# Use the following table to answer and

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```					                               Temple University
Department of Economics

Economics 201
Intermediate Microeconomic Analysis

Final Exam

Directions: You have 2.5 hours to complete all questions of all parts of this
exam. There is a multiple choice part with 15 questions; there is problem part
with three questions; there is an essay question. Point values are shown. This
is a closed book exam. You may neither give nor receive help.

Part A. Multiple choice (30 points)

Use the following table to answer questions 1 and 2 and 3. Mark, Bob and Joe
are the only consumers of coffee for these questions.
Price of coffee per Mark’s quantity       Bob’s quantity     Joe’s quantity
lb                   demanded             demanded           demanded
\$3                   6                   10                 19
4                   4                   7                  15
5                   2                   6                  11
6                   1                   4                  9
7                   0                   3                  8
8                   0                   1                  4
9                   0                   0                  0

1. Total consumer surplus in the coffee market when the price is \$5/lb is
approximately (coffee can only be purchased in the quantities shown in the
table):
a. indeterminate
b. 30
c. 51
d. 65
e. 73

2. If the price of coffee increases from \$6 to \$7, total revenues ____________,
suggesting market demand is _____________.
a. Increase; elastic
b. Decrease; elastic
c. Increase; inelastic
d. Decrease; inelastic
e. Remain constant; unit elastic

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3. What is the greatest amount of money that Mark would pay for 2 pounds of
coffee.
a. \$6
b. \$5
c. \$11
d. \$16
e. indeterminate

4. Given the following demand curve, P = 62.5-.167Q, when P=\$38 demand is
classified as
a. Elastic
b. Perfectly elastic
c. Inelastic
d. Perfectly inelastic
e. Unit elastic

5. One of the most important differences between a firm's economic profit and its
accounting profit is the subtraction of
a. costs incurred when hiring labor, capital, and land
b. any explicit cost incurred by the entrepreneur for risk taking
c. any implicit charges for the use of capital owned by the entrepreneur
d. any taxes on the retained earnings of the firm
e. the costs of distributing the firm's output

6. Least cost production requires firms to adjust their inputs until the relative
prices of the inputs are equal to the relative
a. prices of outputs
b. total costs for each resource
c. average productivity per resource
d. economies of scale of production
e. marginal products of the inputs

7. If the competitive price is insufficient to cover average total costs, firms should
a. definitely shut down as soon as possible
b. continue to operate where P=MC, if P>AVC
d. cut back and eliminate their overhead
e. operate as long as price coves all fixed costs

8. The production function Q = aK0.7L0.4 exhibits __________ returns to labor.
a. Constant
b. Increasing
c. Decreasing
d. Cannot be determined

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9. The production function Q = aK0.7L0.4 exhibits _____________ returns to scale.
a. Constant
b. Increasing
c. Decreasing
d. Cannot be determined

10. The demand curve for a monopolist is given by P=350-7Q, and the short run
total cost curve is given by TC=500+70Q. The profit maximizing price and
quantity are
a. Q=1.78, P=337.5
b. Q=20, P=210
c. Q=40, P=70
d. Q=20, P= 70

11.Patents and copyrights, which confer market power, exist to
A)     protect the consumer from imitations.
B)     ensure excessive profits to the holders.
C)     protect research and development and creative expression.
D)     reduce competition in all sectors of the economy.
E)     magnify the dominance of large firms.

12.Which of the following situations will come closest to perfect price discrimination?
A)    Charging a different price on different days.
B)    Charging a different price at the end of the year.
C)    Negotiating a price with a group of consumers.
D)    Negotiating a price with each individual consumer.
E)    Offering instant, in store rebates.

13.A dominated strategy is one that
A)     leads to a higher payoff, regardless of the other player's choice.
B)     leads to a lower payoff, regardless of the other player's choice.
C)     is sometimes selected.
D)     contains the set of all possible strategies.
E)     is present in all games.

14.The reason a monopsonist hires fewer workers than a perfectly competitive firm is
A)     he can.
B)     he is not a profit maximizer.
C)     he works them harder.
D)     his threats of being fired motivate workers.
E)     each extra worker increases labor costs by more than the wage rate.

