ECN 100: Final Exam: Version A
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Ecn 100 - Intermediate Microeconomic Theory
ECN 100: Final Exam: Version A
SECTION I: MULTIPLE CHOICE (60 points)
1. The donut market is dominated by Dunkin Donuts, due to their advanced technology which allows them to produce donuts with the cost function (in cents) of c(q) = 10q . There are hundreds of other smaller firms each with a cost function of c(q) = 110 + q2 . If the market demand for donuts is q(p) = 220 − 2p, what is the profit maximizing quantity that Dunkin Donuts should produce?
(a) 200.
(b) 90.
(c) 60.
(d) 100.
2. In a competitive industry with identical firms, the marginal cost for 1 firm is 2q and the average cost for 1 firm is + q . Demand in the industry is D(p) = 100 − 5p (where p is price). In the long run:
(a) The market price will be $5 and the number of firms will be 15.
(b) The market price will be $5 and the number of firms will be 10.
(c) The market price will be $10 and the number of firms will be 10.
(d) The market price will be $10 and the number of firms will be 5.
3. In a monopoly market, if marginal costs are constant then
(a) Prices will be higher if elasticity is lower.
(b) Deadweight loss will be higher if elasticity is lower.
(c) Producer surplus will be lower if elasticity is lower.
(d) both (a) and (b).
4. Garbage collection has a cost function of C(q) = 200 + 2q2 . Demand is perfectly inelastic. What conditions would make garbage collection a natural monopoly?
(a) Demand lower than 10.
(b) Demand lower than 100.
(c) Demand higher than 10.
(d) Garbage collection would never be a natural monopoly.
5. The bakery Let them eat cake has a monopoly on cupcakes in the Davis market. The elasticity of demand for cupcakes is -2. If the marginal cost of cupcakes is 1, what is the profit maximizing price for cupcakes?
(a) 4.
(b) 8.
(c) 2.
(d) 1.
6. A major difference between a perfectly competitive firm and a monopoly is that
(a) Monopolies operate where marginal revenue equals marginal costs, while perfectly com- petitive firms do not.
(b) Monopolies earn short-run profits while competitive firms do not.
(c) Competitive firms operate where marginal revenue equals marginal costs, while monop- olies do not.
(d) Competitive firms operate where price equals marginal cost, while monopolies do not.
7. The above figure shows the US market for large tractors. Canadian tractors have an MC of 10, while US producers have an (aggregate) MC = 10.01 + q . The US has imposed a quota that will not allow more than 10 Canadian tractors. The change in Canadian producer surplus from imposing the import ban is (where ”-” means a loss and ”+” means an increase).
(a) The areas B + C.
(b) The areas - G - H.
(c) The area B.
(d) The areas B - G - H.
8. Consider an oligopoly market whose firms are identical and are producing according to a Cournot equilibrium. Which of the following could, on its own, cause the Lerner Index to Double.
(a) The elasticity of demand is cut in half.
(b) The number of firms is cut in half.
(c) The number of firms doubles.
(d) Either (a) or (b).
9. If the inverse demand function for a Monopolist’s product is P = a − bq, then its marginal revenue will be zero when
(a) q = .
(b) q = .
(c) q = 0.
(d) q = a.
10. It costs UC Davis $10 per fan to host a basketball game, as illustrated in the above figure. The stadium only holds 1000 fans. What is the deadweight loss from monopoly pricing of Davis Basketball?
(a) Areas A, B, and D.
(b) Areas C and E.
(c) Areas C, E and F.
(d) Area F.
11. In the above figure, the producer surplus at the monopoly price would be
(a) 36,000.
(b) Larger if the stadium were bigger.
(c) 42,000.
(d) Both (a) and (b).
12. Consider a market with 2 identical firms. Which type of competition would produce lower prices than Cournot competition?
(a) Perfect Competition.
(b) Stackelberg Competition.
(c) A perfect cartel.
(d) Both (a) and (b).
SECTION II: SHORT ANSWER (40 points)
1. (20 points) Assume that the cost function for making tablet computers, for any firm, is of the form C(q) = 200 + 2q2 . The demand for tablet computers is D(p) = 24 − p/10.
(a) At what quantity is the average cost of producing tablet computers at its minimum?
(b) If this market had completely free entry and exit, how many perfectly competitive firms could this market accommodate?
(c) Now assume that one of the firms, Apple, has a patent on tablet computers and is a monopolist in this market. As before their costs are C(q) = 200 + 2q2 . How much should Apple produce and what is the monopoly price?
(d) In a graph draw the demand curve, marginal revenue curve, and marginal cost curves with and without the Patent (e.g. under your answer to part b, and under your answer to part c). Also identify the Short-run Deadweight Loss (ignoring fixed costs) resulting from Apple’s patent (e.g. relative to a market under part b). You do not have to calculate the DWL numerically.
2. On the Island of South Pepsicola, Dictator Havemo Sugar has nationalized the soda industry. He has decreed that all citizens of South Pepsicola should have access to all the soda they desire at no charge (e.g. a price of zero). Demand for soda (in the local currency) is D(p) = 100 − p, or p(q) = 200 − 2q where q is measured in cases of soda. The aggregate (total) variable cost of producing soda is VC(q) = q2 . Mr. Sugar has promised to pay producers a subsidy that will ensure enough production so that all citizens get the soda they want.
(a) (5 points) Before the “free soda” policy was put in place, what was the equilibrium price and quantity of soda (assuming perfect competition)?
(b) (7.5 points) What is the subsidy (per case of soda) necessary to provide all citizens with free soda?
(c) (7.5 points) Draw a picture depicting the demand for soda, the supply of soda (assuming no market power), and the deadweight loss that results from this policy.
2022-12-16