Final 2010 - Elements(of(Microeconomics Final(Exam...

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Unformatted text preview: Elements(of(Microeconomics( Final(Exam( May(16,(2010( ( 1. (a.((A(firm’s(situation(in(the(marketplace(is(depicted(below:( ( ( MC( $( AC( ( ( P( ( ( ( ( X( ( ( a. [5]$$Is(this(a(picture(of(the(firm(in(the(short(run(or(the(long(run?((Explain( ( ( 1. Short run. If long run, P = AC. 2. \pi > 0, then firms enter, then prices down. ( ( ( b. [5]$$Is(this(firm(in(a(competitive(industry(or(a(monopolistic(industry?((Explain.(((( ( ( Competitive because firms cannot pick prices. MR = MC for monopoly, separate from demand curve. ( ( c. [10]$$Find(the(profitKmaximizing(level(of(profit(for(the(firm.((Explain(how(you(know(that(this(level( of(output(maximizes(profit((in(other(words,(how(do(you(know(that(any(other(level(of(output( would(result(in(lower(profit(than(the(output(level(you(found?).( ( ( P = MC; show graphically (this is for ANY question) P > MC, P < MC (GN / BN) ( ( ( ( d. [5]$$What(happens(to(the(graph(drawn(above(if(the(firm’s(fixed(cost(rises?((Explain(and(show(on( the(graph.((( ( ( AC curve shifts upwards;(be careful: MC cuts through the minimum) \pi decreases because cost increases; show \pi box and cost box; 2. ( Consumption ( -w when p_c = 1 ( ( ( ( N > 0, non-labor’s income ( ( Leisure a. ([5]$$The(graph(above(is(the(beginning(of(a(consumer’s(analysis(of(how(much(labor(to(supply.(( Label(the(axes(and(explain(what(is(depicted(in(the(graph.((What(is(the(slope(of(the((nonKvertical)( portion(of(the(graph?((Explain.((( ( agent deciding between leisure / consumption; N > 0: non-labor’s income. ( ( b. ([5]$$Using(this(graph(and(whatever(else(you(need,(find(the(level(of(labor(supply(that(will(be( offered(by(the(consumer.((( ( ( ( ( Derive the labor supply curve; Indifference curves as the wage rate changes. graph: backwards bending, IE < SE on bottom, SE < IE on top ( c. [8]$$(The(worker’s(employer(wants(our(worker(to(put(in(more(hours(on(the(job((he(doesn’t(want( to(hire(more(workers(because(he(will(have(to(train(them).((Which(makes(more(sense(to(the( employer(–(a(wage(increase(or(overtime(pay?((Explain(carefully.((( ( Substitution Effect ? Income Effect ( ( ( ( ( ( d. [7]$$The(employer(now(fears(that(his(prize(worker((the(employer(has(invested(thousands(of( dollars(in(training(him)(will(resign(and(work(for(somebody(else.((Would(it(make(more(sense(for( the(employer(to(offer(overtime(or(a(simple(wage(increase?((Explain(using(the(graph.((( ( ( 3. (A(consumer(has(his(own(backyard(business(which(is(capable(of(producing(C((for( consumption,(which(is(the(only(good(other(than(leisure(that(he(cares(about).((His(production( possibilities(curve(is(depicted(below(in(graph(A.((He(has(also(been(offered(a(job(paying(a( wage(and(yielding(him(a(budget(constraint(as(shown(in(graph(B.`((( ( C( C( 15( 15( ( A( B( ( ( 10( 10( ( ( ( ( 24( ( leisure( 24( leisure( sure( a. [10]$$(First,(assume(that(he(cannot(split(his(time(between(his(home(operation(and(his(paid(job;( he(must(do(one(or(the(other.((What(should(he(do(–(run(his(home(business(or(take(the(paid(job?( Explain.(([if(you(need(more(information(make(it(up.]( ( ( ( ( ( b. [10]$$Now(suppose(that(he(can(split(his(time(between(his(backyard(business(and(his(wageKpaying( job.((( ( ( ( ( ( ( ( c. ([5]$$Through(a(technology(breakthrough,(our(consumer(has(increased(his(ability(to(produce(C(in( his(back(yard.((The(“C”(intercept(in(graph((((((((((((is(now(15((and(the(rest(of(the(graph(changes(( A( consistent(with(this).((How((if(at(all)(does(this(change(your(analysis(in(part((b)(above?((Explain.( ( ( 4. (( a. [8]$$Write(down(the(formula(for(present(value(and(explain(what(it(is(and(why(it(makes( sense.((Be(sure(to(define(all(of(your(terms.((( ( ( ( ( ( ( ( ( b. [8]$$In(class(we(argued(that(the(demand(curve(for(investment(funds(is(downward( sloping.((Explain(why(this(is(true.