econ 306 final exam

Econ 306 Section 7980

Final Exam

There are 11 questions on this exam. Please complete all the questions and send then upload your solved questions in the dropbox for your final exam labeled as FE by Friday May 9 by midnight EST.

Please show your work wherever possible for full credit.

Q1. (10 points) The demand for packs of Pokemon cards is given by the equation QD = 500,000 - 45,000P. At a price of $2.50 per pack, what is the quantity demanded? At $5.00 per pack, what is the price elasticity of demand?

Q2. (10 points) The market for gravel has been estimated to have these supply and demand relationships:

Supply P = 10 + 0.01Q

Demand P = 100 - 0.01Q,

where P represents price per unit in dollars, and Q represents sales per week in tons. Determine the equilibrium price and sales. Determine the amount of shortage or surplus that would develop at P = $40/ton.

Q3. (56points)

a. (3 pts) Alvinʹs preferences for good X and good Y are shown in the diagram below. Based on Figure 3 what can we infer about Alvin’s preferences for goofds X and Y?

b. (3 pts) Theodore’s budget line has changed from A to B. Please indicate what may explain the change in the budget lines budget line?

Q4. (8 pts) The cost of producing 600 small fiberglass sailboats per year, and the cost of producing sails and fittings necessary to make the boats seaworthy in a single plant, are together $780,000. If produced in separate plants, the boats would cost $540,000, and the sails and fittings would cost $180,000. From this information.

a. (4pts) Calculate the economies of scope in the production of sailboats, sails, and fittings?

b. (4pts) What can you conclude from your solution (i.e. should they be produced together by one firm or separately by different firms? Why?

Q5. (17 pts) Alex Fiani Corporation produces egg cartons that are sold to egg distributors. Alex Fiani Corporation has estimated this production function for its egg carton division:

Q = 25L0.6K0.4,

where Q = output measured in one thousand carton lots, L = labor measured in person hours, and K = capital measured in machine hours. Alex currently pays a wage of $10 per hour and considers the relevant rental price for capital to be $25 per hour.

Derive

a. (4 pts) Derive MPL

b. (4 pts) Derive MPK

c. (4 pts) Solve for MRTS using mpl and mpk

d. (5 pts) Determine the optimal capitallabor ratio that Acme should use in the egg carton division

Q6. (4 points)The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the marginal cost?

Q7. (15 points) A competitive firm sells its product at a price of $.10 per unit. Its total and marginal cost functions are:

TC = 5 0.5Q + 0.001Q2

MC = -0.5 + 0.002Q,

where TC is total cost ($) and Q is output rate (units per time period).

a. (8 pts) Determine the output rate that maximizes profit or minimizes losses in the shortterm.

b.(7pts) If input prices increase and cause the cost functions to become TC = 5 0.10Q + 0.002Q2 MC = -0.10 + 0.004Q, what will the new equilibrium output rate be? Explain what happened to the profit maximizing output rate when input prices were increased.

Q8. (6 points) Define consumer surplus and describe how it is impacted by an increase in price

Q9. (12 points)

a. (4 pts) Determine the "rule-of-thumb" price when the monopolist has a marginal cost of $25 and the price elasticity of demand of -3.0.

b. (3 pts) Galaxy has market power in the market for Iowa State University Big XII Championship 2000 T-shirts. If the price of the firm’s product =$20, and the total cost curve is TC= 5-15Q, what is the markup for this firm?

c. (3 pts) What if the price elasticity of demand for this firm becomes -5, what will be the firm’s markup?

d. (2 pts) Compare a monopsony to a monopoly

Q10. (10 points) Discount stores for private labeling. Marginal cost is a constant $10 per tire, regardless of the sub-market in which the tire is sold. The firm has estimated the following demand curves for each of the markets.

QB = 70 - 2000PB (brand name)

QP = 20 – 5000PB (private label).

Quantities are measured in thousands per month and price refers to the wholesale price. American currently sells brand name tires at a wholesale price of $28.50 and private label tires for a price of $17. Are these prices optimal for the firm?

Q11. (12 points) A firm's total cost function is given by the equation:

TC = 4000 + 5Q + 10Q2.

Write an expression for each of the following cost concepts using the equation above (for example TC =

a. Total Fixed Cost

b. Average Fixed Cost

c. Total Variable Cost

d. Average Variable Cost

e. Average Total Cost

f. Marginal Cost