1) Which of the Following Properties Is Not Assumed About an Individual S Preferences

ECON 303 Fall 2001 Final Exam Dr. Cary Deck

This exam consists of 25 multiple-choice questions each worth 2 points. The remaining 50 points come from the four written problems. Your exam should contain 9 pages. Please write your name on the top of each page. Answer each question as best you can. Where appropriate you must show work in order to receive full credit. The exam is closed book. If you have any questions please raise your hand and someone will come to you. There is no talking allowed during the exam. The use of electronic devices other than calculators only capable of the basic arithmetic operations is prohibited. You have two hours to complete this exam. Exams will not be accepted after the end of the exam has been announced.

Name:______

Score:______

1 1. Which of the following properties is not assumed about an individual’s preferences? a. rational b. complete c. transitive d. monotonic

2. Supply is a. the vertical summation of individual firm’s MC curves in a competitive market. b. the relationship between the price of a good and the quantity that is supplied. c. a well defined concept for a monopolistically competitive firm. d. all of the above

3. Suppose an individual’s preferences are such that x and y are perfect compliments. Then an increase in the price of good x will a. create no change in the individual’s behavior if Px > Py originally. b. have a substitution effect larger than the associated income effect. c. force the substitution and income effects to work in opposite directions. d. not change the optimal ratio of goods x and y the individual purchases.

4. Which of the following is not a method of regulating a natural monopoly? a. MC pricing b. ATC pricing c. predatory pricing d. rate of return pricing

5. If a 1% drop in price cause the quantity demanded to increase by more than 1% then a. demand is elastic. b. demand is unit elastic. c. demand is inelastic. d. demand is linear.

6. If a monopolist faces demand P=A-BQ then the equation for the MR curve the monopolist faces is given by a. A-2BQ b. 2A-BQ c. 2A-2BQ d. A-BQ

7. The income effect is a. the amount of money a person would need to purchase the original optimal bundle after a price change. b. the difference in utility before and after the price change. c. negative for normal goods when the price increases. d. is zero for a Giffen good.

2 8. Suppose an individual’s MRS is 3. Also, suppose that Px=2 and Py=1. In order to increase utility this person should a. buy more x and less y b. buy more y and less x c. buy less of both goods d. continue with current consumption

9. Which of the following (market structure, characteristic) pairs is mismatched? a. (monopsony, 1 seller many buyers) b. (perfect competition, homogeneous goods) c. (monopolistic competition, heterogeneous goods) d. (perfect competition, no barriers to entry)

10. If a person’s utility is expressed by u(x,y)=x3y2 and they consume x=1 and y=1, then the person’s marginal utility from consuming one more unit of y is a. 3 b. 4 c. 7 d. 8

11. The production function f(K,L)=K1/3L2/3 has what kind of returns to scale? a. increasing b. constant c. decreasing d. variable

12. If income equals 20 and Px=2 and Py=4 then the affordable set includes all of the following (x,y) bundles except a. (4,3) b. (1,5) c. (8,1) d. (5,2)

13. If a firm’s Total Cost function is given by TC=4+q2 then a. ATC=4+q and MC=2q b. AFC=4/q and MC=4+q c. AVC=q and MC=q d. FC=4 and AVC=q

14. Which of the following is false about the Income Expansion Path? a. It is positively sloped for a Giffen good. b. It is negatively sloped for an Inferior good. c. It cannot be negatively sloped for all income levels. d. It shows the optimal bundle associated with a particular income holding prices constant.

3 15. Which of the following market structures is not efficient? a. perfect competition b. monopolistic competition c. perfect price discriminating monopolist d. Bertrand competition when each firm has the same cost

16. Which of the following is false? a. A public good is non-rival. b. A public good is excludable. c. Examples of public goods include lighthouses and clean air. d. A public good often is associated with the free rider problem.

17. A change in the quantity demanded is associated with a. an outward shift of the demand curve. b. an inward shift of the demand curve. c. a movement along the demand curve. d. a & b

18. A monopolist with MC=10 that faces demand given of P=90-4Q would create a dead weight loss of a. 0. b. 10. c. 100 d. 200.

