Intro Micro Exam 3, 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.
1. “In the long run, there is no difference between monopolistic competition and perfect competition.” True, false, or ambiguous? Discuss this statement with respect to the following. A graph is not necessary but a good explanation certainly is. (15 points)
a. The price charged to consumers.
b. The efficiency of the market outcome.
c. The typical firm’s profit in the long run.
2. You are researching the breakfast cereal industry and you discover that the four-firm concentration ratio (CR4) is 82.9. What exactly does this CR4 mean? Use this statistic to evaluate the level of market power in the breakfast cereal industry. You also discover that the CR4 in the plastic pipe industry is 24. In which industry would you expect the difference between price and marginal cost to be the smallest? Explain your responses. (12 points)
3. Is the earnings difference between men and women entirely the result of employment discrimination? Why or why not? Use evidence from readings and the DVD to support your argument. (12 points)
3. Magnificent Blooms is a florist in a monopolistically competitive industry. It is a successful operation, producing the quantity that minimizes its average total cost (ATC) and making a positive profit. The owner boasts to you that at its current level of output, the MC>MR. (6 points each)
a. Illustrate the current situation for Magnificent Blooms in a well-labeled diagram.
b. In the short run, could Magnificent Blooms increase its profit? Explain.
c. In the long run, could Magnificent Blooms increase its profit? Explain.
5. The U.S. and the European Union (EU) send fishing fleets to the North Atlantic to harvest fish. Each nation has two choices, to send one fleet or two fleets of ships. The matrix below shows the profit ($) per week earned by the two nations. The payoffs are US, EU.
EU1 Fleet / 2 Fleets
U.S. / 1 Fleet / $10,000 , $10,000 / $4,000 , $12,000
2 Fleets / $12,000 , $4,000 / $7,500 , $7,500
a. What is the non-cooperative (i.e. competitive) Nash equilibrium? (4 points)
b. Suppose the fish in the North Atlantic are becoming scarce from too much fishing. Could the U.S. and EU come to an agreement that is beneficial to the fish? Would it be beneficial to the fishing industry in each nation? Explain. (6 points)
6. Suppose a competitive labor market is in equilibrium. Describe how the following events will affect the labor market and predict changes in equilibrium employment and the market wage. Diagrams are not necessary, but make sure that you provide an explanation for the changes. (5 points each)
a. The demand for the product produced by the labor increases.
b. A licensing requirement is necessary in order to be employed at this occupation.
c. The price of capital, a substitute for the labor, increases.
d. Combine parts a) and b).
7. Use the table below to determine this firm’s employment decisions. The firm hires labor and capital in perfectly competitive labor markets and each unit of the final product sells in a competitive output market for $.25. The price of labor is $2 and the price of capital is $1.
Qty of Labor / MP of Labor / Qty of Capital / MP of Capital1 / 20 / 1 / 20
2 / 16 / 2 / 18
3 / 12 / 3 / 16
4 / 10 / 4 / 12
5 / 8 / 5 / 8
6 / 4 / 6 / 6
7 / 2 / 7 / 4
8 / 1 / 8 / 2
a. What is the least-cost combination of labor and capital that would enable the firm to produce 150 units of output? (4 points)
b. What is the profit maximizing combination of labor and capital? (4 points)
c. What is the total output and profit when the firm is employing the profit-maximizing combination of labor and capital? (5 points)
Eric Dodge Page 3 11/20/2008