Econ 3070-002 In term ediate M icroeconom icTheoryFinal ExamSpring 2006Time: 2.5 hr30 percen t of o v erall grade. P lease pro v e andin terpret y our answ ersNAME: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.Answ er (only) four of the fiv e questions in the space pro videdGRADING:• All questions have equal weight.• Each part within each question has the same weight.Good luck!1Question 1The long run cost function for a typical firm in a competitive industry isgiven b yTC(q)=40q − q2+ .01q31. How man y units of output will each firm produce in the long run?Why?2. Calculate the firm’s sh u tdown price. Depict marginal and a verage cost.Explain y our answ er.23. What is the equation of the long-run industry supply? Explain youranswer and illustrate it with a graph.4. Assume the market demand for the industry product isQ (P ) = 6000 − PHo w many firm s will the industry have in the long run? What is theprice that will prevail in the market? Dra w the market equilibriumdiagram to illustrate y our answer.5. Assume more consumers hav e joined the mark et and the new demandisQ (P ) = 10000 − 2PWill the long run-price change? Wh y? How much individual firm willproduce? How many suppliers will the market have?3Question 2Deman d on the mar ket for pears in a small coun try isQd(P )=10− Pand supply is perfectly elastic at P =5, so that each producer faces the samemarginal and average cost equal to 5.1. Calculate the competitive market equilibrium , consum ers’ surp lus, pro-ducers’ surplus, and total surplus.2. Assum e an excise tax of t =1(per unit) is levied on producers. Ca l-culate the competitive m arket equilibrium , consum ers’ surplus, pro-ducers’ surplus, government revenue and total surplus. Wh at is thedeadweigh t loss?3. Explain the economic meaning of the deadweigh t loss.4Question 3Consider an econom y with two individuals, Adam and Eve. Adam has 90tomatoes (x) and 10 pounds of cheese and Ev e has 90 pounds of goat ch eese(y) and 10 pounds of tomatoes. Eve’s utility is UE¡xE,yE¢=3xEyEandAdam’s utility is UA¡xA,yA¢=2xAyA1. Depict the endowm en t in an Edgeworth bo x2. Draw the indifference curves throug h the initial endo w ment. Is thisallocation Pa reto efficient?53. Calculate the set of Pareto Efficient allocations. G raph y our answ er inthe Edgeworth bo x .4. Assume after an exchange (with an auctioneer announcing prices) Evehas 30 tomatoes and 70 pounds of cheese, while Adam has 70 tomatoesand 30 poun ds of ch eese. Can this be a ‘competitiv e market allocation’with both Adam and Ev e taking prices as given? Why?6Question 41Suppose that Acme Pharmaceutical Company disco v ers a drug that curesthecommoncold. AcmehasplantsinboththeUnitedStatesandEuropeand can manufacture the drug on either continen t at a margina l cost of 10.Assume all the fixed costs are sunk. In Europe, the demand for the drugis QE(P )=70− P and in the United states the demand for the drug isQU(P )=110− P .1. Assume first that Acm e Pharm aceutical can not price-discriminate, sothat they have to charge the same price for the drug in both countries.Depict and calculate inverse dema n d facing the mon opolist.2. Find the quan tity that the monopolist offers in this case and the pricecharged.3. Calculate the profits of the monopolist.1Problem 12.10 from the textbook74. Now suppose the m on opolist can price-discr imina te, so that she cancharge different prices in differen t cou ntries. Write do w n the maxi-mization problem of Acme Pharmaceutical Comp any.5. What will be the prices charged and quan tities offered on each mark et?Are there an y consumers that will w elcome price-discrimination? Wh y?6. Depict (in t wo separate graphs) demand and marginal rev enue for eachmarket. Illustrate you r solution graphically.7. Calculate the profits of the company in this case and compare it to thecase of no price discrim in ation . Will Acme w a nt to price-discriminat e?8Question 5In tow n X demand for DSL service is P (q)=90−2q,whereP is monthlyfee and q is number of residen tial customers. T wo firms, Co vad and Qw est,en ter the mark et, their costs are identical, assume, with MC (q)=10.Ac-cording to local regulations in town X, both companies have to commit toserv e certain num ber of custom ers and demonstrate they have the capacit yto support their comm itment, so that the companies compete as in Cournotmodel.1. Find reaction function for eac h firm.2. Find Cou rno t equilibrium.93. Town X officials got a request from a third comp any, Z, whose MC isalso 10, to serve the tow n customers. If the officials are interested inlo wering the price of the service, should they allow company Z to oper-ate in their town? Prove your answer. (Hint: find Cournot equilibriumwith three firms, calculate the resulting price in the market.)4. Will companies Covad and Qwest support the decision of the tow n of-ficials? Why? Support y our answer b y calculating the relevan t