A. 1. Use the following two statements to answer this question:

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1 Intermediate Microeconomics Spring 2005 Final Exam K. Yamamoto Answer all the questions in the sections A and B. For the section C, answer any two (2) questions. A. 1. Use the following two statements to answer this question: I. The average total cost of a given level of output is the slope of the line from the origin to the total cost curve at that level of output. II The marginal cost of a given level of output is the slope of the line that is tangent to the total cost curve at that level of output. a. Both I and II are true. b. I is true, and II is false. c. I is false, and II is true. d. Both I and II are false. 2. In 1970s the federal government imposed price controls on natural gas. Which of the following statements is true? a. These price controls caused a chronic excess supply of natural gas. b. Consumers gained from the price controls, because consumer surplus was larger than it would have been under free market equilibrium. c. Producers gained from the price controls because producer surplus was larger than it would have been under free market equilibrium. d. This episode of price controls was unusual, because it resulted in no deadweight loss to society. 3. Which of the following is NOT true regarding monopoly? a. Monopoly is the sole producer in the market. b. Monopoly price is determined from the demand curve. c. Monopolist can charge as high a price as it likes. d. Monopoly demand curve is downward sloping.

2 4. Which of the following is true at the output level where P=MC? a. The monopolist is maximizing profit. b. The monopolist is not maximizing profit and should increase output. c. The monopolist is not maximizing profit and should decrease output. d. The monopolist is earning a positive profit. 5. Use the following two statements to answer this question: I. A firm can exert monopoly power if and only if it is the sole producer of a good. II. The degree of monopoly power a firm possesses can be measured using the Lerner Index: L=(P-AC)/AC. a. Both I and II are true. b. I is true, and II is false. c. I is false, and II is true. d. Both I and II are false. 6. Use the following two statements about monopolistic competition to answer this question. I. In the long run, the price of the good will equal the minimum of the average cost. II. In the short run, firms may earn a profit. a. I and II are true. b. I is true, and II is false. c. I is false, and II is true. d. I and II are false. B. 1. Which of the following relationships is NOT valid? a. Rising marginal cost implies that average total cost is also rising. b. When marginal cost is below average total cost, the latter is falling. c. When marginal cost is above average variable cost, AVC is rising. d. None of the above. 2

3 e. Figure Refer to Figure 7.1. The diagram above contains cost curves. a. short run b. intermediate run c. long run d. both short run and long run. 3..Refer to Figure 7.1. At output level Q 1 a. marginal cost is falling. b. average total cost is falling. c. average variable cost is less than average fixed cost. d. marginal cost is less than average total cost. e. all of the above. 3

4 4. The LAC and LMC curves in the diagram below are consistent with a production function that exhibits a. decreasing returns to scale. b. constant returns to scale. c. increasing returns to scale. d. increasing returns to scale for small levels of output, then constant returns to scale, and eventually decreasing returns to scale as output increases. e. decreasing returns to scale for small levels of output, then constant returns to scale, and eventually increasing returns to scale as output increases 4

5 5. Consider the following diagram where a perfectly competitive firm faces a price of $40. MC AC AV D Figure 8.1 Refer to Figure 8.1. The profit-maximizing output is a. 30. b. 54. c. 60. d. 67. e Refer to Figure 8.1. At the profit-maximizing level of output, total revenue is a. $1200. b. $2160. c. $2400. d. $2680. e. $

6 7. Refer to Figure 8.1. At the profit-maximizing level of output, total profit is a. -$120. b. $0. c. $432. d. $600. e. $ The supply curve for a competitive firm is a. its entire MC curve. b. the upward-sloping portion of its MC curve. c. its MC curve above the minimum point of the AVC curve. d. its MC curve above the minimum point of the ATC curve. e. its MR curve. 9. Deadweight loss refers to a. losses in consumer surplus associated with excess government regulations. b. situations where market prices fail to capture all of the costs and benefits of a policy. c. net losses in total surplus. d. losses due to the policies of labor unions. 6

7 10.. Figure 9.2 Refer to Figure 9.2. At price 0E and quantity Q*, consumer surplus is the area a. 0FCQ*. b. AFC. c. EFC. d. AEC. e. none of the above. 11. Refer to Figure 9.2. At price 0E and quantity Q*, the deadweight loss is a. 0ACQ*. b. 0ECQ*. c. 0FCQ*. d. EFC. e. none of the above. 7

8 12. Scenario 2: A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product: Q = 200-2P MR = Q TC = 5Q MC = 5 Refer to Scenario 2. What level of output maximizes total revenue? a. 0 b. 90 c. 95 d. 100 e. none of the above 13. Refer to Scenario 2. What is the profit maximizing level of output? a. 0 b. 90 c. 95 d. 100 e. none of the above 8

9 14. When a drug company develops a new drug it is granted a making it illegal for other firms to enter the market until the expires. a. franchise; franchise b. copyright; copyright c. government license; government license d. patent; patent 15. A tennis pro charges $15 per hour for tennis lessons for children and $30 per hour for tennis lessons for adults. The tennis pro is practicing a. first-degree price discrimination. b. second-degree price discrimination. c. third-degree price discrimination. d. fourth-degree price discrimination. e. fifth-degree price discrimination. 16. A firm sells an identical product to two groups of consumers, A and B. The firm has decided that third-degree price discrimination is feasible and wishes to set prices that maximize profits. Which of the following best describes the price and output strategy that will maximize profits? a. P A = P B = MC. b. MR A = MR B. c. MR A = MR B = MC. d. (MR A - MR B ) = (1 - MC). 9

