Dr. Eric R. DodgePage 110/9/2018
Intro Micro Exam 2, Fall 2006
NAME:______
You may not attach additional paper to this exam. You may use the back page for additional space. If something is unclear, please do not hesitate to ask for clarification.
1a. Suppose the income elasticity for tickets to NASCAR races is EI = -2.5. Interpret this value for someone completely unfamiliar with the concept. (5 points)
1b. Suppose you’re told that the cross price elasticity of marijuana consumption with respect to the price of beer is Em,b = -1.32. Interpret this value for someone completely unfamiliar with the concept. (5 points)
2. A firm employs labor and capital to produce goods. Explain the law of diminishing marginal returns to labor. Explain how these diminishing marginal returns to labor are related to the marginal costs of producing those goods. Please also use diagrams to illustrate the relationship. (10 points)
3. What is the difference between marginal, and total utility of the consumption of some good (call it X)? Can marginal utility from the consumption of good X be negative? Briefly explain with an example. (15 points)
4. You are choosing between two goods, Beer and Pretzels, and your marginal utility from each is as shown below. Your daily income is $9 and the price of Beer is $1 and Pretzels are $2.
Units of Beer / MUbeer / Units of Pretzels / MUpretzels1 / 8 / 1 / 10
2 / 7 / 2 / 8
3 / 6 / 3 / 6
4 / 5 / 4 / 4
5 / 4 / 5 / 3
6 / 3 / 6 / 2
7 / 2 / 7 / 1
8 / 1 / 8 / 0
a. Give an algebraic restatement of the utility-maximizing rule and explain what it means. (6 points)
b. What daily quantities of each will you purchase to maximize utility? (4 points)
c. What total utility will you realize? (3 points)
d. Assume that, other things remaining unchanged, the consumer’s income increases to $12. What quantities of Beer and Pretzels will you now purchase? (4 points)
5. A monopolist has the following total cost data and demand schedule:
Output (units) / Price ($) / Total Cost ($)0 / 12 / 5
1 / 11 / 10
2 / 10 / 15
3 / 9 / 20
4 / 8 / 25
5 / 7 / 30
6 / 6 / 35
7 / 5 / 40
8 / 4 / 45
9 / 3 / 50
10 / 2 / 55
11 / 1 / 60
12 / 0 / 65
b. Now suppose the government wishes to regulate this monopolist to produce at the socially optimal level of output. How will this affect the output, price, and profit realized by the monopolist? Be specific. (6 points)
6. The U.S. market for soybeans is perfectly competitive with thousands of price-taking buyers and sellers.
a. Graphically depict both the U.S.soybean market and one typical farmer who is producing at the profit maximizing quantity when the market price is below his average total cost curve but above the shutdown point. Label everything. (10 points)
b. Thoroughly describe, you do not need to draw, how the above situation, both for the U.S. soybean market and for the typical farmer, will adjust in the long run. (8 points)
7. For each of the following statements, critically evaluate the correctness of the statement and explain your response. (6 points each)
a. Because a monopolist can control product price, the monopolist is always assured of profitable production by simply charging the highest price consumers will pay.
b. A price that exceeds marginal cost is the market’s way of signaling the need for more production of a good.
c. Perfectly competitive markets are more efficient than monopolistic markets and therefore society will always prefer the more efficient outcome.
Intro Micro Exam 2, Fall 2006