1 This is form A of the exam The answer is A 2 The point 10 pizzas 10 sodas is on the second indifference curve In order to answer this question we need to find another point that lies on the same indifference curve The point 24 pizzas 2 sodas is the only point from the choices that also lies on this second indifference curve The answer is E 3 Given and income of 60 the prices PPizza 4 and PSoda 2 we can draw the budget constraint If Terrapin spends all his money on pizza he can afford 15 pizzas If he spends all his money on soda he can afford 30 sodas Therefore 15 pizzas 0 sodas and 0 pizzas 30 sodas are the extreme points of the budget constraint The slope of this line connecting the points the budget constraint is 2 Therefore the opportunity cost of one more slice of pizza is equal to c The answer is C 4 Using the budget constraint in the previous question the optimal consumption bundle is the points on the budget constraint that reaches the highest indifference curve This point is the points 10 pizzas 10 sodas Therefore 10 pizzas 10 sodas is the optimal consumption bundle The answer is D 5 Because the price of pizza falls to 2 Terrapin can now afford 30 pizzas if he spends all his money on pizza Therefore the budget constraint rotates the budget constraint changes from the blue BC line to the green BC2 line Using the new budget constraint BC2 we use the same process as in the previous question we can find the new optimal consumption bundle point B Demand moves from point A 10 pizzas 10 sodas to point B 20 pizzas 10 sodas Therefore demand for pizza changes from 10 pizzas to 20 pizzas The answer is D 6 In order to compute Income and Substitution effects we need to proceed in the following fashion First compute the initial optimal bundle point A 10 pizzas 10 sodas and the final bundle C 20 pizzas 10 sodas when the price for pizza is 2 We can see that total effect for pizza is 10 units and for soda 0 units In order to disentangle income and substitution effects we need an intermediate point B where the initial indifference curve is tangent to a parallel line to the final budget constraint The movement from A to B along same indifference curve is the substitution effect and it is positive for pizza 2 and negative for soda 4 The movement from B to C higher indifference curve is the income effect Income effect is positive for both goods 8 4 Hence relative to pizza both effects are positive and the income effect 8 is bigger than substitution effect 2 The answer is B 7 Now price for Pizza is 2 and price for soda is also 2 We know that at the new optimal bundle C marginal rate of substitution is tangent to the budget constraint which slope is just the opportunity cost of pizza in terms of soda Since now the opportunity cost is just the new ratio of prices 2 2 1 slope is equal to MRS so it is 1 too Then the right answer is C 8 From question 6 we have seen that if price of pizza goes down to 2 he is going to consume 20 slices of pizza By increasing the income to 62 we have to analyze the new optimal bundle We see that the new budget constraint purple line would never reach an indifference curve as the point C So Terrapin gets more utility by the discount of 2 on the slice of pizza instead of increasing the income to 62 Hence the answer is A 9 Let s consider each statement individually i FALSE MC is not required to be greater than ATC at all quantity levels At any quantity where MC ATC the firm will set P MC and will be making a profit and in the LR more firms will enter until there are zero profits in the industry In an industry LR equilibrium each firm chooses to produce at its profit maximizing quantity which is where ATC is at its minimum It is also where ATC intersects MC ii TRUE This is to ensure that all firms have the same cost curves I e a firm is more costly when it has worse technology This is necessary because all firms will then have the same profit maximizing price the minimum ATC which gives the price of the LR supply curve iii TRUE There cannot be barriers to entry because in the LR the industry s supply adjusts to changing demand by changing the number of firms not changing the amount of production within each firm iv FALSE The supply curve for the individual firm is the MC curve We don t require it to be unit elastic it doesn t have an effect on the LR supply curve v TRUE This is similar to ii This ensures that cost curves of firms do not change as the number of firms in the industry increases The answer is D 10 Recall that TC FC VC and dividing through by Q we get that ATC AFC AVC This implies that AFC ATC AVC This is true for any quantity Q So for Q 3 we see that ATC 8 and AVC 5 This implies that AFC 3 at Q 3 We also have that AFC FC Q so this implies 3 FC 3 and hence we have that FC 3x3 9 Note that we could have computed FC at another quantity for example at Q 9 There ATC 12 AVC 11 and so AFC 1 Hence FC AFCxQ 1x9 9 as well The answer is A 11 The long run PLR is determined by the point where MC intersects ATC This is because firms in the long run should make zero profits and be profit maximizers hence P MC ATC This happens when MC and ATC intersect and the price at that intersection is 8 hence PLR 8 The answer is A 12 qLR is the long run quantity that each firm produces Here both the zero profit condition and the profit maximization condition should hold hence the firm in the long run produces at the quantity where MC ATC as in the question above Hence qLR 3 The answer is B 13 The equilibrium price in the long run is PLR 8 The demand curve D1 tells us that at that price quantity demanded is 600 The quantity in the industry is the same as quantity demanded The answer is E 14 The total industry production is QLR 600 and each firm produces qLR 3 So it is necessary 200 firms 600 3 to produce industry quantity The answer is D 15 In the short run the number of firms is fixed and from previous question we know there are 200 firms Remember that the short run supply from each firm is its MC curve that is equal for every firm Since there are 300 firms for a …