Download MIDTERM EXAMINATION 1

FINAL EXAMINATION A
Intermediate Microeconomics
(ECON 520)
December 13, 1999
Professor D. Weisman
There are two parts to this examination weighted 50 points each. 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. Good Luck!
Part I. Multiple Choice (50 points). Please indicate your choice for the best answer to
each question on the standardized answer sheet provided.
1.
Which of the following is a positive statement?
a.
A course in microeconomics tends to increase student scores on the law
school admissions test (LSAT).
b.
College football coaches should not be paid more than economics
professors.
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.
e.
None of the above.
Use the following information to answer the next two questions:
The demand for books is:
The supply of books is:
QD = 100 – 2P
QS = 3P
2.
What is the equilibrium price of books?
a.
5
b.
10
c.
15
d.
20
e.
none of the above.
3.
The price elasticity of demand at the market equilibrium is
a.
inelastic.
b.
elastic.
c.
unitary elastic.
d.
inferior.
e.
none of the above.
4.
In class, we discussed a recent article that suggests cocaine is an inferior good. If
income were to rise, ceteris paribus, the equilibrium price of cocaine would
a.
rise.
b.
c.
d.
e.
fall.
remain unchanged.
a or c.
b or c.
5.
The price elasticity of long-distance telephone service is –0.7 and the cross
elasticity of long-distance and local telephone service is –0.25. 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 long-distance telephone service is
reduced by 20 percent, what is the implied change in the price of local telephone
service?
a.
a 10 percent increase.
b.
a 10 percent decrease.
c.
a 16 percent increase.
d.
a 5 percent increase.
e.
a 5 percent decrease.
6.
Mikey has a utility function given by U = 10 min {2C, 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.
e.
none of the above.
7.
John’s utility function is given by U = 4P + 1B. If John consumes both P and B in
equilibrium then it follows that,
a.
4PP = PB
b.
PP = 4PB
c.
PP > 4PB
d.
4PP < PB
e.
none of the above are necessarily true.
8.
Dagwood’s utility function for beers (B) and pizzas (P) is given by U = 10B•P.
What is Dagwood’s marginal utility of pizza when 6 beers are consumed?
a.
24
b.
6
c.
60
d.
2/3
e.
This cannot be determined from the information provided.
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9.
Suppose that Beer (B) and Pizza (P) are complements and inferior goods.
Following standard notation, let Pp and PB denote the price of pizza and beer,
respectively and let I denote income. Which of the following demand functions
reflect these properties.
a.
P = I/[2Pp].
b.
P = 10/I[Pp + 4PB].
c.
P = 10I/[Pp + 4PB].
d.
a. and b.
e.
none of the above.
10.
The price for a good increases and total expenditures for the good decrease. 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 a firm’s production function is given by Q = 4KL, where K is capital and
L is labor. What is the marginal product of capital when 4 units of labor are
employed?
a.
2.
b.
4.
c.
6.
d.
16.
e.
None of the above.
12.
The Law of Diminishing Returns assumes that
a.
there is at least one fixed input.
b.
all inputs are changed by the same percentage.
c.
the firm is operating in the short run.
d.
all inputs are held constant.
e.
a. and c.
13.
A firm’s marginal product of labor is 5 and its marginal product of capital is 10. 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 5 units.
b.
reduce its use of labor by 2 units.
c.
maintain the same level of labor utilization.
d.
also increase capital by 1.5 units.
14.
A firm’s production function is given by Q = 4 min {K, 2L}. What set of input
combinations could represent a cost-minimizing choice?
a.
L = 2, K = 2.
b.
L = 2, K = 1.
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c.
d.
e.
L = 2, K = 6.
L = 3, K = 8.
None of the above.
15.
A production function is given by Q = 2K + L. The firm is minimizing costs and
produces output using 5 units of K and 10 units of L. If the price of capital, r, = 2,
then the price of labor is
a.
2
b.
1
c.
4
d.
5
e.
unable to be determined with this information.
16.
In a competitive market, the firm’s demand curve is
a.
the same as the market demand curve.
b.
downward sloping to the right.
c.*
horizontal at all output rates for the firm.
d.
upward sloping and then downward sloping as output is increased.
e.
none of the above.
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 3.
18.
A monopolist is currently operating where the price elasticity is equal to –0.5. In
order to maximize profits, the monopolist should
a.
sell more output.
b.*
sell less output.
c.
sell the same amount of output.
d.
a. or c.
e.
b. or c.
19.
A monopolist operates in two submarkets. In submarket 1, Ed = -2 and in
submarket 2, Ed = -1.5. Suppose that C(Q) = 2Q in both markets. The profitmaximizing prices for this monopolist are given by
a.
P1 = 2 and P2 = 2
b.
P1 = 2 and P2 = 3
c.
P1 = 2 and P2 = 1.5
d.*
P1 = 4 and P2 = 6
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e.
20.
None of the above.
Suppose that the Department of Justice (DOJ) vetoes all mergers that are likely to
lead to an increase in price of the product. The market demand function is given
by P(Q) = 24 – Q. Pre-merger, the market is competitive and the cost function is
given by C(Q) = 16Q. 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 = 22 - 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? What are the monopolist’s profits if average fixed costs are equal to
4 at the profit-maximizing quantity?
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 now that Q = 1/n min{K, L} is the production function for this industry,
where K is capital, L is labor and the positive integer n is the number of firms
participating in this market. In addition, let r = 4 and w = 4. 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) on the last
day of class for the semester (Thursday, December 9). The essay must be typed, either
double-spaced 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
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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.
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
considering the merits of a merger between Union Pacific (UP) and the BurlingtonNorthern (BN) railroads. The market served by these two railroads is competitive before
the merger. The market demand for rail shipping is given by Q = 32 - 2P + s, where Q is
quantity demanded, P is price, and s is an index of service reliability. In addition, both
railroads currently use the same production function which is given by Q = min{K, L}.
The railroads claim that they will realize greater efficiencies as a result of the merger.
This implies that the production function for rail shipping post-merger will be given by Q
= x min{K, L}, where x > 1. Suppose that r = 5 and w = 5, and the pre-merger service
reliability index is s = 4.
a)
Suppose that the market for rail shipping is a monopoly following the merger
between UP and BN. Also assume that x = 5/4 and s remains constant at 4. How
much better/worse off are consumers as a result of this merger?
b)
Continue to assume that x = 5/4, but the market for rail shipping remains perfectly
competitive following the merger. For what values of s are consumers better off
as a result of this merger?
c)
Government studies reveal that on average service reliability declines by 25%
following a merger. In addition, assume that the market for rail shipping remains
perfectly competitive following the merger. For what values of x are consumers
better off as a result of this merger?
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