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15.The optimal number of workers for a perfectly competitive firm to hire occurs when
A)     total labor costs equal total revenues.
B)     the lowest possible wage is accepted by workers.
C)     the wage rate equals the marginal product of the last worker.
D)     the wage rate equals the value of marginal product of the last worker.
E)     the largest output is achieved.

Part B. Problems (45 points)

1. (15 points) For this question refer to the graph that follows. John Steinbeck
has an income of \$80 per week, all of which he spends on grapes (G) and
tortillas (T). Initially the price of grapes (PG) is \$2 per pound and the price of
tortillas (PT) is \$4 per box. His utility function is U=5GT.

Grapes and Tortillas

30

20
Tortillas

10

0
0     10              20             30             40
Grapes

(a) Write the equation for Steinbeck’s budget constraint.

80 = 2G + 4T
or
T = 20 – (2/4)G

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(b) What is the greatest number of pounds of grapes that Steinbeck can buy with
his income?
40

(c) What is the greatest number of boxes of tortillas that Steinbeck can buy with
his income?
20

(d) When PG = \$2 and PT = \$4, how many pounds of grapes and boxes of tortillas

G=20 and T=10

(e) At the G and T combination in (d), what is Steinbeck’s utility?

1000

(f) Suppose that the price of grapes (PG) rises to \$4. What is the greatest
number of pounds of grapes Steinbeck can buy now?

20

(g) What are Steinbeck’s new utility maximizing choices for G and T?

G = T = 10

(h) Referring to the graph, what is the numerical value of the substitution effect
resulting from the change in the price of grapes (PG)?

-6

(i) Referring to the graph, what is the numerical value of the income effect
resulting from the change in the price of grapes (PG)?

-4

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(j) Are grapes a normal good or an inferior good? How do you know?

Normal since the income effect reinforces the substitution effect.

2. (15 points) This question deals with the cost structure of spice mining by the
House of Atreides on Dune. The table from question 1 is reproduced in part
below.

a. Complete the following table. Note that fixed costs are 336 Acquas (the unit
of currency). The fixed costs cover the fixed capital stock: Ornithopters,
Sandcrawlers, etc. Variable costs are 112 Acquas per unit of labor; labor is the
only variable input. Complete the following table:

Labor    Total        Fixed     Variable      Total     Marginal     Average        Average
Input   Product       Costs      Costs        Costs      Costs       Variable        Total
Costs          Costs
0          0          336          0          336           -           -             -

1         50          336         112         448         2.24        2.24          8.96

2         140         336         224         560         1.24        1.6            4

3         240         336         336         672         1.12        1.4            2.8

4         320         336         448         784         1.4         1.4           2.45

5         355         336         560         896         3.2         1.57          2.52

6         370         336         672        1008         7.46        1.81          2.72

b. In the short run, below what price will the House of Atreides begin to lose
money even if they can sell all they want at that price? That is, what is the
breakeven price?

2.45 is the minimum point at Q=320 of the ATC.

c. Below what price, provided they could sell all they wanted at that price, will the
House of Atreides cease its mining operations on Dune?

1.4 is the minimum at Q=240 and Q=320 of AVC

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d. The House of Atreides is just one of many Spice mining firms in the universe.
The Spice industry is in long run equilibrium. Each firm has a U-shaped long run
average cost curve that reaches a minimum value of 2.45 Acquas at an output of
320. Factor prices are unaffected by the scale of the industry. The industry
demand function is given by Q=8850-1000P. What are the market price and
quantity in long run equilibrium?

P = __________2.45________           Q = _____6400____________

e. How much output is each active firm producing? And how many firms are
there in the industry, including the House of Atreides?

q = ______320_________          N = ________20______________

f. What is consumer surplus in the Spice industry? ___20,480____________

g. What is producer surplus in the Spice industry? ____0_________

h. The House of Atreides acquires all of its competitors and becomes a
monopolist in the Spice industry. Each of the acquired firms has a U-shaped
long run average cost curve that reaches a minimum value of 2.45 Acquas at an
output of 320. Factor prices are unaffected by the scale of the industry. The
industry demand function is given by Q=8850-1000P. What quantity will be
offered by the monopoly to the market and at what price? (Hint: for this and the
next two parts you should draw a sketch)

Pm = ______5.65_____________        Qm = ___________3200____________

Long run MC = 2.45, MR = 8.85 – (2/1000)Q

i. What are the new producer and consumer surplus?

