ECON 002 - Principles of Microeconomics Drake University, Fall 2022 William M. Boal

### Version A

I. Multiple choice

(1)c. (2)a. (3)b. (4)c. (5)b. (6)a. (7)a. (8)b. (9)b. (10)a.
(11)d. (12)b. (13)b. (14)a. (15)a. (16)d. (17)c. (18)b. (19)c. (20)b.
(21)b. (22)c.

II. Problems

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

1. \$3 (= marginal cost).
2. \$8 (= marginal cost).
3. Firm A (because it has lower marginal cost).
4. 9 thousand, so that marginal costs are equal.
5. 5 thousand, so that marginal costs are equal.
6. \$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: 16 pts]

1. 2 units of clothing.
2. 1/2 units of food.
3. \$8, because in competitive equilibrium, prices reflect opportunity costs for the economy as a whole: if the opportunity cost of a unit of food is 2 units of clothing, then the price of a unit of food must be 2 times the price of a unit of clothing.
4. Austin's budget line should have intercepts at 40/8=5 units of food and 40/4=10 units of clothing.
5. 2 units of clothing, same as PP curve.
6. 1/2 units of food, same as PP curve.
7. 3 units of food, at tangency between budget line and highest indifference curve that Austin can reach.
8. 2, because at a tangency the slope of his indifference curve (MRS) must equal the slope of his budget line.

(3) [Monopoly: 12 pts]

1. Since demand curve is linear, MR curve must have same intercept and twice the slope. So MR curve should have intercept at \$14 on price axis, and slope = -1/1 thousand.
2. 8 thousand, where MR=MC.
3. \$10, on demand curve.
4. \$48 thousand = TR - TC = (price × quantity) - (AC × quantity).
5. \$16 thousand = area of triangle between monopoly price (\$10), demand curve, and vertical axis.
6. \$8 thousand = area of triangle between demand curve, MC curve, and vertical line at monopoly quantity (8 thousand).

(4) [Monopoly price discrimination: 4 pts]

1. \$12 = MC / (1 + (1/ε)), where ε = elasticity for children.
2. \$20, using same formula, where ε = elasticity for adults.

(5) [Competition versus collusion: 16 pts]

1. 9 million.
2. \$3 = marginal cost = height of supply curve.
3. \$3. Note that perfect competition yields marginal-cost pricing.
4. Since demand curve is linear, MR curve must have same intercept and twice the slope. So MR curve should have intercept at \$12 on price axis, and slope = -2/1 million.
5. 5 million, where MR = MC.
6. \$2 = marginal cost = height of supply curve.
7. \$7, on demand curve.
8. \$10 million, the area of a triangle between demand curve, joint MC curve, and vertical line at cartel quantity (5 million).

(6) [Monopolistic competition: 16 pts]

1. differentiated products.
2. 80 sandwiches, from demand curve.
3. loss, since P < average cost at that quantity
4. \$80, since profit = TR - TC = (price × quantity) - (AC × quantity).
5. Since demand curve is linear, MR curve must have same intercept and twice the slope. So MR curve should have intercept at \$13 on price axis, and slope = -2/10.
6. 50 sandwiches, where MR=MC.
7. \$8, on demand curve.
8. \$3, on marginal cost curve.
9. \$0, since profit = TR - TC = (price × quantity) - (AC × quantity). Whenever price = AC, profit is zero.

### Version B

I. Multiple choice

(1)a. (2)b. (3)c. (4)b. (5)c. (6)d. (7)b. (8)a. (9)a. (10)b.
(11)a. (12)b. (13)c. (14)b. (15)b. (16)e. (17)a. (18)c. (19)b. (20)c.
(21)c. (22)d.

II. Problems

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

1. \$10 (= marginal cost).
2. \$6 (= marginal cost).
3. Firm B (because it has lower marginal cost).
4. 6 thousand, so that marginal costs are equal.
5. 8 thousand, so that marginal costs are equal.
6. \$8, 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: 16 pts]

1. 1/2 units of clothing.
2. 2 units of food.
3. \$3, because in competitive equilibrium, prices reflect opportunity costs for the economy as a whole: if the opportunity cost of a unit of food is 1/2 units of clothing, then the price of a unit of food must be 1/2 times the price of a unit of clothing.
4. Becky's budget line should have intercepts at 30/3=10 units of food and 30/6=5 units of clothing.
5. 1/2 units of clothing, same as PP curve.
6. 2 units of food, same as PP curve.
7. 2 units of clothing, at tangency between budget line and highest indifference curve that Becky can reach.
8. 1/2, because at a tangency the slope of her indifference curve (MRS) must equal the slope of her budget line.

(3) [Monopoly: 12 pts]

1. Since demand curve is linear, MR curve must have same intercept and twice the slope. So MR curve should have intercept at \$14 on price axis, and slope = -1/1 thousand.
2. 6 thousand, where MR=MC.
3. \$11, on demand curve.
4. \$36 thousand = TR - TC = (price × quantity) - (AC × quantity).
5. \$9 thousand = area of triangle between monopoly price (\$11), demand curve, and vertical axis.
6. \$3 thousand = area of triangle between demand curve, MC curve, and vertical line at monopoly quantity (6 thousand).

