r03A COLLEGE MrcRoECoNoMrcs COLUMBIA FrNAL ExAMTNATToN Ndtrre, A /Jflc,j E.iP-S 8 December 2016 You have three hours. SHOW WORK where calculations are required. Use lined sheets for your work and essays. A. Multiple Choice (80 pts) Place (A, B, C, D or E) in the space on the exam paper. Only one answer for each. If demand increases, but supply decreases: B A. Baoth price and quantity exchanged will increase. B. Price will increase, but we don't know what will happen to quantity exchanged. C.Quantity exchanged will increase, but we don't know what will happen to price. D. Both price and quantity exchanged will decrease. E. Price will increase but quantity exchanged will decrease. 2. a rise Suppose two goods aqiproduced her in one in the demand for one of the , what will i.e. complements in supply). if there is A.Tts cost of production will be reduced. left. . Its demand curve will shift to the Its dernand curve will shift the left. to ll flO, Shis will cause a rise in the price lwtrictr is a movement aloirg each curve and not a shift of any curve.) right. , D Suppose two goods have a [email protected];;r;1";ri"iDith on. of tlr" gooas, what will f,appen to the oiher lle. ltr cost will rise too. t C. Its supply f llE. W" "un't will shift right. gt6-dr------* lllle. each other. If there Its Aemand is a rise in the cost of producing will shift right. 'l[{D. Its demand will shift left. tell which curve will shift unless we can tdlfiT-tli6se16normal or inferior goods. 4. Ia The less etastic the suppty: A. The greater the dead weight loss from a price ceiling. ll greater . the consumer surplus from a price ceiling. EJ't C. The smaller the producer surplus.from a price ceiling. I r/i D. The greater the cost of the price ceiling to the governmeut. E. The larger the change in the quantity consumed. I l : Suppose we replace a price floor (where the government buys the surplus) with an equivalent subsidy so the quantity produced is exactly the same as it was with the old price floor. Then: The dead weight loss is the same as with the price floor. The consumer surplus is the same as with the price floor. fhe producer surplus is the same as with the price floor. l:.c :ost to the government is the same as with the price floor. ,..: : -antiqr consumed (by consumers) is the same as with the price floor. 1 .i1 : : ' spending all your money. lt If the marginal utility -J *-entl) --entll you are spendtng ::.:: .:. --=.::::. :::1in of the last dollar you spent on Y, this means: ---7--. rll-iT:--.-i -':: l: :I 'l' 1[E i of the last dollar you spent on X is i greater ---:-: - \-:-: -^ qAVe some qmnrrnf nf qnrl inn"aqco hannineqs sartrte lrrrnev Y rrnrr :.-. - s::.e happiness end you redrrne and save money ifif wnrr reduce fhe you hrrrr the amount of X buy and increase w Y. = '. .-ii this pi:::. : -: ::iser constraint must be steeper than your indifference curve. \'ou 0rB ricli.: ..:-: :,..tiput expansion path. ft this point. rhe i::;:=::n.e curve is tangent to your budget constraint. -^' ;=: .-a:. -: -- -- -a l\ \\Ihat is a pr:ce ce-,nsumption curve for X? A.m .o*birations of X and \- that give you the greatest utility as your income varies. line which )'ou get r'hen r ou slt tn" slope olthe indifference curve equal to the slope of the budget line. @t''t relationship of maximum utiliq benveen X on the X-axis and P on the Y-axis. L_t94 A relationship befween on the X-axis and Y on the Y-axis that gives you the maximum utility as the price of X varies. lltl{p ' E. The curve which dividesXthe change in X befween the income and substitution effects. f . -:l ..... - i\4ICROECONOMICS FINAL EXAM Page TWO 8 December 2C q .i::l :::i.il I :,.::-,i :,! .: , *t. If the price of both X and Y rise by 10%but incomes is the same, what happens to the budget constrai C tt Ur*-"" rteeper. 11a. 'lLB. ft becomes flatter. lC. We can't tell if it is steeper or flatter unless be know what happens to the marginal rate of substitution. llO. lt .tlifts outward in a parallel fashion. , , 'llllE. tt rffis inward in a parallel fashion. .,-'3-. 