(([Surely(the(best(way(to(do(this(is(to(explain(where(the( demand(curve(comes(from.]( ( ( ( ( c. [9]$$(Consider(a(world(in(which(there(are(two(goods(under(consideration,(C0( (consumption(goods(this(year)(and(C1((consumption(goods(next(year).((Does(the(market( mechanism(we(described(in(class(lead(to(an(efficient(allocation(of(resources(between( these(two(goods?((Explain.(([note(that(this(part(of(the(question(is(worth(a(lot(of(points.]( ( ( 5. (The(graph(below(shows(the(market(demand(curve(and(the(industry(longKrun(average(cost( curve(for(some(good.( ( ( $( ( ( ( ( LRAC( ( D( ( ( X( a. [5]$$(Where(is(the(longKrun(marginal(cost(curve?((Explain.( ( ( ( b. [5]$$If(the(industry(is(competitive,(what(will(be(the(equilibrium(priceKquantity( combination?((Explain.( ( ( ( ( ( ( c. [8]$$If(the(industry(is(a(monopoly,(what(will(be(the(equilibrium(priceKquantity( combination?((Explain.((( ( ( ( ( ( ( ( d. [7]$$If(this(industry(is(a(monopoly((and(the(other(industry(is(competitive)(will(the( equilibrium(be(efficient?((Explain.( ( ( 6. There(are(two(goods(in(the(economy,(T(and(U.((There(is(a(sales(tax(on(T(but(not(on(U.((Both( goods(are(produced(competitively.((( ( a. [8]$$Use(supply(and(demand(curve(analysis(to(depict(the(market(for(good(T.((You(should( show(the(priceKquantity(combination(that(would(have(prevailed(if(there(had(been(no( tax,(as(well(as(the(price(and(quantity(after(the(tax(is(imposed,(and(the(total(tax(revenue.((( ( ( ( ( ( ( b. [8]$$Is(the(allocation(of(resources(efficient(in(this(world?((Explain.((( ( ( ( ( ( c. [9]$$(What(happens(to(the(supply(and(demand(curves((and(hence(to(market(equilibrium)( in(the(market(for(U(after(the(imposition(of(the(tax(in(market(T?((Explain.((( (( 7. (Scientists(tell(us(that(CO2(emissions(cause(climate(change(that(is(harmful(to(residents(of( Earth.((It(is(important,(therefore,(that(we(cut(back(on(CO2(emissions.( a. [8]$$Explain(the(principle(that(must(be(adopted(if(we(are(to(be(sure(that(the(total(cost(of( emission(reduction(is(minimized.(([In(your(answer,(be(sure(to(show(why(adoption(of( your(principle(ensures(cost(minimization.]( ( ( ( ( ( b. ([8]$$Describe(two(different(policies(that(the(government(might(pursue(to(achieve(this( costKminimization(target,(and(show(that(each(will(indeed(achieve(cost(minimization.((( ( ( ( ( ( ( c. ([9]$$As(a(policyKmaker,(how(would(you(decide(whether(to(recommend(the(first,(or(the( second,(of(the(two(policies(you(discussed(above?((Explain.((( ( ( 8. Consider(three(different(options(for(a(government(plan(to(increase(food(consumption( among(the(poor:( • Food$Stamp$Program:$$Eligible(consumers(can(buy(food(stamps(from(the( government.((Each(food(stamp(costs($0.50(and(can(be(used(to(buy($1.00(worth(of( groceries.((Grocers(then(turn(in(the(food(stamps(to(the(government,(which( reimburses(them($1.00(per(stamp.(((So(the(grocer(gets(full(price(for(the(food(–(half( paid(by(the(government(and(half(by(the(poor(person,(in(effect)(( • Cash$Grant$Program:$$Since(the(food(stamp(program(costs($1000(per(eligible( person,(under(this(plan(the(government(abolishes(the(food(stamp(program(and( replaces(it(with(a($1000(cash(grant(to(each(eligible(person.( • Free$Food$Program:$$Under(this(program(the(government(purchases($1000(worth(of( food(for(each(eligible(person(and(gives(the(food(to(the(person.( ( a. [6]$$Which(of(the(three(programs(will(the(eligible(poor(person(like(the(most?(( Explain.( ( ( ( ( ( ( ( b. ([6]$$Which(of(the(three(programs(will(increase(food(consumption(the(most?(( Explain.((( ( ( ( ( ( ( ( c. [7]$$Which(of(the(three(programs(is(most(likely(to(result(in(fraud?((Explain.((( ( ( ( ( ( ( ( d. [6](((Now(the(foodKstamp(program(changes.((Eligible(people(still(buy(food(stamps(at( 50(cents(for(a($1.00(food(stamp.((But(now(nobody(can(buy(more(than($500(worth(of( food(stamps.((Draw(and(explain(the(consumer’s(budget(constraint.((( ( ( ( ...
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