19. A monopolist with MC=5 is in a market with demand, P=25-Q. What price will the monopolist charge? a. 5 b. 10 c. 15 d. 25

20. Suppose a firm has a production function, f(L,K)=2K+L. If the rental rate of capital is 3 and the wage rate of labor is 2, what is the minimum cost to the firm to produce 22 units of output? a. 22 b. 33 c. 44 d. 110

21. In the long run a. all inputs are fixed. b. some inputs are fixed and some inputs can vary. c. all inputs can vary. d. a monopolistically competitive firm can earn positive profits.

4 22. What is the Nash equilibrium in the following game? C D

C 1,2 4,6 D 2,9 5,4

a. (2,9) b. (4,6) c. (C,D) d. (D,C)

23. Consider the following picture of a price taking firm: $

5 3 q 10 20 If the market price was $4 we would expect a. the firm to shut down immediately. b. competitors to enter the market. c. the firm to produce between 10 and 20 units. d. the firm to increase its price to $6 to increase profit.

24. If two firms with TC=20q compete according to the Cournot model and face demand given by P=50-Q the market a. quantity is 15. b. quantity is 20. c. quantity is 30. d. is efficient.

25. A natural monopoly is categorized by a. declining ATC. b. constant MC. c. government regulation. d. the use of natural resources.

WP #1. (14 points) A consumer with an income of 40 has utility given by u(x,y)=xy. The price of good x is 1 and the price of good y is 2.

5 What is the optimal amount of x and y that this person should consume? (2 points each)

A price increase of 3 for good x is being considered. What is the total change in the level of good x that this person will consume if the price increase occurs? (2 points).

What would be the loss in utility from this price change? (1 point).

What would be the substitution and income effects for this price change? (2 points each)

Does this mean good x is a normal, inferior, and /or Giffen good? (1 point)

Calculate this person’s demand curve for good x. (2 points)

WP #2. (11 points) A firm has a production function given by f(L,K)=min(L,2K). Wages are equal to 5 in the market and capital costs 7 to rent.

6 What is the cheapest input bundle the firm can use to produce 20 units of output? 30 units? (1 point each)

What is the minimum cost associated with producing 20 units? 30 units? (1 point each)

For the remainder of the problem, suppose the union forces the firm to agree to hire seven workers regardless of the economic conditions. What is the maximum output this firm can produce? (1 point).

For output levels below this level, what are the equations for the firm’s total cost, variable cost, and fixed cost? (2 points each)

WP 3. (11 points) Congress is considering a price support program for wheat. The proposed program would support a price of 50 for wheat farmers. However, before

7 deciding how you should vote, you want to evaluate the economic impact of this program. From researching the issue you have found that the market for wheat is characterized by a demand of P= -2Q+120 and supply of P=Q.

With no price support policy, what will be the equilibrium price and quantity? (1 point each)

Calculate the consumer surplus and producer surplus that will be realized if the policy is not implemented. (1 point each)

With the price support system what quantity will consumers purchase and what price will they pay? (1 point each)

What are the consumer surplus and producer surplus if the policy is implemented? (1 point each)

What will be the total amount paid by the government and how many units will it purchase if the policy is implemented? (1 point each)

What is the loss to society if the price support is implemented? (2 points)

WP #4. (14 points) Currently the market demand for cotton bowl sweatshirts is given by P=100-Q and the supply of sweatshirts is P=10+2Q.

8 What is the current equilibrium price and quantity in this market? (1 point each).

To raise money to feed tusk on his trip to Dallas, a tax of $18 per sweatshirt has been proposed. What would be the price and quantity traded in this market if the tax is imposed? (1 point each)

Calculate each of the following assuming that the tax is imposed: Consumer Surplus, Producer Surplus, Dead Weight Loss, Consumer Tax Incidence, and Producer Tax Incidence. (2 points each)

ECON 303 Fall 2001

9 Final Exam Dr. Cary Deck

This exam consists of 25 multiple-choice questions each worth 2 points. The remaining 50 points come from the four written problems. Your exam should contain 9 pages. Please write your name on the top of each page. Answer each question as best you can. Where appropriate you must show work in order to receive full credit. The exam is closed book. If you have any questions please raise your hand and someone will come to you. There is no talking allowed during the exam. The use of electronic devices other than calculators only capable of the basic arithmetic operations is prohibited. You have two hours to complete this exam. Exams will not be accepted after the end of the exam has been announced.

