Page 1 of 18 Massachusetts Institute of Technology Department of Economics 14.01 Principles of Microeconomics Final Exam Wednesday, December 19th, 2007 Last Name (Please print): ______________ First Name: __________________ MIT ID Number: __________________ Instructions. Please read carefully. The exam has a total of 100 points. Answers should be as concise as possible. This is a closed book exam. You are not allowed to use notes, equation sheets, books or any other aids. You are not allowed to use calculators. You must write your answers in the space provided between questions. DO NOT attach additional sheets of paper. This exam consists of (18) sheets (14 pages + 4 blank pages for scratch work). 0. Circle Your Section/Recitation (1 point): Please circle the section or recitation which you are attending below. The marked exam will be returned to you, in the section or recitation that you indicate. You will loose 1 point if you leave it unselected. S01: MWF9 (Peter Schnabl) R01: F10 (Rongzhu Ke) S02: MWF10 (Chia-Hui Chen) R02: F11 (Rongzhu Ke) S03: MWF11 (Chia-Hui Chen) R03: F2 (Rongzhu Ke) S04: MWF1 (Monica Martinez-Bravo) R04: F12 (Marco Migueis) R05: F1 (Marco Migueis) R06: F2 (Marco Migueis) DO NOT WRITE IN THE AREA BELOW: Question 1 __/25 Question 2 __/5 Question 3 __/25 Question 4 __/25 Question 5 __/19 Question 0 _/1 Total __/100 Cite as: William Wheaton, Chia-Hui Chen, Rongzhu Ke, Monica Martinez-Bravo, Marco Migueis, Peter Schnabl, and Hongliang Zhang, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].Page 2 of 18 1. True/False Questions (TOTAL: 20 points): In this section, write whether each statement is True or False. Please fully explain your answer, using a diagram if appropriate. No credit will be given for an answer without an explanation. (a) (5 points) After Professor Wheaton promises that no one would fail, students never study and turn in problem sets again. This is an example of adverse selection problem. (b) (5 points) When a firm chooses among different projects, the one which has the highest present value is always the one with the highest yield rate. Cite as: William Wheaton, Chia-Hui Chen, Rongzhu Ke, Monica Martinez-Bravo, Marco Migueis, Peter Schnabl, and Hongliang Zhang, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].Page 3 of 18 (c) (5 points) If the government guarantees a binding price floor for agricultural output by purchasing any surplus, then the demand for farm labor will be more elastic. (d) (5 points) Exploitation Mining Co. is the only employer in the remote town of Uranium City and pays its workers $10.00/hour. If the government forces the company to raise its wage by a small amount—say to $10.10/hour—then it will hire more workers. Cite as: William Wheaton, Chia-Hui Chen, Rongzhu Ke, Monica Martinez-Bravo, Marco Migueis, Peter Schnabl, and Hongliang Zhang, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].Page 4 of 18 (e) (5 points) A factory that pollutes a river has negative externalities on residents along the river. If the factory and residents can negotiate, an efficient result can be achieved only if the property right of the river is assigned to the residents. Cite as: William Wheaton, Chia-Hui Chen, Rongzhu Ke, Monica Martinez-Bravo, Marco Migueis, Peter Schnabl, and Hongliang Zhang, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].Page 5 of 18 Short Question: 2. (5 points) A and B play rock, paper, scissors. Their payoffs are as follows (the first number is A’s payoff and the second number is B’s payoff): B A Rock Paper Scissors Rock 0,0 -1,1 1,-1 Paper 1,-1 0,0 -1,1 Scissors -1,1 1,-1 0,0 How many Nash equilibria are there in the game? Explain. Cite as: William Wheaton, Chia-Hui Chen, Rongzhu Ke, Monica Martinez-Bravo, Marco Migueis, Peter Schnabl, and Hongliang Zhang, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].Page 6 of 18 Long Questions: 3. (25 points) Suppose that Intel has a monopoly in the market for computer chips. In order to produce X computer chips, it costs Intel C(X) = 2X2 . (a) (2 points) Find the marginal cost of producing a computer chip for Intel. (b) (6 points) The demand for computer chips is XD = 12 − 0.25P . Find the level of output that maximizes Intel’s profits. What price is Intel charging? Cite as: William Wheaton, Chia-Hui Chen, Rongzhu Ke, Monica Martinez-Bravo, Marco Migueis, Peter Schnabl, and Hongliang Zhang, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].Page 7 of 18 (c) (4 points) What level of output would maximize total surplus in the computer chip market? (d) (4 points) Suppose the government knew the demand and production functions. Find a price regulation the government could impose that would induce Intel to maximize total surplus, i.e., produce the efficient quantity from part (c). Cite as: William Wheaton, Chia-Hui Chen, Rongzhu Ke, Monica Martinez-Bravo, Marco Migueis, Peter Schnabl, and Hongliang Zhang, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].Page 8 of 18 (e) (6 points) If the government subsidized Intel s for every unit of computer chips produced, what quantity would Intel choose? Find the choice of subsidy that maximizes total surplus, i.e., induces Intel to produce the efficient quantity from part (c). (f) (3 points) Both the price regulation policy from part (d) and the subsidy policy from part (e) maximize total surplus. Is there any reason someone might prefer one policy over the other? Cite as: William Wheaton, Chia-Hui Chen, Rongzhu Ke, Monica Martinez-Bravo, Marco Migueis, Peter Schnabl, and