ICMB202/203 Microeconomics. Final Practice Questions. Carefully explain whether each of the following statements is true, false or uncertain.

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1 ICMB202/203 Microeconomics Final Practice Questions Question 1 Carefully explain whether each of the following statements is true, false or uncertain. a) Because of their monopoly power, monopolists always set the highest price in order to maximize their profits. b) Accounting profit tends to be larger than economic profit. c) As Uncle Bob is a rational person, he will always hire an additional worker as long as this worker brings in a positive amount of revenue. d) A patent or copyright reduce a firm s or a person s monopoly power in a market. e) To do price discrimination, a monopoly should charge a higher price on consumers who have elastic demand curve. f) In a perfectly competitive market, both buyers and sellers are price takers. g) A firm operating in a perfectly competitive market may earn positive, negative, or zero economic profit in the long run. h) For a price-taking firm, average revenue equals to marginal revenue. i) In a perfectly competitive market, firms that raise their prices above market price are typically rewarded with larger profits. j) Consider the following short-run production function, Number of Workers Number of Output This production function does not exhibit diminishing marginal product of labor as the amount of output keeps increasing along with an increase in number of workers.

2 Question 2 Baggy Inc. is a perfectly competitive firm and faces costs of production as follows. Q Total FC \$100 \$100 \$100 \$100 \$100 \$100 \$100 Total VC \$0 \$50 \$70 \$90 \$140 \$200 \$360 a) Calculate the company s average fixed costs, average variable costs, average total costs and marginal costs. b) Suppose that the price of a bag is \$50. What is the quantity the company should produce? What are the firm s profits/losses at this level of output? c) If you are a CEO of this company, what would be your short-run strategy for the company? Explain. d) If there is no change in market condition, what would be your long-run decision for the company? Explain. Question 3 The market for apple pies in the city is competitive and has the following demand schedule: P \$1 \$2 \$3 \$4 \$5 \$6 \$7 \$8 \$9 \$10 \$11 \$12 \$13 QD 1,200 1,100 1, Each producer in the market has fixed cost of \$9 and the following marginal cost: Quantity MC \$2 \$4 \$6 \$8 \$10 \$12 Suppose that apple pies can only be produced and sold as a whole unit (e.g. quantity cannot be in decimal point.). a) Compute each producer s total cost and average total cost for 1 to 6 pies. b) The price of pie is now \$11. How many pies are sold in the city? How many pies does each producer make? How many producers are there? How much profit does each producer earn? c) Is the situation described in part b. a long-run equilibrium? Why or why not? d) If not, explain what would happen in the long run. What will be the price? How many pies will be sold? How many pies will each producer make? How many producers will be in the market? How much profit will each producer earn if any?

3 Question 4 The accompanying table shows a car manufacturer s total cost of producing cars. Q TC \$300 \$340 \$360 \$370 \$390 \$420 \$460 \$520 \$600 \$720 \$900 a) Calculate the company s average fixed costs, average variable costs, average total costs and marginal costs. b) Suppose that the price of a car is \$120. What is the quantity the car manufacturer should produce? What are the company s profits/losses at this level of output? c) Suppose that there is a higher demand in the raw material used in car production process. The cost of production for car manufacturer thus increases by \$40 per car produced. Would there be any change in the profit-maximizing level of output given that the price level still remains at \$120? If yes, how many car should the company produce? Question 5 According to the diagram below, answer the following questions a) If the price is at P 4, what is the profit-maximizing level of output for a competitive firm? b) If the price is at P 4, calculate the profit/loss a competitive firm can earn. c) In the short run, what is the minimum price firms would take before deciding to temporarily shut down production? d) In the long run, some competitive firms will exit the market if the price falls below which level? e) If the price is at P 4, is the market in the long-run equilibrium? If not, explain what will happen to price and quantity each firm produces in the long-run equilibrium.

