1. (a)You are an efficiency expert hired by a manufacturing firm that uses K and L as inputs. The firm produces and sells a given output. If w (price of labor) = $40, r (price of capital) = $100, MP_L = 20, and MP_K = 40 is the firm minimizing cost? Please explain and show any calculations.

(b)The production function for a competitive firm is Q = K^0.5L^0.5. The firm sells its output at a price of $10 and can hire labor at a wage of $5.

Marginal Product of labor =

Capital is fixed at 25 units. What is the profit-maximizing quantity of labor? Please show your calculations.

2.There are over 5,000 banks in the United Statesmore than 10 times more per person than in other industrialized countries. A recent study suggests that the long-run average cost curve for an individual bank is relatively flat. If Congress took steps to consolidate banks (merge some of the banks), thereby reducing the total number to 2,500, what would you expect to happen to average costs within the banking industry? Please explain.

3. Many fast food restaurant chains like McDonalds and others have some stores which are directly owned by the company (McDonalds) which hires a manager and staff to manage the restaurants, and some stores that they sell a franchise to an outside company/individual who operates the restaurants and pays the company (McDonalds) a franchise fee and keeps the rest of the profits. The franchise fee will have to be paid no matter what the profits of the restaurant may be.

(a) What is the principal - agent problem in the company owned restaurants? Please explain.

(b) What is the principal - agent problem in the franchised restaurant? Please explain. You may assume that the owner is still McDonalds as McDonalds can cancel the franchise agreement if they want to, in which case the former franchisee will no longer be able to use the McDonalds brand to sell their food.

(c) In which case will the principal-agent problem be more severe? Please explain.

4. (a) What is vertical integration? Please explain.

(b) Explain how Apple Inc. is a vertically integrated company. You must give an explanation.

5. (a) How is the concept of concentration in the United States affected by the presence of foreign firms (not foreign firms that have factories or offices in the United States, but foreign firms that produce in their home countries and then export to the United States and are not included in the measures of C4 and HHI). Do these foreign firms tend to increase or reduce the degree of concentration in U.S. industry? Please explain.

(b)An industry consists of three firms with equal annual sales. What is the industry's HHI and C4? Please show your calculations.

6. (a) Which market structure, Perfect Competition, Monopoly, or Monopolistic competition, will result in the greatest degree of choice between alternate products for consumers? Please give an explanation.

(b) In which market structure are firms most likely to advertise? Please explain.