FINAL EXAMINATION. Intermediate Microeconomics (ECON 520)

Transcription

1 FINAL EXAMINATION Intermediate Microeconomics (ECON 520) May 10, 2000 Professor D. Weisman There are two parts to this examination weighted 50 points each (inclusive of take-home essay). Please write legibly and think carefully about your answers. You may find that graphical and/or mathematical analysis will assist you in answering some of these questions. Part I. Multiple Choice (50 points). Please indicate your choice for the best answer to each question on both the standardized answer sheet provided and the examination so that you have a record of your answers. 1. Which of the following is a positive statement? a. A course in intermediate microeconomics should be required of all undergraduate students. b.* Colleges that pay their football coaches more than their economics professors tend to win more football games. c. Smoking should be restricted on all airline flights. d. Requiring all students to take at least one semester of Calculus is a bad idea. 2. A technological advance in automobile production will likely result in a. a decrease in the equilibrium price of automobiles. b. an increase in the equilibrium price of automobiles. c. no change in the equilibrium quantity of automobiles. d. an increase in the equilibrium quantity of automobiles. e.* a and d. 3. Suppose that the price elasticity of demand for electricity is -2 at the market clearing price and that supply is perfectly inelastic. What will result from a price ceiling that is 10 percent below the market-clearing price? a. Consumers will be better off. b. Consumers may be better or worse off. c. A shortage equal 20 percent of the market clearing quantity. d.* a and c. e. b and c. 4. A business firm faces a demand curve for its product that is given by Q = 16 - P. The firm implements a small price change that results in an increase in both revenue and consumers surplus. This implies that the a.* price was reduced and the initial price was greater than 8

2 b. price was increased and the initial price was greater than 5. c. price was reduced and the initial price was less than 8. d. price was increased and the initial price was greater than The price elasticity of long-distance telephone service is 0.6 and the cross elasticity of long-distance telephone service with respect to the price local telephone service is 0.2. Price changes are implemented that result in an increase in the quantity demanded of long-distance telephone service of 10 percent. If the price of local telephone service is reduced by 20 percent, what is the implied change in the price of long distance telephone service? a. a 10 percent increase. b.* a 10 percent decrease. c. a 20 percent increase. d. a 5 percent decrease. 6. Mikey has a utility function given by U = 20 min {C, M} where C is cereal and M is milk. Cereal costs 4 cents per unit and milk costs 6 cents per unit. If Mikey has income of $8 then to maximize utility Mikey purchases a. 40 units of cereal and 80 units of milk. b.* 80 units each of cereal and milk. c. 50 units of cereal and 100 units of milk. d. 100 units each of cereal and milk. 7. John s utility function is given by U = 4P + 1B. If John consumes positive quantities of both P and B in equilibrium then it follows that, a. 4P P = P B b. P P > 4P B c.* P P = 4P B d. 4P P < P B e. none of the above are necessarily true. 8. Which of the following is most likely to represent the demand function for automobiles, where P A and P G are the price of automobiles and gasoline, respectively, and Q is the quantity of automobiles. a.* Q = 100I/[2P A + P G ] b. Q = I/[2P A ]. c. Q = [I + P G ]/ P A. d. Q = [2P A + P G ]/I. e. b. and d. 9. John has 2 goods in his consumption bundle, beer and pizza. Suppose that the price of pizza increases. The substitution effect results in decreased pizza 2

3 consumption of 6 units. The income effect results in increased consumption of pizza by 8 units. a. Pizza is a normal good. b. Pizza is an inferior good, but not a Giffen good. c.* Pizza is a Giffen good. d. a. or b. e. none of the above is necessarily true. 10. The price for a good increases and total expenditures for the good increase. This implies that a. demand is elastic. b.* demand is inelastic c. the good is a normal good. d. the good is an inferior good. e. demand is of unitary elasticity. 11. Suppose that a firm s production function is given by Q = 6KL, where K is capital and L is labor. What is the marginal product of labor when 6 units of capital are employed? a. 48. b. 6. c.* 36. d A firm s marginal product of labor is 2 and its marginal product of capital is 8. If the firm adds one unit of capital, but does not want its output quantity to change, the firm should a. reduce its use of labor by 8 units. b.* reduce its use of labor by 4 units. c. maintain the same level of labor utilization. d. also increase capital by 1.5 units. 13. Which of the following statements is true regarding sunk costs? a. Sunk costs have zero opportunity costs. b. Sunk costs cannot be recouped once they are incurred. c. Sunk costs are irrelevant for making forward-looking decisions. d.* all of the above. 14. Suppose that your grade on this examination is described by the production function G = 2.25A 0.5 E 0.5, where G is your numerical score, A is ability, and E is effort measured in terms of hours studied. Suppose that A = 100. How many hours would you need to study in order to earn a score of 90? a.* 16. b. 12. c

