Download Econ 200B Aut 14 Midterm 2A

Econ 200
Autumn 2014
Midterm 2A
Name:
TA/Quiz Section/Time:
80 points
Please write legibly and mark your answers clearly. Illegible writing will result in lost points.
We will also deduct points for sloppy and unclear explanations. Show your work.
Academic integrity is the cornerstone of the Department’s rules for student conduct and evaluation of
student learning. Students accused of academic misconduct will be referred directly to the Office of
Community Standards and Student Conduct for disciplinary action pursuant to the Student Conduct Code
and, if found guilty, will be subject to sanctions. Sanctions range from a disciplinary warning, to academic
probation, to immediate dismissal for the Department and the University, depending on the seriousness of
the misconduct. Dismissal can be, and has been, applied even for first offenses. Moreover, a grade of
zero can be assigned by the instructor for the course.
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1. (25 points) Iggy’s Ice Cream Shack sells ice cream. The quantity of output (pounds of ice
cream scooped per day) and the corresponding number of workers per day are in the following
table:
L
Q
MPL
TC
MC
ATC
AVC
(workers/day)
(lbs of ice
cream/day)
(lbs/worker/
($)
($/lb)
($/lb)
($/lb)
day)
1
3
2
9
3
14
4
16
5
17.5
6
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The Shack is a profit maximizing firm in a perfectly competitive market, and a worker earns
$30 per day. Fixed costs come from a 1-year contract for rents paid on the freezers, and are
$100 per day.
a. (8 points) In the table above, find the MPL, TC, MC, ATC and AVC. No need to show your
work.
b. (5 points) If the market price of ice cream is $15/pound, how much output would The
Shack produce? Calculate the profits at this level of output. Show your work.
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c. (3 points)Explain (in one or two sentences) why the firm chooses this level of output.
d. (4 points) Would the firm continue to operate in the long run if the price of ice cream fell
to $13.00 per pound? Explain why or why not.
e. (3 points) Below what price will the firm shut down (stop producing output) in the short
run? Why did you choose this value?
f. (2 points) What would their profits be at the price you found in e?
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2. (15 points) Maria has the following marginal utility schedule—in discrete amounts-- for
consumption of hamburgers and Coke (per week):
Hamburgers
Coke
Quantity
Total Utility
MU
Total Utility
1
10
5
2
18
9
3
24
12
4
29
14
5
33
15
6
34
15
MU
a. (4 points) Calculate Maria’s Marginal Utility from consuming hamburgers and Coke. No
need to show work.
b. (8 points) How many burgers and Cokes does she consume per month if her income is
$29, and the price of burgers and Coke is $5 and $2, respectively? Briefly explain why
she chooses that level of consumption (what is the consumer’s utility maximizing
condition?) and show any work.
c. (3 points) If the price of burgers falls, should she buy more or less Coke? Explain why.
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3. (25 points) Seattle Power has a monopoly on the provision of electricity to the greater
Seattle area. The monthly demand for services by households in this market is given by
QD=12-P. This translates to a Marginal Revenue of MR(Q)=12-2Q. The Marginal Cost of
electricity production is MC(Q)=2Q. Show your work on all parts.
a. (7 points) Calculate Seattle Power’s profit maximizing choice of output and price.
b. (5 points) Calculate Seattle Power’s profits.
c. (7 points) Calculate the perfectly competitive output and price for this industry.
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d. (6 points) On the graph below, draw Seattle Power’s demand, marginal revenue and
marginal cost. Identify the deadweight loss of the monopoly on the graph and calculate
its magnitude. Be sure to identify all curves and relevant points.
4. (15 points) Answer the following questions about oligopolistic markets using the payoff
matrix below for a simultaneous game in which Microsoft and Apple decide whether to
advertise. (No need to show work.)
Apple
Microsoft
Advertise
No Ads
Advertise
M: $16 billion
A: $8 billion
No Ads
M: $12 billion
A: $15 billion
M: $8 billion
A: $10 billion
M: $6 billion
A: $12 billion
a. (3 points) Is there a dominant strategy for Microsoft? If so, what is it? If not,
why not?
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b. (4 points) Is there a Nash Equilibrium? What is it?
c. (4 points) Is this game a Prisoner’s Dilemma? Explain why or why not.
d. (4 points) In an oligopoly market, do individual firms pay attention to the
behavior of other firms? Explain why or why not.
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SCRATCH PAPER
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SCRATCH PAPER
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