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


EXAM 4 ANSWER KEY
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) [Economywide efficiency: 12 pts]
 $3 (= marginal cost).
 $8 (= marginal cost).
 Firm A (because it has lower marginal cost).
 9 thousand, so that marginal costs are equal.
 5 thousand, 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) [Economywide efficiency: 16 pts]
 2 units of clothing.
 1/2 units of food.
 $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.
 Austin's budget line should have intercepts at 40/8=5 units of food and 40/4=10 units of clothing.
 2 units of clothing, same as PP curve.
 1/2 units of food, same as PP curve.
 3 units of food, at tangency between budget line and highest indifference curve that Austin can reach.
 2, because at a tangency the slope of his indifference curve (MRS) must equal the slope of his budget line.
(3) [Monopoly: 12 pts]
 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.
 8 thousand, where MR=MC.
 $10, on demand curve.
 $48 thousand = TR  TC = (price × quantity)  (AC × quantity).
 $16 thousand = area of triangle between monopoly price ($10), demand curve, and vertical axis.
 $8 thousand = area of triangle between demand curve, MC curve, and vertical line at monopoly quantity (8 thousand).
(4) [Monopoly price discrimination: 4 pts]
 $12 = MC / (1 + (1/ε)), where ε = elasticity for children.
 $20, using same formula, where ε = elasticity for adults.
(5) [Competition versus collusion: 16 pts]
 9 million.
 $3 = marginal cost = height of supply curve.
 $3. Note that perfect competition yields marginalcost pricing.
 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 million, where MR = MC.
 $2 = marginal cost = height of supply curve.
 $7, on demand curve.
 $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]
 differentiated products.
 80 sandwiches, from demand curve.
 loss, since P < average cost at that quantity
 $80, since profit = TR  TC = (price × quantity)  (AC × quantity).
 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.
 50 sandwiches, where MR=MC.
 $8, on demand curve.
 $3, on marginal cost curve.
 $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) [Economywide efficiency: 12 pts]
 $10 (= marginal cost).
 $6 (= marginal cost).
 Firm B (because it has lower marginal cost).
 6 thousand, so that marginal costs are equal.
 8 thousand, so that marginal costs are equal.
 $8, because each firm will then maximize its own profit by choosing its output level so that its marginal cost equals this price.
(2) [Economywide efficiency: 16 pts]
 1/2 units of clothing.
 2 units of food.
 $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.
 Becky's budget line should have intercepts at 30/3=10 units of food and 30/6=5 units of clothing.
 1/2 units of clothing, same as PP curve.
 2 units of food, same as PP curve.
 2 units of clothing, at tangency between budget line and highest indifference curve that Becky can reach.
 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]
 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.
 6 thousand, where MR=MC.
 $11, on demand curve.
 $36 thousand = TR  TC = (price × quantity)  (AC × quantity).
 $9 thousand = area of triangle between monopoly price ($11), demand curve, and vertical axis.
 $3 thousand = area of triangle between demand curve, MC curve, and vertical line at monopoly quantity (6 thousand).
(4) [Monopoly price discrimination: 4 pts]
 $14 = MC / (1 + (1/ε)), where ε = elasticity for children.
 $18, using same formula, where ε = elasticity for adults.
(5) [Competition versus collusion: 16 pts]
 7 million.
 $5 = marginal cost = height of supply curve.
 $5. Note that perfect competition yields marginalcost pricing.
 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.
 4 million, where MR = MC.
 $4 = marginal cost = height of supply curve.
 $8, on demand curve.
 $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]
 differentiated products.
 30 sandwiches, from demand curve.
 loss, since P < average cost at that quantity
 $90, since profit = TR  TC = (price × quantity)  (AC × quantity).
 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.
 60 sandwiches, where MR=MC.
 $7, on demand curve.
 $1, on marginal cost curve.
 $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) [Economywide efficiency: 12 pts]
 $1 (= marginal cost).
 $11 (= marginal cost).
 Firm A (because it has lower marginal cost).
 10 thousand, so that marginal costs are equal.
 4 thousand, so that marginal costs are equal.
 $6, because each firm will then maximize its own profit by choosing its output level so that its marginal cost equals this price.
(2) [Economywide efficiency: 16 pts]
 1/3 units of clothing.
 3 units of food.
 $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.
 Carla's budget line should have intercepts at 30/6=5 units of clothing and 30/2=15 units of food.
 1/3 units of clothing, same as PP curve.
 3 units of food, same as PP curve.
 3 units of clothing, at tangency between budget line and highest indifference curve that Carla can reach.
 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]
 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.
 12 thousand, where MR=MC.
 $9, on demand curve.
 $72 thousand = TR  TC = (price × quantity)  (AC × quantity).
 $18 thousand = area of triangle between monopoly price ($9), demand curve, and vertical axis.
 $6 thousand = area of triangle between demand curve, MC curve, and vertical line at monopoly quantity (12 thousand).
(4) [Monopoly price discrimination: 4 pts]
 $20 = MC / (1 + (1/ε)), where ε = elasticity for children.
 $32, using same formula, where ε = elasticity for adults.
(5) [Competition versus collusion: 16 pts]
 10 million.
 $3 = marginal cost = height of supply curve.
 $3. Note that perfect competition yields marginalcost pricing.
 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.
 6 million, where MR = MC.
 $2 = marginal cost = height of supply curve.
 $5, on demand curve.
 $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]
 differentiated products.
 80 sandwiches, from demand curve.
 loss, since P < average cost at that quantity
 $160, since profit = TR  TC = (price × quantity)  (AC × quantity).
 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.
 40 sandwiches, where MR=MC.
 $6, on demand curve.
 $2, on marginal cost curve.
 $0, since profit = TR  TC = (price × quantity)  (AC × quantity). Whenever price = AC, profit is zero.
[end of answer key]