Final Exam Answers Key - Intermediate Microeconomic Theory | ECO 401, Exams of Economics

Download Final Exam Answers Key - Intermediate Microeconomic Theory | ECO 401 and more Exams Economics in PDF only on Docsity! ECO 301-002 Final Exam Spring 2006 Name: KEY Multiple choice: 4 pts. each, circle correct answer. 1. The demand and supply curves for coffee are given by: i. Qd = 600 -2P ii. Qs=3O0+4P 8, = 4 , Equilibrium price and quantity are: a) P=500, Q=50 b) P=20, Q=300 C) P=75,Q=300 @ P=50, Q=500 2. As manager of the famous Scottish rock band ME3, you have to decide how to set ticket prices for the upcoming U.S. concert tour. You have narrowed your choices to $50 per ticket and $60 per ticket. Fewer people will want to attend at the higher price, and so there will be more empty seats in the stadiums where ME3 plays. More empty seats along with the higher price may be better than fewer empty seats at the lower price if a) demand is elastic (6J demand is inelastic . F T 4 T R ~ - I 4 c* L 0 . c) ME3 concerts are a luxury good d) ME3 concerts are a normal good Suppose that you work as a "gutter" in a chcken processing plant and that you are paid your monthly income in lund: you get forty chickens per week. Only one other good, grapefruit, is produced, and there is no money in h s economy at all. Goods are bartered by persons not content with their holdings of chickens and grapefruit. Other individuals are willing to trade at the rate of 2.5 grapefruit per chicken. Only one of the following bundles could be utility maximizing for you. Which one? cL a) 35 chickens, 10 grapefruit @ 30 chickens, 25 grapefruit c) 25 chickens, 50 grapefruit 3 v d 5-h, d) 10 chickens, 60 grapefruit G F as I* 1 0 0 4. You find that when you use 8 quarts of insecticide in combination with 16 lbs. of fertilizer, you are able to produce 45 lbs. of zucchini squash in your garden. If you use 22 lbs. of fertilizer, output rises to 50 lbs. of zucchini. If you then cut back on insecticide to 6 quarts, zucchni output falls back to 45 lbs. What is the margmal rate of t e chca l substitution between fertilizer and insecticide between the two points that you have on the isoquant for a) One quart of insecticide for 2 lbs. of fertilizer C b) Two quarts of insecticide for 5 lbs. of zucchini 4 = s o @ One quart of insecticide for 3 lbs. of fertilizer d) Six lbs. of fertilizer for 5 lbs. of zucchini . . 5. Given the MRTS that you just calculated in question 4, suppose that you are minimizing cost. If insecticide is $3 per quart, what must be the price of a lb. of fertilizer? 8 $1 S I b S . Zud-a *PI s = b) $2 P I I gf r . #.#.. 4 . - - 4 A " rr ?r S Ibr. r u * k L . - - - = - c) $3 MIF = *P = A f 6 fbs. fPALLUev &re d) $9 P, 3 - x I ,K = \ r/ 6 6. Situation A: P=$5, AFC=$2, AVC=$7; Situation B: P=$7, AFC=$9, AVC=$~. The firm should: a) shut down in both situation A and situation B A : P L A V C , n r U J - - (3 @ shut down in situation A but produce in situation B R: P > A J c , pulClU c) produce in situation A but shut down in situation B a,* m R = - - d) produce in both situation A and situation B 7 . A firm's long-run total cost curve is gven by TC(Q) = lOOOQ - 3 0 ~ ~ + Q ~ . At what output is LRAC at a minimum? = = , a - + L a) Q=5 Q c b) Q = ~ O a a - . . ,. e = d - r ~ - l a d o - t o Q .+ 3 Q= @ Q=15 h c = A L A C d) Q=20 L l o o o - 30 Q + c,'= r a c e - C O B + 3 4 Q = 15 8. Which of the following best fits the characteristics of a perfectly competitive market? a) Fast food restaurants Mutual funds . h--V--- + 13 c) Personal computer operating systems '% . * $ . w- d) Automobile manufacturing ++ 9. Knowing that you have become an expert on the functioning of perfectly competitive markets as a result of tahng intermediate microeconomics, over summer break your parents ask you to explain somethng to them. They grow soybeans on the family farm. They have just learned of the development of a new drought-resistant and insect-resistant seed