Q15. 1. (150 points; 8 minutes) Decide whether each of the following statements is True, False, or Uncertain, and give a brief but clear explanation of your answer. (Most of the credit will be given for the explanation.)

(a) If average cost is falling, marginal cost must be falling as well.

(b) Paint prices have risen in the past year, largely due to oil price increases. When defining the market for paint, oil companies should be included.

2.(225 points; 12 minutes) With Hurricane Rob approaching, the market conditions for plywood to protect homes are given by:

Demand: P = 30 - Qd Supply: P = 4 + Qs where Q is measured in tons and P is in thousands of dollars per ton.

(a) Graph the supply and demand for plywood. Find the equilibrium quantity and price. Calculate the consumer surplus.

(b) Newspapers often report that retailers are taking advantage of consumers by charging high prices during these times of crisis.

Consider if the local government passed a consumer protection law that set P=5.

How much would be supplied? How would consumer surplus compare to part (a)?

3. (225 points; 12 minutes) A local franchise has a monopoly on Krispy Kreme doughnuts with daily demand and cost given by: Demand: P = 150 - 2Q Cost: C = 250 + 30Q where Q is hundreds of donuts, P=price per 100 donuts, and C is in dollars.

(a) To maximize profits, how many doughnuts will be sold daily? At what price? What will daily profits be?

(b) Concerned about rising health care costs of municipal employees, the local government raises Krispy Kreme's real estate taxes, causing its daily fixed costs to increase from 250 to 350. How much will its daily sales change?