Microeconomics Exam Two

Show your work and explain all your answers!

1. (16 points) Camila spends all her money on pancakes and maple syrup. Assume that the price of pancakes is $2 each, and the price of maple syrup is $1.50 for each quantity. The table below gives her marginal utility for various quantities of each good.

Quantity of Pancakes	Total Utility of Pancakes			Quantity of Syrup	Total Utility of Syrup
0	0	----	----	0	0	----	----
1	20			1	15
2	36			2	28.5
3	48			3	40.5
4	56			4	51
5	60			5	60

1. Find the marginal utility associated with each quantity of both goods. Then find the marginal utility per dollar spent for each quantity of both goods. You can enter the values in the extra columns provided in the table.
2. If Camila has $8.50, what is her optimal consumption bundle of pancakes and maple syrup?
3. Briefly explain how we can use this utility maximization model to find Camila's demand curve for pancakes.

2.(12 points) Alice and Beatrice both run landscaping firms. The table below shows their short-run production functions, i.e. how many yards they can service, Q, for a given number of workers, L.

L	QA	MPL,A	QB	MPL,B
0	0	----	0	----
1	5		9
2	10		16
3	15		21
4	20		24
5	25		25

1. Complete the table - what is the marginal product of labor for each woman's landscaping firm?
2. Describe the short-run supply curves for each woman's firms - are they vertical, steeply upward sloping, relatively flat, or completely flat? Briefly explain your answer.

3.(12 points) Cost and Production. The table below shows the short-run cost of producing Spanish saffron for a typical firm. Use this information to answer the following questions.

1. What is the variable cost of producing one unit?

Q	TC	VC	FC	ATC	AVC	MC
0			10	-----	------	------
1	18
2		14
3						8
4				10.5
5					8.8

1. What is the total cost of producing three units?
2. What is the marginal cost of the fourth unit?
3. Based on this cost information, and assuming labor is the only variable input, does it appear that saffron production exhibits diminishing marginal returns in production?At what quantity to we see these diminishing returns set in? Briefly explain your answer.

4.(24 points) Suppose the market for Spanish saffron is perfectly competitive and the market price is currently $10 per unit.Use the cost table from question #3 to answer the following questions. Assume further that these are the lowest possible cost curves obtainable for a typical firm.

1. What is the profit maximizing quantity? What is profit at that quantity?
2. Could this market be in long-run equilibrium?Why or why not?
3. Would the firm whose costs are given in #2 want to continue operating in the short-run? Why or why not?
4. Is this market allocatively efficient in the short-run? Why or why not?
5. Do we expect price rise or fall in this market?Is it possible that $12 could be the long-run equilibrium price in this market assuming there is no change to costs?
6. (12 points) Long-run Costs.
7. Which industry is likely to experience diseconomies of scale at a lower level of output, pizzerias or automobile manufacturers?Briefly explain your answer.
8. Specialized college textbooks are usually much more expensive that best-sellijng novels. Briefly explain at least one reason why this might be true, even if the material cost is similar for the two books.