EXAM 4 ANSWER KEY
Version A
I. Multiple choice
(1)c. (2)b. (3)b. (4)b. (5)d. (6)b. (7)d. (8)a. (9)c. (10)b.
II. Problems
(1) [Economic efficiency: 12 pts]
- $5 (= marginal cost).
- $11 (= marginal cost.
- Firm A.
- 10 million, so that marginal costs are equal.
- 6 million, so that marginal costs are equal.
- $7, because each firm will then maximize its own profit by choosing its output level so that its marginal cost equals this price.
(2) [Economy-wide efficiency: 20 pts]
- 1/4 units of clothing.
- 4 units of food.
- $12, because in competitive equilibrium, price equals marginal cost.
- $3, because in competitive equilibrium, prices reflect the slope of the production possibility curve for the economy as a whole: if the opportunity cost of a unit of clothing is 4 units of food, then a unit of clothing must be 4 times as expensive as a unit of food.
- $3, because in competitive equilibrium, price equals marginal cost.
- Brian's budget line should have intercept at 20 on food axis, and intercept at 5 on clothing axis.
- -4.
- 4 units of food.
- 1/4 units of clothing.
- 4, because Brian's preferred bundle is at a tangency between his budget line and the highest indifference curve he can reach, and at a tangency the slope of the indifference curve must equal the slope of the budget line.
(3) [Monopoly, perfect price discrimination: 20 pts]
- MR curve should have intercept at $14 on price axis, and slope = -1/1 million.
- 10 million, where MR=MC.
- $9, on demand curve.
- $50 million.
- $25 million.
- $14.
- $4.
- 20 million, because anyone willing to pay at least the marginal cost will be served.
- $100 million, because revenue = area under demand curve down to the axis, and cost = average cost × quantity.
- $0 million, because with perfect price discrimination, everyone willing to pay the marginal cost is served.
(4) [Competition versus collusion: 16 pts]
- 10 thousand.
- $6.
- $6, because height of supply curve = marginal cost.
- MR curve should have intercept at $16 on price axis, and slope = -2/1 thousand.
- 6 thousand, where MR=MC.
- $4, from joint marginal cost curve.
- $10, on demand curve.
- $12 thousand.
(5) [Monopoly price discrimination: 8 pts]
- 33 percent.
- 9 percent.
- $22.
- $30.
(6) [Monopolistic competition: 14 pts]
- A person will be indifferent between buying an ice-cream cone at Yum-Yum and buying at Tasty Treat if
P_{Y} + 0.01 D = P_{T} + 0.01 (1000-D),
where P_{Y} is the money price at Yum-Yum, D is the person's position along the beach, and P_{T} is the money price at Tasty Treat. So just substitute the given values of P_{Y} and P_{T} to find D. People to the right of D choose Tasty Treat and people to the left of D choose Yum-Yum.
Now people are scattered evenly along the beach, one person per yard, so D is also the number of people that choose Yum-Yum. Finally, Yum-Yum's total revenue equals D × P_{Y}.
Yum-Yum's price |
Number of people that choose Yum-Yum |
Yum-Yum's total revenue |
$2 | 700 | $1400 |
$4 | 600 | $2400 |
$6 | 500 | $3000 |
$8 | 400 | $3200 |
$10 | 300 | $3000 |
- $8.
- $5.99, just slightly lower than Tasty Treat's price.
Version B
I. Multiple choice
(1)a. (2)d. (3)a. (4)d. (5)a. (6)b. (7)a. (8)b. (9)b. (10)c.
II. Problems
(1) [Economic efficiency: 12 pts]
- $24 (= marginal cost).
- $6 (= marginal cost.
- Firm B.
- 6 million, so that marginal costs are equal.
- 10 million, so that marginal costs are equal.
- $9, because each firm will then maximize its own profit by choosing its output level so that its marginal cost equals this price.
(2) [Economy-wide efficiency: 20 pts]
- 1/3 units of clothing.
- 3 units of food.
- $12, because in competitive equilibrium, price equals marginal cost.
- $4, because in competitive equilibrium, prices reflect the slope of the production possibility curve for the economy as a whole: if the opportunity cost of a unit of clothing is 3 units of food, then a unit of clothing must be 3 times as expensive as a unit of food.
- $4, because in competitive equilibrium, price equals marginal cost.
- Brian's budget line should have intercept at 15 on food axis, and intercept at 5 on clothing axis.
- -3.
- 3 units of food.
- 1/3 units of clothing.
- 3, because Brian's preferred bundle is at a tangency between his budget line and the highest indifference curve he can reach, and at a tangency the slope of the indifference curve must equal the slope of the budget line.
(3) [Monopoly, perfect price discrimination: 20 pts]
- MR curve should have intercept at $14 on price axis, and slope = -1/1 million.
- 12 million, where MR=MC.
- $8, on demand curve.
- $72 million.
- $36 million.
- $14.
- $2.
- 24 million, because anyone willing to pay at least the marginal cost will be served.
