Microeconomics Analysis
Dr. Fadlon, 2016
January 2016
Quali…cation Exam
Answer all of the following 6 questions.
Write your answers in the space provided following each question.
Before you write your answer, read the question carefully.
Show enough of your work so that your reasoning can be followed.
There is one formula on page 15.
Student Name:
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1. The market for semiskilled labor can be represented by the following supply and demand curves:
LD
LS
= 32000 4000W
= 8000 + 6000W;
where L = millions of person hours per year, and W = the wage in dollars per hour.
(a) Calculate the equilibrium price and quantity that would exist under a free market. What impact
does a minimum wage of $3.35 per hour have on the market?
(b) The government is contemplating an increase in the minimum wage to $5.00 per hour. Calculate
the impact of the new minimum wage on the quantity of labor supplied and demanded.
(c) Calculate producer surplus (laborers’ surplus) before and after the proposed change. Comment
on the net e¤ect of the proposed change upon workers as a whole and on individual workers. How
does this price ‡oor di¤er from an agricultural support price?
(d) Is the policy e¢ cient from an economist’s viewpoint?
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4
2. LeAnn’s telecommunications …rm has a monopoly in the local market. The elasticity of demand is
at every price (Note: Demand is not linear.). LeAnn’s marginal costs are constant at $0:9:
4
(a) If LeAnn is maximizing pro…ts, calculate the price she is charging.
(b) If the local community institutes a $0:1 tax on each unit LeAnn sells, calculate the new price
LeAnn will charge consumers.
(c) What portion of the tax does LeAnn absorb?
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6
3. Travelers driving through Appletown can use a freeway or the Cross Town Tollway to get through the
city. The tollway charges $10 per car during the morning rush hour (6-9 AM) and the afternoon rush
hour (4-7 PM), and the toll is $4 per car at all other times. The weekly demand for using the tollway
during rush hour is
Q1 = 8000 200P1
where quantity demanded is measured in thousands of cars, and the weekly demand for the non-rush
hour period is
Q2 = 20000 1000P2 :
Appletown’s marginal cost of operating the tollway is
M C = 0:02 + 0:001Q
per car.
(a) What are the marginal revenue curves associated with the two demand curves?
(b) Has the city set the pro…t maximizing tolls for the Cross Town Tollway? If not, do the current
tolls generate too much or too little tra¢ c on the tollway?
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4. Two large diversi…ed consumer products …rms are about to enter the market for a new pain reliever. The
two …rms are very similar in terms of their costs, strategic approach, and market outlook. Moreover,
the …rms have very similar individual demand curves so that each …rm expects to sell one-half of the
total market output at any given price. The market demand curve for the pain reliever is given as:
Q = 2600
400P:
Both …rms have constant long-run average costs of $2 per bottle. Patent protection insures
that the two …rms will operate as a duopoly for the foreseeable future. Price and quantity values are
stated in per-bottle terms.
(a) If the …rms act as Cournot duopolists, solve for the …rm and market outputs and equilibrium
prices.
(b) If a third …rm with the same average cost enters the market, solve for the …rm and market outputs
and equilibrium prices.
(c) If K 2 …rms with the same average cost enter the market (so there are K …rms in the market),
solve for the …rm and market outputs and equilibrium prices. What is the market price as K ! 1
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5. Consider an individual with the following utility function described in the following graph
(a) Determine whether the individual is risk-averse, risk-neutrral, or risk-loving.
(b) Does the individual prefer a 50% chance of $100 and a 50% chance of $50 to a sure $75? Explain
(c) When facing a 50% chance of receiving $50 and a 50% chance of receiving $100, what is the risk
premium the individual is willing to pay?
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6. Rebecca consumes two goods, X and Y. Rebecca has a utility function given by the expression:
U (X; Y ) = 4X 0:5 Y 0:5 :
The current prices of X and Y are $25 and $50, respectively. Rebecca currently has an income of $750
per time period.
(a) Write an expression for Rebecca’s budget constraint.
(b) Calculate the optimal quantities of X and Y that Rebecca should choose, given her budget constraint.
(c) Suppose that the government rations purchases of good X such that Rebecca is limited to 10 units
of X per time period. Assuming that Rebecca chooses to spend her entire income, how much Y
will Rebecca consume? Is Rebecca satisfying the usual conditions of consumer equilibrium while
?
the restriction is in e¤ect M RS = PPX
Y
(d) Calculate the impact of the ration restriction on Rebecca’s utility.
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Formula
Monopoly rule of thumb
P
MC
=
P
15
1
EPD