Principles of Microeconomics (Econ 002) Drake University, Spring 2012 William M. Boal Course page: www.drake.edu/cbpa/econ/boal/002 Blackboard: bb.drake.edu william.boal@drake.edu

### Version A

I. Multiple choice

(1)c. (2)c. (3)b. (4)b. (5)a. (6)e. (7)a. (8)b. (9)b. (10)b.
(11)d. (12)a. (13)c. (14)b. (15)c. (16)c.

II. Problems

(1) [Basic definitions, cost and revenue: 12 pts]

1. marginal cost. (Marginal cost of Firm A.)
2. marginal cost. (Marginal cost of Firm B.)
3. marginal revenue.
4. average cost.
5. total cost.
6. marginal revenue.

(2) [Economy-wide efficiency: 12 pts]

1. \$10.
2. \$4.
3. Firm B.
4. 8 million. (Marginal costs must be equal.)
5. 12 million.
6. \$6.

(3) [Economy-wide efficienty, PP curves: 10 pts]

1. 180 units of food. (Slope = Δ food / Δ shelter.)
2. 20 units of shelter.
3. -5.
4. 5.
5. (i) (Indifference curve's slope is greater, in absolute value, than production possibility curve's slope. So indifference curve through point A is steeper than production possibility curve.)

(4) [Monopoly price discrimination: 10 pts]

1. 18 percent.
2. 4 percent.
3. general public. (Market segment with less elastic demand always gets the higher price.)
4. \$4.50.
5. \$8.00.

(5) [Monopoly, perfect price discrimination: 18 pts]

1. 10 million. (Choose quantity where MR = MC.)
2. \$9. (Set price according to demand curve.)
3. \$50 million. (= revenue - cost = P x Q - AC x Q.)
4. \$25 million. (Area of triangle.)
5. \$14.
6. \$4.
7. 20 million. (Choose quantity where demand = MC.)
8. \$100 million.
9. \$0. (No deadweight loss with perfect price discrimination. Everyone willing to pay the marginal cost is served.)

(6) [Competition versus collusion: 16 pts]

1. 16 thousand.
2. \$8. (Marginal cost = height of supply curve.)
3. \$8.
4. MR has vertical intercept at \$16 and slope of -1/1 thousand. (If demand is straight line, MR must have same intercept as demand and twice the slope.)
5. 10 thousand. (Choose quantity where MR = MC.)
6. \$6. (Marginal cost.)
7. \$11. (Set price according to demand curve.)
8. \$15 thousand. (Area of triangle.)

III. Critical thinking [6 pts]

(1) This question applies the concept of economy-wide efficiency.

1. Axes should be labeled "food" and "housing." Production-possibility curve is downward-sloping, curved toward origin. Indifference curve should be curved away from origin, touching but not crossing production-possibility curve.
2. Point C is the tangency point.
3. Point M is on the production-possibility curve, but not at the tangency. Point M should be between point C and the food axis. Thus point M shows more food and less housing than point C, because under monopoly, too little is produced.

(2) The Arts Festival is an example of monopolistic competition.

1. Craft artists produce differentiated products, not perfect substitutes, because each artist's style is unique--at least in the minds of buyers.
2. Price is greater than marginal cost. Each artist faces downward-sloping demand because their work has a unique style.
3. Price equals average cost in the long run. There are no barriers to entry. If craft artists at the Festival are enjoying positive economic profits, more artists will come to the Festival, until prices are driven down to average cost. There are zero economic profits in the long run, which means that artists are making as much money making crafts as they could make doing something else.

### Version B

I. Multiple choice

(1)d. (2)a. (3)e. (4)c. (5)b. (6)d. (7)b. (8)b. (9)c. (10)c.
(11)a. (12)b. (13)a. (14)c. (15)d. (16)d.

II. Problems

(1) [Basic definitions, cost and revenue: 12 pts]

1. marginal revenue.
2. marginal cost.
3. marginal cost.
4. marginal revenue.
5. average cost.
6. total cost.