Name:______

Score:______

10 1. Which of the following games is an example of the Prisoner’s Dilemma?

a. b. c. d. C D C D C D C D

C C 1,1 1,1 4,4C 0,0 C2,4 4,2 3,3 1,5 D D D D 3,0 1,1 0,0 2,2 3,2 2,3 5,1 2,2 2. The Marginal Physical Product of labor is a. the additional output produced by hiring one more worker. b. the additional revenue generated from hiring one more worker. c. the additional cost associated with hiring one more worker. d. equal to the Marginal Physical Product of capital in equilibrium.

3. A monopolist with MC=q who faces a demand given by P=30-q will create a dead weight loss of a. 0 b. 5 c. 10 d. 25

4. If a person with income = 180 and utility given by u(x,y)=x2y4 faces prices of Px=5 and Py=4, then the person would optimally purchase which (x,y) bundle? a. (36, 0) b. (20,20) c. (12, 30) d. (0, 45)

5. Barriers to entry a. allow a firm to maintain positive profits in the long run. b. are a characteristic of monopolistic competition. c. such as patents, can be beneficial to society. d. a & c

6. Suppose that demand is given by P=100-2Q and Supply is given by P=34+4Q and a price ceiling of 70 is imposed on the competitive market. Which of the following would be true? a. A surplus of 6 units would result. b. The price control would be ineffective. c. Consumer surplus would be $40 less than if the ceiling was not imposed. d. The total market surplus would be $8 less than if the ceiling was not imposed.

7. Each of the following make cartels harder to enforce except

11 a. non-overlapping markets b. large number of participants c. unobserved behavior d. large profits to defection

8. Two goods, x and y, are compliments if a. an increase in Px causes less y to be purchased a. a decrease in Py causes less x to be purchased b. a decrease in Px causes less x to be purchased c. an increase in Py causes more y to be purchased

9. When not stealing Christmas, the Grinch produces widgets. Now, the market for widgets is perfectly competitive and widgets are made from thingys and whatsits. The whos down in whoville who buy widgets feel that widgets and gizmos go together (here is a hint: they treat the two goods as compliment). After the holidays, the price of gizmos decreases and simultaneously the price of whatsits increases. But, the Grinch only cares about what he gets, so what will be the impact on the market for widgets? a. Pe decreases b. Pe increases c. Qe decreases d. Qe increases

10. A monopolist faces D: P=25-2q and has total cost q2+q. What is the optimal quantity for this monopolist? a. 4 b. 5 c. 6 d. 10

11. Assume the market for good A is competitive. Also, the cross price elasticity of good A and B is positive. If the price of good B increases and the wage rate increases what must occur in the market for good A? a. Pe increases b. Pe decreases c. Qe increases d. Qe decreases

12. Demand is given by P=72-Q. If there are 3 identical firms with TC=q2 who compete according to the Cournot model then a. each firm will produce 8 units. b. the price will be 36. c. the firms will earn 0 profit. d. each firm will produce 10 units.

13. Which of the following is not an example of price discrimination?

12 a. ATC pricing b. market separation c. coupons d. quantity discounts

14. The Rate of Technical Substitution is a. the ratio of the marginal products of the inputs. b. the way output changes when the inputs are changed. c. the negative slope of the isocost curve. d. an increasing function of output.

15. Which of the following utility functions represent two goods which are perfect substitutes? a. u(x,y) = x.5y.5 b. u(x,y) = min(x,y) c. u(x,y) = x d. u(x,y) = x+y

16. A natural monopoly is characterized by? a. no barriers to entry. b. decreasing average total cost. c. government regulation. d. negative long run profit.

17. The marginal utility of a good is a. the amount of money a person will pay for an additional unit. b. equal to the negative slope of the budget constraint at the optimal bundle. c. the additional enjoyment from consuming one more unit. d. ridiculous as utility is cardinal.

18. Which of the following is false? a. If the price of a Giffen good increases then more of the good will be purchased. b. A normal good has positive income elasticity. c. An inferior good is one for which marginal utility is increasing d. Preferences are complete transitive and reflexive.

19. In the long run a. all factors of production are held fixed. b. ATC is lower than in the short run. c. a competitive firm will earn positive profits. d. demand will be upward sloping.

