Practice Questions: Quiz 3 Prep

Sneha Thapliyal & Srinidhi Vasistha August 27, 2012

Attempt the following questions after having tried all the question at the end of the chapters of the HV text book. 1. The one and only way a monopolist can achieve the competitive outcome is by setting marginal revenue equal to marginal cost. True, False, Cant Say. Please argue explicitly. 2. Why is the assumption of free entry and exit critical to the concept of competitive equilibrium? Discuss the long-run equilibrium with free entry and exit in a competitive market. In relation to this discuss the concept of economic rents. 3. Randome Architects sells its domes - a structural element of architecture that resembles the hollow upper half of a sphere - in both the domestic market and the foreign market. It is a monopolist in the dome market. The demands are dierent on these markets: on the domestic market the demand curve is pd = 20, 000 20q and on the foreign market its demand curve is pf = 25, 000 50q . Randome Architects spends 1000 units of wealth to manufacture a single dome, and they make this with bare hands and so have no xed costs. Discuss Randome Architects prot maximizing level of price and output in each market. One day one Mr. Jason Statham gures out how to transport domes at zero cost from the domestic to the foreign market and back. What would Randome Architects revised prot maximizing strategy be? 4. A monopolist faces the inverse demand function described by p = a bq where q is output. The monopolist has no xed cost and c(q ) = kq . Discuss the monopolists prot function.
4000 5. Suppose the demand for a monopolists output is (p where p is the price the +5)2 monopolist charges. What is the elasticity of demand for the monopolists output when the price is Rs. 9?

6. A monopolist faces the demand curve q = 110 p 2 where q is the number of units sold and p is the price in dollars. He has quasi-xed costs, C ; and constant marginal costs of 20 per unit of output. Therefore his total costs are C + 20q if q > 0 and 0 1

if q = 0. What is the largest value of C for which he would be willing to produce positive output? 7. Suppose the production function is f (x1 , x2 ) = x1 x2 . (a) What is the marginal product for x1 at the point (x1 , x2 )? (b) What is the technical rate of substitution between x2 and x1 ? 8. A monopolist has discovered that the inverse demand function of a person with income M for the monopolists product is p = 0.002M q . The monopolist is able to observe the incomes of its consumers and to practice price discrimination according to income (second-degree price discrimination). The monopolist has a total cost function, c(q ) = 100q . What pricing schedule will the monopolist have? 9. Ginko is extracting juice from lychee for his juice stall. If he has x lychees, the number of glasses of juice he can extract from them is f (x) = 2x1/3 . Lychees cost Ginko Rs.w each. He can sell each glass of juice for Rs.p. (a) How many lychees does he need to extract y glasses of juice? (b) What is the cost of extracting y glasses of juice? 10. A competitive rms cost curve is given by c(y ) = y 2 + 1. Derive the inverse supply curve and the supply curve for the rm. Plot the supply curve. Discuss the competitive rms prot function when cost is being minimized. How does the prot vary with price? Derive the producers surplus and contrast it with the prot function. 11. Suppose the cost function for a rm is C (q ) = 4q 2 + 16. (a) Find the variable cost, average cost, average variable cost, and average xed cost. (b) Find the output that minimizes average cost. (c) At what price ranges will the rm produce positive output? 12. Daku Mangal Singh sells illegal CD outside two grocery stores - FoodFlood (FF) and ReliableFoods (RF). The two demand curves that he faces at FF and RF are qF F = 500 2p and qRF = 1500 6p. As a third degree price discriminator what should he do? (a) charge a higher price in FF than in RF (b) charge a higher price in RF than in FF (c) charge the same price in both markets (d) sell in only one market. Please argue your answer. 2
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13. The production set is the set of all products that a rm can produce (a) True (b) False (c) Impossible to say (d) Maybe if the technology shows constant returns to scale 14. Consider the production function: f (x1 , x2 ) = min(x1 + 2x2 ; 2x1 + x2 ). It shows (a) Decreasing Returns to Scale (b) Increasing Returns to Scale (c) Constant Returns to Scale (d) Minimum Returns to Scale 15. A competitive rm produces output with a technology that allows it to produce according to q = 8 x, where q is the amount of output produced, while x is the amount of factor input used. The price of the output is Rs. 16 while that of the input is Rs. 8. The amount of the factor that the rm will demand is: (a) 10 (b) 2 2 (c) 64 (d) 48 16. A competitive rm has a single production plant with the cost function c(y ) = 4y 2 + 419 and produces 9 units in equilibrium. It decides to invest in another plan which has somewhat dierent technology and a cost function given by c1 (y ) = 9y 2 + 49. To maximize prots from this newly constructed plant how many units should it produce (a) 34 (b) 24 (c) 14 (d) 04 17. A competitive rm is choosing an output level to maximize its prots in the shortrun. Which of the following is not necessarily true? (Assume that marginal cost is not constant and is well-dened at all levels of output.) (a) Marginal Cost is at least as large as average variable cost (b) Total Revenues are at least as large as total costs (c) Price is at least as large average variable cost

(d) Price equals marginal cost. 18. The change in the producers surplus when the price goes from p1 to p2 is half the area to the left of the marginal cost curve between p1 and p2 (a) True (b) False (c) Only if the demand curve is horizontal (d) Only if the prot is captured by a trapezoid 19. Two rms with identical technology face the same costs for hiring its variable input,; however, Firm 1 paid twice as much in setting up its plant than Firm 2 even though they have the same plant capacities. Firm 1 would be producing twice as much as Firm 2. (a) True (b) False (c) If Firm 1 entered the market before Firm 2 (d) If Firm 2 entered the market before Firm 1 20. A rm has a production function Q = KL where K is the amount of capital used and L is the amount of labor used as inputs in producing Q quantity of output. Capital costs Rs. r per unit while labor costs Rs. w per unit. The conditional labor demand function is: (a) Qwr (b) (c) (d)
Qr w Qr w Q rw