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CSUN ECON 500 - Final Examination

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ECON 500 Final Examination - Spring 2005 1. Carl and Dave devote each workday to harvesting apples or bananas. In any given day Carl can harvest either 100 apples or 200 bananas, while Dave can harvest either 400 apples or 300 bananas. Suppose that trade can take place between these two workers. a. Which individual has an “absolute advantage” in the production of apples? Clearly explain. (4 points) b. Which individual has a “comparative advantage” in the production of apples? Clearly explain. (4 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)2. Consider the market for gasoline in Northridge. Clearly explain how equilibrium price and equilibrium quantity will each change if there is a simultaneous increase in supply and decrease in demand. (10 points) 3. Consider a consumer with 21210)( xxXU += . For this individual, 115xMU = and 221xMU = . a) Consider the following consumption bundles: =X(4, 9) and =Xˆ(1 ,36). Which of these two bundles does this consumer prefer? Explain. (4 points) b) Are the preferences of this consumer “monotonic”? Explain. (4 points) c) Specify 2,1MRS as a function of 1x and 2x . Does 2,1MRS appear to be “diminishing”? Explain. (4 points)4. Ernie wears Fidra golf shirts; Adam wears Burberry golf shirts. They notice the following elasticities for these two products under current market conditions: Elasticity Burberry shirts Fidra shirts Price Elasticity of Demand -0.78 -1.09 Cross-Price Elasticity of Demand .23 .37 Income Elasticity of Demand -.09 .12 Clearly answer the following questions. Within each explanation, be sure to specify which value (or values) above your answer is based upon. a. Would an increase in the price of Fidra golf shirts result in an increase or decrease in total expenditure on the product? (5 points) b. Under the current market conditions, are Burberry golf shirts and Fidra golf shirts complements to or substitutes for each other? (5 points) c. Would an increase in the income of consumers in this market lead to an increase or decrease in demand for Burberry golf shirts? (5 points)5. Consider a firm with the production function KLLKF 40),( = . As a result, LKLMP 20= and KLKMP 20= . a. Does this production function exhibit Increasing, Decreasing, or Constant Returns to Scale? Clearly explain. (4 points) b. Graphically illustrate the solution to the Long Run Cost Minimization Problem of this firm. (6 points) c. Determine the Long Run Cost Minimizing levels of labor and capital for this firm to hire. (6 points) d. Determine the Long Run Average Cost Function of this firm. (4 points)6. 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 7=p , what quantity should this firm produce in order to maximize profit? Is this firm able to earn a positive profit at this price? Explain. (4 points) b. If the price of the output of this firm is 12=p , what quantity should this firm produce in order to maximize profit? Is this firm able to earn a positive profit at this price? Explain. (4 points) c. Determine the numerical value of Fixed Costs of Production. (hint: start by determining Average Fixed Costs for some level of output…) (4 points) $ q MCATC AVC 55 50 40 25 10 0 0 12 9 77. Consider a market in which demand is given by the linear function ppD 20600)( −= , which is illustrated below: a. Determine the value of Consumers’ Surplus at a price of 25=p . (5 points) b. Determine the value of the change in Consumers’ Surplus as price decreases from 25=p to 20=p . Is this an increase or decrease in CS? (5 points) c. Determine the maximum value of “Total Consumer Expenditures” in this market. (5 points) qp30 600EXTRA CREDIT - 3 points! Consider a consumer with utility of 2155)( xxXU+=. Suppose this consumer has income of 120=I . Initially prices are 41=p and 32=p . As the price of commodity one falls to 21=p (with income and the price of commodity two unchanged) consumption of commodity one increases. Determine the total increase in consumption of commodity one, and decompose this total change into that resulting from the “Substitution Effect” and that resulting from the “Income Effect.”Blank


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CSUN ECON 500 - Final Examination

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