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Practice Questions / Intermediate Microeconomics Exam #3 1 . A firm sells books to members of two distinct clubs that are isolated from each other. Club #1's inverse demand curve is: P1 = 72 - 4q1 Club #2's inverse demand curve is: P2 = 48 - 2q2 The firm has a total cost function equal to output squared: TC = (q1 + q2). The firm originally maximized its profit by charging prices p1 = $48 and p2 = $36. However, this arrangement started to break down when members of club #2 begin reselling books to members of club #1. The firm decided to respond by discontinuing its price discrimination policy, and to instead charge the same price to members of both clubs. Use the above information to answer the following: (a) What was the firm's original level of profit? (b) What is the firm's new level of profit with p, and p2 equal? (c) YES or NO - Do both clubs continue to buy books absent price discrimination? (i.e., are both q, and q2 still > 0?) 2. Assume there currently exists a monopolistically competitive industry with 21 firms, and that total revenue (price * quantity) for the first firm is [(180 - 0.22q) - q1] *q1 where q1 represents the output of firm 1, and q (j = 2,3,...,21) represent the outputs of its 20 competitors. Assume that each firm has the identical total cost function TC = 0.5q - 21q + 300q (a) Derive the expression for firm 1's marginal revenue (MR. ) assuming - albeit inconsistently - that both: (i) like any Cournot-type competitor, firm 1 ignores the indirect effects of its output choice, and (ii) all 20 other firms will produce the same quantity as firm 1. (b) When setting MR, equal to Marginal Cost, what is the corresponding short run profit maximizing level of output for firm 1? (c) At this (common) output level, what price will firm 1 charge?L 3. The following matrix shows payoffs for a game of "chicken": Driver #2 Swerve Don't Swerve Driver Swerve (0,0) (-10,+10) #1 Don't Swerve (+10,-10) (-100,-100) (a) Identify all pure strategy Nash equilibrium points in the above game. (b) Suppose Driver #2 announces to everyone he will choose to swerve (or not) at random, with his probability of swerving equal to P2. If so, (1) For what value of P2 would the expected payoff for Driver #1 be the same regardless of what action Driver #1 chooses to take? (ii) What is the expected payoff for Driver #1 under these circumstances? (iii) Driver #1 is only interested in playing chicken if his expected payoff is positive; given Driver #2's announcement, will the game be played or not? 4. Explain/define the following: the Pareto criterion for a social improvement . the Kaldor criterion for a social improvement the Rawls criterion for a social improvement . a Grand Utilities Possibilities Frontier . a Constrained Bliss Point4. Labor markets and labor supply shocks (25 points) Consider the labor market in the country of Widgetland. The demand for labor is given by: LD = 34 -4w where w is the wage rate. Labor supply is: LS = L+2w where I is the number of people in the country willing to work at a wage of zero. (a) (5 points) Suppose that Z = 10. Find the equilibrium wage and equilibrium demand for labor. Is demand for labor elastic or inelastic at the equilibrium wage? Suppose that there is a sudden influx of migrant labor, which increases the number of people willing to work at a wage of zero to L = 16. For the remainder of the problem, set L = 16. (b) (5 points) Compute the new market equilibrium. What happens to the equilibrium wage rate? GO (c) (5 points) In reality an increase in population should affect the demand for labor as well as the supply. Explain how the equilibrium wage and labor demanded will change compared to the market equilibrium in part (a) if demand for labor were to increase as well.5. Income and substitution effects (26 points) Glenn's utility function for goods X and Y is represented as U(X, Y) = X0-2y0.$. Assume his income is $100 and the prices of X and Y are $10 and $20, respectively. (a) (4 points) Express his marginal rate of substitution (MRS) of good Y for good X. As the amount of X increases relative to the amount of Y along the same indifference curve, does the absolute value of the MRS increase or decrease? Explain. (b) (4 points) Express his marginal rate of substitution (MRS) of good Y for good X. As the amount of X increases relative to the amount of Y along the same indifference curve, does the absolute value of the MRS increase or decrease? Explain. 10 (c) (5 points) What is his optimal consumption bundle (X*, Y*), given income and prices of the two goods? (d) (5 points) How will this bundle change when all prices double and income is held constant? When all prices double AND income doubles?Problem Set 1 Professor D. Weisman 'I. The market demand and supply curves are given by Q\" = 24 P and DS = 2P, where P is price. a} What is the equilibrium price and quantity? b) What is the price elasticity of demand and supply at the market equilibrium? c] What is consumers' surplus at the market equilibrium? d) Determine the effect on total revenues of a technological advance [that shifts the supply curve out) from the perspective of the initial market equilibrium? 2. The equilibrium price and quantity in the market are given by P" = 4 and Q\" = 20. a} Find the equation of the linear demand curve if'l units of the good are demanded when the price is 5? b) Find the equation of the linear supply curve if the price elasticity of supply at the market equilibrium is equal to 2 [and P 2 2]? 3. The demand for cigarettes is given by QC = 16 - 2P'3 + P\