Final 2013 - Elements of Microeconomics Final Exam May 11...

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Unformatted text preview: Elements of Microeconomics Final Exam May 11. 2013 1 2 3 4 5 6 7 TOTAL 1. a. [8] Define the Law of Diminishing Returns and explain why it makes sense. b.[5] Is it possible for one firm’s production process to be subject to both the Law of Diminishing Returns and Constant Returns to Scale? Explain. c. [7] The graph below shows a firm’s short-­‐run average and marginal cost curves, as well as the price at which it can sell its goods. i. Label the axes and the curves (which one is the average and which the marginal cost curve). ii. Why does the average-­‐cost curve have the general shape you have indicated? iii. Why does the marginal cost curve have the general shape you have indicated? iv. What explains the general relationship between the average and marginal cost curves? d. [6] What would you expect this firm to do in the long run? Why? e. [5] What will happen to the price in the long run, and why? 2. The government notices that poor people do not purchase (and eat) enough food. To address this problem they consider three alternative programs: • Cash grants to poor people • Deliveries of free food to poor people (this free food is originally purchased by the government) • Food stamps. The food stamp program works as follows: o Eligible (poor) consumers are authorized to purchase as many $1 food stamps as they wish from the government at a price of $.50 each. o They can use these food stamps to buy approved groceries ($1 worth of groceries for each $1 food stamp). In other words, so long as they use them for food, these food stamps are as good as money. o The grocer then turns in the food stamps to the government, which repays the grocer $1 in cash for each $1 food stamp. In evaluating these programs, the government insists that each program cost the same amount of government money. a. [10] Which of the three programs results in the highest food consumption? Explain. REMEMBER: In comparing programs, make sure that they each cost the government the same amount of money. b. [6]Which program would the poor person most prefer? Explain. c. [7] Which program is most likely to result in fraud? (Assume that the federal bureaucrats running all three programs are honest.) Explain. d. [7] In class we argued that the food stamp program will result in an economically inefficient allocation of resources. Explain the inefficiency. 3. a. [10] Starting with appropriate tools, derive two points on a labor supply curve. b. [6] Which increases labor supply more – overtime pay or a simple wage increase? Explain. c. [7] Two people with equal ability are admitted to college. One goes to college and the other does not. Which person will work more hours after college, and how do you know? d. [7]. Explain what the value of the marginal product of labor is and how a competitive firm would use it in its decision-­‐making. 4. a. [10] You are offered $100 to be paid to you one year from today. But rather than wait a year for your $100, you sell the “right” to your $100 to your roommate. Explain how you would determine the fair price for the $100-­‐next-­‐year promise. b. [7] A consumer will live for two years. In year 0 his income is Y0 and his income in year 1 is Y1. Assuming he can borrow or lend at interest rate r, use appropriate analytical tools to determine how much money he will save in year 0 (to spend in year 1). c. [6] Now show how to find the amount of saving he will do if the interest rate rises (from what you assumed in part c above). d. [7] Why does the demand curve for investment projects slope downward? 5. a. [10] When an industry is perfectly competitive we predict that P = MC. But if the same industry is organized as a monopoly, we do not expect P = MC. What do we expect instead of P = MC, and why? b. [5] If an industry is perfectly competitive, we expect profit to be equal to zero in the long run. Explain why this is, and why we do not expect long-­‐run profit to be equal to zero for a monopoly. c. [10] Consider an economy that produces two goods, M and C. Good M is produced by a monopoly and good C is produced by a competitive industry. i. Is the allocation of resources efficient? Explain. ii. Assume it is impossible to break up the monopoly and make it competitive. Which of the following schemes do you think would be more likely to improve economic efficiency? Explain your answer. • • Levying a tax on good M Levying a tax on good C d. [5] If the technology for some good is subject to increasing returns to scale, why would it be impossible for the industry to be competitive? 6. a. [5] Define an externality. b. [10] We argued in class that a carbon tax yields the cheapest possible way of reducing CO2 emissions. Explain the argument. c. [10] Some people argue that a carbon tax would just be passed on to consumers (of gasoline, electricity,…) and therefore would not reduce emissions. Evaluate this argument. d. [5] Some people say that whereas a carbon tax might be the cheapest possible way to reduce emissions, it is impossible to know in advance how much emissions will be reduced by a carbon tax. Evaluate this argument. 7. There are two goods in the economy, Good T and Good U. For some reason it is possible to levy a tax on Good T but it is not possible to levy a tax on Good U. a. [6] Using supply-­‐and-­‐demand curve analysis, show (and explain) what happens to the market for Good T. Your analysis should show, among other things, i. The effect of the tax on the quantity of the good ii. the price iii. The amount of tax revenue b. [6] Using supply-­‐and-­‐demand curve analysis, show (and explain) what happens to the market for Good U. c. [6] Is the allocation of resources efficient when Good T but not Good U is taxed? Explain. d. [6] Would tax evasion improve economic efficiency or create more inefficiency? Explain. e.[6] Suppose we reduce the tax on Good T and levy a tax on Good U. (Yes I know I said that was impossible, but for the moment assume we’ve found a way.) Would this tax policy change improve efficiency or make inefficiency worse? Explain. ...
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