Practice Final Exam Total : 200 points Exam time: 7:00 9:00. You have 6 questions in 3 pages. Please make your diagrams clear and label it. Good Luck! 1. Amy is currently spending her income to maximize her utility. Her utility can be expressed as the following function: U=10XY. Where X is dinner and Y is books. She spends her $500 income on Dinner and books. Dinner cost her $20 each and books cost $25 each. [30 a. Write down algebraic expression for her budget constraint and Draw Amy s budget constraint. Label appropriately and put Dinner on the horizontal axis. [5 b. What is her consumption combination of dinner and books? (hint: MRS=Y/X) [5 c. Dinner price decreased to $10 as a result of competition. What will be the new consumption combination? [10 d. Show the substitution effect and income effect graphically. [10 2. A firm s total cost function is given by the equation: TC= 5Q - 10Q 2 + 20Q 3 Write an expression for each of the following cost concepts. [each 5 a. Average Cost b. Marginal Cost c. Determine the quantity that minimizes average cost. d. Determine the quantity that minimizes marginal cost. 3. The equation for Total Revenue used above is TR=20Q - (Q 2 /4) and for Total Cost is TC = 5Q + (Q 2 /4). [25 a. Find the demand curve and write in the following form Q = a-bp (you are being asked to solve for a and b). What is a? What is b? [5 b. What is MC? [5 c. What is MR? [5 d. Solve for the profit maximizing quantity Q* where MR=MC (Q* may or may not be an integer). [5 e. What is the profit of this firm when this firm produces at quantity calculated at d? [5
4. Verizon is the only telephone company in Maryland. Demand curve for telephone service is given as: P = 28 0.0008Q Marginal cost is given as: MC = 0.0012Q Where Q is the number of telephone subscribers and P is the price of telephone service. There is only one telephone plans exist in Maryland. [45 a. What price and quantity would Verizon choose to maximize their profit? [10 b. What will be the socially most efficient price and quantity in this market? [5 c. Show consumer surplus and producer surplus in case of Monopoly graphically. [5 d. If there is any dead weight loss, show in the graph. [5 e. Let s assume that Verizon practice First-degree price discrimination. Calculate quantity under First-degree price discrimination. [10 f. Show consumer surplus and producer surplus in case of part e graphically. [10 5. Suppose that a firm's production function is q=10l ½ K 1/2 The cost of a unit of labor is $20 and the cost of a unit of capital is $80. [40 a. The firm is currently producing 100 units of output and has determined that the costminimizing quantities of labor and capital are 20 and 5, respectively. Graphically illustrate this using isoquants and isocost lines. (make sure to show intercept and slope) [10 b. The firm now wants to increase output to 140 units. Capital is fixed in the short run, how much labor will the firm require? Find the firm's new total cost. [10 c. Graphically identify the cost-minimizing level of capital and labor in the long run if the firm wants to produce 140 units. [10 d. If the marginal rate of technical substitution is K/L, find the optimal level of capital and labor required to produce the 140 units of output. [10
6. SBC, the monopoly satellite company, broadcasts TV to subscribers in New York and Washington D.C. area. The demand functions for each of these two areas are Q dc =60-0.25 P dc Q ny =100-0.50 P ny where Q is the number of subscriptions per year and P is the subscription price per year. The cost of providing Q units of service is given by C= 40Q where Q=Q dc + Q ny (If you need rounding do it at the second digit. ex) you can use 123.35 instead of 123.3456.) [40 a. What are the marginal revenue for the New York and DC markets? [5 b. What are the profit maximizing prices and quantities for the New York and DC markets? [5 c. What are the maximized profit for the New York and DC markets? [5 As a new technology people in New York receives SBC's DC broadcasts and people in DC receives SBC's New York broadcasts. As a result, anyone in New York or DC can receive SBC's broadcasts by subscribing in either city. Thus SBC can charge only a single price. d. What price should he charge? [10 e. How much quantities can SBC sell in New York and DC altogether? [10 f. What will be the profit? [5
