533578033
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. Marty’s Frozen Yogurt has the production function per day shown in the accompanying table. Marty
produces frozen yogurt in a perfectly competitive market and he employs workers in a perfectly
competitive labor market. The market equilibrium wage rate for each worker is $60 per day. He also has
fixed costs of $10 per day. Each cup of frozen yogurt sells for $2.
Quantity of Labor
Quantity of frozen
(workers)
Yogurt (cups)
0
0
1
40
2
75
3
105
4
130
5
150
6
165
a. How many workers should Marty employ to maximize his profit? Calculate Marty’s profit. (3 points)
b. Suppose that Marty purchases a new yogurt machine that increases productivity at the shop. In fact the
machine doubles output at all levels of labor employment. Assuming the wage remains the same, how
many workers should Mary employ to maximize his profit? Recalculate Marty’s profit. (4 points)
2. You are researching the restaurant industry in a large city and you find that the four-firm concentration
ratio (CR4) is 10. What exactly does this CR4 tell you? What type of market structure does the restaurant
industry appear to be? Explain. What difficulties exist in using the CR4 to accurately measure market
concentration? (10 points)
3. Coke and Pepsi are each considering whether to advertise during the Super Bowl or to not advertise at
all. The matrix below shows the profit ($) earned from this decision. The payoffs are Coke, Pepsi.
Pepsi
a. First identify any dominant strategies. (4 points)
Don’t Advertise
Advertise
Don’t
Advertise
$10,000 , $9000
$8,000 , $12,000
Advertise
$15,000 , $6,000
$7,500 , $7,500
Coke
b. If each firm makes the choice at the same time, what is the Nash equilibrium? Is this an example of a
prisoner’s dilemma? Explain. (7 points)
Eric Dodge
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NAME:__________________
4. A monopolist has the following total cost data and demand schedule:
Output (units)
0
1
2
3
4
5
6
7
8
9
10
11
12
Price ($)
12
11
10
9
8
7
6
5
4
3
2
1
0
Total
Cost ($)
a. If this monopolist is unregulated, find
the profit maximizing quantity, price and
profit. (6 points)
5
10
15
20
25
30
35
40
45
50
55
60
65
b. Now suppose the government wishes to regulate this monopolist to produce at the level of output where
there is zero dead weight loss. How will this affect the output, price, and profit realized by the monopolist?
Be specific. Is this a wise strategy on the part of the government? (7 points)
5. 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. (7 points each)
a. The demand for the product produced by the labor increases.
b. Immigration has increased the number of people who are capable of performing this work.
c. Combine parts a) and b).
Eric Dodge
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NAME:__________________
6. 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 $1 and the price of capital is $2.
Qty of Labor MP of Labor Qty of Capital MP of Capital
1
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 78 units of
output? (5 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)
7. We discussed a form of labor market bias called “customer discrimination”. First, summarize this form
of discrimination. Was this evident in any of the cases we discussed in class? Explain. (8 points)
8. 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. (6 points)
Eric Dodge
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