(2) [Economy-wide efficiency: 12 pts]

1. \$3. (Marginal cost of Firm A.)
2. \$9. (Marginal cost of Firm B.)
3. Firm A.
4. 10 million. (Marginal costs must be equal.)
5. 6 million.
6. \$5.

(3) [Economy-wide efficienty, PP curves: 10 pts]

1. 120 units of food. (Slope = Δ food / Δ shelter.)
2. 30 units of shelter.
3. -4.
4. 4.
5. (i) (Indifference curve's slope is greater, in absolute value, than production possibility curve's slope. So indifference curve through point A is steeper than production possibility curve.)

(4) [Monopoly price discrimination: 10 pts]

1. 14 percent.
2. 3 percent.
3. general public. (Market segment with less elastic demand always gets the higher price.)
4. \$3.50.
5. \$9.00.

(5) [Monopoly, perfect price discrimination: 18 pts]

1. 12 million. (Choose quantity where MR = MC.)
2. \$9. (Set price according to demand curve.)
3. \$72 million. (= revenue - cost = P x Q - AC x Q.)
4. \$36 million. (Area of triangle.)
5. \$15.
6. \$3.
7. 24 million. (Choose quantity where demand = MC.)
8. \$144 million.
9. \$0. (No deadweight loss with perfect price discrimination. Everyone willing to pay the marginal cost is served.)

(6) [Competition versus collusion: 16 pts]

1. 20 thousand.
2. \$6. (Marginal cost = height of supply curve.)
3. \$6.
4. MR has vertical intercept at \$16 and slope of -1/1 thousand. (If demand is straight line, MR must have same intercept as demand and twice the slope.)
5. 12 thousand. (Choose quantity where MR = MC.)
6. \$4. (Marginal cost.)
7. \$10. (Set price according to demand curve.)
8. \$24 thousand. (Area of triangle.)

III. Critical thinking

Same as Version A.

### Version C

I. Multiple choice

(1)a. (2)b. (3)d. (4)a. (5)c. (6)d. (7)c. (8)c. (9)a. (10)d.
(11)b. (12)c. (13)b. (14)d. (15)a. (16)e.

II. Problems

(1) [Basic definitions, cost and revenue: 12 pts]

1. total cost.
2. marginal revenue.
3. marginal cost.
4. marginal cost.
5. marginal revenue.
6. average cost.

(2) [Economy-wide efficiency: 12 pts]

1. \$5. (Marginal cost of Firm A.)
2. \$15. (Marginal cost of Firm B.)
3. Firm A.
4. 11 million. (Marginal costs must be equal.)
5. 7 million.
6. \$8.

(3) [Economy-wide efficienty, PP curves: 10 pts]

1. 240 units of food. (Slope = Δ food / Δ shelter.)
2. 15 units of shelter.
3. -0.5.
4. 0.5.
5. (ii) (Indifference curve's slope is less, in absolute value, than production possibility curve's slope. So indifference curve through point A is flatter than production possibility curve.)

(4) [Monopoly price discrimination: 10 pts]

1. 6 percent.
2. 3 percent.
3. general public. (Market segment with less elastic demand always gets the higher price.)
4. \$7.50.
5. \$15.00.

(5) [Monopoly, perfect price discrimination: 18 pts]

1. 6 million. (Choose quantity where MR = MC.)
2. \$8. (Set price according to demand curve.)
3. \$36 million. (= revenue - cost = P x Q - AC x Q.)
4. \$18 million. (Area of triangle.)
5. \$14.
6. \$2.
7. 12 million. (Choose quantity where demand = MC.)
8. \$72 million.
9. \$0. (No deadweight loss with perfect price discrimination. Everyone willing to pay the marginal cost is served.)

(6) [Competition versus collusion: 16 pts]

1. 10 thousand.
2. \$5. (Marginal cost = height of supply curve.)
3. \$5.
4. MR has vertical intercept at \$15 and slope of -2/1 thousand. (If demand is straight line, MR must have same intercept as demand and twice the slope.)
5. 6 thousand. (Choose quantity where MR = MC.)
6. \$3. (Marginal cost.)
7. \$9. (Set price according to demand curve.)
8. \$12 thousand. (Area of triangle.)

III. Critical thinking

Same as Version A.