20. Which of the following is not correct?

13 a. if TC=q5+4q+1/q+5 then AVC=q4+4+1/q2 b. if AFC= 4/q and AVC=q2+q then TC=q3+q2+4 c. if AVC=q2+3 then MC=q2+3 d. if TVC=q2+q and TFC=5 then ATC=q+1+5/q

21. If demand is P=79-3Q and supply is given by P=24+2Q then a price floor of 40 would a. create a surplus of 5. b. create a shortage of 5. c. be ineffective. d. be indeterminate.

22. If u(x,y) = x2y2 then the bundle (4,5) could be optimal given what income and prices? a. I=40, Px=4, Py=5 b. I=45, Px=5, Py=5 c. I=50, Px=5, Py=4 d. I=80, Px=10, Py=8

23. What is the Nash equilibrium in the following game? C D

C 3,2 4,6 D 2,9 1,1

a. (2,9) b. (4,6) c. (C,D) d. (D,C)

24. If demand is given by P=10-Q and Supply is given by P=Q, what is the dead weight loss associated with a per unit tax of $2? a. 1 b. 2 c. 4 d. 5

25. If demand is given by P=10-Q and Supply is given by P=Q, then with a policy that sets a price guarantee at $7, the government will a. purchase 7 units. b. purchase 3 units. c. pay 4 per unit. d. pay 7 per unit.

14 WP #1. (12 points) A consumer has utility expressed by u(x,y)=max(2x,3y). If the price of good x is 3 and the price of good y is 4 then what is the cheapest bundle that this person could purchase in order to receive the same utility as the point (2,2)? (2 points) What is the cost of that bundle? (1 point)

If this person had Income of 48 and the price of good y changed to Py=12, what is the maximum utility this person could receive? (2 points)

For a Py=12 and Income equal to 48, calculate this person’s demand for good x (3 points) and draw a sketch of this demand function (2 points).

What is the income expansion path for this person given that Px=3 and Py=12? (2 points)

15 WP #2. (13 points) A competitive firm has TC=3Q2+4Q+48. Calculate the following cost curves for the firm: ATC, AVC, AFC, and MC. (1 point each)

Find the break-even price and quantity. (2 point each)

If there are six identical firms in the industry, what is the equation for market Supply? (2 points)

If demand for the good is P=40-Q, what is the equation for the MR curve faced by the firm? (1 point)

How many firms will be in this industry in the long run? (2 points)

16 WP #3. (12 points) A country is considering changing its policy towards allowing importing and exporting of a certain good. Currently, no international trade is allowed. The domestic market is categorized by demand: P=14-Q and supply: P=Q. What is the domestic equilibrium price and quantity for this good. (1 point each)

Suppose that the world price for this good is 4. If there were no restrictions on trade (that is importing and exporting were allowed) what quantity would buyers purchase in this market? (1 point)

How much of the quantity bought would be supplied domestically and how much would be imported? (1 point each)

Since opening up the markets reduces producer surplus, producers have successfully lobbied to have some restrictions place on imports. Now the government must decide which of two policies to enact. The first policy is a tariff of 2 on all imported units. If this policy is enacted, what will be the quantity bought by local demanders? (2 points) How much will be sold by domestic suppliers? (2 points)

If instead the government limits imports by placing a quota of four units on this market, what will be the domestic price, the quantity purchased, and the quantity supplied locally? (1 point each)

17 WP #4. (13 points) A monopolist with TC=12Q faces a demand of P=100-2Q. What is the optimal quantity for this monopolist to produce? (2 points)

What price will this monopolist charge? (1 point)

Calculate the monopolist’s profits, consumer surplus, and the dead weight loss. (1 point each)

If the monopolist is capable of practicing first degree price discrimination, what output level will this monopolist produce? (2 points)

Recalculate the monopolist’s profits, consumer surplus, and dead weight loss for the 1st degree price discriminator. (1 point each)

Now assume that the demand curve is for a single non-strategic buyer. If instead of 1st degree price discrimination, this firm could practice 2nd degree price discrimination and pick a (price, quantity) pair to offer this customer, what would be the optimal choice by the firm. In this case, the buyer must either buy the entire quantity offered or buy 0. (2 points)