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Fall 2008 Midterm Answers for Econ 173 at Drake Univ. - Prof. William M. Boal, Exams of Microeconomics

Drake UniversityMicroeconomics
Prof. William M. Boal

The answer key for midterm examination #4 in intermediate microeconomic analysis (econ 173) at drake university, fall 2008. The answer key includes multiple choice, short answer, and problem-solving questions related to various microeconomic concepts such as general equilibrium, monopoly, and cournot duopoly.

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Uploaded on 07/30/2009

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Intermediate Microeconomic Analysis (Econ 173)
Drake University, Fall 2008
William M. Boal
MIDTERM EXAMINATION #4 ANSWER KEY
VERSION A
I. MULTIPLE CHOICE
(1)a. (2)e. (3)b. (4)b. (5)b. (6)d. (7)e. (8)e. (9)b. (10)b.
(11)b. (12)b. (13)b. (14)c. (15)c. (16)a. (17)a. (18)e. (19)a.
II. SHORT ANSWER
(1) a. Set MCA(qA) = MCB(100-qB) and solve to get qA = 60 units.
b. 40 units. c. $11 = MCA = MCB.
(2) a. decrease. b. 180 units other goods. c. 3 units other goods.
d. $6, since slope = –Penergy/Pother goods. e. –3.
(3) a. $0.85. b. decrease. c. $0.15 (=MC–MR).
(4) a. $360. b. $150.
(5) a. curve B, tangent to average cost curve. b. 30 units.
c. $6.
III. PROBLEMS
(1) [General equilibrium]
a. MRSCA = q1A / (2 q2A) . b. MRSCB = (2 q1B) / q2B .
Allocation C is efficient because MRSCA = MRSCB and all goods are consumed.
Allocation D is inefficient because not all goods are consumed.
Allocation E is efficient because MRSCA = MRSCB and all goods are consumed.
Allocation F is inefficient because MRSCA MRSCB.
Allocation G is efficient because (although MRSCA is undefined) one cannot
make Amy better off without making Bob worse off, and one cannot make Bob
better off in any case.
Allocation H is efficient because (although MRSCB is undefined) one cannot
make Bob better off without making Amy worse off, and one cannot make Amy
better off in any case.
(i)
Contract Curve
0
2
4
6
8
10
12
14
16
18
20
0 2 4 6 8 10 12 1 4 16 18 2 0
pf3
pf4
pf5

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Download Fall 2008 Midterm Answers for Econ 173 at Drake Univ. - Prof. William M. Boal and more Exams Microeconomics in PDF only on Docsity!

Intermediate Microeconomic Analysis (Econ 173) Drake University, Fall 2008 William M. Boal

MIDTERM EXAMINATION #4 ANSWER KEY

VERSION A

I. MULTIPLE CHOICE

(1)a. (2)e. (3)b. (4)b. (5)b. (6)d. (7)e. (8)e. (9)b. (10)b. (11)b. (12)b. (13)b. (14)c. (15)c. (16)a. (17)a. (18)e. (19)a. II. SHORT ANSWER (1) a. Set MCA(qA) = MCB(100-qB) and solve to get qA = 60 units. b. 40 units. c. $11 = MCA = MCB. (2) a. decrease. b. 180 units other goods. c. 3 units other goods. d. $6, since slope = –Penergy/Pother goods. e. –3. (3) a. $0.85. b. decrease. c. $0.15 (=MC–MR). (4) a. $360. b. $150. (5) a. curve B, tangent to average cost curve. b. 30 units. c. $6. III. PROBLEMS (1) [General equilibrium] a. MRSCA = q1A / (2 q2A). b. MRSCB = (2 q1B) / q2B. Allocation C is efficient because MRSCA = MRSCB and all goods are consumed. Allocation D is inefficient because not all goods are consumed. Allocation E is efficient because MRSCA = MRSCB and all goods are consumed. Allocation F is inefficient because MRSCA  MRSCB. Allocation G is efficient because (although MRSCA is undefined) one cannot make Amy better off without making Bob worse off, and one cannot make Bob better off in any case. Allocation H is efficient because (although MRSCB is undefined) one cannot make Bob better off without making Amy worse off, and one cannot make Amy better off in any case. (i) Contract Curve 0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20