Econ206 Spring 2010 Department of Economics, Korea University Final Exam Beomsoo Kim Total : 170 points Exam time: 3:30 4:45. Explain the following words in microeconomics; [each 5 1. Adverse selection 2. Moral hazard Short answers: 3. Amy is currently spending her income to maximize her utility. Her utility can be expressed as the following function: U=5XY. Where X is dinner and Y is book. She spends her $500 income on Dinner and book. Dinner cost her $20 each and book cost $25 each. [each 5 a. Write down algebraic expression for her budget constraint and Draw Amy s budget constraint. Label appropriately and put Dinner on the horizontal axis. b. What is her consumption combination of dinner and book? c. Dinner price decreased to $10 as a result of competition. What will be the new consumption combination? d. Show the substitution effect and income effect graphically. 4. The market for wheat consists of 500 identical firms, each with the total cost functions shown: TC= 90,000 + 0.00001Q 2 Where Q is measured in bushels per year. The market demand curve for wheat is Q=90,000,000-20,000,000P, Where Q is again measured in bushels and P is the Price per bushel. [each 5 a. Determine the short-run equilibrium price and quantity that would exist in the market b. Calculate the profit maximizing quantity for the individual firm. c. Calculate the short-run profit (loss) at that quantity. d. Assume that the short-run profit or loss is representative of the current long-run prospects in this market. You may further assume that there are no barriers to entry or exit in the market. Describe the expected long-run response to the conditions. [7 5. Verizon is the only telephone company in Maryland. Demand curve for telephone service is given as: P = 28 0.0005Q
Econ206 Spring 2010 Beomsoo Kim Marginal cost is given as: MC = 8 Where Q is the number of telephone subscribers and P is the price of telephone service. There is only one telephone plans exist in Maryland. [each 5 a. What price and quantity would Verizon choose to maximize their profit? b. What will be the socially most efficient price and quantity in this market? c. Show consumer surplus and producer surplus in case of Monopoly graphically. d. If there is any dead weight loss, show in the graph. e. Let s assume that Verizon practice First-degree price discrimination. Calculate quantity under First-degree price discrimination. [7 f. Show consumer surplus and producer surplus in case of part f graphically. 6. Let the inverse market demand for paper be P=120-Q, where P is the price of paper and Q is the market output of paper. The industry inverse supply curve of paper is P=2Q. The industry emits one unit of pollution for each unit of paper produced, with a marginal external cost of pollution equal to MEC=Q. [each 5 a. What is the market equilibrium price and output of paper? b. What is the socially optimal price and output of paper for this industry? c. What is the deadweight loss at the market equilibrium? [7 d. What is the level of specific tax, $T, imposed on producers, that would make this market attain the social optimum? e. What is the quantity tax, t(q), imposed on producers, that would make this market attain the social optimum? f. What is the industry emissions standard that attains the same outcome as the optimal quantity tax? 7. Acme Widgets is a monopolist in the widget market. The widget market consists of 60 A s and 40 B s. Acme can produce a high quality widget or a low quality widget at zero cost. The A s are willing to pay $90 for a high quality widget and $60 for low quality widgets; the B s are willing to pay $200 for a high quality widget and $70 for a low quality widget. Each consumer will either (i) buy one low quality widget, or (ii) buy one high quality widget, or (iii) buy no widgets. Suppose that Acme is unable to identify who is an A and who is a B. Acme would like to engage in second degree price discrimination. (a) What are the participation constraints in this problem? (b) What are the self-selection constraints in this problem? (c) Find the monopolist s profit-maximizing prices. (d) How much profit will Acme earn by engaging in second degree price discrimination? 8. The following graph presents demand and supply in the labor market. Market
Econ206 Spring 2010 Beomsoo Kim equilibrium quantity of labor and wage are marked as We and Le. Government set the minimum wage which is higher than free-market price. a. Draw the minimum wage in the graph. b. Compare the employment level before and after the minimum wage law. c. Show the consumer surplus and producer surplus after the minimum wage law d. Show the deadweight loss due to minimum wage law. e. Explain how Card and Krueger tries to evaluate the impacts of minimum wage law in their paper. [7 f. What are the possible concerns of Card and Krueger s approach? [7 W D S We Le L Honor Pledge: I pledge on my honor that I have not given or received any unauthorized assistance on this assignment/examination. Signature: