Download Suppose your indifference curves are described by equations of the

Name: __________________________________
Intermediate Microeconomic Theory (3550)
Fall 2006
Final Exam
December 11, 2006
For full credit, you must show all calculations.
Consider supply and demand analysis.
The following scenario applies to questions 1 though 5 .
The BCS National Championship Game is the final bowl game of the annual Bowl
Championship Series and is intended by organizers to determine the NCAA Division I-A
national football championship. The National Championship Game for 2006 is sponsored by
Tostitos and will be played in Glendale, Arizona on January 8, 2007 and will be broadcast on the
FOX television network. The game will feature the #1 ranked Ohio State Buckeyes against the
#2 ranked Florida Gators. In order to dissuade too many tailgating fans, city officials propose
that the stadium owners pay a tax of $10 per vehicle allowed into the stadium parking lot.
Stadium owners think this policy is unfair and suggest instead that the city impose the $10 tax on
the driver of each vehicle entering the stadium parking lot.
1.
You are hired to arbitrate the dispute. What do you recommend, and why?
2.
Use a graph to support your response to question 1. Label the axes and all relevant lines and
points clearly and specifically.
3.
If demand for parking spots is given by QD = 40,000 – 2,000P, and supply is given by
QS = 8,000, what is the pre-tax equilibrium quantity of parking spots?
4.
Once the recommended tax is imposed, how much revenue is collected from the tax?
5.
What is the post-tax price stadium owners receive per vehicle parking in the stadium
parking lot?
Consider consumer theory and associated budget constraint / indifference curve models.
The following scenario applies to questions 6 though 11.
Your instructor has a limited amount of time each day to accomplish her work before she returns
home to be with her family. She is currently wasting time watching students take a final exam.
Instead of monitoring the exam she could be reading and grading papers. Being in the Christmas
spirit, the department administrative staff decided to help her by providing proctors to monitor
the exam with her. This effectively decreased the cost of monitoring so that your instructor
doesn’t have to pay quite so much attention.
6.
Given a diagram such as the one below, illustrate the effect on the instructor’s budget
constraint of providing exam proctors. (Your answer should be drawn in your blue book.)
Graded Papers
100
25
75
100
Monitored Exam
7.
Indicate on your graph (drawn in question 6) Dr. Hauge’s new optimal bundle given that
she views monitoring exams to be important but would prefer not to do it herself.
8.
Indicate on the same graph the income and substitution effects of having exam proctors.
Clearly indicate the compensated budget constraint.
9.
What type of good is having the exam monitored to Dr. Hauge? How do you know?
10. Suppose Dr. Hauge’s daughter’s guinea pig got loose and Dr. Hauge has to leave work
earlier than usual to help find her. She decides to re-allocate the more limited time she now
has and doesn’t feel too bad, thinking, “I’ll just read the number of papers I’d originally
thought I’d get to read before I was given proctors to help me. I’m just as well off as I used
to be.” Is her reasoning correct? You may wish to use a graph to help justify your carefully
explained answer.
11. Suppose Dr. Hauge rushes home and successfully finds the guinea pig. She wants to give
the pig some treats to make up for her trauma. Knowing the pig’s utility function is given by
U(a,c) = 3a + 5c where a is apples and c is carrots (and she has both in her refrigerator),
what should she give the pig?
2
Consider producer theory and analysis.
The following scenario applies to questions 12 through 16.
Dr. Hauge plans to spend the Christmas break in Florida. Unfortunately, passenger airlines do
not allow guinea pigs in the cabin. There are a few local firms that will ship the pet to Florida by
plane, presumably as cargo. Petsfly.com requires a contract to be on file before any flight
arrangements can be made. While the contract doesn’t obligate one to use that firm’s services, it
is mandatory before those services can be used. The contract fee is $25. Once a contract is on
file, it is good for as many flights as needed for 6 months. The cost to fly the pet from DFW to
Ft. Lauderdale is $150 (one way) via petsfly.com, and $173 (one way) via American Airlines
cargo, however American Airlines does not require a contract.
12. What would have the bigger effect on Dr. Hauge: an increase in the cost to file a contract
with petsfly.com or an increase in the cost of jet fuel? Explain.
13. If the government imposes new regulations that force pet transport firms to incur some onetime expenses for safety improvements, will the new regulations raise the price of pet
transport? Explain.
14. The production function of petsfly.com is given by Q = 2KL. The firm currently has five
employees and two vans. They want to hire another employee. If the rental rate for a van is
$50 per shift, how much should the firm pay the new employee per shift?
15. The total cost to petsfly.com of transporting a pet is given by TC = 500 + 20q2. If this is a
competitive constant cost industry, what is the firm’s long run break-even price?
16. How far can prices fall before petsfly.com exits the pet transport industry?
3
Consider a non-competitive (i.e., monopoly or oligopoly) market.
The following scenario applies to questions 17 through 22.
In the market for instruments there are a few leading firms. One such firm sells pre-owned
violins, for example the Amedee Dieudonne Mirecourt 1936. This violin is described as a
beautiful French violin, stamped "A. Dieudonne Fils Mirecourt" with a characteristic rich, dark,
red varnish. The violin is signed by the maker, and bears the label "Amedee Dieudonne No 646
Mirecourt Anno 1936."1 Suppose marketing research has determined that the market demand for
such violins is given by Q = 1,250 – ½ P. There are two dominant firms in the market, one with
cost function CA(qA) = 8qA; the other with cost function CB(qB) = 6qB where A and B are simply
subscripts that identify the firms.
17. What level of production (how much output) will firm A choose?
18. What is the market price of violins? (If you did not get an answer for question 17, assume the
quantity firm A produces is 200, clearly indicate any other necessary assumptions, and continue.)
19. What is firm B’s profit?
20. Complete the table by filling in the oligopoly responses from questions 17 – 19. Then
assume any and all firms have the same cost function: C(q) = 8q, and fill in the remainder of
the table with the words greater than or less than those answers in the oligopoly row. You
may answer on this sheet or re-draw the chart in your blue book.
Industry Type
Firm A’s Output
Firm B’s Profit
Market Price
Competitive
Oligopoly
Monopoly
21.
1
.
Briefly state how the competitive market price is determined.
http://www.a440violinshop.com
4
22. Choose one of the questions below to answer. Please clearly identify which question you
are answering.
a.
A well-known saying is “you can never have too much of a good thing.” Is it possible to
have too much of a good thing? Explain your reasoning.
b.
In Landsburg’s Slate column “Vine is Money” (May 25, 2005), the initial question posed is:
Why are yuppies willing to pay three times as much for tomatoes on the vine than off?
What is the “correct” question to ask, and why?
c.
In Landsburg’s Slate column “Taken to the Cleaners?” (July 3, 1998), Landsburg questions
how dry cleaners are able to charge different prices for cleaning men’s and women’s
clothing. Model completely one possible response.
5