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1、SAMPLE FINAL EXAM #5ECON 8100PART I. Indicate whether the following statements are true, false, or uncertain and carefully defend your answers using sound economic reasoning.1. If a monopoly firm is substituted for a formerly purely competitive industry structure, the social cost is likely to be sma
2、ll because the dead-weight welfare loss is only approximately Vi PQdPdQ, where dP and dQ are the resulting changes in price and quantity following monopolization.2. If the elasticity of demand for X sold in market A were constant at 3.5 (absolute value), and in market B price elasticity were constan
3、t at 10, third degree price discrimination would lead to a price of A to price of B ratio of about 2.86.3. The maximum feasible value for the Lerner index ( L = (P-MC)/P ) is 1, and in general, will vary from 0 to 1, but cannot exceed unity.4. A movie theater faces the following demand curve for 6 o
4、unce candy bars:Q = 100-20 P, or in inverse form: P = 5 - .05 Q, where P is price in dollars.The theaters marginal cost of obtaining and selling such candy bars is $.50. The theater has significant market power in the showing of any given film. If it chooses to sell only 12 ounce candy bars and sell
5、s 45 such bars at the price of $3.50 per 12 ounce candy bar, it is in essence engaging in interunit price discrimination.5. If three existing firms (which arc the only firms in the industry) decide to share the market for their product equally (sometimes called the Chamberlin oligopoly solution), th
6、e resulting price and quantity will always be the same as under single firm monopoly.6. A tax of t cents per unit on an item initially selling in a monopolized market for a price of $1.00 per unit will reduce the marginal revenue curve at the pretax output by more than will a tax of t% of the price.
7、7. Price discrimination may be a more efficient pricing strategy as well as a more profitable strategy for a natural monopoly when it is contrasted with regulatory constraints that limit price to roughly average cost (i.e. Tate of return regulation).Part II.1. Suppose that the supply curve for labor
8、 facing a monopsonistic firm is given by:L = 100 w, where w is the wage rateThe firms marginal revenue product curve yields the following equation:L = - 50 w + 450What is the expression for “marginal labor cost in this case?a. Explain why in this case the marginal labor cost is higher than the avera
9、ge labor cost.b. How many workers will this monopsonistic finn hire AND at what wage?c. If the firm were to engage in “perfect wage discrimination,v how many workers would it hire?2. Among the products manufactured and sold by Frontier Engineering Corp. (FEC) is a digital clock radio. The demand fun
10、ction facing this firm for this product has been estimated to be:P = 610-9QManufacture and sale of the clock radio is done by FECs Home Products Division (HPD), with a major component part being supplied by a second division, the Electronics Speciality Division: (ESD). The cost functions for the two
11、 divisions are (in dollars):Total Cost (HPD) = 3,000 + 10QTotal Cost (ESD) = 7,000 + 10Q + Q2The divisions are operated as separate profit centers. Internal transfers are accomplished by allowing the “using/consuming、 division to offer a given price and the supplying division to then determine the q
12、uantity that it will sell at that price.a. Assume that the electronic component supplied by ESD could be sold to an outside firm for use in another product (one that docs not compete with FEC) for $190. This outside firm will purchase up to 100 units at this price. What is the optimal transfer price in this situation? Explain. How many units will ESD sell to HPD? How many units will it sell to the outside firm?b. Show on a simple diagram the basic reason why this is the best solution for FEC, i.e. show that FECs profits as a whole are maximized by this solution.