(2) [Monopoly] a. MR = 14 – (Q/10). b. Q* = 120. c. P* = $8. d. Profit = $720. e. DWL = $360. f. Q = 240. g. Profit = $1440. h. No DWL with perfect price discrimination. (3) [Cournot duopoly] a. Rev 1 = q 1 P = 14 q 1 – (q 12 /20) – (q 1 q 2 /20). b. MR 1 = 14 – (q 1 /10) – (q 2 /20). c. q 1 = 120 – (q 2 /2). d. q 1 * = 80. e. Q* = 160, P* = $6. f. Profit = $640. g. DWL = $160. IV. CRITICAL THINKING (1) Non-profit organizations may focus on the public good, but they still must minimize their losses. Thus they are motivated to use market-segmenting price discrimination to minimize losses. This means that they follow the same pricing rule as profit-making firms:

 i 

i

MC

P

 (^) , where i denotes the elasticity of demand by the ith market segment. So if students and senior citizens have greater elasticity of demand (that is, if they are more sensitive to the price) than other customers, then these organizations will give these groups discount prices. (2) If firms engage in price competition, then indeed the market price will be driven down to marginal cost. But if the firms set quantities instead of prices, as in a Cournot oligopoly , then price will not be driven down to marginal cost. Alternatively, if the firms' products are differentiated (imperfect substitutes in the eyes of consumers) and even if entry is free as in monopolistic competition , then price will not be driven down to marginal cost. VERSION B I. MULTIPLE CHOICE (1)e. (2)b. (3)a. (4)c. (5)d. (6)a. (7)b. (8)b. (9)d. (10)c. (11)c. (12)c. (13)b. (14)e. (15)d. (16)a. (17)a. (18)c. (19)c. II. SHORT ANSWER (1) a. Set MCA(qA) = MCB(100-qB) and solve to get qA = 70 units. b. 30 units. c. $12 = MCA = MCB. (2) a. decrease. b. 240 units other goods. c. 4 units other goods. d. $8, since slope = –Penergy/Pother goods. e. –4. (3) a. $1.40. b. increase. c. $0.40 (=MR–MC). (4) a. $240. b. $144. (5) a. curve C, tangent to average cost curve. b. 40 units. c. $8. III. PROBLEMS

(i) Contract Curve 0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20 (2) [Monopoly] a. MR = 21 – (Q/10). b. Q* = 180. c. P* = $12. d. Profit = $1620. e. DWL = $810. f. Q = 360. g. Profit = $3240. h. No DWL with perfect price discrimination. (3) [Cournot duopoly] a. Rev 1 = q 1 P = 21 q 1 – (q 12 /20) – (q 1 q 2 /20). b. MR 1 = 21 – (q 1 /10) – (q 2 /20). c. q 1 = 180 – (q 2 /2). d. q 1 * = 120. e. Q* = 240, P* = $9. f. Profit = $1440. g. DWL = $360. IV. CRITICAL THINKING (Same as Version A) VERSION C I. MULTIPLE CHOICE (1)e. (2)b. (3)a. (4)b. (5)a. (6)b. (7)d. (8)d. (9)a. (10)b. (11)a. (12)d. (13)d. (14)b. (15)c. (16)d. (17)a. (18)e. (19)c. II. SHORT ANSWER (1) a. Set MCA(qA) = MCB(100-qB) and solve to get qA = 20 units. b. 80 units. c. $11 = MCA = MCB. (2) a. decrease. b. 300 units other goods. c. 5 units other goods. d. $10, since slope = –Penergy/Pother goods. e. –5. (3) a. $0.30. b. decrease. c. $0.70 (=MC–MR). (4) a. $200. b. $140. (5) a. curve B, tangent to average cost curve. b. 50 units. c. $7. III. PROBLEMS (1) [General equilibrium] a. MRSCA = (2q1A) / q2A. b. MRSCB = q1B / q2B.

Allocation C is efficient because MRSCA = MRSCB and all goods are consumed. Allocation D is inefficient because MRSCA  MRSCB. Allocation E is efficient because (although MRSCA is undefined) one cannot make Amy better off without making Bob worse off, and one cannot make Bob better off in any case. Allocation F is inefficient because not all goods are consumed. Allocation G is efficient because MRSCA = MRSCB and all goods are consumed. Allocation H is efficient because (although MRSCB is undefined) one cannot make Bob better off without making Amy worse off, and one cannot make Amy better off in any case. (i) Contract Curve 0 2 4 6 8 10 12 14 16 18 20 0 2 4 6 8 10 12 14 16 18 20 (2) [Monopoly] a. MR = 7 – (Q/10). b. Q* = 60. c. P* = $4. d. Profit = $180. e. DWL = $90. f. Q = 120. g. Profit = $360. h. No DWL with perfect price discrimination. (3) [Cournot duopoly] a. Rev 1 = q 1 P = 7 q 1 – (q 12 /20) – (q 1 q 2 /20). b. MR 1 = 7 – (q 1 /10) – (q 2 /20). c. q 1 = 60 – (q 2 /2). d. q 1 * = 40. e. Q* = 80, P* = $3. f. Profit = $160. g. DWL = $40. IV. CRITICAL THINKING (Same as Version A) [end of answer key]