- $144 million, because revenue = area under demand curve down to the axis, and cost = average cost × quantity.
- $0 million, because with perfect price discrimination, everyone willing to pay the marginal cost is served.
(4) [Competition versus collusion: 16 pts]
- 9 thousand.
- $7.
- $7, because height of supply curve = marginal cost.
- MR curve should have intercept at $16 on price axis, and slope = -2/1 thousand.
- 5 thousand, where MR=MC.
- $6, from joint marginal cost curve.
- $11, on demand curve.
- $10 thousand.
(5) [Monopoly price discrimination: 8 pts]
- 28 percent.
- 6 percent.
- $22.50 .
- $60.
(6) [Monopolistic competition: 14 pts]
- A person will be indifferent between buying an ice-cream cone at Yum-Yum and buying at Tasty Treat if
P_{Y} + 0.01 D = P_{T} + 0.01 (1000-D),
where P_{Y} is the money price at Yum-Yum, D is the person's position along the beach, and P_{T} is the money price at Tasty Treat. So just substitute the given values of P_{Y} and P_{T} to find D. People to the right of D choose Tasty Treat and people to the left of D choose Yum-Yum.
Now people are scattered evenly along the beach, one person per yard, so D is also the number of people that choose Yum-Yum. Finally, Yum-Yum's total revenue equals D × P_{Y}.
Yum-Yum's price |
Number of people that choose Yum-Yum |
Yum-Yum's total revenue |
$2 | 500 | $1000 |
$4 | 400 | $1600 |
$6 | 300 | $1800 |
$8 | 200 | $1600 |
$10 | 100 | $1000 |
- $6.
- $1.99, just slightly lower than Tasty Treat's price.
Version C
I. Multiple choice
(1)b. (2)e. (3)c. (4)e. (5)b. (6)c. (7)b. (8)c. (9)a. (10)d.
II. Problems
(1) [Economic efficiency: 12 pts]
- $3 (= marginal cost).
- $12 (= marginal cost.
- Firm A.
- 12 million, so that marginal costs are equal.
- 4 million so that marginal costs are equal.
- $5, because each firm will then maximize its own profit by choosing its output level so that its marginal cost equals this price.
(2) [Economy-wide efficiency: 20 pts]
- 2 units of clothing.
- 1/2 units of food.
- $6, because in competitive equilibrium, price equals marginal cost.
- $12, because in competitive equilibrium, prices reflect the slope of the production possibility curve for the economy as a whole: if the opportunity cost of a unit of clothing is 1/2 units of food, then a unit of clothing must be half as expensive as a unit of food.
- $12, because in competitive equilibrium, price equals marginal cost.
- Brian's budget line should have intercept at 10 on food axis, and intercept at 20 on clothing axis.
- -1/2.
- 1/2 units of food.
- 2 units of clothing.
- 1/2, because Brian's preferred bundle is at a tangency between his budget line and the highest indifference curve he can reach, and at a tangency the slope of the indifference curve must equal the slope of the budget line.
(3) [Monopoly, perfect price discrimination: 20 pts]
- MR curve should have intercept at $11 on price axis, and slope = -1/1 million.
- 8 million, where MR=MC.
- $7, on demand curve.
- $32 million.
- $16 million.
- $11.
- $3.
- 16 million, because anyone willing to pay at least the marginal cost will be served.
- $64 million, because revenue = area under demand curve down to the axis, and cost = average cost × quantity.
- $0 million, because with perfect price discrimination, everyone willing to pay the marginal cost is served.
(4) [Competition versus collusion: 16 pts]
- 14 thousand.
- $6.
- $6, because height of supply curve = marginal cost.
- MR curve should have intercept at $13 on price axis, and slope = -1/1 thousand.
- 8 thousand, where MR=MC.
- $5, from joint marginal cost curve.
- $9, on demand curve.
- $12 thousand.
(5) [Monopoly price discrimination: 8 pts]
- 24 percent.
- 6 percent.
- $30.
- $75.
(6) [Monopolistic competition: 14 pts]
- A person will be indifferent between buying an ice-cream cone at Yum-Yum and buying at Tasty Treat if
P_{Y} + 0.01 D = P_{T} + 0.01 (1000-D),
where P_{Y} is the money price at Yum-Yum, D is the person's position along the beach, and P_{T} is the money price at Tasty Treat. So just substitute the given values of P_{Y} and P_{T} to find D. People to the right of D choose Tasty Treat and people to the left of D choose Yum-Yum.
Now people are scattered evenly along the beach, one person per yard, so D is also the number of people that choose Yum-Yum. Finally, Yum-Yum's total revenue equals D × P_{Y}.
Yum-Yum's price |
Number of people that choose Yum-Yum |
Yum-Yum's total revenue |
$8 | 600 | $4800 |
$10 | 500 | $5000 |
$12 | 400 | $4800 |
$14 | 300 | $4200 |
$16 | 200 | $3200 |
- $10.
- $11.99, just slightly lower than Tasty Treat's price.
[end of answer key]