Exam #2. Due date: 8 April Instructor: Brian B. Young. 1) 15 pts

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1 Economics 212 Exam #2 Microeconomic Principles Due date: 8 April 2014 The value of an exam returned late on or before 15 April is 90 points. No exam will be accepted after 15 April Name: The value of this exam is 100 points. Instructor: Brian B. Young Please show your work where appropriate! 1) 15 pts The diagram below shows the cost curves for a perfectly competitive wheat farmer. a. At what price does the wheat farmer shut down? b. What is the minimum price the wheat farmer must receive to earn an economic profit? c. Indicate how much economic profit (or loss) the farmer will realize when the price of wheat is $4.00/bushel by adding a shaded rectangle to the diagram below. d. In the diagram below, draw the farmer s marginal revenue and demand curves when the price of wheat is $2.50/bushel e. How many bushels of wheat does the farmer produce if the price is $2.00 per bushel? f. How many bushels of wheat does the farmer produce if the price is $1.50 per bushel? Page 1 of 7

2 2) 15 pts Suppose that a firm in a perfectly competitive market has the following revenue and cost functions: R(q) = pq and C(q) = q q 2. Since this firm can sell any quantity of production at a market price of p, its marginal revenue is p. Further, take as a given that its marginal cost is q. MR(q) = p and MC(q) = q. a. Write an expression for this firm s fixed cost and average fixed cost. b. Write an expression for this firm s variable cost and average variable cost. c. If the market price for this firm s product is $5.00 per unit, at what output level does this firm maximize its profits? d. How much economic profit or loss does this firm make at its profit maximizing output level when p = $5.00? e. Suppose that the firm invests in some capital technology which doubles its fixed cost but halves its variable costs. Then, the firm s new cost function is C(q) = q q 2 and its marginal cost is MC(q) = q. i. If the market price for this firm s product is $5.00 per unit, at what output level does this new firm maximize its profits? ii. How much economic profit or loss does this firm make at its profit maximizing output level when p = $5.00? iii. At what output level does the firm begin to realize lower costs from the investment in technology? Page 2 of 7

3 3) 15 pts Fill in the blanks in the following table describing industrial organization under the four listed market structures: Number of Firms Herfindahl- Hirschman Index Pricing Power Product Differentiation Efficient Output Level Elasticity of Demand Perfect Competition A great many (atomistic firms) Yes Monopolistic Competition Some Oligopoly Can be either Monopoly 10,000 Very Inelastic Example Automobiles, cell phones, airliners Page 3 of 7

4 4) 15 pts Rebate Ford s Strategies No Rebate Rebate Chevy s Strategies $100 I $95 $300 II -$200 No Rebate -$120 III $300 $250 $250 IV Ford Motor Co. and General Motors must decide whether or not to offer rebates to purchasers of the Ford Fusion and Chevrolet Malibu, respectively. The payoff matrix above represents the weekly profit ($1,000s) available to the firms under the different rebate strategies. a. What is the dominant strategy for Ford? b. What is the dominant strategy for Chevy? c. Which quadrant represents the equilibrium that will result if both firms act independently and compete with one another? What is the name of this equilibrium? d. Which quadrant represents the equilibrium that will result if the two firms successfully collude? If the two firms collude, what is Ford s incentive to cheat on the collusive agreement? Page 4 of 7

5 5) 15 pts The above figure shows the marginal cost and total cost curves for a perfectly competitive firm. How much economic profit or loss does this firm realize under the following three scenarios? a. The price of its output is $5 per unit. b. The price of its output is $10 per unit. c. The price of its output is $15 per unit. d. At what price does the wheat farmer shut down? Page 5 of 7

6 6) 15 pts In the figure above, complete the graph of the electric utility company by adding the marginal revenue and marginal cost curves. Assume the marginal cost is constant at 4 per kilowatt-hour. Now discuss the two options regulators have in trying to regulate the firm average cost pricing and marginal cost pricing. Be sure to state the price and quantity that are selected for each option. Also, what price and quantity does the firm select if it is not regulated? Page 6 of 7

7 7) 5 pts Are the short-run average total cost curve and the long-run average cost both U-shaped for the same reasons? If so, carefully explain these reasons. If not, explain why each curve is U-shaped. 8) 5 pts Quantity of labor (workers) Marginal product (pounds per hour) Value of marginal product, $2 per pound (dollars) Value of marginal product, $1 per pound (dollars) Tom and Mary grow tomatoes. They can hire different numbers of college students to help plant, cultivate, and harvest the tomatoes. The above table gives their marginal product schedule. a. If the price of a pound of tomatoes is $2 a pound, complete the first value of the marginal product column in the table. If Tom and Mary must pay their workers $10 an hour, how many workers do they hire? b. If the price of a pound of tomatoes falls to $1 a pound, complete the second value of the marginal product column in the table. If Tom and Mary still must pay their workers $10 an hour, how many workers do they hire? c. When the price of a pound of tomatoes falls, what happens to Tom and Mary s demand for labor curve? Page 7 of 7