Economics 500 Final Examination – Fall 2005 1. The graph below illustrates Supply and Demand in the market for socks in Los Angeles. The members of the city council have decided that $4.75 is too much for consumer to pay for a pair of socks. In order to make consumers better off, they impose a price ceiling of 00.4=cp in this market. a) Does this price control have an impact on the outcome in this market? Explain. (4 points) b) Does enacting this policy achieve the stated goal of “making consumers better off”? Explain. (4 points) c) Is the outcome in the presence of the price ceiling efficient? Explain. (4 points) $ Q Supply Demand 4.75 2,500 0 02. The following elasticities have been estimated for “Product X” and “Product Y” under current market conditions: Elasticity Product X Product Y Price Elasticity of Demand 1.07 .83 Cross-Price Elasticity of Demand .27 .19 Income Elasticity of Demand -.21 .14 Based upon these estimates, answer the following questions. a) Would an increase in the price of “Product X” lead to an increase, decrease, or no change in total expenditures on “Product X”? Explain, making specific reference to one of the six values given above. (4 points) b) Is “Product X” a normal good or an inferior good? Explain, making specific reference to one of the six values given above. (4 points) c) Focus on the market for “Product Y.” How would equilibrium price and equilibrium quantity change in the market for “Product Y” if the price of “Product X” is increased? Explain. (4 points)3. Sally and Quincy devote each workday to harvesting potatoes and tomatoes. In any given day Sally can harvest either 50 potatoes or 150 tomatoes, while Quincy can harvest either 200 potatoes or 100 tomatoes. Suppose that trade can take place between these two workers. a) Which individual has an “absolute advantage” in the production of potatoes? Clearly explain. (3 points) b) Which individual has a “comparative advantage” in the production of potatoes? Clearly explain. (3 points) c) Graph the daily Production Possibilities Frontier for this “two person economy.” Clearly label each intercept, as well as the slope of this curve at each point. (8 points)4. Consider a perfectly competitive firm operating in the Short Run. Marginal Costs, Average Variable Costs, and Average Total Costs are illustrated below. a) If the price of the output of this firm is 16=p , what quantity should this firm produce in order to maximize profit? If you claim that the firm should produce a positive level of output, be sure to explain why they would not want to “shutdown.” (4 points) b) If the price of the output of this firm is 11=p , is this firm able to earn a positive profit? Explain. (4 points) c) Determine the numerical value of Fixed Costs of Production. (4 points) $ q MC ATC AVC 430 400 200 6 0 0 20 12 10 275 650 16 475 1005. Assume you own, manage, and are the only employee for a t-shirt concession stand at The Matadome. During each CSUN basketball game you are able to sell 500 shirts at a price of $15 each. Your costs are as follows: Cost of plain t-shirt: $4 each t-shirt Cost of t-shirt design: $3 each t-shirt Equipment rental fee (per game): $700 Stand rental fee (per game): $300 Answer the following: a) Determine the value of your revenue per game. (3 points) b) Determine the value of your explicit costs of production per game. (3 points) c) What is your “Accounting Profit” per game? (3 points) d) Your next best alternative job is to work as a manager for another local retail business. If your economic profit from operating the t-shirt stand is $200 per game, how much could you earn as a manager for this other retail business? Explain. (3 points)6. Gene’s preferences for 1x =(blue t-shirts) and 2x =(cigarettes) can be summarized by 2110)( xxXu = . As a result, his marginal utility functions are 2110xMU = and 1210xMU = . Suppose each unit of 1x costs 1p , each unit of 2x costs 2p , and Gene’s income is equal to I. a) Illustrate the indifference curve along which Gene realizes utility of 200=u . Identify three different consumption bundles along this curve. (4 points) b) Derive an expression for 2,1MRS . (4 points) c) Showing all work, determine Gene’s optimal levels of consumption as functions of 1p , 2p , and I. (6 points)7. Consider the market for DVD Recorders. Suppose Demand and Supply simultaneously increase in this market. Clearly explain how the equilibrium price and equilibrium quantity could change as a result of these changes. (8 points) 8. Paul the salmon fisherman faces inverse demand of qqPD40125)( −=, where q is the number of pounds of salmon he supplies to the market. This inverse demand curve is illustrated below. Supposing Paul is not able to price discriminate, his marginal revenue is qqMR20125)(−=. Paul’s Total Costs are FqqTC += 5)(, with 0>F . Thus, his Marginal Costs are 5)( =qMC. For parts a, b, c, and d, suppose Paul is not able to price discriminate! a. Draw the Marginal Revenue and Marginal Cost curves in the graph above, identifying all intercepts. (2 points) b. Graphically identify the profit maximizing level of output and the corresponding profit maximizing price. (2 points) c. Determine the numerical values of his profit maximizing price and profit maximizing level of output. (4 points) p q)(qPD 25 000,1 0(…question 8 continued…) d. For what values of 0>F is Paul able to earn a positive profit? Explain. (2 points) For parts e and f, suppose Paul is able to engage in First Degree Price Discrimination! e. How much output will he sell in order to maximize profit? Explain. (4 points) f. For what values of 0>F is Paul able to earn a positive profit? Explain. (2 points)EXTRA CREDIT - 3 Points! Yair and Pradeep grow apples and bananas. Their individual Production Possibilities Frontiers are illustrated below. Suppose that currently Yair is allocating his time so that he produces point “Y,” while Pradeep is allocating his time so that he produces point “P.” Does it appear as if these individuals could collectively produce more of