that will _reduce the cost of growing soybeans. In trylng to decide whether they can afford to send you back to college in the fall, they need to know what is going to happen in the soybean industry as a result of t h s cost-reducing technological advancement. What do you tell them? @ Short-run profits for early adopters, which gradually dissipate as market supply [d increases and price falls from its current level. d b) Price will fall in the short run, but return to its current level in the long run. /ccd-tL c) Market demand will increase, leading to short-run and long-run economic profits. eb d) Market supply will decrease because firms in the industry will exit as a result of short- -. ] run losses. 10. Ralph and Gordon, owners of a local grocery store, are the only sellers of milk in the neighborhood. Their margnal cost is $1.70 per gallon. They have found that a 10% change in price results in a 40% change in quantity demanded. Given this information, what price should Ralph and Gordon charge for their milk? / - 'i 13. On the other side of your professor's family tree, brother-in-law Bubba owns a restauranthar in Fort Walton Beach, Florida. On a recent visit Bubba shared the following information: Income Statement for Bubba's Bar Costs Revenues Wholesale cost of food and beer $40,000 Sales of food and drinks $130,000 Wages and salaries $50,000 (including $20,000) for himself) taxes and insurance $12,000 interest paid on bank loans $100,000 @ 10% $ l0,OOO * I I r , a * o Bubba has $150,000 of his own money invested in the bar. He anticipates that business will continue like this for the foreseeable hture. Bubba also has a standing offer of $30,000 to manage another bar in Fort Walton Beach, something he considers equally attractive to his current situation. Suppose a national restauranthar chain offers Bubba $250,000 to sell his bar, which would enable him to pay back the $100,000 bank loan and recoup his own $150,000. Should he take the offer? (Hint: what are Bubba's economic profits?) 14. (10 pts.) You own and operate an Arby's restaurant. Your production function is given by ~ = 1 OK'L.', where Q represents the number of meals per hour produced in your restaurant and K and L refer to inputs of capital and labor per hour. a) If capital is fixed at K = 8 in the short run, how much labor must you use if you want to produce 120 meals per hour? b) Suppose the prices per unit of labor and capital are w = $6/hour and v=$6/hour. Does the combination that you are using in part (a) minimize the cost of producing 120 meals per hour? In your answer you should plot the isoquant for Q=120 and draw several isocost lines. 15. (1 5 pts.) Suppose your uncle is athletics director at the University of Kentucky. For your birthday he gives you the monopoly rights to sell plastic wildcat hats at LadyCats basketball games. Your cost h c t i o n is given by C(Q) = 200 + 2 ~ ~ . The inverse demand function for plastic wildcat hats is given by P(Q) = 80 - 24. Q is the number of hats you sell at each game. a) What price should you charge in order to maximize profits? How many hats will you sell? What will your profits be? b) Graph your total revenue, total cost, and profit functions on the diagram below, making sure that your graphs match up with the answer that you derived in (a). C) Graph your demand, marginal revenue, and marginal cost curves in the other diagram below, and explain the correspondence between your two diagrams. ) T C = L a b f L Q m c = dyc - - - _ _ L -- 44 - Y Q - _- - - I I dLCSC..g: p = P O - t Q a- - ,-R = P . * s 9 0 . - ~ 4 % ALP W A = = g o - Y Q 4Q - v a M ~ = ~ ~ : 8 0 - v Q - ka = O Q Q.", 1 . 3 ,, p * = $ 6 0 n-= T R -7= = r G oo - 'y oO = * &I - 9 7-R r e - ?T 0 z o o - Z O O 1 0 0 -she a r e - y o 0 O=-----?O~ ,g 7 c d "' -&a too 1 0 . 0 3 0 G o o '4 0 0 I - - --- A Q = 1 0 1 . I _ -- (=) M / L = a ~ c a Q Z I O , _____-p--___ ----- h d + 4 A Q = ' o -A P = ' 6 . -- - - - - - - - - - *-+-+-yr. -