Eric Dodge Page 1 4/6/2005
Exam 3_EC213 W 2005.doc Name: ______
EXAM #3
If there is a question that is unclear to you, simply ask. Show all work for partial credit opportunities. Use the space provided to answer the following questions. There is additional space on the back.
1. A perfectly competitive firm has a cost function: TC = 30+ 12Q + .2Q2
a. If the price of the firm’s output is $15, how much output should the firm produce to maximize profit? Calculate profit at this level of output. (5 points)
b. Explain the shutdown condition and why firms might sometimes find it optimal to shut down. At what price would the above firm find it optimal to shut down and produce nothing? You may use a numerical example to help your explanation. (9 points)
c. Given the situation found in part (a), what do you expect to see in the long run for: (i) this industry and (ii) a typical competitive firm. Please describe any and all adjustments. Diagrams are not necessary. (10 points)
2. A researcher claims to have estimated input demand curves in an industry in which the production technology involves two inputs, capital and labor. The input demand curves he claims to have estimated are: L = wr2Q and K = w2rQ.
Are these valid input demand curves? In other words, could they have come from a firm that minimizes its costs? Explain your reasoning and use a diagram to make your point. (9 points)
3. a. Explain the concept of allocative efficiency. How do you know when it has been achieved in a market? (5 points)
b. Explain the concept of dead weight loss. How do you know when it exists in a market? (5 points)
4. Suppose market demand is given by P = 20 – 1.5Qd and market supply is given by P = .5Qs.
a. With no taxes or subsidies, what is the competitive market equilibrium price and quantity? Calculate consumer and producer surplus in this market. Show in a well-labeled diagram. (6 points)
b. If the government imposes an excise tax of $2 on suppliers, what will be the new equilibrium quantity? What price will the buyer pay and what price, after the tax is paid, will sellers receive? Show in a well-labeled diagram. (6 points)
c. Who bears the greater burden of the tax? Please be specific. What does this tell you (in general terms) about the elasticity of demand? Explain. (6 points)
d. How much revenue is collected by the government? How was total social welfare affected by the excise tax? Please be specific. Show in a well-labeled diagram. (6 points)
5a. Describe the structural characteristics of the pure monopoly model. (8 points)
b. Suppose the government proposes to levy a tax on a monopolist so that all monopoly profits are redistributed back to consumers. How will this policy impact consumer surplus? How will the policy impact social welfare? Explain. (10 points)
6. As the owner of Equilibrium, a single’s club for students of Economics, you are exploring the possibility of a third degree pricing scheme. Suppose that the demand equations of women and men for admission to nightclub are given by:
Pw = 9 - .075qw
Pm = 11 - .04qm (where qw and qm are the nightly # of swingin’ Economists, baby.)
It is also the case that the club has a marginal cost of $1 for each clubber that comes through the door. If you are going to be a price discriminator, what prices should men and women be charged for entrance into Equilibrium? What important characteristics are necessary for third-degree price discrimination? Do you see these characteristics here? (15 points)