult work -— and that the Congress should put all the revenues from the “profits tax” into a trust fund which will be used to finance annual Christmas gifts in the form of a $10,000 check for all gasoline station owners from now on. (7 points) c. Moved by Al Gore’s speech at the Oscars, a teary-eyed Dick Cheney persuades Congress to impose a $2 per gallon tax on all gasoline sold at the pump. (7 points) d. After the industry settles into its new long run equilibrium (following the Cheney tax increase from (c)), the Congress decides to help out the gas station owners once more by subsidizing their equipment purchases through a tax credit — thereby lowering the rental rate they have to pay on their equipment. (Assume equipment is fixed in the short run, variable in the long run.) (7 points) e. True or False: Since the short run marginal cost curve measures only costs associated with variable inputs (like labor) and not with fixed inputs (like capital), the short run marginal cost curve in the new long run equilibrium (following the policy in part (d)) is the same as the short run marginal cost curve in the old equilibrium (before the policy in part (d)). Explain. (7 points) ...
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This test prep was uploaded on 04/07/2008 for the course ECON 55 taught by Professor Rothstein during the Fall '07 term at Duke.

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Midterm 2 - Economics 55D — Spring 2007 — Midterm 2...

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