Intermediate Microeconomic Analysis (Econ 173)
Drake University, Fall 2009
William M. Boal
MIDTERM EXAMINATION #4 ANSWER KEY
VERSION A
I. MULTIPLE CHOICE
(1)e. (2)b. (3)a. (4)c. (5)e. (6)d. (7)e. (8)b. (9)d. (10)c.
(11)c. (12)b. (13)b. (14)c. (15)d. (16)a. (17)a. (18)c. (19)c.
II. SHORT ANSWER
(1)
a. Set MCA(qA) = MCB(50-qA) and solve to get qA = 30 units.
b. 20 units.
c. $9 = MCA = MCB.
(2)
a. decrease.
b. 120 units other goods.
c. 1/2 units health care.
d. –2
e. $10, since slope = –Phealth/Pother goods.
(3)
a. $1.45.
b. increase.
c. $0.95 (=MR–MC).
(4)
a. $25.
b. $40.
(5)
a. curve C, tangent to average cost curve.
b. 50 units.
c. $9.
d. $0.
III. PROBLEMS
(1)
[General equilibrium]
a. MRSPA = 2 x1A / x2A .
b. MRSPB = x1B / x2B .
Allocation C is efficient because (although MRSPA is undefined) one cannot
increase output at Firm A without decreasing output at Firm B, and one cannot
make increase output at Firm B in any case.
Allocation D is inefficient because MRSPA  MRSPB.
Allocation E is efficient because MRSPA = MRSPB and all inputs are used.
Allocation F is efficient because (although MRSPB is undefined) one cannot
increase output at Firm B without decreasing output at Firm A, and one cannot
make increase output at Firm A in any case.
Allocation G is efficient because MRSPA = MRSPB and all inputs are used.
Allocation H is inefficient because not all inputs are used.
(i)
(2)
(3)
[Monopoly]
a. MR = 20 – (Q/5).
d. Profit = $810.
g. Profit = $1620.
b. Q* = 90.
c. P* = $11.
e. DWL = $405.
f. Q = 180.
h. No DWL with perfect price discrimination.
[Cournot duopoly]
a. Rev1 = q1 P = 20 q1 – (q12/10) – (q1q2/10).
b. MR1 = 20 – (q1/5) – (q2/10).
d. q1* = 60.
e. Q* = 120, P* = $8.
g. DWL = $180.
c. q1 = 90 – (q2/2).
f. Profit = $720.
IV. CRITICAL THINKING
(1)
Profits are indeed higher under a well-functioning cartel but consumer surplus is
lower because prices are raised to the monopoly level. There is deadweight
loss because some consumers willing to pay the marginal cost do not buy the
product. So the government should not encourage cartels.
P
D
DWL
MC
PC
MR
QC
(2)
Q
Fair but inefficient: Suppose Arnold is given two left shoes and Beth is given two
right shoes. This allocation is presumably fair because each person has the same
number of shoes. But both persons can be made better off by trading shoes, so
it is not Pareto efficient.
Unfair but Pareto efficient: Suppose Arnold is given all four shoes and Beth is
given none. This allocation is presumably unfair. However, it is Pareto efficient
because no one can be made better off without someone else being made
worse off. Beth cannot be made better off except by taking shoes from Arnold,
which would make Arnold worse off, and Arnold cannot be made better off in any
case, because he already has all the shoes.
VERSION B
I. MULTIPLE CHOICE
(1)a. (2)e. (3)b. (4)b. (5)b. (6)d. (7)e. (8)a. (9)e. (10)b.
(11)b. (12)a. (13)d. (14)d. (15)c. (16)d. (17)a. (18)e. (19)c.
II. SHORT ANSWER
(1)
a. Set MCA(qA) = MCB(50-qA) and solve to get qA = 10 units.
b. 40 units.
c. $7 = MCA = MCB.
(2)
a. decrease.
b. 300 units other goods.
c. 1/5 units food.
e. –5.
d. $25, since slope = –Pfood/Pother goods.
(3)
a. $0.95.
b. decrease.
c. –$0.05 (=MR–MC).
(4)
a. $30.
b. $50.
(5)
a. curve B, tangent to average cost curve.
b. 30 units.
c. $9.
d. $0.
III. PROBLEMS
(1)
[General equilibrium]
a. MRSPA = x1A / q2A .
b. MRSPB = q1B / (3 x2B ) .
Allocation C is efficient because MRSPA = MRSPB and all goods are consumed.
Allocation D is inefficient because not all goods are consumed.
Allocation E is efficient because (although MRSPA is undefined) one cannot
increase output at Firm A without decreasing output at Firm B, and one cannot
increase output at Firm B in any case.
Allocation F is efficient because MRSPA  MRSPB and all goods are consumed.
Allocation G is efficient because MRSPA = MRSPB and all goods are consumed.
Allocation H is efficient because (although MRSPB is undefined) one cannot
increase output at Firm B without decreasing output at Firm A, and one cannot
increase output at Firm A in any case.
(i)
(2)
(3)
[Monopoly]
a. MR = 15 – (Q/5).
d. Profit = $360.
g. Profit = $720.
b. Q* = 60.
c. P* = $9.
e. DWL = $180.
f. Q = 120.
h. No DWL with perfect price discrimination.
[Cournot duopoly]
a. Rev1 = q1 P = 15 q1 – (q12/10) – (q1q2/10).
b. MR1 = 21 – (q1/5) – (q2/10).
d. q1* = 40.
e. Q* = 80, P* = $7.
g. DWL = $80.
IV. CRITICAL THINKING
(Same as Version A)
[end of answer key]
c. q1 = 60 – (q2/2).
f. Profit = $320.