Consumer surplus ____5120_______ Producer Surplus ___10,240_________

(5.65-2.45)3200 = 10,240

j. What is deadweight loss due to monopolization?

5120

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3. (15 points) Witch Hazel has a factory in Diagon Alley that makes black
cauldrons using labor and capital. Her foundry is one of 50 in all of England that
make magical kettles. The weekly market demand curve for black cauldrons is Q
= 1000 – 40P. The short run weekly market supply curve for black cauldrons is
Q = 100 + 50P. On Diagon Alley price is stated in terms of bags of gold.

a. What are the equilibrium price and quantity for black cauldrons?

P = ________10______________ Q = ____600__________________

b. From among the many Hogwarts students seeking employment with the many
employers of Diagon Alley, Witch Hazel has hired Klaus Beaudelaire as a
summer apprentice to work in the foundry. The relation between his weeks of
work and firm output is given in the following table. Complete the table.

Weeks of    0         1          2         3          4         5          6
work
Output      0         3          7         10         12        13         12
MP                    3          4         3          2         1          -1

c. The weekly wage rate for an apprentice is 20 bags of gold. For how many
weeks of work should Hazel hire Klaus?

4 weeks

d. With the proceeds of an inheritance Hazel has bought all of her competitors
and is now in the enviable position of being a monopolist in the market for black
cauldrons. Write an algebraic expression for Hazel’s marginal revenue curve.

Her demand curve is now P = 25 – (1/40)Q so her
MR = 25 – (2/40)Q

e. The cauldron industry is characterized by constant input costs in the long run.
Before the merger each of the firms had a constant long run average cost of 10
bags of gold per cauldron. After the merger how many cauldrons should Hazel’s
firm produce and what price should she charge?

10 = 25 – (2/40)Q
Q = 300
P = 25 – (1/40)(300) = 17.5

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f. Use your answers in b. and d. to complete the following table.

Weeks of    0           1           2            3           4           5
work
Output      0           3           7            10          12          13
MP                      3           4            3           2           1
Marginal                24.85x3     24.65x4      24.50x3     24.40x2     24.35x1
Revenue                 = 74.55     = 98.6       = 73.5      = 48.8      = 24.35
Product

g. If Hazel still plans to employ Klaus for four weeks of work, what wage will she
pay him?

48.8

h. Suppose that the management consultants from Arthur and Anders & Sons
have told Hazel that she really should not employ unskilled labor like Klaus.
Rather, they should hire fully trained witches and wizards. The supply curve for
skilled cauldron makers is given by w = 13.5 + 10 L (where L is weeks of work).
Write an expression for the incremental cost of hiring an additional week of
skilled labor, i.e., the marginal factor cost (MFC) of labor.

TFC = 13.5L + 10 L2
MFC = 13.5 + 20L

Weeks of    0           1           2            3           4           5
work
Marginal                33.5        53.5         73.5        93.5        113.5
Factor
Cost

j. Now that Hazel is a monopolist in the cauldron market and is hiring skilled
labor, how many weeks of work should she hire and how much should she pay?

3 weeks of work at 73.5 bags of gold.

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Part C. Essay (25 points)

In a coherent and cogent fashion explain the hurdle model in price discrimination.

A seller practices price discrimination when she offers the product to
different groups or individuals at different prices. There are three types of
price discrimination: First degree discrimination occurs when the seller is
able to segment the market perfectly. Under 2nd degree discrimination the
seller posts a set of prices that decline with the quantity purchased.
Charging a different price in completely separate markets is 3rd degree
discrimination.

In order to practice price discrimination the there must be at least two
types of consumers with differing elasticities. The seller must have some
way to uniquely identify the different groups. Furthermore, there must not
be any opportunity for arbitrage between the groups.

A hurdle is a mechanism by which the seller can induce buyers to separate
themselves into groups with greater or lesser elasticity of demand. For
example, coupon clippers have the more elastic demand for a product.
Offering a coupon captures those customers at a price below the price paid
by those whose impatience make their demand inelastic.

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