Econ 3070-004 In term ediate M icroeconom icTheoryFinal ExamFall 2007Time: 2.5 hr30 percen t of o v erall grade. P lease pro v e andin terpret y our answ ersDecember 12, 2007NAME:SignatureDA TE:Honor code. On my honor, as a University of Colorado at Boulder stu-dent, I have neither given nor receiv ed unauthorized assistance on this w ork.1Question 1The long run cost function for a typical firm in a competitive industr y isgiven b yTC(q)=100.5q − q2+ .5q31. Calculate the firm’s shutdown price. Depict marginal and average cost.Explain your answ er.2. How man y units of output will eac h firm produce in the long run?Why?3. What is the equation of the long-run industry supply? Explain youranswer and illustrate it with a graph.4. Assum e the market demand for the industry product isQ (P ) = 5000 − PHo w many firms will the industry have in the long run? What is theprice that will prevail in the market? Dra w the market equilibriumdiagram to illustrate your answer.5. Assume more consumers ha v e joined the market and the new demandisQ (P ) = 10000 − 2PQuestion 2Deman d on the mark et for pears in a small country isQd(P )=100− Pand supply isQs(P )=P1. Calculate the com petitive mar ket equilibriu m , consume rs’ surplus, pro-ducers’ surplus, and total surplus.2. Assum e an excise tax of t =10(per unit) is levied on producer s. Cal-culate the competitive market equilibrium , consumers’ surplus, pro-ducers’ surplus, governm ent revenue and total surplus. Wh at is thedeadweight loss?23. Explain the economic meaning of the deadweigh t loss.4. How w ould y our answ ers change if the demand w ere to be completelyinelastic?Question 3Consider an economy with t wo individuals (Adam , Ev e) eac h endo wedwith 100 units of different goods (Adam has 100 tomatoes, x and Eve has100 pounds of goat ch eese, y). Eve’s utilit y is UE¡xE,yE¢= xE+ yEandAdam’s utilit y is UA¡xA,yA¢= xAyA1. Depict the endowmen t in an Edgeworth box2. Draw the indifferen ce curves through the initial endo w ment. Is thisallocation Pa reto efficient?3. Calculate the set of Pareto Efficient allocations.4. Assume after an exchange (with an auctioneer announcing prices) Evehas 30 tomatoes and 70 pounds of cheese, while Adam has 70 tomatoesand 30 pounds of c h eese. Can this be a ‘competitiv e ma rket allocation’with both Adam and Eve taking prices as given? Why?5. Extra credit (10%) Com pute Walrasian equilib riu m (allocation andprices) for this economy.Question 4a. 13.14, p. 517. Use the information about cobalt industry from thisproblem to answer additional questions.b. Assum e there are only t wo firm s competing against each other inCournot fashion. Compute the equilibrium quan tity offered by eac h firmand the price prevailing in such a market.c. Consider now the same market is operating under perfect competition.What is the equilibrium price then? How m uc h cobalt is sold in the market?Comparethisresultwiththeprevioustwo(a.,b.) anduseittoconjec-ture that ‘more competition enhances efficiency’. Use graphical analysis toillustrate your answer.d. How high should be the price of cobalt for you to claim the firmscollude and act as a
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