9. :4.. . .i+,i \{. llC. The totalutility must have decreased. '-.:ri-' ::... {l: . ,";l'l I ) Suppose you consume a certain combination of X and Y. Then you increase your consumption of ' but X stays the same. Comparing the old point to the new point: A. The marginal rate of substitution (X on the X-axis) must have decreased. (Become less negative). 1|\le. fne marginal utility with respect to X must have decreased. '::". . l03A jjtl fml1ft marginalriitity with respect to Y must have decreased. -i'Itr. The slope of the budget constraint must have decreased. :.;il !t :'i ii,. :-,.:, l:. : :':.L '':ii :'- )1 , Suppose X is an inferior good and the price ofX falls: A. You will more X because of the price rise. buy f B. You will buy less X because of the price rise. -l1ffi=,re substitution effect will be an increase in X. --+IfD-.The income effect will be an increase in X. e, fne income effect will be larger than the substitution effect. ff f , -: ,, D Suppose K is fixed in the short run. What is true about the total product curve (X:f(L))? point on the TP curve, the average product is equal to the maiginal product, tn" st""pesi lllE-t B. tf you draw a straight line from the origin to the TP curve, the tangency point is the highest marginalproduct. At the steepest point on the TP curve, the average product is greater than the marginal product. ,,[ C lllO. at L above the tangency point of the straight line from the origin, l4!_:l_1g!r lhal_A!. At the tangency point of the straight line from the origin, the marginal product is at its maximum. lll lE. f ff D. l-' You want to find the cheapest way to produce a ceftain amount of X when both inputs can vary. The r*,tt oa will occur when: "h"up*t la. fn" ratio of capital to labour is equal to the ratio of the price of capital lllB T& output expansion path will have the same slope as the isoquants. to the price of labour. marginal product of the last dollar spent on capital is equai to the MP of the last dollar spend on labour. -TliCE"e When the margin:il rate of substitution between X and Y is the same as the slope of the budget constraint. Wten the marginal rate of technical substitution is equal to the isocost. -TlD. *lLf B' C Suppose along the output expansion path, a 100% increase in the amount of labour and capital used causer tlre output that can be produced to increase by lA%. Then: long run maiginal cost curve will bL equal to the short run marginal cost curve. " -11tr[9. fne short run marginal cost curve willhave a negative slope. ll C. ffre long run marginal cost curve will always be above the long run average cost curve. D. The short run marginal cost curve will always be above tlie shorl run average cost curve. illE The minimum point of the short run average cost curve will be on the long iun average cost curye. -fJqtt --l llr, A u.rlWhentheamountofcapitalisfixed,[email protected] labour. For the output produced with this labour: la. The average "oit "rrr" has a negative slope. ItlB. Tne average variable cost can have a positive slope or negative slope. tC. The average cost curve can have a positive slope or negative slope. The marginal cost curve will have a positive slope. f l\t[tP t' '' lE. The average fixed cost will have a positive slope. 1^-\ tv u)., L lil' i-^ \.------- _,- . ii-;- r :'i1 tt: l" r .:- l.b;tf$ FINAL MTCROECONOMICS 1O3A ( 5.