10 17. The price of on-campus parking from 8:00 AM to 5:00 PM, Monday through Friday, is $3.00. From 5:00 PM to 10:00 PM, Monday through Friday, the price is $1.00. At all other times parking is free. This is an example of a. bundling. b. second-degree price discrimination. c. a two-part tariff. d. tying. e. none of the above. 18. In the, each firm treats the output of its competitor as fixed and then decides how much to produce. a. Cournot model b. model of monopolistic competition c. Stackelberg model d. kinked-demand model e. none of the above 19. What is one difference between the Cournot and Stackelberg models?. a. In Cournot, both firms make output decisions simultaneously, and in Stackelberg, one firm sets its output level first. b. In Stackelberg, both firms make output decisions simultaneously, and in Cournot, one firm sets its output level first. c. In Cournot, a firm has the opportunity to react to its rival. d. Profits are zero in Cournot and positive in Stackelberg. 10

11 20. Scenario 3 Consider the following game: Zport Co. Moto Corp. Offer Lo-Profile Tires Offer Sunroof Offer CD 40, , 200 Changer Offer Free Maintenance 0, , 120 Which of the following is true for the game in Scenario 3? a. Moto's dominant strategy is the CD changer. b. Moto's dominant strategy is the free maintenance. c. Zport's dominant strategy is the low-profile tires. d. Zport's dominant strategy is the sun roof. e. Neither company has a dominant strategy. 21.In the game in Scenario 3, equilibrium a. is for Moto to offer a CD changer and Zport to offer low-profile tires. b. is for Moto to offer a CD changer and Zport to offer a sun roof. c. is for Moto to offer free maintenance and Zport to offer low-profile tires. d. is for Moto to offer free maintenance and Zport to offer a sunroof. e. does not exist in pure strategies. 11

12 C. Answer any two (2) questions. 1. A firm's total cost function is given by the equation: TC = Q + 10Q 2. (1) Write an expression for each of the following cost concepts: a. Total Fixed Cost b. Average Fixed Cost c. Total Variable Cost d. Average Variable Cost e. Average Total Cost f. Marginal Cost 12

13 (2) Determine the quantity that minimizes average total cost. Demonstrate that the predicted relationship between marginal cost and average cost holds. 2. A competitive firm has the following short run cost function: C(q) = q 3 8q 2 +30q + 5. a. Find MC, AC, and AVC and sketch them on a graph. 13

14 b. At what range of prices will the firm supply zero output? c. Identify the firm s supply curve on your graph.. d. At what price would the firm supply exactly 6 units of output? 14

15 3. In the text, we examined a vegetable fiber traded in a competitive world market and imported into the United States at a world price of $9 per pound. U.S. domestic supply and demand for various price levels are shown in the following table. Price U.S. Supply (million pounds) U.S. Demand (million pounds) Answer the following about the U.S. market: a. Confirm that the demand curve is given by Q D = 40 2P, and that the supply curve is given by Q S = 2 3 P. b. Confirm that if there were no restrictions on trade, the U.S. would import 16 million pounds. 15

16 c. If the United States imposes a tariff of $3 per pound, what will be the U.S. price and level of imports? How much revenue will the government earn from the tariff? How large is the deadweight loss? d. If the United States has no tariff but imposes an import quota of 8 million pounds, what will be the U.S. domestic price? What is the cost of this quota for U.S. consumers of the fiber? What is the gain for U.S. producers? 16

17 4. A monopolist faces the demand curve P = 11 - Q, where P is measured in dollars per unit and Q in thousands of units. The monopolist has a constant average cost of $6 per unit. a. Draw the average and marginal revenue curves and the average and marginal cost curves. What are the monopolist s profit-maximizing price and quantity? What is the resulting profit? Calculate the firm s degree of monopoly power using the Lerner index. b. A government regulatory agency sets a price ceiling of $7 per unit. What quantity will be produced, and what will the firm s profit be? What happens to the degree of monopoly power? 17

18 c. What price ceiling yields the largest level of output? What is that level of output? What is the firm s degree of monopoly power at this price? 5. If the demand for drive-in movies is more elastic for couples than for single individuals, it will be optimal for theaters to charge one admission fee for the driver of the car and an extra fee for passengers. True or False? Explain.. 6. Two firms compete in selling identical widgets. They choose their output levels Q 1 and Q 2 simultaneously and face the demand curve P = 30 - Q, where Q = Q 1 + Q 2. Until recently, both firms had zero marginal costs. Recent environmental regulations have increased Firm 2 s marginal cost to $15. Firm 18

19 1 s marginal cost remains constant at zero. True or false: As a result, the market price will rise to the monopoly level. 7. We can think of the U.S. and Japanese trade policies as a prisoners dilemma. The two countries are considering policies to open or close their import markets. Suppose the payoff matrix is: Japan Open Close Open 10, 10 5, 5 U.S. Close -100, 5 1, 1 Assume that each country knows the payoff matrix and believes that the other country will act in its own interest. Does either country have a dominant strategy? What will be the equilibrium policies if each country acts rationally to maximize its welfare? 19

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