Econ 320 Intermediate Microeconomic Analysis, Section 04

Exam 2

Wednesday 7th April, 2021, 7:40–9:00 pm


There are 60 points on the exam.

Sign the honor pledge in the Canvas quizzes section before taking the exam.

Write your answers on paper and show all your working. Scan and upload 9:00–9:05pm.

Calculators, notes, and ipads are not allowed.


1. (5+10=15 pts) Consider the market for bread. Assume there is an upward–sloping supply curve and a downward–sloping demand curve.

(a) Initially there is perfect competition. On a well–labeled graph, shade producer and consumer surplus.

(b) The government introduces a price ceiling. On a new graph, shade producer and consumer surplus, and deadweight loss.


2. (12+8=20 pts) Europe’s demand for ventilators is:

There are only two manufacturers in the market, Hamilton (H) in Switzerland and Drager D in Germany. The two firms are identical, with total cost function

TC = 60q + 100.

(a) What will the price and total quantity (Q = qH + qD) be if the two collude and act as a cartel?

(b) What will Hamilton’s reaction function be if the two engage in Cournot competi-tion? (No need to continue and solve the problem, but please write the reaction function with as few terms as possible).


3. (20 pts) Shirley and Laverne live in a two person economy, where they exchange jokes (J) and cigarettes (C). Shirley has the following linear utility function: U(J, C) = JS + JS, and Laverne has the Leontief utility function U(J, C) = max(JL, CL). The economy has 10 jokes and 5 cigarettes.

(a) Make an Edgeworth box diagram with Shirley’s origin in the lower left hand corner and Laverne’s in the upper right. Carefully draw indifference curves for Shirley and Laverne, indicating the direction of increasing utility. Place J on the horizontal axis and C on the vertical axis.

(b) Show on the diagram the set of efficient allocations (from which neither Shirley nor Laverne can be made better off without making the other worse off).


4. (1+1+3=6 pts) The market for electricity in each large region of the United States used to be in the hands of a monopoly before many regions allowed competition in the 1990s. At this time and until recently, coal was the largest source of electricity generation, and natural gas was a minor source.

(a) Before the reforms, the monopolies were regulated according to “fair price”, which is what in class and in the book we called “fair rate of return”. With this method, what would the regulator measure to use as the basis for choosing the monopoly firm’s price of electricity?

(b) What is the basis for the price of electricity after competition (viewed from a firm’s perspective)?

(c) After the reforms, but not before, the price of electricity began to fluctuate with the price of natural gas (i.e. the two prices rise and fall together). Why?