______;._. , Suppose , paJh. Ai-this level of^,L, I EXAM Page THREE 8 December 2016 K is fixed in the short run and we are using a level of L that is greater than the output expansion A. The shoft run marginal cost is below the long run marginal cost' ort run marginal cost is below the short run average cost. The short run average cost is above the long run average cost' -DJEE[ong run average cost curve has a negative slope. has a negative slope. l[e. fne short run average cost curve . Suppose the price is below the minimum point on the average cost curve but above the minimum point on \6. the average variable cost curye. Then: lh. The company should increase the amount of X it produces to increase profits. tl'g. th" company should decrease the amount of X it produces to increase profits. The company should produce the amount of X where price equals marginal cost. ThEcompany should shut down to reduce losses' The company should reduce fixed costs to reduce losses. \/ Suppose all the firms in a perfectly competitive industry are making losses. mo\ e to the tong run: n ).f fne number-of firms will .lf cost. average alower produce X at will left . E4h firm Ti1-e l[iO I +iiF-E=f *n firm fi.- will .,,ill produce Y at of a a lower lnrver marginal maroinal cost. cnqt ^"ndrrnp X ,f if increase. "'r, ft We predict that as we fne price of^this.product will decrease. f""n firm Ieft will produce less X than before. monopoly is maximizing profit: t{ Tb-e price the monopoly charges will be greater than the marginal revenue. -ll*tS. Th" marginal revenue will be greater than the marginal cost' whe, a Tlre ma$4g&g$ must be greatsr than the average cost. n+{l( ' 'tlln The marginal revenue must be greater than the average cost' ' E. Tlte price must be less than the maiginal cost. ''19. e Suppose there is a decrease in demand (but no change in costs) for a product produced by a monopoly. U. p*ai"r A The monopoly will now be making a loss' Tii+B The monopoly will be producing X at a lower average cost. i I C the rnonopoly will be producing X at a higher average cost. 1lC;ne monopoly will have a higher price to maximize profit' W Tlregonopoly will have a lower price to maximize profit. a ' .r.C |EJt l--* l) ;urve. Suppose by luck, the monopoly maximizes profit by producing X that is the minimum point on a short run This means: profit (at this break even point). marginal revenue will be equal to average cost (notjust marginal cost). ],: The price the rnonopoly charges will be equal to the marginal revenue. I The DWL comparing the monopoly to competition will be zero' '11: .{t this point marginal revenue will be greater than price. e monopoly is making zero 'i iA-,rt this X, the monopoly's , L B. Comparative Statics (26 pts) Let the market for olives be: Price: 3 5 7 9 11 13 30 18 6 Quantity Demanded: 66 54 42 9 15 21 27 33 Quantity Supplied: 3 and of supply at equilibrium. demand of elasticities i Cul"rtut" tire ""q,iriu,i,",i C4= 4 ju (g, j 8 December 2016 Page FOUR FINAL EXAM MICROECONOMICS 1O3A Etc Etc. Etc. the cdem and and s upplyy curves elastic or inelastic S,l:bL B_,q=,o = 4 t-a' 2= '/ 'n{'& ==Z*-{ y l- A4--A\=L1 :11 5-81 y1r0%. ises by incomleIrises -8P w hen inr o: Qd:1 ts to: nd shifts maand Qc 'A.k:zl. zrl (d=tl.-'a.k 4 rta,rt L,t ,? -rt ,o? = (o *t0? = f(l ( '>- PP Pc -?l . ,L ln- t4L I tZru4 NtloRnl -l> ives:: APS ,*z 'G' 45 '{t7- Ig lo -qz t''.' -t.6 t,?n -LCtdldf. 'zO2 f?( ACS QP Qc ,.-3) -/!: bU a't--_-efi, ( i-- i, i,z5 per uni it tax on u rit unit of $3 per What is the economic Z. -d7 "1 +l rt2,:-,f)G '?-tl '?-\ %. B#" €=z(*)= t-1.2:f \ r[,4k ), 2-1 DWL AGR r)t's) r-{i -q ,> , 1"5 9C .\r\ r o-z D-.-On D,,-O1n Py:$20e{:& c. utiliry (23 pts) Let U=5XY-X=X(5Y-1), (MUx:5Y-1, MUy:5X) I:$76, Px:$9, 3- l.t =/aq qj=291 o=:% 5 r 1 ,-l >L, Y=tt ,4.162 Find tlre new equilibrium i'x;. X', Y' and U' if !ft:=p '--',,!i6a Px decreases to $Z' Find the demand equation for X (Isolate X on one side of tf,e(/uiti lC= 2x 1 "T:' @x , ++1 X'=ff>:tl,'l1t ')= l.cl(frindtheintermediatepoint(bothllndY)forthesamehaovi2e-ss-a2pflbut o. -r4iu :lt: hY+ xD '! .--72=2hx) withPx,=$2(HINT:tffin''t.;\7.ol'4i,a=2c,1.-lt1i:t,v+xDt!.-IA,,5x -'.fi, i',- indilference curves' budget constraint and ICC 5. Draw a rough diagram showing the results of #1, #zwith the appropriate mark the income and substitution effects of curves. carefully label these and then rnu.r. ,rc iniermediate poiri 1++;. Also the increase in thi price of AX4J X. 5 u-rc 2,\ "4 * (t''"H Gff/ \'*Y ..