econ 202: principle of microeconomics name: fall 2005...

ECON 202 Practice Third Midterm Fall 2005

ECON 202: Principle of Microeconomics Name:________________ Fall 2005 Bellas Practice Third Midterm You have two hours and twenty minutes to complete this exam. Answer all questions, explain your answers, label axes and curves on graphs and do your own work. Fifty points total, points per part indicated in parentheses. 1. Consider a firm with the following technology that sells its output for $8 per unit:

Labor Total Physical Product (TPP)

Marginal Physical Product (MPP)

Marginal Revenue Product (MRP)

1 10 2 19 3 27 4 34 5 40 6 45 7 49 8 52 9 54

A. Calculate MPP and MRP. (2) B. How many units of labor will be demanded if the wage is $33? (1) C. How many units of labor will be demanded if the wage is $25? (1) D. How many units of labor will be demanded if the wage is $17? (1)

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2. Taxes are important issues in microeconomics. A. Draw a supply and demand diagram showing a tax on a consumer. Be sure to include:

the pre-tax quantity (1) the post-tax quantity (1) the dead weight loss from the tax (1) the burden on consumers (1) the burden on suppliers (1)

B. Consider a tax on kashkaval, a little known but very tasty variety of cheese. Are consumers likely to bear most of the burden or are producers likely to bear most of the burden of this tax. Explain. (2) C. What difference does it make if the kashkaval tax is put on suppliers or on consumers? (2)

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3. Diagram a positive externality that occurs in consumption. Be sure to show: the demand curve (1) the social marginal value curve (1) the market quantity (1) the efficient quantity (1) the dead weight loss at the market quantity (1)

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4. Aaron and Derek operate a pirate business. They are ruthless profit maximizers. A. One day, Derek reorganizes the deck of the pirate ship and discovers that this increases the crew’s productivity. What impact does this have on their demand for labor? (2) B. Aaron discovers that he can use his hypnotic powers of suggestion to convince people to loan him money at an interest rate well below what he could have borrowed at before. What impact does this have on their level of investment? (2) C. How does the change in Aaron and Derek’s level of investment affect the marginal productivity of labor? (2)

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5. Consider a firm selling a good with a price of $16 with the indicated marginal cost schedule and the indicated marginal external cost schedule.

Quantity

Marginal Private Cost

Marginal External Cost

Marginal Social Cost (MSC = MPC + MEC)

1 $ 5 $ 6 2 $ 7 $ 6 3 $ 9 $ 6 4 $11 $ 6 5 $13 $ 6 6 $15 $ 6 7 $17 $ 6

A. Complete the marginal social cost schedule. (1) B. What is the profit maximizing quantity to produce? (1) C. What is the efficient quantity to produce? (1) D. Calculate the dead weight loss from the profit maximizing quantity. (1) E. What per unit Pigouvian tax will result in the efficient quantity being produced? (1)

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6. Consider this example in which there are three firms, each emitting ten tons of a pollutant, who have the following marginal abatement costs (MAC) or marginal cost schedules for reducing their pollution: Tons of Pollution Abated

MACA

MACB

MACC

1 $ 3 $ 5 $ 4 2 $ 6 $ 6 $ 8 3 $ 9 $ 7 $12 4 $12 $ 8 $16 5 $15 $ 9 $20 6 $18 $10 $24 7 $21 $11 $28 8 $24 $12 $32 9 $27 $13 $36 10 $30 $14 $40 Imagine that the goal of the pollution control authority is to reduce pollution by twelve tons. A. If each firm does four tons of abatement (that is, if they both reduce their pollution by four tons) what will be the total cost? (2) B. What is the lowest cost way to reduce pollution by twelve tons? How much abatement does each firm do? (2) C. What per ton emission fee will result in a reduction of twelve tons of pollution? (2)

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7. One approach to dealing with externalities is through the use of a Pigouvian tax. A. Briefly explain what a Pigouvian tax is. (1) B. Briefly describe the advantages and disadvantages of a Pigouvian tax for dealing with pollution problems. (1)

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8. Find the equilibria for the following games. Each game may have zero, one or multiple equilibria. (1 each)

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9. Opportunity cost is one of the most important concepts in economics. You win a free ticket to a hockey game and, for various reasons, you cannot re-sell the ticket. The band “The Real McKenzies” is performing at the same time and is your next-best alternative activity. Tickets to see “The Real McKenzies” cost $30. On any given day, you would be willing to pay up to $55 to see them perform. They do an excellent cover of “Auld Lang Syne” on their CD Clash of the Tartans. Assume there are no other costs of attending either event. Based on this information, what is the opportunity cost of going to the hockey game? (3)

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10. The principle of comparative advantage is important in economics, and especially in international trade. Consider the example of two farmers, Angus from Scotland and Malcolm from Australia, who are growing oats and cane. In one year, they have the following production possibilities: Oats Cane Angus 18 6 Malcolm 4 16 That is, Angus can grow 20 units of oats or raise 8 units of cane or any linear combination of the two. A. Calculate the opportunity cost of each activity for each person. (1) Each person requires three units of oats to stay alive and, after that, would like to have as much cane as possible. B. If they do not trade, how much cane can each person have? (1) C. If they specialize and trade, what is the total gain in terms of units of cane? (1)

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11. Two of the market imperfections we considered were monopoly and negative externalities. A. Draw the standard picture of a monopolist’s profit maximizing output decision, showing both the efficient quantity and the profit maximizing quantity and the dead weight loss from the profit maximizing quantity. B. Draw the standard picture of a negative externality resulting from production, showing both the efficient quantity and the market quantity and the dead weight loss from the market quantity.

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econ 202: principle of microeconomics name: fall 2005...

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