4 Question 6 Suppose that a chocolate market is perfectly competitive and all firms have upward sloping marginal cost curves and U-shaped average cost curves. Further assume that the chocolate industry has constant long-run average costs. Suppose the market is initially in a short-run equilibrium in which the typical firm is making positive profit. a) Illustrate the short-run equilibrium for the chocolate market and also for an individual firm, including all relevant points. b) Illustrate the long-run equilibrium for the chocolate market and also for an individual shop, including all relevant points and curves. Suppose that Valentine s Day is a big event in your country. Consumers therefore demand more chocolate for any given price. c) Continue from b), show what happens in the short-run to the chocolate market as a whole and also to a representative firm. Show the profit-maximizing level of profit (or loss) in your diagram for the representative firm. d) Explain in details what will happen in the long run. Illustrate the new long run equilibrium in your market and representative firm diagrams. Question 7 Suppose that alcohol market is perfectly competitive and all firms have upward sloping marginal cost curves and U-shaped average cost curves. Further assume that the alcohol industry has constant longrun average costs. Suppose the market is initially in a short-run equilibrium in which the typical firm is break even. a) Illustrate the short-run equilibrium for the alcohol market and also for an individual firm, including all relevant points. Now suppose that the government decide to impose a lump-sum tax of \$100 on each firm regardless of the amount of production with an aim to reduce the amount of alcohol sold in the market. b) Show what happens in the short-run to the market as a whole and also to a representative firm. Show the profit-maximizing level of profit (or loss) in your diagram for the representative firm. c) Explain in details what will happen in the long run. Illustrate the new long run equilibrium in your market and representative firm diagrams.

5 Question 8 Max is a magazine monopolist. His marginal cost of production (per magazine) is constant at \$5. His demand information is as follows P \$50 \$40 \$30 \$20 \$15 \$10 \$5 \$2.5 QD a) Calculate the total revenue for Max at each price. b) Calculate the marginal revenue for Max at each price. c) What is Max s profit-maximizing output level and price? Compare this with the perfectly competitive equilibrium level of output and price. Question 9 The small island of Fuju has one electricity provider FujuPower. It maintain at an annual (fixed) cost of \$1 million and it costs \$200 to produce each Mega Watt hour (MWh) of electricity. The demand for electricity from Fuju s residents is described by the equation: Q D = 10,000 10P a) Derive Fuju s Marginal Revenue function. b) What price would Fuju Power charge for electricity if its objective was to maximize profit? How much profit would it make? c) Illustrate this profit-maximizing outcome, identify the profit made by the monopolist and include all relevant points in a diagram. Question 10 Suppose Uncle Bob is the sole provider of water supply in a small city. The demand equation Uncle Bob faces can be described by the equation: Q D = 200 5P a) Derive Uncle Bob s Marginal Revenue function. b) Suppose that, to produce a pipe network and supply water to households, Uncle Bob has fixed cost of \$125 and a constant marginal cost of \$10. What is his profit-maximization price and quantity and what total profit will he make? c) Illustrate this profit-maximizing outcome, identify the profit made by Uncle Bob and include all relevant points in a diagram.

6 Question 11 Suppose Uncle Bob opens one and only one restaurant that provide seafood buffet in a small city. He observes that the demand for the buffet in the afternoon is given by P = 100 Q and the demand for 5 the buffet in the evening is given by P = 200 Q. 2 a) What should Uncle Bob do in order to maximize his profit? Explain in details. b) Given that his fixed cost is \$10,000 and he has a constant marginal cost of \$15, what is his profit? Question 12 Suppose the distributor charges Holiday Cinemas \$4 per ticket sold to rent the movie, STAR WARS 15: THE NEXT BILLION and a flat fee of \$1,000 to rent the theater. Holiday Cinema observes that the demand to see the movie is given by P = 20 Q 10 for students and P = 40 Q 10 for adults. a) Suppose that price discrimination is not allowed. What would be the price and quantity Holiday Cinema should set in order to maximize its profit? b) Now the government allows Holiday Cinema to do price discrimination. What would be the price and quantity it should charge and sell for each group of customers in order to maximize its profit? How much more profit Holiday Cinema can earn through price discrimination? c) Continue from b), suppose that the theater can seat a maximum of 150 people. Would there be any changes to quantity and price Holiday Cinema charges at each group of customers previously computed? If so, how?