#ro'!'" ;17 (S{1,o \| \ /// ,l' /,./ //l ( @yt* - GE) t.\st -\-- i(,2 iO., Sx(Jl) -x 3b-'5"'r.-o,v<L 5 Y'=72 i<= 4 x Y = i'o'185- I\4ICROECONOMICS IO3A FINAL EXAM Page FIVE 8 December 2016 D. Production (32 pts) Let X:Lrl3K"', lMPr:11 /31L'2/3K2t3,Mpy:(2/3)LIl3K-r/3 wL:$2, 4 1 lC= z (iex\+noff)= i5o/ 4 , (a = z( /ARTS.- 2L* Zt *lht+ C3=> Findtheequationforthelongruntotalcostcurve.,Ws f ,.' sarrto) = goco +- Yo 3. Complete the table below.... A. Find the cheapest way to produce wK:$500 Find the_equatiion for tfdshort run\qtal cost curve when K=10, ., L= X:40 when both L and K are free to vary. %o, s point u ith r our results. A and fill in the table below B. Find the cheapest way to produce X:40 when K:l0 in the short run. Call this point B and fill in the table below with y'our results io C. Find the amount of X that is the cheapest to produce when K$in the short run. Call this point C and fill in the table b€lu-\\ rvith your results. PONT { ) X K 40 g B L/O /D c 5o io LTCACMC I aoo l5c 6occ t57 6Vo 6ao tzlo t5c /5oo t5C q[ ts-D -i. Draw a rough diagram showing all the appropriate isoquants, isocosts and the output expansion path. Label these and the PONTS A, B and C. The purpose of this diagramis tq sh-ow how these points fit together so show their relationship to each other clearly and carefully.6 /' L=125K i'Ll lo , I i*. *. it it >-C.: >o\=, 6lb 1660 tLS-a lt_ l-. Drarv a rough diagram showing all the appropriate average and marginal cost curves (both long run and short run). Carefully label the curves and POINTS A, B and C. The purpose of this diagram is to show how these points fit together s: shou their relationship to each other clearly and cajefully. ./ ,/ --'-,/ AC*=//lC.e (50 q4 ? I -a T -.:-s:n). .: -s:n ). = 3 6 LIO If P:$216, how much X should you produce (if you were one firm in a perfectly H How much profit would you make? 2/6. y% '3o*rq7 a -t'aJ x lzzo n2:36oQ = 3bvu E. rndustrial Structure (19 pts) Let variable 3 !,p.VK t+-lO, z ,. /21 v' ;" ,. X+= I , ;*o""'trrlr'ro; 4. tn. ,l 4. ,/ tr\ ,r'.* r**,',r li,io ';':Eio ?2=;;;' $!"t?Al= pzo. ',{;ifff!:;r::yv='y';!y:;#zv,::;muchquan"v Te ?r(O '--'3 J: -'I -.r^-^ 'r,lF"{rl""runthere 1A i,{o-tinqllw cized firms in this perfect ^-^ aret6identicallvrl:"9rrir*7)itffiP",f""ttv *, . =ZZ ilro-= -"i= i= q"iZ n,,,iEiT Ho* cost: 8 December 2016 Page SIX FINAL EXAM IV1ICROECONOMICS 1O3A ,, ?c,l t -- - 6 s?4 ?. T3 ' irt'n J; 2c=r6t,t* i'=ri '*oV!;i;iW-'W:*F ir firms sized te"aitry bv as'manv identicallv as sr.n,ry." tl,".e ls *iitn"i'e';"p:'ifuq"^*'y ^#";:r;*tsuin"B itri[^ ^\i;:]t:::i!';',1":, price rvourd ;:T:;,1oiit i, ina,,try, *hat ^rry:lit'o$yt!r:U'F::'fi'#'"* * -,.- ,-^-^-n,rr monopoly' this short run cul"u.ite ,t',"'iuaweight loss caused by words) essa]r' clearly (1) of tlie fo[owing topics for a short (maximum 250 F. Srrort Essay (20 pts) choose oNLy gNE help your essay' iabelled and explained diagrams will definitely elastic than a long a short run demand curve more or less as time passes? -(Is l . what happens to the elasticity of demand run? Explain' long the or *ug" tu* a" ,""r" a"rrug" in the short run run demand curve?) Given this, wilr u ,ninirnu. n.l cars are still far too of the ECONOMIST, batteries for electric z6rh,zor6issue November the to 2. According per kilorvatt hour' If fue[ed cars. currentry, a battery costs $325 expensive to be competitive yiJh easo]ine then electric (the 2oz0 target set by ihe uS Department olEnerg)')' hour kilowau to $tzs feil costs ner battery per banel) Under Bc'r barre_r. (-urrent oil prices are around $50 cars would be competitiv; if oil cost $11tp"; from the government o ..clean Energy vehicle Program", gc residents and businesses ut" Lligibl" for a subsidy money? car. no yo" thint< tiris is a good use of go\.erriment $5000 ( and up to $g250) if they buy an erectric Why or whY not? qqa qo 26 t61 Lcs- 5't4(ry*)=-55 AP5"= V6 *taslz A()5"+b, = = -fi (z.-) ' - 2i tL 68924