(4) [Monopoly price discrimination: 4 pts]

1. \$14 = MC / (1 + (1/ε)), where ε = elasticity for children.
2. \$18, using same formula, where ε = elasticity for adults.

(5) [Competition versus collusion: 16 pts]

1. 7 million.
2. \$5 = marginal cost = height of supply curve.
3. \$5. Note that perfect competition yields marginal-cost pricing.
4. Since demand curve is linear, MR curve must have same intercept and twice the slope. So MR curve should have intercept at \$12 on price axis, and slope = -2/1 million.
5. 4 million, where MR = MC.
6. \$4 = marginal cost = height of supply curve.
7. \$8, on demand curve.
8. \$6 million, the area of a triangle between demand curve, joint MC curve, and vertical line at cartel quantity (4 million).

(6) [Monopolistic competition: 16 pts]

1. differentiated products.
2. 30 sandwiches, from demand curve.
3. loss, since P < average cost at that quantity
4. \$90, since profit = TR - TC = (price × quantity) - (AC × quantity).
5. Since demand curve is linear, MR curve must have same intercept and twice the slope. So MR curve should have intercept at \$13 on price axis, and slope = -2/10.
6. 60 sandwiches, where MR=MC.
7. \$7, on demand curve.
8. \$1, on marginal cost curve.
9. \$0, since profit = TR - TC = (price × quantity) - (AC × quantity). Whenever price = AC, profit is zero.

### Version C

I. Multiple choice

(1)b. (2)c. (3)d. (4)d. (5)d. (6)b. (7)c. (8)d. (9)c. (10)b.
(11)b. (12)c. (13)a. (14)c. (15)c. (16)a. (17)b. (18)c. (19)a. (20)d.
(21)d. (22)a.

II. Problems

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

1. \$1 (= marginal cost).
2. \$11 (= marginal cost).
3. Firm A (because it has lower marginal cost).
4. 10 thousand, so that marginal costs are equal.
5. 4 thousand, so that marginal costs are equal.
6. \$6, 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: 16 pts]

1. 1/3 units of clothing.
2. 3 units of food.
3. \$2, because in competitive equilibrium, prices reflect opportunity costs for the economy as a whole: if the opportunity cost of a unit of food is 1/3 units of clothing, then the price of a unit of food must be 1/3 times the price of a unit of clothing.
4. Carla's budget line should have intercepts at 30/6=5 units of clothing and 30/2=15 units of food.
5. 1/3 units of clothing, same as PP curve.
6. 3 units of food, same as PP curve.
7. 3 units of clothing, at tangency between budget line and highest indifference curve that Carla can reach.
8. 1/3, because at a tangency the slope of her indifference curve (MRS) must equal the slope of her budget line.

(3) [Monopoly: 12 pts]

1. Since demand curve is linear, MR curve must have same intercept and twice the slope. So MR curve should have intercept at \$12 on price axis, and slope = -1/2 thousand.
2. 12 thousand, where MR=MC.
3. \$9, on demand curve.
4. \$72 thousand = TR - TC = (price × quantity) - (AC × quantity).
5. \$18 thousand = area of triangle between monopoly price (\$9), demand curve, and vertical axis.
6. \$6 thousand = area of triangle between demand curve, MC curve, and vertical line at monopoly quantity (12 thousand).

(4) [Monopoly price discrimination: 4 pts]

1. \$20 = MC / (1 + (1/ε)), where ε = elasticity for children.
2. \$32, using same formula, where ε = elasticity for adults.

(5) [Competition versus collusion: 16 pts]

1. 10 million.
2. \$3 = marginal cost = height of supply curve.
3. \$3. Note that perfect competition yields marginal-cost pricing.
4. Since demand curve is linear, MR curve must have same intercept and twice the slope. So MR curve should have intercept at \$8 on price axis, and slope = -1/1 million.
5. 6 million, where MR = MC.
6. \$2 = marginal cost = height of supply curve.
7. \$5, on demand curve.
8. \$6 million, the area of a triangle between demand curve, joint MC curve, and vertical line at cartel quantity (6 million).

(6) [Monopolistic competition: 16 pts]

1. differentiated products.
2. 80 sandwiches, from demand curve.
3. loss, since P < average cost at that quantity
4. \$160, since profit = TR - TC = (price × quantity) - (AC × quantity).
5. Since demand curve is linear, MR curve must have same intercept and twice the slope. So MR curve should have intercept at \$10 on price axis, and slope = -2/10.
6. 40 sandwiches, where MR=MC.
7. \$6, on demand curve.
8. \$2, on marginal cost curve.
9. \$0, since profit = TR - TC = (price × quantity) - (AC × quantity). Whenever price = AC, profit is zero.