Econ 3070-002 In term ediate M icroeconom icTheoryFinal Exam∗Spring 2006Time: 2.5 hr30 percen t of o v erall grade. P lease pro v e andin terpret y our answ ersMay 2, 2006NAME:SignatureDA TE:Honor code. On my honor, as a Univ ersity of Colorado at Boulder stu-dent, I have neither given nor receiv ed unauthorized assistance on this w ork.∗various sources were used including study guides by Rockett and by Bergstrom andVarian1Answer four (only) of the fiv e questions belo w in the space providedQuestion 1The long run cost function for a typical firm in a com petitive industr y isgiven b yTC(q)=100.5q − q2+ .5q31. Calculate the firm’s sh u tdown price. Depict margin al and average cost.Explain your answer.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 man y firms will the ind ustry have in the long run? Wh at is theprice that will preva il in the mark et? Draw the mark et equilibriumdiagram to illustrate your answ er.5. Assume more consumers ha ve joined the market and the new demandisQ (P ) = 10000 − 2PWill the long run-price change? Why?Question 2Deman d on the market for pears in a small country isQd(P )=100− Pand supply isQs(P )=P1. Calculate the competitiv e market equilibrium, consum e rs’ surp lus, pro-ducers’ surplus, and total surplus.22. Assum e an excise tax of t =10(per unit) is levied on producers. Cal-culate the competitive mark et equilibrium, consumers’ surplus, pro-ducers’ surplus, government revenue and total surplus. Wh at is thedeadweigh t loss?3. Explain the econom ic meaning of the deadweigh t loss.Question 3Consider an economy with t wo individuals (Adam , Eve) eac h endow edwith 100 units of different goods (Ad am has 100 tomatoes, x and Ev e has100 pounds of goat cheese, y). Eve’s utilit y is UE¡xE,yE¢= xE+ yEandAdam’s utility is UA¡xA,yA¢= xAyA1. Depict the endo wment in an Edgeworth box2. Draw the indifference curv es throug h the initial endow m ent. 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, wh ile Adam has 70 tomatoesand 30 pounds of ch eese. Can this be a ‘competitive market allocation’with both Adam and Ev e taking prices as given? Why?Question 4Plum Com puter Comp any sells Plum computers in both domestic andforeign markets. Its costs areTC(Q) = 10000QBecause of differences in the power supplies, a Plum purchased in one marketcan not be used in the other market. The inverse dema nd in the dom esticmarket isPd(Q) = 20000 − 20QThe inverse demand in the foreign market isPf(Q) = 25000 − 50Q31. Write do wn the maximization problem of the Plum Computer compan y.2. Find quan tities of computers that the company offersoneachoneofthe mar kets.3. Calculate firm’s profits from operating on both markets.4. Depict (in two separate graphs) demand and marginal rev enue for eachmarket. Illustrate your solution graphically.5. Suppose that somebody figu res out a wiring trick that allows a Plumcomp uter built for eith er market to be costlessly converted to work inthe other. Ignore transportation costs. Comp ute the m arket demandthat the firm faces now.6. Given that the costs did not change, how many computers will beoffered on the marke t no w ? What is the prevailing price?7. Wh at is the decrease in profits that the com pany suffersasaresultof the wiring trick? Will any of the consumers loose as a result ofin troducing the trick?Question 5(problem 4, hw #6)a. 13.1 4, p. 517. Use the information about cobalt industry from thisproblem to answ e r additional question s.b. Assum e there are only t wo firm s competing against each other inCournot fashion. Compute the equilibrium quan tity offered by each firmand the price prevailing in such a market.c. Consider no w the same market is operating under perfect competition.What is the equilibrium price then? How m uch cobalt is sold in the mark et?Comparethisresultwiththeprevioustwo(a.,b.) anduseittoconjec-ture that ‘more competition enhances efficiency’. Use graphical analysis toillustrate your