For each of the following three questions, please indicate whether it is true, false, or uncertain, and explain why.If the statement has two parts, or if it is partly true and partly false, please explain both parts.The evaluation of your answer focuses on the quality of your explanation.

A.(12 points)Given the following information:The market demand curve for a product is a downward-sloping straight line.At the market price P₀ for this product, the price elasticity of demand is 0.25.

Statement to evaluate:Even if we know that, at the market price P₀, total spending on this product is $100,000, we cannot say what is the dollar amount of consumer surplus at this price.

B.(8 points)The advantage of bulk purchasing of materials can lead to economies of scale but do not lead to economies of scope.

C.(10 points)Given the following information:A market for a product exists.The price elasticity of market demand for the product is 1.5, and the income elasticity of market demand for the product is 0.5.During the initial time period the market price for the product is $84 per unit, and the number of units purchased is 126 thousand units.During the next time period the market price for the product is $74 per unit, and the number of units purchased is 141 thousand units.

Statement to evaluate:Between the initial time period and the next time period, the market demand curve shifted to the right.

PART TWO (30 points)

A firm is a monopoly that maximizes profit.Initially, the market demand curve is a downward-sloping straight line. Initially, the firm has an upward-sloping curve (not a straight line) that shows both the firm's average cost of production and its average variable cost of production. In the initial situation, the firm charges a price of $30 per unit and produces and sells 200 units during the time period.

Each of the two (identical) graphs on the next page shows the firm's initial average cost curve and the market demand curve, as well as the approximate location of the quantity 200 units.

[In your answers to this part, please use one or both of the graphs shown on the next page, or one or more graphs like it, adding any lines, curves or labels that you need.]

A.(8 points)Show graphically and explain briefly the firm in its initial situation, including why the firm chooses the price $30 per unit and the quantity 200 units, and how much profit the firm earns.

B.(22 points) The firm is now going to be fined for a patent infringement, and the fine will be either one or the other of the following:

Version X:The firm will have to pay a fine of $800 during the next time period that is just beginning.

-- OR --

Version Z:The firm will have to pay a fine of $4 per unit that it produces and sells during the next time period that is just beginning.

(In either case, the fine will be in place for only this one time period.)

For each of the two versions, show graphically and explain how that version of the fine will alter the situation of the firm for the time period with the fine (compared to the initial time period with no fine).

In comparing the effects of the two fines, which of the following is/are possible:

The amount of profit with Version X is larger than the amount of profit with Version Z.

The amount of profit for the two versions is the same.

The amount of profit with Version Z is larger than the amount of profit with Version X.

Explain, referring to your graph(s) as much as you can.

Graphs(s) for Part Two

$/unit

200units

AC₀ = AVC₀

D₀

$/unit

200units

AC₀ = AVC₀

D₀