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EASTERN MEDITERRANEAN UNIVERSITY
ECON 601- Advanced Microeconomics
Sample Final Exam
Spring, 2007
1. (20 points) Carl the clothier owns a large garment factory on an isolated island.
Carl’s factory is the only source of employment for most of the islanders, and thus
Carl acts as a monopsonist. The supply curve for garment workers is given by
L =80w,
Where L is the number of workers hired and w is their hourly wage. Assume also
that Carl’s labor demand (marginal revenue product) curve is given by
L = 400 – 40 MRPL
a. How many workers will Carl hire in order to maximize his profits, if he
behaves as a monopsonist, and what wage will he pay?
b. Assume that the government implements a minimum wage law covering all
garment workers. Carl must now pay this wage rate to everyone he employs. How
many workers will Carl now hire.How much unemployment will there be if the
minimum wage is set at $4.00 per hour?
c. Suppose Carl makes a deal with the government for it to eliminate the
minimum wage of $4.00 and in return he will behave as if he were in a
competitive situation. Will he be better or worse off than he was with the
minimum wage? What will happen to the number unemployed?
2. (15 points) Suppose the demand for labor is given by
Ld=-50w+450
and the supply of labor is given by
Ls=100w
where L represents the number of people employed and w is the real wage..
a. What will be the equilibrium levels for w and L in this market?
b. Suppose that the government wishes to raise the equilibrium wage to
$4 per hour by offering a subsidy to employers for each person hired.
How much will this subsidy have to be? What will the new
equilibrium level of employment be? How much total subsidy will be
paid?
c. Suppose instead that the government declared a minimum wage of $4
per hour. How much labor would be demanded at this price? How
much unemployment would there be?
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3. 3. (20 points) Suppose that a monopolist can produce any level of output it
wishes at a constant marginal (and average) cost of $10 per unit. Assume that the
monopoly sells its goods in two different markets that are separated by some
distance. The demand curve in the first market is given by Q1 = 50 – P1 , and the
demand curve in the second market is given by, Q2 = 120 – 2P2,
a. If the monopolist can maintain separation between the two markets, what
level of output should be produced in each market, and what price will be
charged in each market? (4 points)
What are total profits in this situation? (3 points)
What is the dead weight loss created by the monopolist? (3 points)
b. Suppose the firm were able to be a perfectly price discriminate between
each of the customers within both of the above markets. How much would
the monopolist produce in each of the markets? (4 points)
What would be the monopolist’s profits? (3 points)
What would be the deadweight loss of the monopolist in this
situation? (3 points)
4. (10 points) Suppose a country produces two items (a) goods and (b) services.
Both goods and services are produced with constant returns-to-scale production
functions using capital and labor as inputs. The factor inputs are fixed in supply to
the country. Initially only “goods” are subject to a tax of t percent tax on their
market prices which is collected by the government. Now the government
imposes an identical t percent tax on market price of all “services” and the
additional revenues collected by the tax on services is given back to the entire
population by way of an equal grant to each member of the population.
Question: In what ways will the introduction of this new tax on services alter the
level of economic welfare in the society? Explain your reasoning.
5. Players A and B are engaged in a coin-matching game. Each shows a coin as
either heads or tails. If the coins, match B pays A $1.
a)
Write down the payoff matrix for this game, and show that it does not
contain a Nash equilibrium.
b)
How might the players choose their strategies in this case?
6. Consider the following dynamic game. Player B announces, “ I have a bomb
strapped to my body. If you (A) do not give me $1, I will set it off, killing each of
us.” Illustrate this game in extensive form and assess whether B’s announced
strategy for the game meets the criterion of subgame perfection.
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7. Suppose firm A and B each operate under conditions of constant average and
marginal cost, but that MCA= 10, MCB= 8. The demand for the firm’s output is
given by
QD= 500 – 20P
If the firms practice Bertrand competition, what will be the market
price under a Nash equilibrium?
b)
What will be the profits be for each firm?
c)
Will this equilibrium be Pareto efficient?
a)
8.
a
(35 points) Please explain why the following statements are True, False or
Uncertain.
If the elasticity of substitution of Capital for Labor in the production in an
industry is greater than 1, then an increase of the ratio of w/v will reduce
the share of labor in total production costs.
b. A rise in the real wages of female doctors will always cause an increase in
the average size of the doctors’ families, because children are a normal
good.
c. A consumer with monopsony power in buying a commodity X, would buy
more of that commodity than a competitive buyer with similar tastes and
income.
d. The elasticity of demand for a factor of production by a competitive
industry will be higher when the supply of other factors are less than
perfectly elastic than when the prices of these other factors are held
constant.
e. The elasticity of demand for a factor of production will be smaller if the
industries using the factor are subject to increasing returns to scale rather
than decreasing returns to scale.
f. A monopsonist will hire more labor and pay a higher real wage rate if the
labor in the sector is unionized than if it the labor market is supplied
competitively.
g. The elasticity of demand for a factor input will be smaller (in absolute
value) if all the goods produced with it are substitutes rather than
complements.
The End
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