4 d A production function is given by Q = 2K + L, where K is capital and L is labor. Initially, r = 2 and w = 1. Suppose that w decreases, ceteris paribus. Relative to the initial equilibrium, a.* the total cost of production will fall. b. the total cost of production will not change c. more units of capital will be used in production. d. more units of labor will be used in production. 16. Profit is maximized at an output rate at which a. price is equal to marginal revenue. b.* marginal revenue is equal to the marginal cost of production c. average revenue is equal to the marginal cost of production. d. total revenue is at a maximum. e. b. and d. 17. A firm will shut down in the short run when: 1. price is less than average total costs. 2. price is less than average variable costs. 3. total revenues are less than total variable costs. Which of the following is correct? a. 1 only. b. 1 and 2 only. c.* 2 and 3 only. d. 1 and 3 only. e. 1, 2, and A monopolist operating on the inelastic portion of the demand curve should take what action to increase profits. a.* decrease output b. increase output c. keep output at the current level d. cease all advertising e. none of the above 19. A monopolist operates in two submarkets. In submarket 1, E d = -2 and in submarket 2, E d = -4. Suppose that C(Q) = 6Q in both markets. The profitmaximizing prices for this monopolist are given by a. P 1 = 2 and P 2 = 4 b. P 1 = 2 and P 2 = 6 c. P 1 = 6 and P 2 = 4 d.* P 1 = 12 and P 2 = 8 e. none of the above 4

5 20. Suppose that the Department of Justice (DOJ) vetoes all mergers that are likely to lead to an increase in the price of the product. The market demand function is given by P(Q) = 28 Q. Pre-merger, the market is competitive and the cost function is given by C(Q) = 18Q. Post-merger, the market will be controlled by a monopolist and C(Q) = xq. For what values of x will the DOJ approve this merger? a.* values of x less than or equal to 8. b. values of x less than or equal to 12. c. values of x greater than 8. d. values of x less than or equal to 16. e. The DOJ will not approve this merger for any value of x. Part II. Problems (50 points). The question below is worth 20 points. Your take-home essay question is worth 30 points. 1. (20) The market demand function is given by Q = 18 - P, where Q is output and P is price. a) (8) What price would a profit-maximizing monopolist charge if C(Q) = F + 2Q, where F > 0 are fixed costs? Determine the monopolist s average fixed costs if its profits in equilibrium are equal to 40? b) (8) How much better/worse off would consumers be if the competitive outcome prevailed in this market? [Assume the same cost function as in part a)] c) (4) Suppose the cost function is now given by C(Q) = 2nQ, where the positive integer n 0 {1,2,3,.} is the number of firms participating in this market. Suppose that the competitive outcome prevails for all n > 1. If consumers could choose the number of firms participating in this market, what value of n would they choose? Provide a clear economic rationale for your answer. TAKE-HOME ESSAY QUESTION Instructions: This is the take-home essay question for your final examination in this class and is worth 30 points. This essay is to be turned in without exception at the beginning of class on Tuesday, May 2, The essay must be typed, either doublespaced or one and one-half spaced, and use a font size no smaller than 12 pt. While there is no definitive page constraint, you are encouraged to practice economy of presentation. You need not type any graphical analysis used in support of your answer, but such graphs should be constructed with precision. Your name and student number should appear in the upper right-hand corner of your essay. You are encouraged to work with your classmates in developing the ideas necessary to answer this question, but the write-up itself should be your own work. These instructions should be followed precisely. 5

6 The Department of Justice (DOJ) is charged with overseeing mergers in the United States to determine if they are in the public interest. A merger is considered in the public interest if consumers surplus does not fall as a result of the merger. The DOJ is currently deciding whether to allow the pending merger between MCI/WorldCom and Sprint to proceed. The market demand for long-distance telephone service is given by Q = 36 2P + s, where Q is quantity demanded, P is price, and s is an index of service reliability. The market served by these two long-distance carriers is currently competitive. In addition, both long-distance carriers currently use the same technology for producing long-distance telephone service which is given by Q = min {2K, L}. Bernard Ebbers, CEO of MCI/Worldcom has told Wall Street analysts that the merger will result in efficiency gains. This implies that the production function for long-distance telephone service postmerger will be given by Q = x min {2K, L}, where x > 1. Suppose that r = 4 and w = 3, and the pre-merger service quality index is s = 4. a) (10) Suppose that the long-distance market is a monopoly following the merger between Sprint and MCI/Worldcom and that x = 5/4. Assume that s remains constant at 4. Should the DOJ allow this merger to proceed? Provide a careful economic analysis in support of your recommendation. b) (10) Continue to assume that x = 5/4, but the market for long-distance telephone service remains perfectly competitive following the merger. For what values of s will the DOJ approve this merger? c) (10) Derive the cost function for MCI/Worldcom post-merger for any value of x. Suppose that service reliability declines by 25 percent following the merger. In addition, assume that the market for long-distance telephone service remains perfectly competitive following the merger. Determine the values of x for which the DOJ will approve this merger. 6