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ECON 101: Principles of Microeconomics – Discussion Section Week 11 – Spring 2015
Content for Today
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Exam problems
Introductory market power: monopoly
Questions
I) Hard Exam Problems
(Question numbering is based off the version of the exam posted on Learn@UW.)
3)
According to the figure above, it is possible to say that:
a. The demand for Macaroni & Cheese is perfectly inelastic.
b. The demand for Caviar is perfectly elastic.
c. The demand for Caviar is perfectly inelastic.
d. Macaroni & Cheese is a Giffen Good
Answer: c
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ECON 101: Principles of Microeconomics – Discussion Section Week 11 – Spring 2015
The diagram below shows Professor Smith’s preferences over Hawaiian Shirts (x)
and chalk sticks (y) for teaching his microeconomics class. Three points are
labelled with their (x,y) coordinates given.
8)
It appears that for Professor Smith, Hawaiian shirts (x) are a(n) _______
good, and chalk sticks (y) a(n) _______ good.
a. inferior; Giffen
b. normal; normal
c. inferior ; normal
d. normal ; Giffen
Answer: d
Use the following budget line for Jane to answer the next two (2) questions:
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ECON 101: Principles of Microeconomics – Discussion Section Week 11 – Spring 2015
9)
If Jane has ninety dollars then the price of good Y is ____ and the price of
good X is _______.
a. $2, $2
b. $2, $6
c. $6, $2
d. $6, $6
Answer: c
10) If point A was Jane’s optimal bundle what would her marginal rate of
substitution be at that point?
a. 2/3
b. 3
c. 3/2
d. 1/3
Answer: d
13) Given a typical production process when average product (AP) decreases,
the marginal product (MP) _________________
a. first decreases and then increases
b. is less than AP
c. first increases and then decreases
d. always increases
Answer: b
16) Jimmy Toms’ restaurant was fined $50,000 this spring for food safety
violations. As a result of this the restaurant will have _________ average
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ECON 101: Principles of Microeconomics – Discussion Section Week 11 – Spring 2015
cost (AC), _________ average variable cost (AVC), and ___________
marginal cost (MC).
a. a higher/higher/the same
b. the same/higher/lower
c. a higher/the same/higher
d. a higher/the same/the same
Answer: d
Consider the market for widgets, which is perfectly competitive and in which all
firms are identical. The representative firm has the following total cost and
marginal cost curves, where q is the quantity of widgets the firm produces.
Assume that the current scale of production also supports the long run equilibrium.
TC = 2q2 + 4q + 32
MC = 4q + 4
24) Suppose the industry is in long run equilibrium, so the number of firms is as
you found in the above question. Holding this number of firms fixed, the
industry supply curve is given by:
a. Q = (25/4)P - 25
b. P = 100Q + 4
c. P = 25Q - 4
d. Q = P - 4
(Note: should have found the market had 25 firms in previous question)
Answer: a
26) Brian owns a firm that produces rock songs. ITunes buys each song Brian
produces for $1,000. To produce songs Brian requires rock bands (labor)
and microphones (capital). If Brian is paying $2000 for each rock band and
$500 for each microphone, what is the marginal product of labor and what is
the marginal product of capital for Brian’s firm?
a.
b.
c.
d.
MPL = ½; MPK = 1/2
MPL = ½; MPK = 2
MPL = 2; MPK = 2
MPL = 2; MPK = 1/2
Answer: d
28) The cross price elasticity of demand between labor and capital is negative.
This implies that when the wage increases a firm will
a. hire more labor.
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ECON 101: Principles of Microeconomics – Discussion Section Week 11 – Spring 2015
b. use more capital.
c. use less capital.
d. None of the above.
Answer: c
30) Ian's Pizza requires labor and ovens to produce their famous Mac and
Cheese pizza. Suppose wages in Wisconsin increase, and as a result Ian’s
Pizza demanded fewer ovens. We would conclude that
a. The factor substitution effect dominated the output effect.
b. The output effect dominated the factor substitution effect.
c. There was zero output effect.
d. The factor substitution effect and the output effect cancelled each
other out.
Answer: b
31) Assume a firm that only uses labor and capital for production. Given an
increase in the price of capital, the firm will maintain the same level of
workers if
a. The factor substitution effect dominates the output effect.
b. The factor substitution effect is zero.
c. The output effect is zero.
d. The factor substitution effect and the output effect have the same
magnitude but opposite direction.
Answer: d
II) Monopoly
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ECON 101: Principles of Microeconomics – Discussion Section Week 11 – Spring 2015
1. Consider the market for archery lesson in Nottingham. Market demand
for archery lessons is given by 𝑃𝐷 = 250 − 2𝑄𝐷 . Merry Men Incorporated
is granted a legislated monopoly over archery lessons in Nottingham by
King Richard. The company has a cost function 𝑇𝐶 = 100 + 10𝑞 + 𝑞 2 , with
marginal cost 𝑀𝐶 = 10 + 2𝑞.
a. Suppose the CEO of Merry Men Inc, Robin of Locksley, has not
taken any economics classes and so chooses a quantity as if he was
in a perfectly competitive market (i.e. he charges a price equal to
his marginal cost). What price and quantity will be supplied? Robin
chooses quantity such that P=MC. Since there is only one firm we
can just set demand as P: 250-2Q = 10 + 2Q, so P = 130 and Q = 60.
b. The shareholders fire Robin and replace him with Guy of
Gisbourne. Instead of setting price equal to marginal cost, Guy
ruthlessly attempts to maximize his revenue. Plot total revenue as a
function of quantity. What quantity maximizes revenue and what is
the elasticity of demand at this point? Total revenue is price times
quantity, so TR = P*Q = (250-2Q)*Q. This is a parabola with a
maximum when Q = 125/2. Note that this is the midpoint of the
demand curve, when elasticity of demand is 1.
c. The shareholders are still not entirely happy so they fire Guy of
Gisbourne and hire the Sheriff of Nottingham instead. The Sheriff is
even more devious than Guy and he manages to maximize profits.
Plot his marginal revenue curve and calculate what quantity and
price he uses. The Sheriff knows that to maximize profits he must
set marginal revenue equal to marginal cost. He also knows that
when he sells one more unit the price goes down a bit, so he
realizes his marginal benefit is not exactly the price. For a linear
demand curve marginal revenue has the same y intercept but is
twice as steep (this is true by applying calculus to total revenue,
since total revenue is a parabola). Thus the Sheriff sets:
𝑀𝑅 = 250 − 4𝑄 = 𝑀𝐶 ⇒ 250 − 4𝑄 = 10 + 2𝑄 ⇒ 𝑄 = 40
Substitute Q=40 into the demand curve to get the price ($170).
d. What can you say about the elasticity of demand at the quantity the
Sheriff decides to produce? The monopolist always produces on the
elastic portion of the demand curve.
e. What is the deadweight loss caused by Merry Men Inc acting like a
monopolist instead of a competitive firm? The deadweight loss is
the area of the triangle below. It turns out to be $800.
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ECON 101: Principles of Microeconomics – Discussion Section Week 11 – Spring 2015
“Very Important Homework”
Economists are generally not fans of monopolies. The head TA’s least favorite
monopoly is the De Beers mining cartel, which has a (close to) monopoly on
diamond production. As “homework”, watch this educational video about the
situation, appropriately titled “Adam ruins everything” (warning: contains some
adult language): https://www.youtube.com/watch?v=N5kWu1ifBGU
Instead of buying diamonds Adam Smith recommends buying moissanite
instead. This essay explains why: http://diamondssuck.com/
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