NAME: INTERMEDIATE MICROECONOMIC THEORY FALL 2006 ECONOMICS 300/012 Final Exam December 8, 2006

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1 NAME: INTERMEDIATE MICROECONOMIC THEORY FALL 2006 ECONOMICS 300/012 Section I: Multiple Choice (4 points each) Identify the choice that best completes the statement or answers the question. 1. The slope of the budget constraint line is a. the ratio of the prices (P x /P y ). b. the negative of the ratio of the prices (P x /P y ). c. the ratio of income divided by price of Y (I/P y ). d. none of the above. 2. Suppose a teenager likes both rap music (R) and country music (C) with a set of preferences so that U = C 1/2 R 1/2. Which point (C, R) makes the teen the happiest? a. 100, 1 c. 25, 25 b. 49, 4 d. 36, If an individual has a constant MRS of shoes for sneakers of 3/4 (that is, he or she is always willing to give up 3 pairs of sneakers to get 4 pairs of shoes) then, if sneakers and shoes are equally costly, he or she will a. buy only sneakers. b. buy only shoes. c. spend his or her income equally on sneakers and shoes. d. wear sneakers only 3/4 of the time. 4. If a good is normal and its price increases, a. the income effect will be positive and the substitution effect will be positive. b. the income effect will be negative and the substitution effect will be negative. c. the income effect will be positive and the substitution effect will be negative. d. the income effect will be negative and the substitution effect will be positive. 5. If the demand for a product is elastic, then a rise in price will a. cause total spending on the good to increase. b. cause total spending on the good to decrease. c. keep total spending the same, but reduce the quantity demanded. d. keep total spending the same, but increase the quantity demanded. 6. A firm s isoquant shows a. the amount of labor needed to produce a given level of output with capital held constant. b. the amount of capital needed to produce a given level of output with labor held constant. c. the various combinations of capital and labor that will produce a given amount of output. d. None of the above.

2 7. The production function q = a. exhibits constant returns to scale and constant marginal productivities for K and L. b. exhibits diminishing returns to scale and diminishing marginal productivities for K and L. c. exhibits constant returns to scale and diminishing marginal productivities for K and L. d. exhibits diminishing returns to scale and constant marginal productivities for K and L. 8. For an increasing cost industry, the long-run supply curve has a(n) elasticity of supply a. infinite. c. positive. b. negative. d. zero. 9. In order to minimize the cost of a particular level of output, a firm should produce where a. labor input equals capital input. c. the MRTS (of L for K) b. d. the MRTS (of L for K) = the MRS = 10. Suppose a chemical company is in a perfectly competitive industry and has a short run total cost curve of TC = q 3 + 5q q + 10 and a short run marginal cost of SMC = q q At the price of 49, how many will be produced? a. 0 c. 5 b. 3 d In a competitive market, an efficient allocation of resources is characterized by a. a price greater than the marginal cost of production. b. the possibility of further mutually beneficial transactions. c. the largest possible sum of consumer and producer surplus. d. a value of consumer surplus equal to that of producer surplus. 12. In the long run, the greater burden of a specific tax will usually be absorbed by a. consumers. b. the party consumers or producers with the more elastic demand/supply curve. c. the party with the least elastic demand/supply curve. d. shareholders and employees of the firm in the form of reduced dividends and wages. 13. Suppose demand for sour cream is Q D = P and supply is Q S = P. Suppose a party of health nuts imposes their distaste for sour cream on the general population through a ban on its consumption. Suppose everyone obeys the new law. The dead weight loss is a. 449,000.5 c. 498,452 b. 498,002 d. 499,500 Page 2 of 8

3 14. A profit-maximizing monopoly will produce that output for which a. marginal revenue equals price. b. average cost is minimized. c. marginal cost is minimized. d. marginal cost equals marginal revenue. 15. A price discriminating monopolist having identical costs in two markets should charge a higher price in that market a. which has a higher demand. b. which has a more elastic demand. c. which has a less elastic demand. d. which has a higher marginal revenue. Page 3 of 8

4 Section II: Essay Problems Give clear, well-written answers to the questions below. Use graphs if appropriate. Please make sure your graphs are legible and label all parts of the graph (e.g., axes, lines, etc.). You will not receive full credit if the graphs are illegible. 1. (5 points) Someone has to pay for road repair in Delaware. Should the state of Delaware levy a percentage sales tax on some good that is related to road use, like gasoline, or should they collect an equal amount with an income tax? Which option would leave the taxpayers better off? Use indifference curve and budget line analysis to show how economic analysis can help answer these questions. (Put gasoline on horizontal axis and all other goods on vertical axis.) Page 4 of 8

5 2. (5 points) Suppose that the marginal cost of producing output, q, in the short-run for a competitive firm is SMC = 10 + q. The market demand for the product is P = Q D, and the market supply is P = Q S. a. What are the short-run market equilibrium price and quantity and the number of firms in the industry? Show your calculations. b. Suppose that each firm minimizes its LRAC at an output of 5 units and at an average cost of $15/unit. What are the long-run equilibrium price, market demand quantity, and the number of firms in the industry? Show your work. Page 5 of 8

6 3. (10 points) Suppose that the demand curve for wheat is Q D = P, and the supply curve is Q S = 10P. The government imposes a specific tax of $1 per unit. a. Under the imposition of the tax, what is the equilibrium quantity? What price do sellers receive? What price do consumers pay? Illustrate the equilibrium in a graph. b. What effect does this tax have on consumer surplus, producer surplus, government revenue, overall welfare, and deadweight loss? (Compare the no tax scenario to the tax scenario.) Clearly identify the deadweight loss in your graph. Page 6 of 8

7 4. (15 points) Suppose a monopolist has a cost structure such that TC = Q 2 + 4Q + 10 and MC = 2Q + 4 and face demand such that P = 20 - Q D and MR = 20-2Q D. a. What is the profit-maximizing price and quantity? Show the price and quantity in a graph. b. What is the profit that the monopolist earns? Show the profit clearly in your graph. c. What is the elasticity of demand at the profit-maximizing price and quantity? At this point, is the demand elastic or inelastic? Page 7 of 8

8 5. (5 points) Name three factors that a firm must do or have to make price discrimination successful. Briefly explain the reason behind each factor. Page 8 of 8