Economics I

Economics I Midterm 2

Spring 1998

Part I (24 points)

Answer the first question and five out of the remaining six. Explain whether the statement is true, false or

partially true. The grade will be based on the quality of your explanation.

1. In the article, "Does Market for Women's Labor Need Fixing?" Fixing?" presents wages for men and women in narrowly defined occupations to show that differences in human capital explain the wage gap between men and women.

2. A perfectly price discriminating monopolist is Pareto effficient.

3. Leisure is a normal good for Jane, and thus a wage increase will not affect her labor supply.

4. Links between factor markets and product markets are a reason why the long run industry supply curve may slope up.

5. It is hard to sustain a Cartel that has many members.

6. Monopolistic competition is socially desirable.

7. Unions increase unemployment when they demand a wage above the monopsony wage.

Part II (12 points)

The sole electric company in the region has fixed costs of 1,000 and the marginal costs of producing a kilowatt of electricity is zero. Thus TC=1,000 + 0*q and MC=AVC=O. The demand for electricity is given by Q= -1 00-P.

(1) If the company is not regulated what will be the price for electricity? How much electricity will be produced? What will be the company's profits?

(2) Now suppose the state decides to regulate the industry and demands the company produce at marginal cost pricing or shut down. How much electricity will the firm produce?

(3) What problem is presented here? Suggest a possible solution (no calculations necessary).

Lauren Rich

Section-Specific

Suppose the pizza market is perfectly competitive. An individual pizza maker has the following hourly costs:

Output (pizzas per hour)

Total cost ($/hr)

a) (3 points) If pizzas sell for $14, what is the firm's profit-maximizing output per hour? What is its profit?

b) (3 points) What is the pizza maker's shutdown point? Derive the firm supply curve.

c) (3 points) What price will cause other firms with identical costs to enter the pizza industry?

d) (3 points) What is the long-run equilibrium price of pizzas?

e) (2 points) Consider the pizza market in Philadelphia. Which market structure do you think best describes this market? Explain your answer.

John Phillips

Section-Specific

Part III (14 Points)

(1) The market for widgets is perfectly competitive. Each firm in the widget market faces the cost structure depicted in the diagram below. Replicate the diagram below in your exam booklet. Use it to derive the supply curve for a widget-producing firm. Briefly explain your derivation of the firm's supply curve. Identify the shutdown price.

[Graph]

(2) Replicate the diagram below in your exam booklet. Say the firms in the perfectly competitive market for widgets form a cartel called Worldwide Widgets. They collude and jointly maximize profits like a single-price monopolist (assume full cooperation). Use your diagram to compare producer and consumer surplus in the previously competitive market for widgets and the new monopoly market for widgets. Is the new monopoly market allocative efficient? Using your diagram, prove your answer (i.e., show the inefficiency).

[Graph]

(3) Assume Worldwide Widgets can perfectly price discriminate. Repeat the exercise from (2) by comparing the perfectly competitive market for widgets to the perfectly price discriminating Worldwide Widgets.

Prof. Rebecca Stein

Section-Specific

Part III (14 points)

A large number of potential firms have the following cost functions for producing beer, regardless of how

many of them actually enter the brewing industry:

[Graph]

(The units of output are cases, where one case is 24 bottles of beer.)

Note that MC=q/20.

The demand for beer is given by Q = 900 - 10p.

(a) (4 points) Find the long-run competitive equilibrium price p*, per-firm beer output q*, industry output Q*, and number of firms, n* .

(b) (5 points) Suppose that in a short-run situation, there are just two firms in this beer industry, both with the cost functions depicted above. Now find the competitive equilibrium price, per-firm output, and industry output.

(c) (S points) Suppose now that there is a tax of 20 dollars per case of beer. Let p be the price that a firm gets per case, so that the amount a consumer pays for a case is p + 20. Find the long-run competitive equilibrium level of this price, as well as per-firm output, industry output, and number of firms.

Tomer Blumkin

Section-Specific

Part III (Total 14 points)

Letter manufacturers hire labor (workers) and capital (typewriters) in perfectly competitive factor markets and sell letters in a perfectly competitive product market. All producers employ an identical Production technology which satisfies the following property: production of each letter requires one worker and one typewriter. That is, if we denote by X the number of letters, and denote by L, K the number of workers and the number of typewriters respectively, then the technology is summarized by the following equation: X=Min (L, K). i.e., if L=4 and K=6, then X=Min(4, 6)=4.

(I) Draw a typical isoquant curve ("Indifference Curve"). (8 points)

(II) Suppose, the prevailing wage rate and price of capital are p1 =3 and pk

respectively. Characterize the cost function of a typical firm in the letter industry (3

points).

(III) Suppose that each firm can produce up to 10 letters per day. Characterize the daily

supply schedule of a typical producer. Show the graph (3 points).

Hint: For derivation of Mc(x), use the definition Mc(x)=Tc(x)-Tc(x- I ) for any x.

Calculate Mc(x) for an arbitrary x, don't substitute specific quantities.