Sample Micro Economics Final Dr. Stokes
Name __________________________ SS # ________________________
Answer all questions on this sheet. Check answer and explain why you made this choice for 1-4
1.
10 points Consider a good whose own price elasticity of demand is 0 and price elasticity of supply is 1. The fraction of a specific tax that will be passed through to consumers is: a.
0 b.
.25 c.
.5 d.
.75 e.
1.
Explain why. e. Since the demand curve is a vertical, then the full price can be passed on to the consumers.
2. 10 points. When the federal government installs a price support program that requires the government to purchase all of a good not bought in the private economy at the support price, changes in producer surplus a.
are negative b.
are positive, but more than offset by the cost to consumers and the government c.
are positive, and not offset by the cost to consumers and the government d.
and consumer surplus are both positive
Explain and draw the case. b. See figure 9.10 page 333
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Sample Micro Economics Final Dr. Stokes
3. 10 points. The demand for tickets to the Meatloaf concert (Q) is given as follows:
Q=120,000 - 2,000P
MR=60-.001Q
Th stadium at which the concert is planned holds 60,000 people. The marginal cost of each additional concert goer is essentially zero up to 60,000 fans but becomes infinite beyond that point.
Given the information above, what is the profit maximizing number of tickets sold and the price of tickets? a.
0, $60 b.
20,000, $50. c.
40,000, $40 d.
60,000, $30 e.
80,000, $20
Explain
(d). Here MC=0 => 0=MR=60-.001Q, => Q=60/.001=60,000.
P=(120000-Q)/2000=60000/2000 = 30
4. 10 points. Using the information from problem 3, assume that the City council imposes a ticket tax of $10.00 to cover "cooling off center costs." As concert promoter what is the profit maximizing price? a.
Increase by $10.00 b.
Increase by $5.00 c.
No change in price d.
Decrease by $5.00 e.
Decrease by $10.00
Explain your calculations and tell the expected number of people you will have at the rock concert you are promoting.
MC=10, Set MC=MR => 10=60-.001Q, Q=(60-10)/.001=50000
50000=120000-2000P, => P=(120000-50000)/2000=35. => raise price $5.00. The concert will no longer sell out!!
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Sample Micro Economics Final Dr. Stokes
5. 20 points. Rita Hernandez is the city planner in a medium-sized southeastern city. The city is considering a proposal to award an exclusive contract to Clear Vision, Inc. a cable television carrier. Ms. Hernandez has discovered than an economic planner hired a year before has generated the demand, marginal revenue, total cost and marginal cost functions given below:
P
 
Q
MR
 
Q
TC
 
Q
2
MC

.0012
Q where Q = the number of cable subscribers and P = the price of basic monthly cable service. Conditions change very slowly in the community so that Ms. Hernandez considers the cost and demand functions to be reasonably valid for present conditions.
Ms. Hernandez knows relatively little economics and has hired you to answer the questions listed below. a.
What price and quantity would be expected if the firm is allowed to operate completely unregulated?
Firm sets MR=MC. => 28-.0016Q=.0012Q, Q=28/(.0012+.0016)=10000
P=28-.0008(10000)=$20 b.
Ms. Hernandez has asked you to recommend a price and quantity that would be socially efficient. Recommend a price and quantity to Ms. Hernandez using economic theory to justify your answer.
Here we set MC =P. =>28-.0008Q=.0012Q, Q=28/(.0008+.0012)=14,000
P=28-.0008*14000=$16.80 c.
Compare the economic efficiency implications of (a) and (b) above. Your answers need not include numerical calculations, but should include relevant diagrams to demonstrate the deadweight loss of option (a).
Here when P=MC Q increases from 10,000 to 14,000 and price falls from $20.00 to $16.80
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Sample Micro Economics Final Dr. Stokes
6. 20 points. The P. M. D. Light Company produces and sells three standing lamps. The contribution to overhead and profit for these lamps is constant at the following levels regardless of output level: Model A = $8.75, Model B = $13.25 and Model C = $16.80. All three models go through the basic assembly process; then models A and B go through the fabric installation process while model C goes through the antique-bronzing process. The wage rate for labor is $8.00 and
$12.00 for overtime. The requirements of each model in each process and the weekly availability of these processes are as follows:
Process Hours Available
Assembly 800
Fabric 480
Bronzing 160
Hours Required per unit
A
.2
.1
0.
B
.3
.12
0.
C
.35
0.
.8 a.
Carefully layout the problem and discuss when is meant by the "Objective
Function" and the "Shadow Price."
Objective function what we maximize. Here = 8.75A+13.25B+16.8C
Shadow price = increase in objective function if one more input is used.
Your research assistant Jose Lopez-Smith has provided you with the below listed b34s output.
Numberer of activities (X) 3
Number of constraints (m1+m2) 3
Number of inquality constraints (m1) 3
Number of equality constraints (m2) 0
Constraint Matrix (A)
1 2 3
1 0.200000 0.300000 0.350000
2 0.100000 0.120000 0.00000
3 0.00000 0.00000 0.800000
Constraint vector (B)
800.000 480.000 160.000
Cost vector (C)
8.75000 13.2500 16.8000
Objective function maximized at 35601.66666666667
Primal values
0.00000 2433.33 200.000
Dual values
44.1667 0.00000 1.67708
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Sample Micro Economics Final Dr. Stokes b.
Discuss what products the firm should produce and whether they should increase any of the hours available. If an increase is called for, should overtime be used? Explain carefully your reasoning
Analysis suggests produce ONLY 2433.33 B. Profit will be 35601.66666.
Only increase constraint # 1 (800) to 801. Profit increases (44.1667-8.00) or (44.1667-
12.00) depending on whether regular or overtime is used. Constraint # 3 (160) does not add more than it costs => do nothing here,
7. 20 points. In the town of Jonesville the plumbers have a choice of joining unions or working as non-union union plumbers. The total short-run supply of plumbers is perfectly inelastic at 500 workers per day. The demands for nonunionized and unionized plumbers, respectively are:
W nu
 
W u

30 .10
L
The wage rate is W $/hr and the number of workers per day is L. a.
Determine the total demand for plumbers
L
NU
=750-25W, L
U
= 300-10W, => L = 1050-35W, W = (1050/35)-(L/35)=30-.0286L b.
Calculate the total market wage rate of plumbers assuming that unionized and nonunionized plumbers get the same wage.
500=1050-35W, => W = $15.71 c.
In the unionized workers success in getting their wage increased to $20.00 per hour, how many unionized workers would loser their jobs?
L u
=300-10*20=100. L uold
=300-10*15.71=143. => 43 people lose their jobs!! d.
If the unionized workers in c who lost their jobs take jobs as non-unionized workers, how much and in what direction would non-unionized wages change?
L nuold
=750-25*15.71=357. Could just take 500-143 to get 357.
Total non union = 357+43=400. => non union wage = 30-.04*400=$14.00
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